Property Updates…
Some notes, ideas and suggestions for the “Property Investor”…
Before answering this question, let’s establish the meaning of the two strategies.
Cash flow is the income you will receive each year.
Capital growth is how much your property increases each year.
Cash flow is the income you will receive each year.
Capital growth is how much your property increases each year.
Cash flow refers to the income you will be getting on an annual basis for your investment property. The yield is a good indicator of your cash flow. As a rule of thumb, less than 5% yield is lower cash flow whilst a property gaining more than 5% is good cash flow.
Yield is worked out by multiplying weekly rent by 52 then dividing this over the purchase price then x 100. For example, a weekly rent in Morayfield is $360 and was purchased for $308,000. Applying the above formula: $360 x 52 = 18720 / 308 000 x 100 = 6% yield.
Capital growth is how much the property increases in value each year. For example, the same property in Morayfield was purchased at $308,000 in 2014 and now is valued at $360,000. The capital growth is 16.8%. This is a substantial growth rate. Sydney has been experiencing on average growth rates of up to 20% in 2014 - 2015. Some capital cities have not experienced the same capital growth and this is due to various economic drivers and factors such as supply/demand for property.
So now the question is, which one should you focus on?
Well the short answer to this question is to focus on both cash flow and capital growth. Cash flow will ensure you remain in the property market in the short term whilst capital growth ensures you remain in the property market in the long term. You will need to service the debt. Thus a good strong yield will ensure you are not stretching your budget each month and you can safely pay the mortgage with the rental income. In the long term, you will want your property to increase in value so when you eventually sell it, you will have equity. This equity could be used to pay off another investment property then quite simply you have passive income. Also, strong capital growth will mean you can use as equity for your next property purchase. Thus capital growth ensures you can build wealth.
It is very possible to focus on both when carrying out due diligence research. When you are building your property portfolio it is important to have a diverse range of properties across the nation where some focus more on capital growth and some investments will be cash flow.
For example, Salisbury in Adelaide is a good cash flow property with steady capital growth. Whilst Cranbourne in Melbourne has strong capital growth and is a lower cash flow property.
Many people fear purchasing property interstate simply because it is an area they are unfamiliar with.
The thought of purchasing a property unseen is a big deterrent for many investors as it is seen as not being ‘diligent’.
The thought of purchasing a property unseen is a big deterrent for many investors as it is seen as not being ‘diligent’.
Well let me tell you, I have purchased 65% of my properties unseen and I believe I have been very diligent in my research and sourcing. Like any investment, the numbers must work for it to be a viable investment. Just because you have not seen a property does not mean the numbers won’t work - THEY DO. So how???
1. Know the property cycles within the states. Is it in decline, expansion/growth or boom? Choose states that are at the lowest of their cycle so the potential for growth is likely to occur.
2. Do extensive research on the area such as population, employment trends, industry trends, income, infrastructure plans and projects.
3. Speak with at least 3 local agents such as the property managers in the area to establish trends in their market specifically. As well speak with town planners to establish the projects within the area.
4. When sourcing a property, understand the market value and potential yields and what property is in demand in the area.
5. Once you have found some properties that work out yield wise and tick many of the boxes, then ask a property manager to inspect the property on your behalf. They should give you objective feedback that will assist you making a decision to put an offer in.
6. Know the settlement process and real estate laws for each state.
7. Find out important contacts such as local conveyancers and building and pest inspectors.
Following the steps above are critical in purchasing interstate investment properties.
As your independent buyer’s agent, all this due diligence will be done for you.
The Australian Prudential Regulation Authority (APRA) have tightened the criteria for investors by reducing the loan-to-value ratio (LVR) from 95% to 80%.
This means a bigger deposit is required, for example, for a property valued at $500 000 a deposit of $100 000 is required. Investors also need to service loans at higher than 7% ( a 2% buffer). As well as these changes, the banks have removed mortgage discounts for investor loans and cut back on offering riskier products such as interest-only loans.
APRA have implemented these changes to curb the heated property market in Sydney (growth of 20%) and Melbourne (growth of 10%). APRA aims to reduce investment loans by targeting 10% of all investment loans.
So what does this mean for you as an investor?
Well it means that as an investor you need to be even more diligent in sourcing high yielding and strong capital growth properties. A high yielding property will ensure you can service your loan in the medium to long term with the given borrowing restrictions and rate changes. Strong capital growth properties will ensure you gain equity each year so this can be used as part of your deposit for your next property.
All investors must keep in mind that even though these conditions are not encouraging, there are other conditions that are that make property investing a viable option.
• Strong demand in the Australian market for housing
• Asset prices are rising for houses
• Tax concessions like negative gearing
• The ability to offset capital gains.
Investors also need to note that these new lending conditions are for banks only so there are opportunities for the non banking sector to fill the gap.
“Off the plan” purchases are quite popular amongst investors and I would like to shed some light about this investment option.
For some investors, buying off the plan can be a smart way to generate growth in your portfolio, if you carry out due diligence on the suburb and the developers you’re working with.
You need to ensure you are investing in a growth area. Purchasing an off the plan early in the recovery cycle means you’ll be in the best position to achieve capital gain by the time the property is completed.
And now - some risks with “Off the Plan” investments….
The property developer who is selling these properties are embedding their profits into the price. The price you pay is not of market value as the property has not been built yet. This means you are speculating that the price you pay will be undermarket and hope you gain capital growth immediately. This exact speculation causes uncertainty and risks.
As an investor, you are speculating yields, population forecasts as well as the risks of a poorly built property or the building developer going bust during the construction stage. There are simply too many unknown factors with off the plan purchases to make it a viable and low-medium risk investment option.
There are many factors that impact on your borrowing capacity.
The Australian Prudential Regulatory Authority have recently increased Loan To Value Ratio ( LVR) from 95% to 80% for investors.
The Australian Prudential Regulatory Authority have recently increased Loan To Value Ratio ( LVR) from 95% to 80% for investors.
This means a bigger deposit is needed for the loan to be approved. For example, a property valued at $500 000, a deposit of $100 000 is needed (20%). This can be very discouraging particularly for first time investors who may not have savings of $100 000 nor equity in an owned property to draw from.
After meeting with a number of Loan Lenders, there is flexibility with this ratio. For example, the lenders are able to offer first time investors a family pledge arrangement whereby family members who do have property and equity in their homes are able to use this as part of the first home investors deposit. This enables first time investors the ability to get into the property market quite easily. They do however, need to prove financial stability by having full time employment and proven savings. The banks will also revise your credit rating.
For homeowners who want to invest in property, this means they can use the equity in their homes. This means that you do not have to outlay any deposit if you have equity. This is particularly enticing for Sydneysiders who have property as the boom has meant their properties have increased substantially.
So basically the amount you can borrow depends on your assets, income, credit history, and savings.
Snapshot of the Property Cycle in Australia in 2015
All capital city house prices are at or near record levels…
• Brisbane, Adelaide and Hobart are still on the move with moderate growth
• Perth prices growth remains modest, but better signs for Canberra
• Sydney still experiencing a boom growth at 10 -20%
All capital city house prices are at or near record levels…
• Brisbane, Adelaide and Hobart are still on the move with moderate growth
• Perth prices growth remains modest, but better signs for Canberra
• Sydney still experiencing a boom growth at 10 -20%
Overall economic factors impacting on Australia’s property markets:
NEGATIVE IMPACTS…
Consumer confidence declining in the first half of the year from world problems such as China’s economy slowing down, deflation around the world, terrorism, wars.
Rising unemployment & weak economy
POSITIVE IMPACTS…
Interest rates are low
Continuing strong population growth in our capital cities. Currently Australia’s population grows by one person every 77 seconds, driven largely by international migration.
Confidence in our property markets and a feeling that of missing out, whether as a home owner or an investor, will mean more Australians will try and get a foothold on the property ladder before prices increase further or borrowing conditions turn less favourable.
Continued overseas investors with the low Australian dollar.
The wealth effect will kick in with existing property owners (particularly in Melbourne and Sydney) feeling better off as the value of their homes have risen significantly over the last few years. Some will use this extra equity to move home or invest in real estate.
Buying in self-managed super funds may accelerate in the first part of 2015 as the government contemplates removing the ability of SMSF’s to borrow to buy property as recommended by the Murray Financial Systems Inquiry. Improving consumer confidence in the second half of 2015 .
Let's look at our capital city property markets in a little more detail:
NEGATIVE IMPACTS…
Consumer confidence declining in the first half of the year from world problems such as China’s economy slowing down, deflation around the world, terrorism, wars.
Rising unemployment & weak economy
POSITIVE IMPACTS…
Interest rates are low
Continuing strong population growth in our capital cities. Currently Australia’s population grows by one person every 77 seconds, driven largely by international migration.
Confidence in our property markets and a feeling that of missing out, whether as a home owner or an investor, will mean more Australians will try and get a foothold on the property ladder before prices increase further or borrowing conditions turn less favourable.
Continued overseas investors with the low Australian dollar.
The wealth effect will kick in with existing property owners (particularly in Melbourne and Sydney) feeling better off as the value of their homes have risen significantly over the last few years. Some will use this extra equity to move home or invest in real estate.
Buying in self-managed super funds may accelerate in the first part of 2015 as the government contemplates removing the ability of SMSF’s to borrow to buy property as recommended by the Murray Financial Systems Inquiry. Improving consumer confidence in the second half of 2015 .
Let's look at our capital city property markets in a little more detail:
#1: Due Diligence…
Always buy property in well researched areas that have real economic growth drivers to sustain your investment in the future. Buying property should not be high risk if due diligence is carried out.
#2: Property Cycle…
Always know where suburbs & regions are on their property cycle, then aim to purchase at the lowest point so to capitalise on growth. Avoid buying in a boom cycle.
#3: Capital Growth…
Always aim to buy properties where growth in the market is going to occur. Utilising a buy and hold strategy along with strong economic growth drivers will ensure your purchase has strong capital growth. Capital growth will enable you to gain equity in your property so you can keep purchasing more properties.
#4: Solid Yield…
Always aim to purchase a property that has more than 5% yield. This is worked out by calculating the annual rent income (rent per week x 52) divided by the purchase price x 100. Remember a solid yield will keep you in the market so you can maintain your investment.
#5: Know the Market Value….
Always purchase properties at market or below market value. This will ensure you are not paying too much as this will stagnate your ability to purchase more properties. This is the very reason why OFF THE PLAN purchases are not recommended as their true market value is not indicated.
Always buy property in well researched areas that have real economic growth drivers to sustain your investment in the future. Buying property should not be high risk if due diligence is carried out.
#2: Property Cycle…
Always know where suburbs & regions are on their property cycle, then aim to purchase at the lowest point so to capitalise on growth. Avoid buying in a boom cycle.
#3: Capital Growth…
Always aim to buy properties where growth in the market is going to occur. Utilising a buy and hold strategy along with strong economic growth drivers will ensure your purchase has strong capital growth. Capital growth will enable you to gain equity in your property so you can keep purchasing more properties.
#4: Solid Yield…
Always aim to purchase a property that has more than 5% yield. This is worked out by calculating the annual rent income (rent per week x 52) divided by the purchase price x 100. Remember a solid yield will keep you in the market so you can maintain your investment.
#5: Know the Market Value….
Always purchase properties at market or below market value. This will ensure you are not paying too much as this will stagnate your ability to purchase more properties. This is the very reason why OFF THE PLAN purchases are not recommended as their true market value is not indicated.