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The Experts

Margaret Lomas
Expert
+ About Margaret Lomas
Founder and Director of Destiny Financial Solutions
Past chair of Property Investment Professionals of Australia (PIPA)
Author and Television Host

It’s time for property investors to think like disruptors

Wednesday, August 09, 2017

By Margaret Lomas

Disruption is the buzz word of the millennium. Until the turn of the century, it was a word used mainly to describe unruly kids in classrooms, or the traffic chaos you encountered on the way to work. These days, we embrace the word as something to respect and seek out, and if you’re a disruptor, you’re likely to be highly revered.

But disruption still has a down side, and for property investors, disruption in the real estate industry is hurting. As the government introduces integrity measure after integrity measure, in an effort to cool down some of our more heated markets, property investors are taking beatings around the head without any sign of let up.

First, it was lending. The banks tightened up their borrowing criteria, effectively allowing investors to borrow less than they could one year ago. Next came the interest rate bashing, with investors singled out to be charged higher rates of interest on their investment loans.

Then we saw less money being made available to investors, as ASIC put pressure on lenders to cap their investor lending. Many small lenders stopped advancing loans to investors at all for a while, and this took some good deals out of the market place.

And then, as if we had not had enough, the sword was plunged more deeply when the latest budget announced that it would remove plant and equipment deductions for investors of established property. This one is not yet finalised, and although the effective date for implementation has passed, the government is still calling for submissions to assist them to fine tune this little piece of legislation.

Desperate times call for desperate measures, and it’s time for property investors to begin to think like disruptors themselves.

Firstly, just staying in the market with determination will call for you to acquire somewhat of a disruptor mentality. I’ve had many potential investors telling me that they just won’t bother now, as there are too many roadblocks making it harder to achieve success. Once you have decided that you’ll press on, you’ll become part of a shrinking group of people determined not to let barriers get in your way.

Next, begin to think about how you can fine tune what you have done so far to improve your cash flows and outcomes. In my case, I have taken a look at what can stay and what needs to go from my portfolio to make way for property opportunities with potentially better outcomes. I am looking at selling a few plodders which have already made money but don’t outperform, and using the money to potentially improve some of what I am keeping, as well as acquiring different properties elsewhere. 

Part of the fine tuning involves seeing where in my portfolio I can improve my cost of borrowing. I am assessing what is out there where I can get cheaper rates, and then I’ll hit my current bank to match that before leaving them entirely. I’ve avoided this for so long, merely because the effort required in a portfolio of my size is enormous, but I’ve now put aside a couple of days to attack this task with vigour.

Lastly, and most importantly, disruption must come about with some creative thinking on how you’ll go about adding to your portfolio. For example, if you can afford to buy two properties, should you instead look at buying one on a bigger block and adding a second dwelling to improve cash flows? This one action will not only add a property with full plant and equipment deductions (when you add the second dwelling), it will add substantial cash flow as the cost of the second dwelling will be the build cost only, as you’ll already have the land. What about an existing property that you can easily convert to two units? I’ve seen this done really well before, and it could be something you can do.

And now, with plant and equipment deductions available for anything you add to an existing property, what kinds of renovations can you do to improve your rent return and receive additional deductions? It’s time to examine what you already have with a view to improving its performance.

The most important thing you can do as a disruptor though, is to not lie down and accept it all as fate. Things will change again, as they always do. There will be more challenges ahead, but also positive changes that you will benefit from. If you knuckle down now, when it’s hardest, and decide to still invest (even if you have to sacrifice a few things to make it happen), you’ll be the one who didn’t let disruption affect you negatively. Someone who has a better financial future than the average Australian.

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How the Budget will affect property investors

Tuesday, June 06, 2017

By Margaret Lomas

The proposed Federal budget 2017 stopped short of removing negative gearing for property investors, but it did contain some surprising changes which no one really saw coming. There had been a considerable amount of industry stakeholder collaboration with the government, yet they pulled a pretty unpalatable rabbit out of the hat at the finish line, and many of us are now scrambling to make sense of some of the proposals.

In a nutshell, here is how the budget will affect property investors.

Travel expenses

Property investors can no longer take a tax paid trip to inspect their property twice a year.

In my opinion, this is a good decision as this was a costly rort, which did little more than provide two tax paid holidays a year to investors and a great opportunity for property spruikers.

Those spruikers would market often over-priced property in divine tropical locations to willing investors on the basis that they could get a holiday on the tax office just for going to inspect that property. Such an incentive often stripped the investor of their ability (or desire) to even assess the true investment potential of the underlying asset, and the fall out has been that a considerable number of investors now hold property worth far less than they paid – and they are tired of holidaying there.

While the occasional investor took only bona fide inspection trips, this was one benefit which was often abused, and it is a fair decision. For those investors now worried about how they will be able to inspect their properties, remember, you are a property investor, not a property manager. Build a good team of people in the area where your property exists and have them do this menial work for you, while you use your time to seek out more investing opportunities.

Plant and equipment depreciation

This is the one that will hurt the most. While investors retain the right to claim the depreciating value of the building (capital works deduction), they are no longer allowed to claim any fixtures, fittings and furniture, unless they are the original purchaser of that asset.

So, if you build a new property, you essentially are the first owner and so you can claim the building and all that is inside. If you buy from someone else, you no longer get the new effective life (or the remaining value) of the plant and equipment, although you still get the remaining building write-off.

If you scrap items to replace them, you cannot claim the residual value of the scrapped items as before, but you can then claim the new items which you buy, and so a renovation still carries significant benefits. On all property, you can still claim capital works deductions on a structural improvement which you, or someone else, does.

To some extent, I think this is also a step in the right direction, but there are holes you can drive a Mac Truck through. In its present form, an investor can buy a property which has, say, 15-year old carpet, and engage a quantity surveyor to asses its present value. Hence, the investor gets what is known as a ‘new effective life’ on the asset, which gives a further 10 years of depreciation on the second-hand value. Theoretically, that carpet could be depreciated forever under the old rules! So, in my opinion, it’s fair to scrap the ability to get that new effective life on an old item of plant and equipment.

However, if you buy a property which is, say three years old, the original owner of that same carpet has only depreciated it for three years of its 10-year life! It doesn’t seem fair that the new owner cannot at least claim the remaining seven years, especially since they are allowed to claim the 37 years left on the building depreciation. Depreciation schedules for capital works, plant and equipment should belong to a building, and pass to the next owner to depreciate what is left of its original value. This will still be a fabulous integrity measure, but more sensible and easy to implement.

It’s a flawed change, and it needs better clarification. It also raises more questions than it answers, and opens more loopholes than it closes. If you buy a second-hand item (such as a refurbished hot water heater) to put in your second-hand rental house – are you the first owner of it, or does the item have to be new to qualify? And what stops me from buying a property under two contracts; one for the house and land and one which itemises a purchase price for each and every item of plant and equipment? Am I then the one who ‘bought’ the items, and can I claim them?

CGT

While a potential change to Capital Gains Tax (CGT) was mooted, it surprisingly remained unchanged and still offers a 50% discount after you hold the asset for 12 months or more.

Other property-related matters

Other measures which do not necessarily directly impact on property investors include:

  • Those over 65 who sell their homes with a view to downsizing can now contribute up to $300,000 of the proceeds to super as a post-tax contribution;
  • Super borrowing, which is one of the fastest growing areas of lending, has been left alone. This is still allowed BUT borrowed funds are counted in the 1.6m contributions cap;
  • First-home buyers can use their voluntary super contributions to buy a home, but, unlike the now defunct First Home Saver accounts (which were a miserable failure), there are no contributions from government and there is a maximum contribution for home buying purposes of $15k per year and $30k total. Just like its predecessor, I can’t see this having a great rate of take up;
  • Buyers of ‘qualifying affordable housing’ get a 60% CGT discount after 12 months. We will wait to see exactly what these properties look like and how they will be delivered as there is little information around what will constitute a qualifying affordable home. Last time this idea was implemented under the National Rental Affordability Scheme (NRAS), all that happened was that greedy developers built NRAS property, sold it above market value to individuals (even though the scheme was intended for institutional investors) and flooded the market, reducing demand. A lot of mum and dad investors lost a considerable amount of their net worth buying these properties. 
  • Buyers of any property over $750,000 must withhold 12.5% of the purchase price and remit it to the tax office, unless they cite a tax clearance certificate from the vendor proving they are not a foreign resident. This certificate must be produced even if you know they are not a foreign resident. The onus is on the buyer to withhold and remit this tax.

For property investors, the proposed changes will be grandfathered for anyone who owned, or had signed a contract for, property prior to budget night, 9 May 2017. Of course, this all has to be passed yet and it is just a proposal, but given the desire by the Labor party to make sweeping changes to negative gearing, I highly doubt it will be met with much resistance.  

What remains to be seen is just how the anomalies are dealt with and how it is all implemented. Discussions are underway with key industry stakeholders, so we wait with bated breath to see just what will transpire. Once I have more information around these changes, I’ll write them up in another article, so look out for that.

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When it comes to property, are you a leader or a follower?

Tuesday, April 04, 2017

By Margaret Lomas

I definitely subscribe to the practice of ensuring that you have a good team of people to help you on your investment journey. However, I also need to point out that if you are just starting out on your property investment journey, it’s not enough to simply follow others in where and how they invest.

You can’t become a successful investor if all you ever do is attend seminars, buy what is on offer, or listen to the secrets being spruiked as if they were gospel truth. If this is you, then you’re only ever going to be getting the leftovers, or buying in areas where the person who makes the most profit is the one who sold the property to you.

Let me tell you about a client of mine. When Susan and Martin came to my company for assistance, they already owned six properties and seemed to be doing pretty well. They had purchased all of them from a mortgage broker who had gotten them some good deals on some loans, who, in turn, had links with a developer that meant that he received a handsome commission for each sale that he helped effect. Therefore, all of the properties that Sue and Martin owned were in one area and all were very similar types – townhouses purchased off the plan. 

In truth, Sue and Martin were being spruiked without realising it was happening. They trusted this broker and he never mentioned the sizable commission, as the law doesn’t require him to. When I quizzed Sue and Martin about whether they thought they were good investments or not, they didn’t really know, and when I asked them about why they had purchased them, they couldn’t really answer that question either. It was fantastic that they had seriously started to invest, but there were a number of issues. Let’s break them down:

  • All the properties existed in the one area, which meant if that one area slowed down, all of their properties would also slow and further leveraging would be difficult.
  • Most investors, after purchasing six properties, would be becoming more knowledgeable and self-sufficient, but as Sue and Martin had relied totally upon this one adviser, it meant that they were not developing as investors. Investors who develop skills along the way are more likely to be those who also recognise hotspots before the crowd does.
  • In Sue and Martin’s case, they had also met significantly higher buy-in costs due to the commissions along the way, which have to be funded somehow, and it’s usually the inflated price which does that. This placed them further behind in terms of equity acquisition.

While you must have expert guidance and input – and gaining some good education and mentor support is a crucial part of the plan – you also have to know how to approach the task of building a property portfolio on your own. You also have to learn how to find the areas and properties which are most likely to do well, despite what’s happening in the overall economy.

Your adviser or mentor can’t be with you every minute of the day. Sooner or later, it’s important to be able to find the areas on your own – and before others do – and make property choices without being shown what to buy, and where to buy it. You won’t be able to do this if you have to constantly ask someone else where to buy or what to buy. Only when you learn how to do your own research, validate what you find, and then interpret the results in terms of what makes good buying, will you begin to experience the kind of success which sets a successful property investor apart.

That’s not to say that you must become an island. I know from experience that success is enhanced when you have the support of the right people, and when you spend some of your time, at least, networking with like-minded people, attending quality events and adding to your knowledge on a regular basis. My company has thousands of clients, many with similar financial circumstances, but all with vastly different success rates with their property investing. They all have access to the same level of knowledge and support, but we have found that those who attend everything we offer, and seek out support on a regular basis, are those who have the most success.

Make the decision today to become as educated about how to buy property as you possibly can, and then commit to a plan which allows you to in some way work upon your property investing strategy every day. By being in what I call the ‘property headspace’ as often as you can, you’ll become a property investment leader with an exceptional portfolio and a secure financial future.

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Investing in property for income and growth

Tuesday, March 14, 2017

By Margaret Lomas

The debate about whether you are a cash flow property investor or a growth investor has been raging as long as property investors have been around. I’m not personally a believer that you must choose one over the other – my own portfolio is full of properties chosen for the fact that they had the capacity to grow in value while they delivered a healthy positive cash flow to me, and they’ve all done just that.

Flowing on from that is the incorrect notion that if you found a property that had a high positive cash flow, which also indicated a high yield in relation to purchase price, it would be in an area like a regional town, with potentially low growth. The reverse notion also applies – if you want growth, you have to buy in a big city.

In fact, property with good yields and potentially high cash flows does exist in high-growth areas, and high growth areas with good yields are found all over Australia. And so, property investors need to understand that, when they buy property, it should not necessarily be with the aim of getting ‘good growth’ or ‘good yields’. It must be for both. The choice about what to buy should relate to the characteristics of the property and area.

Having said all of that, you should know that cash flow and growth, while they can happen in the same area, rarely happen at the same time. This is because the factors which contribute to each of these events are different. Let’s take a look at what those influences are.

Cash flow influences

The potential to achieve a good cash flow on a property is impacted by a number of factors, including how much access to depreciation an individual property has, an investor’s own marginal rate of tax, and the interest rates of the day.

Of equal importance, is the potential yield for property in an area. This will be strong, and increase, based on the following factors:

  • A new industry or large employer coming to the area and improving employment prospects. The result of this is that people initially move to the area for the work, and rent in that area. It takes upwards of two years for these people to consider becoming permanent residents, at which time they are likely to make a purchase decision if the area presents enough employment opportunity and community amenities.
  • An under-supply of rentals available and low vacancy rates. These areas are not ready for the influx of new people and existing property feels the brunt of this sudden growth. Vacancy rates tumble and landlords are easily able to increase rents in response to this.
  • An adjacent city or town having rents too high. Once rents and prices grow in an adjacent city or town, people will move outward to those areas within easy commuting distance, and that area then experiences pressure on its yields. Those moving are more likely to initially rent, as many of them may have plans to eventually buy in that original area once they can afford to do so.

Growth influences

Property value also grows as a result of a number of factors:

  • The growth in the existing population. This, however, will lag behind that initial boost in population which comes from migration, as migration usually impacts yields first. Population which is growing organically, as a result of people who have made ties in the areas and are starting to have families, is the kind of population growth which usually results in property prices moving higher.
  • The increase in demand from buyers. This is linked to many factors, including population growth and the establishment of industry. I often find that an area where small businesses are growing is an area where property prices are on the move, since the advent of more small business is a sign of intrinsic economic growth.
  • An under-supply of listings in the area. This occurs where population is growing organically, putting pressure on existing properties.
  • The solid establishment of diverse industry. This is opposed to the increase in size of a single industry.
  • A vibrant local economy. This refers to an area where the residents are becoming more affluent and incomes are growing.

When these factors exist, people choose to settle in an area, and when they do so, we see a real increase to property values which is sustainable and consistent over many years.

As an investor, you must first work out what you need, at the exact time you’re buying. Are you at the point in your investing life where cash flow is of prime importance, or is it growth you need? Maybe you can buy one or two properties with growth, then one or two with cash flow, and so on. You must plot yourself on a yield/growth continuum and be guided by those needs when it comes to area selection.

Narrow down those areas which have the best prognosis for investing success, and then eliminate those which cannot satisfy your immediate need for either cash flow or growth. As you carry out your due diligence, you will pop areas onto your list which are from both the regions and from the cities, that have a strong yield or strong growth prognosis.

Your ultimate selection must not rely on whether it’s a city-based or country-based property, the price, whether it’s favoured by others, or whether you’ve read about it being a hotspot.

Your selection must be due to the area’s ability to ultimately deliver both cash flow and growth, and your needs right at this time (i.e. which is most important to you).

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Property growth drivers

Tuesday, February 07, 2017

By Margaret Lomas

When it comes to property investing, the term growth driver is bandied about pretty much everywhere. A growth driver when it comes to property is a characteristic which
impacts positively on both yield growth and value growth.

Past growth is not an indication of future growth, and so if you are presently looking at historical data about how an area has performed over the past five years, it’s not going to help you much. On the contrary, historical data may well tell you where not to buy, since it’s likely that strong past growth means that the best time to buy has already passed.

To buy a property in an area with all of the necessary characteristics for sustained growth over time, you must know the important difference between ‘intrinsic’ and ‘extrinsic’ growth drivers. By being able to place the economic data you are reading into one of these two separate groups, you will be able to make a stronger prediction about the future potential of that area.

Extrinsic growth drivers

Extrinsic growth drivers are the economic influences which contribute to the growth of an area, but which originate outside of that area as a result of influences occurring elsewhere. They are not a result of any micro economic change within that area, but they do come from activity, planning and events which occur temporarily.

When a large infrastructure project or a major building project is planned and executed in an area which has a smaller population, there is generally insufficient local labour available to fill the jobs which are being created. Often, workers will come from surrounding areas, or even from interstate, and for the period of the project, they will be living in that area, most likely in rental accommodation.

This will place a temporary pressure on many of those economic factors which normally result in property growth. The retail and hospitality trades will improve as these new residents spend what they are earning, injecting it into the local economy. Rental accommodation will experience short-term stress and vacancy rates will plummet. A derivative of this will be house price increases – potential landlords witnessing the plunge in vacancy rates may see this as a sign of an impending house price boom and buy into the market, creating pressure on prices. The population is boosted by the new workers, often bringing their families, and the economy enjoys a burst of activity.

To the untrained eye, the features of a strong and growing micro economy will be evident, and the temptation to get in quickly and on the ground floor creates a pseudo demand that can look like a true economic boom.

When the project completes, the workers move on to the next project, and the vacancy rates begin to rise. The funds which were being injected into the economy also dry up and many small businesses, which may have started up or flourished during the building of the project, close down. Pressure is removed from property prices, and in fact prices drop, as distressed landlords sell up. Often, values can return to ‘pre boom’ days, and investors are left with property that is difficult to rent and hard to sell.

Similar results can come from other external sources. Pure investor sentiment, where the rumour is circulating that an area is heating up and investors from all over the country vie for a small pool of available properties, can create a short-term property demand which places a false reading on true house price growth. Equally, property developers who buy up cheap parcels of land, subdivide and then engage clever marketing companies to sell the properties – often to buyers from outside of the state – can also create an impression of potential growth which is never backed up by true economic vibrancy.

Intrinsic growth drivers

Intrinsic growth drivers are those factors which affect growth, but which are organic, sustainable and consistent. These are the economic influences which are created by a complete set of circumstances, rather than single, individual events. They are influences which can be repeated and sustained over time, and which are a sign of underlying economic growth.

Intrinsic growth drivers include

·       Population growth from residents moving into town attracted by factors other than short term employment.

·       Changing demographic mix, where the types of people who live in town are becoming more diverse. A growing area needs young people, families and retired people to create a community. Generally speaking, it is community which provides stability. Areas with a concentration in one demographic category typically grow less well than those which are more diversified.

·       Improved accessibility to the area through transport infrastructure and upgrades.

·       A strong and articulated council development plan, providing services and infrastructure for that growing population.

It’s the depth that counts!

You can see that it’s an important feature of property investing to understand that success is not just about looking for ‘growth’ any more than it is just about looking for cash flow.

It is about the depth with which you can gather the important economic data to be able to assess the true potential of an area. Doing so will provide you with a safety net of sorts, and allow you to stay in the market over the long term by considering all of the financial implications a purchase will bring.

You don’t need hundreds of properties to ensure a solid financial future. You don’t even need dozens of them. Eight to ten well researched and chosen areas, with sustainable growth and short-term yields high enough to manage interest rate rises and vacancies, will result in a solid, growing base of assets which will give you more choices in retirement than you ever imagined.

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Value investing for property

Tuesday, November 08, 2016

By Margaret Lomas

When you are share investing ‘Value investing’ is an investment strategy where stocks are selected that trade for less than their intrinsic values. Value investors actively seek stocks they believe the market has undervalued.

When it comes to property, many people think they are value investing when they get a bargain – they’ve either negotiated well, or found a seller who needs an urgent sale on a property and picked it up below what other properties around it may have recently sold for.

In my opinion, getting a bargain buy is not the same as value investing – if that bargain buy is on a property which exists in an area which has no intrinsic growth drivers, and therefore no capacity to deliver price growth and suitable rental yield over time, then the benefits of that bargain are extremely limited. Buying, say, $10,000 below the intrinsic value in a market which subsequently doesn’t grow, or does not even keep pace with inflation, only gains you that initial $10,000!

Value investing for a share investors involves the belief that the market overreacts to good and bad news, resulting in stock price movements that do not correspond with a company's long-term fundamentals, giving an opportunity to profit when the price is deflated.

Translate this into the property market and the same rationality can be used to find areas with good value, and equally, those which are overvalued with little to offer the future.

If you keep in mind that fact that property cannot be quickly traded, and therefore those short- term movements which typify a value share investor’s buy and sell decisions are not possible with property, there are certainly ways in which a property investor can tell if an area is undervalued, and likely to become more reasonably valued in the short to medium term.

The basic rules are simple:

A hot market, like Sydney, is clearly over valued and cannot, in the short to medium term, provide a return worth the risk involved.  The yields are too low, driven down by the quickly rising values in the past year or so, to make holding anything other than a financial drain. The prices are too high to spread risk – one property in the Sydney market can cost many times that of several in more affordable markets, and so exposure to risk is high, all placed in a single asset, and

A cold market, such as a country town far from any city centre, a town with a single industry or an area with stagnant population may seem affordable, and the rental yields are often attractive, however the value is not there because there is little or nothing to drive possible growth.

And so, leaving out the two extremes, within the rest of the market lies undervalued property with the potential to quickly gain value and make the investment a better one than the average property investment.

Just as with share investing, to find these areas, you must examine the fundamentals, and then gauge these fundamentals against the chances of a change in the short to medium term.  And this isn’t as hard as it may sound.

There are serval characteristics which an area can have which are sure signs that the future is promising, such as:

  • A population growing faster than the national average
  • An unemployment rate which is trending down, with jobs available across a diversified industry base
  • A median household income which is growing faster than inflation
  • A local government which is underpinning the population growth with strong, planned infrastructure, allowing communities to flourish and
  • Little land available for additional development, and low developer activity.

Alongside those fundamentals there must exist affordable property which has not yet had any identifiable boom. Often such areas are found as fringe suburbs in capital cities or ripple areas next to those which have already shown significant price increases. They will be areas which are under the median price of those around them, where the greater proportion of residents are owner occupiers.  Often they will be emerging suburbs, formerly less desirable, where demographics are changing, such as former state housing areas.

The value in these suburbs is in being able to see when the tide is turning. Not all affordable suburbs grow into great investments, but many do and the trick is in seeing the changes in neighbouring suburbs occurring, then buying close by to wait out the urban sprawl. When the up- and- coming suburbs inflate beyond affordability, the ripple occurs as those wanting to get into the area begin to buy close by instead.

A great example are the areas in Melbourne’s South East, in and around Carrum Downs and Cranbourne. Having seen nearby Paterson Lakes and Seaford experience significant recent values growth, these poor cousins can be bought for up to half the value,  and provide higher relative yields. As the older homes are purchased, developed and even subdivided, the ‘creep’ will begin and the lines between the desired and the less desired suburbs will begin to blur.

The same effect is already starting in both the Logan Shire in Brisbane (growing fast in some areas and not so fast in the less desirable ones) and the Moreton Bay Shire in Brisbane, where a significant price differential exists between say, Kallangur (recently boomed) and Deception Bay and Rothwell (still low and not on many radars).

As the infrastructure continues to develop and housing becomes less affordable these suburbs will enjoy the ripple effect. And while you wait for that to occur, handsome 6% rental yields await!

Value lies in not getting a  good price, but in buying at even the market value into an area which others haven’t yet picked as being desirable. It lies in being able to carry out a strong analysis of the fundamentals, and buying before the crowds realise the value was there all along.

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What to learn from boom and bust reports

Tuesday, September 13, 2016

By Margaret Lomas

The news is full of speculation about what might, or might not happen to the ‘property market’.  These days, media reports of crashes or booms seem to be taken as gospel and have an impact on buyer behavior. If the media says it’s true, it is, isn’t it?

The issue I have is mainly about what constitutes a ‘property’ market. While it’s rarely defined in media articles, most of them refer to the Sydney and Melbourne market and use the activity in those markets as a barometer for all property, everywhere. And because of this, we see buyer behavior emulating what these reports say, in an almost self-fulfilling prophecy.

In truth, property behaves significantly differently in different parts of the country. Take the recent ‘Sydney’ boom for example. While journalists were shouting from the rooftops about how fabulously the property market was performing, those in Perth and, to a lesser degree, Adelaide, were looking at their own holdings and struggling to see much cheer.  

Take it back 10 years, and everyone in Sydney was bemoaning their dreadful returns and blaming everything, including the state government, while Perth owners were jumping for joy at the speed at which their own market was doubling in value! Now, Sydney-centric reporters seem to have short memories, with many of them claiming it’s always an amazing market, to the point where buyers are still jumping in and often buying property with abysmal rental yields and limited growth prospects in the coming five years or so.

Markets within markets

The reason for such a disparity in the values of property in one country, and reportedly one economy, is that the overall economic situation of Australia is often not reflected within smaller markets. Take it down to a state level, and then, more importantly, a micro level, where individual local government areas are concerned, and it can be seen that areas can perform well even when a state, or the country as a whole, is not looking as robust. The reverse is also true.

Let’s look at Brisbane as an example. Within the inner ring, 5km from the CBD, property is subdued and buyers are few. Not that long ago, prices were increasing as the trend toward urban living became more and more attractive. Properties were snapped up, improving values, and new projects were developed to meet what appeared to be a creeping demand. Now, we see a potential oversupply of apartments, and a peak for prices of freestanding houses (in what are considered to be blue chip areas), precluding many buyers as the mortgage required to purchase such property begins to pass what the average income of a Brisbane resident can afford.

But go south to the suburbs where affordable housing with high relative yields exist, where the population is growing at a cracking pace, and where there’s diversified employment opportunities, and we see a burgeoning property market which shows no sign of abating. These are economically strong areas which have many reasons for the property to be growing, including an improvement in the overall relative wealth of the area. That doesn’t mean an area has to be ‘wealthy’ for it to provide exceptional yield and growth over time. It means that the community as a whole is becoming more affluent, often off a lower base. This is likely due to improving employment opportunity as businesses move into an area, increased local government employment incentives and commercial investments. All of these factors create a vibrancy which draws people in and keeps them there for the medium to long term – placing pressure on the price of housing.

The lesson

If faced with a choice between buying one property in a ‘blue chip’ area with high buy-in prices (and positive media sentiment) and buying four properties in lower socio economic areas where relative yields are strong and the micro economy shows signs of growth both intrinsically (through lowering unemployment rates) and extrinsically (through external commercial investment), I know what I would prefer. Buying four allows me to buy into a number of economically vibrant areas, get a better overall yield and have diversification and a more robust portfolio which, if need be, can be liquidated slightly at a time.

The lesson here is, don’t pay any attention to media reports which exclaim or decry booms or busts. There is not ‘one’ property market, and believing there is a right time and a wrong time to buy property may lead to missed opportunity. Examining micro markets and looking for those smaller local economies which are in the midst of creating their own mini property boom will not only make you a better property investor, but a far more financially successful one too.  

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The rise of the ‘rentvestor’

Tuesday, July 05, 2016

By Margaret Lomas

There’s still talk of property being ‘unaffordable’, and frankly, it’s a debate I’ve been hearing since it also looked unaffordable back when I was in my twenties. I recall being pressured into buying as soon as I could, since it was not going to be long before no one could afford to buy their own home. That was 1980, and fast forward to today and the rate of home ownership has not really changed to the degree that was expected. Between then and now, housing has come into, and gone out of, affordability more times than I can count. And no doubt this will continue for years to come. Let’s also not forget that the question of affordability is highly subjective – Sydney may be largely unaffordable now (depending upon where you want to live) but Adelaide and Brisbane remain highly affordable in much of the city.

I speak with a lot of young people and they seem less worried about this apparent lack of affordability than those of us who are already way down the path of home ownership. This is not because they don’t want to buy a home of their own, although for many this is the case with careers, travel and lifestyle becoming more and more a priority (not necessarily in that order). Actually owning a home seems further down their list than it ever was for us.

However, there is an emerging new category of property buyers, affectionately known as ‘rentvestors. These are people who understand that getting on the property ladder does not necessarily mean buying an owner-occupied property. They are often people who want to live in areas which are within their price range but have other reasons for wishing to live there. And very often they are people who build large and substantial portfolios without ever needing to actually live in any of their properties. If you have considered becoming a rentvestor, here are a few considerations to make before taking the plunge;

  1. Are you comfortable living in a property where you may have to move if the owner wants it back? While it is possible to obtain long leases, there is no surety in renting. At any time, the owner may sell to someone who no longer wishes to rent out the property, or they may want to move in themselves. Tenure cannot be assured when you are a renter.
  2. Are you prepared for the fact that the landlord can, and most probably will, increase the rent for the next consecutive lease period, particularly if the area suddenly comes under increased demand? Under these circumstances, you may find yourself on the move before you are ready to do so.
  3. Are you OK living in a property where you will be restricted as to what you can do with it? You may not be able to hang pictures or change the curtains, and needed renovations may not occur. Some landlords are often prepared for a tenant to carry out improvements at either a shared cost or their own cost, but often, it makes no sense to spend money on a property which you may not be able to stay in for the long term.
  4. When it comes to where you need to live, is it cheaper to rent, or to pay a mortgage? Establishing if you need to live in an area includes how far the commute to work will be (and how much it will cost), where your social networks live, schools for your children and other lifestyle needs. In some areas rental yields are very low in relation to purchase prices, sometimes lower than 3%, and this would mean it is cheaper to rent. In others, rental yields can be 5 and 6% and in these cases it may be more beneficial to purchase.
  5. Are you committed to still building an investment portfolio of your own, be it through property or through other forms of investment? Simply renting because you don’t want to save the deposit or commit to an investment plan isn’t the same as committing to being a rentvestor. Rentvestors have firm and committed plans and end up with a solid net worth. Renting long-term without putting in place a plan for the future often results in reaching retirement age ill- prepared to be self-supported.

Bear in mind that an owner-occupied home is capital gains tax free and owning an investment property is not. If you want to buy in an area that has not had substantial growth yet (usually affordable areas where the population is growing and infrastructure projects are in abundance) you may well buy a property which grows really well and you won’t have to pay CGT on that gain.

Alternatively, the area that you wish to live in may already have its greatest period of growth behind it (usually those well-established areas with high prices and low rental yields) and so that capital gains tax exemption doesn’t have such a big upside or value to you.

If you would like to start a property portfolio with properties that you don’t live in, you can still preserve the first home owner grant for a future time. The rules around that grant are simply that you don’t own and occupy a property – you can own as many investment properties as you like and still keep the grant for some time in the future. Building a portfolio of properties in this way, as long as you also put in place a savings plan alongside this strategy, can be a great way to boost your savings toward a deposit – you can have a tenant in place paying your mortgage while you save toward a future own home. After a few years, you will have not only your own savings, but also any growth in the property, which can then be used toward any home of your own you might like to buy.

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3 tips for buying interstate

Tuesday, May 17, 2016

By Margaret Lomas

When an investor first starts on the road to building a property portfolio, the default position seems to be to choose a property close to where they live.  There is a misplaced feeling that they somehow ‘know’ their area better than they would some other, and a sense of comfort in knowing that the property is close by and that they can keep an eye on it.

It’s a fact that while most owner occupiers may know their area, the facts they know usually have little to do with ensuring that the investment is a sound one. Important facts like vacancy rates, population and demographic information and infrastructure planning are all important in the decision making process about where to buy, and few people know this kind of detailed information about their own area.

And so, whether it be because you would like to ensure that you have a wide and diversified portfolio of properties bought in areas that have the best chance of growth, or that your own area has become too pricey or too low yielding to make it a viable investment, the time should come in every investor’s life that they think about buying interstate. While doing so will probably bring the reward of a well performing investment, for most, the task seems both daunting and dangerous. It doesn’t need to be so, and here are some tips to help you along.

1. Know that each state has different conveyancing laws

From the complex NSW process of contract exchange, 10% deposit and 49 days till settlement, through to the relatively simple WA method of offer and acceptance (and as little as two weeks till settlement), there is a vast array of different legal systems in place for the conveying of property titles, and you need to be familiar with how it is done in the state you choose to buy. 

To avoid finding yourself in a contract you cannot extricate yourself from, jump on google and find out how things are different from what you are used to.

2. ‘Knowing’ the area

Just because you don’t go there (and you should not be jumping on a plane to view every area you have an interest in) does not mean you cannot become fully informed about an area before you decide to buy. If you follow my 20 Must Ask Questions®, you will be sure to carry out the right kind of research and end up with a complete picture of the area and everything it has to offer from a future growth potential point of view. The best thing is that, by not visiting, you’ll protect yourself from falling in love with an area that actually has very little going for it from an investment point of view.

3. Choosing the right property

Once you’ve narrowed down the area, you want to be sure you don’t choose the lemon property. Those pictures on the internet can make any trash look like treasure, so you need some people on the ground to be sure you get a good buy, and not a money pit. Always get a pest and building inspector to carry out an inspection, but before spending your money on something which you end up not buying, contact a local property manager who has no present interest in the property and ask if they would mind checking it out with a view to getting the management contract if you buy. They should be able to give you a solid ‘habitability report’, which is a great start. Let’s face it, if they do this for you, they’re probably also a good property manager. 

Not only is buying interstate easy, it’s imperative if you are going to have a diversified portfolio with strongly performing properties. Areas definitely grow in cycles, and different cycles all over Australia, and you want properties everywhere so that something in your portfolio is always on its upswing!

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Be wary of property advice

Tuesday, April 12, 2016

By Margaret Lomas

If you are a property investor, you may be unaware of the fact that anything you do to invest in property, any move you make, any advice you take may leave you at greater risk than you thought.   This is because the property investment Industry remains, to this day, unregulated.

Yes, you heard correctly, and to put it into perspective, let’s think about this:

Imagine you had $250,000 to invest.  Your visit to a financial planner will result in, firstly, a risk profile to determine just what asset class will be right for you.  Next will be a financial plan, designed to take into account not only your present needs in terms of income and cash flow, but also your future financial needs, time till retirement and future expected net worth in terms of your assets. Then, a written recommendation, complete with projected outcomes, and a bold statement about risk is presented to you along with product disclosure statements about any chosen products.  Since 1 July 2013, your adviser isn’t allowed to take any commissions on any of these products, and so you will pay a fee to the adviser which must also be clearly disclosed. 

As you can see from this transparent approach, while it may seem a little onerous, protection for you is built in every step of the way.  And, it’s unlikely that you will be recommended a product not right for you just because the adviser gets a better commission – the new laws stamped out the possibility of that behavior on all but life insurance products.

Let’s now project this same scenario onto a property investment, where you have that same $250,000 to invest, which, with leverage through borrowing, could provide over $1m to invest.  The range of options for guidance are numerous – and include the straight mentor deal, where you purportedly just get training and education, the seminar where you are introduced to an actual product, or the marketer who you come across in some way (including via telemarketing) who is looking for buyers on specific developments.

You may think you are dealing with a property investment adviser, but the truth is nothing works as it does with other financial advice.  You most likely won’t be provided with a risk analysis, and so the property which is ultimately spruiked to you will have no relationship to your own attitude to risk.  Few actual property advisers provide any kind of financial plan – most who do are basing it on your purchase of their product only, with no comparisons to anything else. The recommendations are likely to be incredibly skewed – how is it possible that the single property the ‘adviser’ has available for you to buy is also the best possible one for you out of all properties available, one which also matches your risk profile and happens to be in the area that has the best opportunity for capital growth?  

But the worst part about all of this is that, while you are being told that you pay nothing for this service, it’s likely you’re paying through the nose.  This is because there is no law in Australia compelling ‘property advisers’ to disclose commissions to you, outside of that requiring mortgage brokers to tell you what they get from a lender.  Yes, that’s right – NOTHING. This wonderful, free advice you are getting, which I have already shown is likely heavily skewed to the interests of the adviser, can net that adviser commissions upwards of $40,000 per property, including back door payments from developers, conveyancers, real estate agents, accountants, or middle men marketers employed by the developers to shift their product.  

You won’t know about these payments, because there is no law in Australia covering property investment, and therefore no law requiring disclosure of them to you at any stage of the process.  But you’ll be affected by them, because they must be paid, and the only place they can originate is from the money you pay for the property.  It’s highly likely that, despite any protests from the seller to the contrary, the purchase price has been inflated to cover all commissions being paid.   This means that you start well behind the eight-ball, and it’s a long climb back to ground zero, especially in a stagnating market.

Caveat Emptor is a well- known expression – ‘let the buyer beware’, and nowhere does it apply more than in the property investing industry. If you have decided to buy property as an investment, and you rightly also make the decision not to try a do-it-yourself approach (because despite how you may feel you really don’t have an instinct for knowing how to buy property well), be sure that:

1. The ‘Property Adviser’ is qualified. – The not-for-profit Property Investment Professionals of Australia have a great qualification process resulting in the post nominals QPIA (Qualified Property Investment Adviser).  Be advised, though, that a company cannot be a QPIA – only individuals can, so be sure that the company you choose to help you is not only a member of PIPA, but the adviser you work with is a QPIA.

2. The course, mentoring or ‘advice’ is not disguising an ultimate property sale.  If the ‘adviser’ is selling property too, then their advice cannot be independent. They either need to be up front about the fact that they sell property and therefore cannot comment on its appropriateness for you, or they advise you on how to best invest in property without being involved in any way in the subsequent property transaction.

3. If the company is involved in the transaction, they disclose all commissions, kickbacks or soft dollar rewards to you, including the dollar value, in a signed disclosure document.  If the company or person is acting purely as an adviser, mentor or educator who charges you, then all of the fees to be paid at any time during the relationship should be disclosed to you, along with an outline of exactly what you’ll be getting for your money.

4. In the case of an independent adviser, you should also receive a personalised plan which outlines the strategy, the forecasted outcomes, your capacity to afford to undertake that strategy and the risks involved.

Until regulation is invoked, you need to be hyper-vigilant when engaging a professional property investing company, regardless of how they deliver their services. The present situation is highly dangerous and engaging a professional with no qualifications, experience or background in financial advising (which is the case with a good majority of self- styled property experts) may be just as unsuccessful in the end as trying to invest without professional help. 

 

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