UNO home loans
6th October 2022
Investing in property
Where to buy
Deciding where to invest will depend on your individual goals, how much you have to spend, interest rate amd what you might already have in your property portfolio, says property investment strategist and founder of Wealthology Australia, Leonie Fitzgerald. “I usually conduct an assessment with the client before recommending any particular areas,” she tells UNO.
In the world of buying and selling there are some generalist investment strategies, however, that will hold you in relatively good stead.
Stick with capital cities
Capital cities tend to have more infrastructure, a greater number of jobs and a higher population. This equates to a significantly higher rental demand than in other areas, resulting in lower vacancy raes. It’s why property developers invest so much in new buildings in capital cities.
Diversification is key
Fitzgerald suggests property investors look further afield and buy property in different areas – even different states to where you may have looked or bought previously. “Markets grow at different times so if you had a property in each of the major capital cities you should have good capital growth each year overall,” she says, adding this will also help you avoid land tax.
Fitzgerald also says there are a few tricks to spotting a good property investment, including choosing a desirable neighbourhood; quality schools; low crime; a stable job market; attractive amenities such as public transport hubs and shopping centres.
General manager for Cohen Handler Queensland, Jordan Navybox, adds that a good rule of thumb when looking to invest is to avoid so called ‘hot spots’ from the previous year. “Areas that have grown more than 20% in a single year, and outside a capital city – the following year, they’re the ones to avoid,” he says.
What to buy
Before you buy a property, it’s important to know how to invest in property. Agents will always tell you they’ve got the right investment property for you, but it’s more important to avoid the wrong ones, says qualified mortgage broker and UNO consultant, Aaron. “Instead of finding the one needle in the haystack, disregard the problem ones,” he says.
Aaron says where to buy and what to buy will depend largely on an individual’s circumstances, but as a general piece of property investment advice, it’s better to buy land over an apartment. Land is an appreciating asset (people will always want land) whereas apartment blocks can be stacked one on top of the other, which can lead to oversupply and drive values down. “If you’re buying an apartment, you just need to be a bit more savvy,” he says.
You often gain access to a portion of land when you buy an established property (as opposed to a new property). Established properties tend to offer more security because they don’t undergo the same price fluctuations as newer properties do. With a new property, there’s a chance you’ll pay more than the property is worth because real estate agents don’t have a guide to the sale history like they do with established properties.
Established properties do suffer wear and tear, however, which means you’ll likely have to spend some money on maintenance. It may be more difficult to rent an established property out to a tenant who wants all the mod-cons. But you can also make improvements to an established property and increase its value.
New property
A new property, on the other hand, offers an instant advantage when it comes to maintenance. As long as the builders do their jobs well, you shouldn’t have to worry about getting things fixed up (at least for a while). Furthermore, builder’s insurance should cover any structural issues you discover after making the purchase. You can also claim depreciation for the property’s assets from the beginning of their lifecycle.
You may enjoy higher tenant demand, and possibly charge more rent, because new properties have modern design features. You may however, also find demand is not as high as you’d like it to be if you buy a new property as part of a larger development. An abundance of similar types of property going on the market at the same time could lower the property value.
Buying off the plan
This is another option and refers to buying property before it’s been built. You usually pay a deposit of around 10% upfront, and don’t settle until after the property has been built. As it can take several years for the construction to be completed, this grants you more time to save money.
Unfortunately, that long waiting period can also have negative effects. If the property market falters after you make your purchase, you may find the property is worth less than you paid for it. Remember that you can’t carry out a valuation on a property that doesn’t exist yet. This means you’re using estimates to make your decisions.
Finally, you have to consider the possibility that construction won’t start at all. Many real estate developers won’t move forward with a project if they don’t make enough off the plan sales before they begin building. You’ll get your money back, but you’ll have wasted your time and may have missed out on other opportunities.
When to buy
Follow the cycles
Don’t buy in an area that has been on the list of investment ‘hot spots’ for a few years already, warns Fitzgerald. “Invest in a rising property market, in the early stages. Understand the property clock,” she says. Brisbane might be a great place to invest in today, but terrible tomorrow, for example.
Property valuer and principal of Suburbanite, Anna Porter, says research is key. A good thing to look at it is projects planned for cities that might increase the value of that place.
“Adelaide is at the right timing in the cycle – it’s at the early stages of its growth cycle,” she says, adding the new, $2.3bn Royal Adelaide Hospital is going to be a boon for the city, with all signs pointing to a strong rental market over the next few years. “As well as employment growth, there’s the flow on effect for florists, bakeries, cafes: all the local businesses are going to see the impact.
“You’re not getting the highest yields in the country but you’re getting some of the lowest vacancies and some of the strongest rental demand.”
How to make money from an investment property
There are basically two ways to make money on an investment property. One is to negatively gear the property and sit and wait for property prices to increase in value. The reason negative gearing is an attractive option for investors is because the net loss can be used as a tax deduction. You can also bank on capital growth over time, which cancels out any loss in rental income.
The other way to make money through an investment property is through rental yield. Yield is a measure of the rental income the property makes shown as a percentage of the property’s value. For example, a $600,000 property making $450 per week in rent equates to a rental yield of 3.9% ($450 x 52 / $600,000 x 100).
A property of the same value but with a rental income of $510 per week will have a yield of 4.42%. Higher yield means more income which in turn means a stronger cash flow position and more borrowing power for the next investment purchase.
If you get both capital growth and rental yield, this is known as a unicorn.
General property investment advice
Interest rates
Another thing to note is that interest rates for investors tend to be higher than they are for owner occupiers. This is because, as an investor, you pose more risk for lenders. You don’t have as much incentive to pay back your loan as you’re not living in the property and may have the mindset that you can sell it at any time. So be prepared for lenders to evaluate your risk profile when they look at your income and expenses.
Property management
Once you rent out your investment property, you’ll need to decide to manage the property yourself or hire an agent, which comes with fees. Many investors don’t live near their investment property so the former is not an option. If you decide to use an agent, be sure to check they are properly licensed. According to the NSW Fair Trading website, all property managers must hold a license or have a certificate of registration and work under the supervision of a licensed agent. In a large block of units, the agent may be an on-site residential property manager.
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This information is general in nature and you should always seek professional advice when making financial decisions.
