When it comes to investing in property, you're advised to to do your homework and not be greedy, writes Mark Bouris.
Most of us have focused on the cash rate cycle in recent times, but there’s another cycle I’m interested in: Property.
Australian property prices were inflated leading up to the GFC, and then they started falling. Property prices fell more drastically in some of the major cities than in others. However, investment property was hit hard. Many investment apartments were liquidated, as households switched their outlook from debt to savings.
But it could be time to look again.
There are a few observations behind this: Firstly, interest rates are near 50-year lows, so debt is cheap.
Secondly, rental vacancies in capital cities are low, meaning strong demand for rental properties.
Thirdly, although house prices are now moving upwards in some cities, it’s a slow recovery nationally, meaning there is value for smart buyers.
Lastly, employment is still strong in Australia, meaning you can find a lender for an investment property.
Where would you start? Personally, I would rather make a profit on my property and pay the tax than be negatively geared, which entails booking a loss. Going for “yield” means buying well and having good equity in the property, so the costs don’t overcome the revenues.
However, if you want to negatively gear a property you must ensure you have an adviser because the ATO does not accept mistakes in your calculations.
But for the basics of what to look for in an investment property, I really like the check list used by RUN Property:
Location: Buy close to shops, train stations and schools; Scarcity: Art Deco and scarce architecture increases demand; Features: properties with views, outdoor living spaces or units with off-street parking; Demand: which can be seen in median valued properties, low rental vacancy rates and infrastructure which can support employment; and don’t forget capital growth and rental yield.
Now what about the ‘where’? Tim Lawless, RP Data national research director, has some great property figures via the RP Data Home Value Index. His research shows that, for the quarter, across the major cities, Darwin is the stand-out for rental yields: Darwin houses yielded (5.9%) and units (6%), while Melbourne houses (3.6%) and units (4.5%) were the worst-performing rental yielders in the eight major cities.
Most investors also look for capital gain in the property, and the RP Data figures are interesting for different reasons. In the year to October, only three cities’ dwellings have risen in value: Darwin (8.6%), Perth (3.5%) and Sydney (0.6%).
It’s worth looking also at supply. In Melbourne the supply question is still sorting itself out with apartments, which in the 12 months to October went backwards by 6%.
Regionally, it’s the mining areas where rental yields are strongest: the Bowen Basin and Port Hedland provide high gross rental yields.
When it comes to owning rental property, always do your homework, talk to experts and be realistic (not greedy). And good luck.
Mark Bouris is executive chairman of Yellow Brick Road, a financial services company offering home loans, financial planning, accounting and tax, and insurance.