10 Things to Consider Before Buying an Investment Property

8/2/2019 10 Things to Consider Before Buying an Investment Property

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1 0 THIN G S TO C ON S ID E R

B E F ORE B U Y IN G AN

IN V E S TM E N T PROPE RTY

1 . L O C A T I O N

2 . T I M E A N D T I M I N G

3 . Y I E L D 4 . G R O W T H

5 . A S P E C T

6 . N E W V E R S U S O L D

7 . S I Z E O F P R O J E C T

8 . R E S A L E T O

O W N E R - O C C U P I E R S

9 . I N F R A S T R U C T U R E

1 0 . V A LU E O F A D V I C E

wealthadviser Financial advice, at any stage of your life


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Dear Reader,

We are delighted to provide you with a free copy of this

ebook.

We hope that some part of what you read in this ebook is

benecial and of service to you.

As nancial advisers with years of experience, we help peo-

ple make educated nancial decisions throughout various

stages of life.

Ring us today on (02) 9248 0444 to make an appointment or

directly via www.wealthadviser.com.au

Introductory meetings are free and carry no obligation.

Best regards,

Frank Paul

CEO

Wealth Adviser


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Prepared byWEALTH ADVISERFinancial advice, at any stage of your life.

Contents

INTRODUCTION

1. LOCATION

2. TIMEANDTIMING

3. YIELD

4. GROWTH

5. ASPECT

6. NEWVERSUSOLD

7. SIZEOFPROJECT

8. RESALETOOWNER-OCCUPIERS

9. INFRASTRUCTURE

10. VALUEOFADVICE

CONTACTDETAILS


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Congratulations,you are on the right track towardssuccessful property investment.

As anyone in the business willtell you, research is a hugepart of the process.

If youre interested in finding out more about how to invest in property this book will

serve as a primer on what you need to start thinking about. One point we would

like to clarify before we go any further is that we are investors rather than entrepre-

neurs, and this book has been written with this in mind. When we talk about

property investment we are referring to buying and holding for the long term,

as in 10 years or more, rather than entrepreneurial activity where one buys with a

view to renovate or develop and then sell.

INTRODUCTION


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1. LOCATION

Think of location, and comments such as its a block

from the beach, theres a school within walking dis-

tance, or the train station is two blocks away

probably come to mind. Thats because a person

looking for a place to live typically has these

considerations at the front of their mind.

As a property investor you also need to consider

location in these terms, because your prospective

tenants and most of your future

potential buyers owner-occupiers

will care about these things too.

Essentially though, an investor needs to consider

location on a higher, more strategic level. In residential

property investment, location matters in terms of what

it means to the market a prospective property is in.


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What do we mean by this? If youre thinking about buying an investment property, consider the location

in terms of finding the right market to invest in, because real estate markets are defined by

specific geographical areas.

Lets say your recently purchased investment property is a duck, floating on a pond, and that pond is the

suburb youve bought in. As it rains and more water enters the pond, the water line rises, and so does the

duck. Just as house prices overall in your suburb rise, so does the value of your house.

Gains in real estate investment are about the water line rising in your pond.

If the area youve bought into is increasing in value, its likely your property will too.

Make sure the specific

market you are in is healthy and vibrant,because if it rises even if you have got some

other decisions wrong you are going to be dragged along with that

specific markets overall performance.

You can buy junk in a r ising market and it wil l not matter because

everything ends up going up.

If youd bought junk in the Eastern Suburbs of

Sydney 10 years ago, today you would be

sitting on some very expensive junk today. Were not advocating

buying property that is below par. Were only suggesting that your

first consideration be the specific market your property is located in.

So if its deciding between Sydney or Brisbane, thats only the start of

the decision-making. Pay attention to how close a prospective

investment is to basic amenities, and other aspects of its location,

but focus on which specific market the

property is located in, and what that market is likely to do in future.


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2. TIMEANDTIMING

They say timing is everything, and in real

estate this certainly can hold true, but it all

depends on what your objective is.

Timing is often the primary focus of real

estate entrepreneurs, who make a very big

deal about when to buy, and when to sell.

Indeed timing is very

important if you are going to be in the

market for only a couple of years. In thiscase, if you overpay just slightly for a

property, and the market doesnt behave

itself, youre in trouble.


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Buying at the right time is a secondary consideration. If you pay a fair price for a good property in a market

with the potential for growth and you are holding it for the long term, timing is much less of an issue.

Lets face it, no one has the ability to see into the future, or to pick the bottom or top of the market. You do

have the ability though to implement a strategy which views time in terms of duration. Focusing on buying a fair

value property is more integral to the success of a property investment than just trying to get the timing right.

Once youve decided to invest long-term, and to find a fair-priced quality property in an area with good growth

potential, timing becomes a secondary consideration. Thats because theres an inverse correlation between

the term of the investment and the need to get the timing right. If you hold a property for 10 or 20 years, timing

becomes less and less important.

As investors though, the focusneeds to be on paying fair value fora property and buying in

the right market

The classic example of this is your typical mum and dad, who bought a property 30 years ago for $30,000.

If theyd overpaid by 10% (it was actually worth $27,000), would it matter? Today that property is worth

$600,000, so the fact that they overpaid becomes irrelevant. Time has reduced the importance of timing.

Timing matters, but what you really need to consider is how long youre going to be holding onto a

property. If youre an investor, rather than an entrepreneur, dont fret about timing.

As long as youre paying fair value, time will take care of the rest . I f you overpay then its obviously going

to take much longer to make up for that mistake. So the focus should be on finding a property of fair value, and

then holding it for the long term.

(which refers to our first consideration, location).


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The bargain-hunting buyer expends huge amounts of t ime and

energy looking for the cheapest deal, and two to three years later

no property has been purchased yet, because they are still

trying to squeeze out a bargain every time a property comes up.

Meanwhile, the markets gone up 10% and the bargain hunter has

missed out on growth in the market.

Now were not going to tell you to ignore everything weve said about

holding for the long term, but it should be said that no amount of time

can save you if youve entered into a market you havent

properly researched. Buying fair value and holding for the long term is

the essence of no-frills real estate investment, but rst and foremost,

be aware of the market you are entering into.

You must be armed with as much knowledge as possible in order to

make a good decision. If you dont have the time to do the

necessary groundwork, nd someone who can advise you. Holding

for the long term is an excellent strategy for an investment as illiquid

as real estate, however, its not always going to save you if youve

chosen the wrong market to buy in.

When it comes to timing, the message to investors is clear: dont

focus all your valuable time and energy trying to forecast the troughs

or peaks of the real estate waves. A long-term investor understands

that real estate on average increases at or faster than the rate of

ination, and that paying fair value for a property in acarefully selected market is what matters.

One of the negatives ofexcessively worrying about getting

the timing right is thebargain-hunting mentality, because

it often leads to inaction, and anunnecessary delay of a purchase.


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3 . YIELD

The higher the yield the better, right?

Certainly this is the traditional take on yield.

To calculate yield, total up the income you wil l receive from a

property in a given year and then divide this by the value of

the property. Yield is expressed as a percentage. It pays to be

aware of the dynamics behind high yield, because the higher

the yield the better is not necessarily always true.

An example of a situat ion where high yield alone may not be

enough for a sound property investment is in recent trends in

some mining towns around Australia. When a mining company

sets up a local division of its operations in a small town, it brings

a raft of new workers with it. These new temporary residents

need somewhere to live, so the company might lease 200houses in the one town, paying $400 per week to rent houses

that are worth around $200,000, for example. This works out to

around 10% yield, which is fairly high for residential property.

Does high yield alone make this property a smart buy?

Not necessarily. As the yield goes up dramatically, house prices

start to follow, as other investors, spurred by the high yield,

come into the picture and buy houses in town. This unnaturally

inflates the market.


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The problem arises when the company decides to wind down or pack up i ts operat ions, say five years down

the track. Rents return to normal in the area and house prices follow again, this time going down.

If youd been unlucky enough to buy a property in this town at the peak of the price rise, and then wanted

to sell after the company had left town, the prospects of either high yield over the long term, or high capital

growth would both be very unlikely.

High yield must be treated with caution because it can come at a big cost to growth. As an astute investor you

must have an understanding of what the dynamics are behind abnormally high yield. To determine this, youll

need to do some research, gain local knowledge, and understand what trends are active in the relevant market.

in Sydney, for example, yield has been rising and is approaching close to 5% at the moment (2008). This is

driven by a number of factors such as an influx of new immigrants and a shortage of dwellings, which indicate

continuing future demand. This bodes well for the long-term capital growth prospects of the city.The aim is to find an equilibrium betweenyield and capital growth. You also mustconsider that markets are determined

geographically, with yield changing fromarea to area.

In the ideal scenario, an investor is able to strike some sort of equilibrium where a property with a reasonable

yield (which then keeps the costs down of owning it) also has good capital growth prospects. Generalisations

such as high yield is always good and low yield generally means overpriced real estate should never be

taken at face value. A little knowledge can be a dangerous thing, and it takes an experienced, educated mind

to see through it.

For example, waterfront real estate has a long history of low yield, but that does not preclude it from being a

good investment. The potential for capital growth of a waterfront property is so significant it could, in certain

situations, outweigh the deficit in yield. So the goal is to find a balance.


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4. GROWTHCapital growth refers to the increase in the value of your property over time. You buy a property for half a

million dollars and then 10 years later, its worth a million dollars. As discussed earlier, yield is part of the

property investment equation, but particularly in residential real estate, capital growth is just as

(if not more) important.

When considering the growth prospectsof a specific property, it helps to begin byidentifying what drives property growth

in general.


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First and foremost are the forces of demand and supply,

in other words people wanting houses and the

availability of houses. Demand includes the existing population and the

new population arriving or departing. Supply covers both existing houses

and new houses being built. Naturally, demographics play a

big part in the supply and demand equation,

and therefore in the capital growth potential.

The demand for housing isstrong, but as intelligent

investors, we would not stop

our analysis of the region here,because supply needs to be

considered as well.

Inflation is another factor which can put upward pressure on house prices

and result in capital growth. Demand and supply can be static, but if

the cost of building a house goes up then so do house prices overall.

As builders salaries and materials become more expensive, the price of

building one house goes up, and it makes that house more expensive.

This price r ise spreads to every other house around,

even if they were built for less.


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Another factor which impacts property prices, and therefore capital growth, is money supply. Interest rates

affect money supply the more they drop, the more money banks will lend based on the way their formulas

work internally. The invention and engineering of financial products also affects money supply. Not long ago,

no one would have dreamt of lending you more than 80% of the purchase price to help you buy a property,

but times have changed, and on the whole it has become much easier to borrow. In some instances 100% can

be borrowed.

All capita l growth can be explained by supply and demand, inflation, and/or the supply of money. So if youre

looking at a property that has doubled in value, it has doubled for one, two or all three of these reasons.

On the other hand, you could have had dropping interest rates, finance product innovation and an increase in

supply of money, just fewer people to buy houses, so prices do not move.


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5. ASPECT

Aspect refers to which way a

property faces. The accepted truth in Australia is

that north-facing is good. A north-facing aspect

usually means more direct sunlight, for more

of the day. When considering any property

then, is it a matter of north or nothing?

In a recent development of 20 units in

Maroubra, in Sydneys east, quite a

few of the units faced south but they

looked over the water.

If north-facing only was our

stipulation, we would have missed

out on these properties in the

development, which may well have

had more potential for higher yield,

higher capital growth or both.

Every property needs to be taken on

its merits, so there is no absolute truth

when it comes to aspect. What really

matters is how aspect affects a particu-

lar property and what that means in terms

of brightness and sunlight.


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A north-facing property that receives direct sunlight all day can sometimes receive too much sunshine,

and not everyone wants to have to keep the blinds drawn and the air conditioning on all day.

When considering aspect its not just a matter of north, south, east or west, but what this means for a

property given its design, and how this plays out it terms of light. Viewing a property at different times

of the day is a good tactic, as is looking out for areas with minimal light and the potential for mould and

dampness problems.

Every property needs to be assessed on an individual basis. Shying away from anything other than

north-facing, for example, could mean you potentially miss out on a more suitable investment.

You may have a general idea of what isdesirable in an investment property,

but there is no substitute for being out inthe field, doing the research. If you donthave the time to do the legwork yourself,consider using the services of someonewho can do it for you.

What really matters is how

the design of a property interplayswith the direction it faces.


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6. NEWVERSUSOLD

You and I buy a renovators delight, pay forland value, demolish, build a brand new

house on it, and make lots of money.Thats being entrepreneurial, and it makes

for great dinner party conversation.Buying a new property, holding it withminimal capital expenditure and forgetting

about it for 10 years may not make suchgreat conversation, but it can be a much

better way for someone with aday job to invest intelligently.


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Lets begin by understanding what goes into the value of a property. When you pay half a million dollars for a

property you are buying two things: land (or space), and bricks and mortar (the physical structure). The land

itself is an appreciating component (assuming demand is fuelled by immigration and other factors), so it only

becomes more valuable with time. The physical structure, on the other hand, becomes less valuable with time;

its depreciating. So property has two components: land value and physical structure. One goes up in price and

one goes down.

If you were to buy a property and not spend a cent on it for 25 years, you can imagine how deteriorated it

would be. When you sell the property, all you are going to get back is the land value. But this is not typically

what happens.

In reality, what happens is that the structure deteriorates, and then gets upgraded with a new bathroom, a new

kitchen, new floors, and more. One thing that does not get measured in real estate is the spending involved in

keeping a place up to scratch, known as capital expenditure.

Not everyone has the time or desire tospend endless weekends renovating aproperty. If you have the time,

knowledge and dedication, then youmay want to stay away from new, butmany people either cant or dont wantto spend their weekends renovating. Ifyou are one of those people, it is worth

considering why a new property can bea much smarter, cheaper and morecarefree way of investing in real estate.


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When a half-million dollar property becomes a million dollars, what isnt mentioned is the amount of capital

expenditure that went into the property during the time someone owned it.

Every year, billions of dollars and countless hours are spent on improving the structure of investment properties. Its a

signicant amount of money, yet its not mentioned in any real estate data. When median house prices are measured,

and their growth is documented, capital expenditure is not factored in, but it should be.

The costs of owning an old property are big,yet an estimated 90% of property investorsbuy an old property. Why is this the case?

One can only assume that when it comes tochoosing old versus new, people associatenew with costing more, but not everything isas it seems.

When the extra tax benets of owning a new property are considered, the ongoing holding cost of an old property is

about three times the cost of a new property of the same value. For example, if you were to purchase an investmentproperty around $500,000, it might cost you $15,000 per year to run if its old, and $5,000 per year to run if its new.

An entrepreneur would never consider a new property because they would be looking for the opportunity to

add value. But if youre an investor after an invest and forget strategy, new makes sense. Old properties not

only cost more to own, they often require more time and effort to own.

Buying new gives you a property with no capital expenditure for as long as possible. It might be five or six

years, sometimes even 10 years if youre lucky, before you start having to spend $20,000 for a new kitchenor bathroom.

A new property also requires minimal or no investment of time, and no cal ls from real estate agents about the

hot water system or the plumbing. If you select well, and youre able to buy a new, rentable property with good

yield from day one, and it costs you next to nothing to hold, you can forget you even have it, and that is the

value of buying new.


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7. SIZEOFPROJECT

When considering aninvestment property, its

worth thinking aboutwhat size of development

a property is in.The size of a project

matters because it can

have far-reachingimplications for

exit strategy, which issomething investors often

dont think about when

they are entering aproperty transaction.

If you are considering buying an apartment that will be one

of 200, youll need to think about what that means if you

want to sell your property down the line.

In large developments there are almost always 10

others for sale. When this is the case, the most

desperate vendor determines the price for everyone

else. Because the apartments are so similar, it only

takes one or two vendors who

want a quick sale to bring down prices. By willingly

accepting a lower price than what their property

is really worth, these vendors cause a downward

pressure on prices for everyone else. This is one ofthe risk factors to consider in large developments.


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Another reason you wil l need to consider s ize is because

large developments can result in investor ghettos.

These are projects that have been predominantly

sold to investors rather than owner-occupiers. This

is another situation where the selling price can be

negatively impacted.

A much better option is a smal ler development that has a

healthy mix of owner-occupiers and investors.

Owner-occupiers create better prices for a number of

reasons. Instead of being driven by calculators, they are

driven by emotion, so they are willing to pay more for a

property. Pride of ownership means they will also tend to

look after a place better than renters.

Small projects of 20 to 30 apartments areoften the best size because the risk ofcompeting for buyers is much lower when youare selling. The risk of an investor ghetto is

also smaller. In some instances it may be outof your control, but it should be part of theconsideration process.

One way of deducing whether you are

potentially buying into aninvestor ghetto is by speakingto the developer of a project beforehand.

They will often be able to tell you how manyowner-occupiers versus investors

have bought into the project.


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8. RESALETOOWNER-OCCUPIERS

Understanding the characteristics of a property that make

it easy to sell is an important yet unconsidered point when buying a property.

You dont consider exit strategy

when buying shares because it costs$30 to sell your shares, but it sure doesntcost you that to sell your property.


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Selling a property costs time, money, energy, real

estate commissions, negotiations, heartache and

stress. So anything that can reduce that stress and

increase the final price in your hands is good. The

best way to deal with exit strategy problems is to buy

something that an owner-occupier would be happy to

buy later.

At any given time,about 80% or more ofbuyers in the marketare owner-occupiers,

and the remainder areinvestors. So if youare trying to find aninvestor to buy yourproperty, you may belooking for a needlein a haystack.

A serviced apartment, for example, may seem l ike a

good option at first. A holiday rental in a newly

discovered resort town, with its high rent during

weekends and holidays, would be enticing.

Down the track when you try and sell it, however, you

only have a small number of potential buyers.

Compare that to a unit in a small block, on a quiet

street in a leafy area of Sydney, with transport to the

CBD nearby. You are appealing to a much larger pool

of buyers, and it will make selling your investment

property a lot easier, and generally with a better

end result.


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9. INFRASTRUCTUREPicture a house in the desert, with nothing

around it. This property, just standing on its own,

has a certain value. Someone comes along and

builds a big, blue lake next to it. The value of

that property is no longer the same

it has (presumably) increased in value because

of something thats happened next to it.

Someone else comes along and builds a shop

nearby, and not long after someone else comes

along and builds a school and a road. All of

these things affect the value of that property.


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In the same way the house in thedesert gains huge value from alake, school and road appearingnearby, a suburban Brisbane unit,for example, can growsubstantially because ofwhat is going to be around it.It pays to consider what existinginfrastructure is nearby aprospective investment,and what future infrastructureis in the works.

For example, in the area where you are looking for a property, the local council

could have plans under way to turn an unsightly industrial zone into retail space,

including a supermarket. This one change could affect the whole face of the area,

and increase the value of your investment.


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Infrastructure also plays out on a much larger scale. For example, the state government decides to build

a $2 billion port in an area which was once purely industrial. What that normally results in is a marked change inthe whole area and surrounds.

A sharp increase in employment produces an injection of money into the area. More people wil l look for

somewhere to live nearer to work, which puts upward pressure on housing.

Big infrastructure projects are a reasonable leading indicator for what will happen for the future of house prices

in an area two or three years down the line. So, it is helpful to know where and what infrastructure is in

the pipeline.

Infrastructure can also work the other way, and negatively impact an area and the value of a house.

For example, the addition of a tunnel or freeway nearby might bring down property prices in an area.

Infrastructure can and does have a far-reaching impact on property values. You need to have the knowledge

to be able to make a good property decision, which means either undertaking research or employing someone

to do it for you.


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10. VALUEOFADVICE

As youve gathered by now, there are a lot of considerations

which go into making an educated real estate investment decision.

The more knowledge you have, the better the decision you are

going to make. You can go out and collect the informationthat you need, or you can get people to

help you with the decision-making process.

So what are some ofthe sources for advice?

Your local real estate agent,a get-rich-quick seminar,

or the local library, are themainstays. Reputable,

knowledgeable and accessible

property advice is not easy to find.


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In Australia, the property advice sector, relative to other financial advice, is largely unregulated.

Federal legislation and the Australian Securities and Investments Commission (ASIC), which enforces

company and financial services laws to protect consumers, investors and creditors, do not recognise

property as a financial product. Both are silent on how it should be treated and how it should be advised

on. State-based legislation, which applies to real estate agents, mainly covers the mechanics of a

property transaction.

Because of this legislative vacuum, it is very difficult to find a reputable adviser specialising in investment

property. Unfortunately, in the past, this area has been tainted by many unwieldy, unregulated operators

who have profited from the desire of everyday Australians to get advice on how to enter the

investment property market.

A new breed of advisers is emerging and proactively fil ling that void, bringing a planning and

research-based ethic that is enshrined in federal law. We are proud to say that we are part of this

new generation, and we believe we are on the cutting edge of delivering this new type of service.

We voluntarily bring the same ethos we apply to financial advice to investment property, treating it as

though it were any other financial product. This means we research it, provide strategy around it, bring

expertise to the selection of it, and help with its implementation.

Do you like what you see? We aim to provide a no-nonsense property advice service based on research

and disclosure. What we do is simple but not easy, as locating a good property requires extensive

and exhaustive searches, combined with expertise and local knowledge.

Our objective for all of our clients isessentially to locate a good property,in their price range, with minimal stressand cost, and maximum profitability.Let us show you how we can helpyou make the right property decision.Call us today on (02) 9248 0488to book an introductory meeting

with one of our advisers.


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CONTACTDETAILS

Wealth Adviser

Level 4, 99 Bathurst Street

Sydney NSW 2000

PO Box Q1470

QVB NSW 1230

Tel(02) 9248 0488

Fax (02) 9248 0433

E-mail infot@wealthadviser

www.wealthadviser.com.au

Documents

10 Things to Consider Before Buying an Investment Property