13 Things About Australian Investment Properties You Will Kick Yourself For Not Knowing
Property investors are often confused about the best way to select a property. The rules which apply for an owner-occupied property differ quite a bit from the investment piece. Many factors, internal and external, come into play. You have to be cautious about encroachments, title deeds, lease agreements and tenancy negotiations. At the same time, you have to keep an eye on location, infrastructure initiatives from the government, rental yield and capital growth.
Let’s figure out the 13 most crucial factors for filtering an investment property. This way, without exception, the wheat is separated from the chaff. You will also stumble upon that one little known secret of real estate investment which every investor will give their right arm to know.
The 13 Points of Property Investment
Here are the thirteen most significant factors related to Australian investment properties in my book, in no particular order:
1. Investment properties: know the seller’s motivation for selling
It is important to figure out what motivates the seller. The whole world, if you look into it deeply, is driven by urges of the psyche. A seller selling for reasons of the heart (emotion) may have different priorities than one selling for a portfolio reshuffle. So, look into the reason for the sale. Is the seller looking to sell the property because he/she is recently divorced? If this is the case, he/she will be more likely to settle for a cash transaction and be in a hurry to sell, bury the memories and move on.
At the risk of sounding a bit insensitive, these are the sales where the buyer can drive a harder bargain (always remembering that the seller is at an emotional trough and his vulnerability should not be used for maximising one’s profit beyond a point). Let us take another hypothetical instance where the seller is opting for an income stream. In such a case, he will check and recheck all the documents, all the deeds and make sure that the property price is at par with the market.
As a buyer, you have to be on your guard and prefigure the seller’s motivation. It will be wise to remember that unless the seller is too drained emotionally, he or she will also leave no stone unturned to find out your reason for buying. And if the seller comes to know of your personal emotional attachment to the property in question, you can anticipate sky high selling prices.
2. Real estate investment: rental growth more important than flat rent
Investors and their lenders do not give much importance to flat rent. They are keener on understanding what the rental growth on offer for the property in question is. Characteristically, they look for a 2 to 3 percent growth (based on the CPI). When growth is in sync with the consumer price index, there is a near guarantee that the property will keep abreast with inflation.
3. Investment property in Australia bought with lease term in mind
The longevity of the lease term is also an important consideration for any property investor. Ideally, investors look for a long lease term. It is reassuring for them to know that the tenant renting their property will stay for the next 12 years or so. It is not to say that they are averse to the idea of a mid-term lease.
It is a point on which they are ready to budge if they feel they have grabbed the ideal tenant. If there is a short term lease being asked for by the tenant, the investor (and the lender, too) likes to know what may be the motivation behind leasing for a short term and what may make them renew their contract.
4. Investing in property: read about CAM charges you can attach to rent
With regards to Australian investment properties, the lease has another important dimension to it. It is important to prefigure the cancellation options (or otherwise) in the lease document. What if the tenant exercises the option and revokes the lease? Does it bring the investor into uncertain territory? What expenses can the investor pass on to the tenant, being the landlord of the property?
Which party needs to maintain the property and what is the annual pass through cap? The pass through charges or the common area maintenance (CAM) charges include those expenses which the investor cites to the tenant according to the regulations of the particular province. The CAM charges may be referring to the sweeping of the parking area, control of grass or weed, emptying the trash dumpster or receptacle and cleaning the sidewalk.
5. Buying an investment property: prefigure creditworthiness of tenant
The creditworthiness of a tenant is of course crucial. Investors seek security whenever they give out their investment property on rent. Let me begin by saying that there are two kinds of investors.
Some investors belong to the group which keeps capital growth at the top of their strategy and hence gear their properties negatively. On the opposite end are the ones who look for positive cash flow. To this effect, they seek rent which is higher than the mortgage and repair costs. It helps them refrain from paying through their pockets. So, those creditors who pursue a consistent rental stream always seek a creditworthy tenant. Nothing less would suffice.
There are good reasons for wanting it this way. If the tenant has a malicious mindset, he may damage the property a great deal (sometimes beyond redemption). This raises maintenance and repair costs. At the same time, such tenants are likely to default with the rental payment. Together, this can really erode the positive cash flow of any investor, something which is a bipolar opposite of their investment strategy. So, you can fathom why tenant creditworthiness holds great importance in their books.
6. Property investment: search for the scarcity factor
Investors look forward to buying a property with the “scarcity factor”. It is that factor which becomes the unique selling point of a property and separates it from the others. The best properties are not those where nothing more can be added but those where nothing can be subtracted. Such properties are rarely found. Apart from these, there are various properties which have one or two unique points going for them. This way, they remain in demand even during a bearish market.
7. Department of Housing points to mass migration towards CBD
Which location are you investing in? Is it an area well within the targeted range of prospective buyers? Let me bring home my point better.
A couple of decades ago we were really obsessed with large suburban mansions. The idea of living close to the CBD was distressing. Today, we have made a clean departure in taste and are quite willing to downsize in order to remain close to the cafe culture (full of amenities and facilities) of the inner city. So, naturally, if you buy a property in such fancied areas, they are more than likely to give you a pretty high ROI.
Location is the key due to many other factors. There are some areas within a neighbourhood where you will find the comparable sales figure to be higher than the other. It may be due to the perfection of the underneath land, the proximity of heritage properties, the right infrastructure initiatives or some other thing. But the bottom-line is that unless you buy in these areas you will not get the best deal either in terms of capital growth or rental yield.
8. Investment property calculator: diverse drivers of local economy
What are the drivers of growth in your chosen area? Is it governed by multiple economy sources or is it heavily reliant on one product or service? You don’t have to look back farther than the mining bust to pick up some lessons. All those areas which were solely reliant on the mining industry found out that their economy slipped when the boom ended. The value of their real estate slipped along with the economy. Some of these places are still picking up the pieces from the mining bust.
On the contrary, if the local economy is fairly diversified (a well-guarded secret of real estate), the well-to-do sectors take the brunt of the fallen sector and keep the momentum going. Imagine a hypothetical case where those areas in Perth which were laid waste after the mining bust were also supported by the construction sector. Naturally, in such a scenario, Perth would not have hit rock bottom back then and would have managed to carry on after the mining crisis.
9. Australian investment property: vacancy rate as crucial as high rental appraisal
Only a high rental appraisal is not a guarantee of a smart rental yield. What if the rental appraisal is high, but so is the vacancy rate? A high vacancy rate will never let investors (landlords) ask for decent rent. With a higher vacancy rate, the dynamics tilts towards tenants and they enjoy great negotiating power. On the other hand, a low vacancy rate commands that the landlord can charge anything (within ethical boundaries, of course).
This boosts positive cash flow for investors as the disparity between mortgage and rent increases. Sometimes, as is well known, investors add CAM and other charges when they find the distance between mortgage and rent shrinking and lack the market conditions to spike the rental rate.
10. How does equity work?
If you are buying your investment property way above the market price, you are entering the property with a negative equity which is hard to erase. Some properties have everything going for them in terms of capital growth and in the first couple of years, they offer really smart returns. However, buying even such properties far north of the going rate can be an “equity suicide”, so to speak.
When the market is bullish, investors get carried away and justify their overpayment, saying the market is in runaway mode and will compensate for the loss. A small counter-cyclic movement kills their best hopes. Even in those cases where the market moves according to their plan, small corrections can occur due to several external factors. Cumulatively, these hinder the free run of capital growth. The overpayment will begin to hurt then.
11. Property investment in Australia swears by investment strategy
Buying an investment property is always an enticing project, but seasoned investors will tell you that it is crucial to keep the investment strategy in mind while buying these properties. To illustrate my point better, let us take the example of an investor who has both the negatively and the positively geared properties in his portfolio. He has chosen such a strategy so that he can create equity through positive cash flow and at the same time reap tax rewards through negative gearing. Naturally, all his buying efforts will be centred on keeping a balanced profile.
So, it is not hard to decipher that it is important to keep tabs on the investment strategy. Also, remember that properties are illiquid assets. They cannot be converted into cash readily, say, like bonds or shares.
A well diversified portfolio is one which has a steady mix of liquid and illiquid assets and hence your property purchase will depend on your portfolio, too. If you are planning to go big with the shares in the next fiscal, you will want a ‘flipping’ property that can be modified and sold for a higher price next year so that enough cash is released to buy the desired number of shares. This is just one example out of many.
12. Australian property investors should look towards luxury homes (if their budget allows)
Luxury homes have given the impression of registering higher capital growth than their counterparts in recent memory. Even when the residential property market was beginning to show signs of emerging from the plateau, luxury homes were posting decent returns. There is a currently a strong demand for premium homes and the performance of the prestige market is a fair indication. Take the instance of Point Piper, Potts Point, Vaucluse, Elizabeth Bay and Rose Bay in the Eastern Suburbs. They are enough signals in favour of the trend.
The luxury segment is only expected to charge ahead from here, given the global hotspot status Australia enjoys at the moment. I must concede though that the attention of overseas buyers is, for now, stuck only on Sydney and Melbourne.
13. Investment property for sale: fixer-uppers for real estate flipping
Investors either go for the medium or the long haul or they turn their strategy towards site flipping. Here, they intend to buy a home (generally a fixer-upper) at a fairly reasonable cost and undertake renovations, extensions or additions to get the home appraised higher by an independent valuer. This way, the strategy helps investors fetch the best bang for their buck in a very short time. Of course, it is important to assess beforehand what kind of renovations go well for the targeted buyer group and if there is some way uniqueness can be imparted to the property.
Remember, we are talking about a fixer-upper here so the renovation has to stick to a budget in order to escape overcapitalising. It is worth noting that even high-end renovations do not add much to the price sticker for fixer-uppers and the plan, generally, is only to spend enough to make the property more presentable so that it can be latched by prospective investors.
Your investment property: I will be more than glad to give you a hand
If you have an investment property in mind, I can work with you on your project and ensure that you get the best deal (in a market that may force you to buy above the going rate on several occasions). It is worth mentioning that I consider myself fortunate to belong to a fraternity which never faces any conflict of interest.
Unlike many professionals involved in real estate, our sole interest is to protect buyer interest. As a buyer’s agent serving the Eastern Suburbs in particular and Sydney in general, I would love to hunt those properties for you which are in sync with your investment strategy. Feel free to contact me today.