The business pages seem to be full of property owner despair. It’s certainly a buyer’s market, and if you’ve got an interest in investing in an extra property, experts suggest it might not be a bad time after all to get into the game. An article on the Herald website looked at current trends in the investment property market, here are some thoughts on taking a plunge.
Yield And Capital Gain
Like the share market, there are two kinds of profit to be derived from an investment property. There’s yield (from rent) and then capital gains (from the increased value of the property). Choosing whether you would prefer the opportunity of high capital gains or long-term sustainable yield is a personal investment decision. The article in the Herald quoted an expert who suggested that you should look to invest in property that in undervalued, in an area that returns solid capital growth and has relatively low vacancy rates, which you can add improvements to. Other investors are more attracted by the potential of long-term tenants (skim the property pages on domain and you’ll see what I mean) in order to pay down on the mortgage, and increase equity in a property.
Apartment Or House?
The expert discussed in the Herald article speculates that apartments will become predominate as an investment choice, as one in four people live in single person households with little time to keep up a big house. While the great Australian dream is still burning bright (white picket fence anyone?), it’s a reality for fewer Australians as households get smaller. As always, it’s a personal choice and if the property is under-valued and looks like there is plenty of opportunity, whether it’s an apartment or house, it’s a good opportunity. You want to be looking for a property that can appeal across demographics- to young families as well as singles, for instance.
Public transport is a must. If you don’t have good public transport to the area you are investing in, you’ve just automatically cut out the whole segment of the population who don’t have a car or would prefer to save money and use public transport. It’s also good to buy in an area with long-term residents, hopefully people who own their own homes as they’re more likely to invest in the area and maintain the value of the area.
Cash Flow Positive Or Negative Gearing?
Generally, experts suggest it’s pretty difficult to achieve a cash flow positive when it comes to investment properties. As in, it’s unlikely you’ll have any income left over after you pay your mortgage and running costs of the property. The aim is to get to cash flow neutral, where the rent you are charging covers all your expenditure. The people quoted in the Herald article were wary of negative gearing (where your losses are claimed against your tax) although I know of people where it works out to their advantage to have it set up in that way. Investing in a rental property, with 2% rental vacancy in Sydney and some of the highest cost of living rates in the world, it certainly is a scenario that tips in the landlords favour.
If you’re borrowing to invest (and most people are), it’s important to work out a long-term strategy in order to ensure your finances are well-protected irregardless of what should happen. A couple of essentials include an understanding of the risk to other assets, especially that of the family home, an available income to withstand plateaus in the housing market, and an ability to sustainably repay what you’ve borrowed, hopefully with a capital gain over time.