Yahoo Finance 9 rules to guarantee success in today’s property market
We are in new territory.
Australia’s property market is going through an unprecedented period of growth that even the coronavirus pandemic can’t dampen.
Lockdowns across the country are becoming more onerous as the latest COVID-19 strain takes hold, pushing panic-stricken property markets higher and higher.
House prices are now rising at their fastest rate in more than 17 years, and they show little sign of slowing down.
Australia’s national median house price has climbed exceptionally close to the million-dollar mark at $955,927 – which is a huge 18.8 per cent increase over the year, or 5.8 per cent over the June quarter, according to Domain’s latest quarterly House Price Report.
So why are prices rising so fast?
Because there is a ‘perfect storm’ for house prices: low-interest rates, low housing supply versus strong demand, a flight to quality by investors and various government stimuli.
This combination is frustrating prospective first-home buyers who are being blocked out of the market as rising prices make buying property out of reach for many.
At the same time, the confusion caused by the lockdowns and the lack of supply is putting off many would-be sellers from putting their property up for sale.
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BUT, the rules for property investing don’t change
While there is a lot of uncertainty clouding the market at present, for those property investors who do want to get into the market for the first time, or add to their property portfolio, the fundamental rules remain the same as ever.
Because no matter if the market is hot or not, those investors who follow these timeless rules for real estate investment are likely to achieve ultimate investment success.
9 rules to succeed in today’s property market
Let’s look at 9 key beliefs for property investment, no matter what point of the economic or property cycles we are in.
Rule 1: Your long-term aim should be capital growth
Capital growth, or capital appreciation, is simply an increase in the value of your investment over time.
And this should be the ultimate goal for every property investor.
Because while cash flow keeps you in the investment game, it is capital growth which gets you out of the everyday rat race.
Building wealth through real estate is best achieved by buying quality investment-grade properties and holding them for the long term, allowing the market to do most of the hard work for you.
You see… residential real estate is a high growth relatively low-yield investment.
Sure after all expenses, your net yield may be less than 3 per cent.
But when you consider the capital growth you’ll achieve from a well located property, the overall returns are very good, especially in today’s low interest rate environment.
And as this capital growth is not taxed unless you sell your property – and why would you do that – this enables you to reinvest your capital to generate higher compounding returns.
On the other hand, rental income is taxed, leaving less to be reinvested.
This means for investors in the asset accumulation stage of their journey, the more capital growth you achieve (even at the cost of lower rental income) the more wealth you will accumulate in the long term.
The bottom line is that if you build a substantial asset base over time you’ll have choices how to live your life and if you don’t have a big asset base your choices will be more limited.
Rule 2: Demographics will drive our property markets
Is assessing demographics an integral part of the way that you build your property portfolio?
If not you could be missing the key to building long-term wealth without significant risk.
Understanding demographics could and should be the final piece of the puzzle for you during the decision-making process.
After all, we are looking for locations that can ride out a downturn and produce above-average rates of return in the good times.
And COVID-19 lockdowns are accelerating this trend further as a large chunk of white collar workers realise they can easily work remotely and neighbourhood has become more important to them than ever.
Another trend accentuated by COVID is that the rich are getting richer and Australia’s middle class is disappearing.
You see, many people think wealth distribution is a bell curve, with most of us in the middle and outliers of rich and poor.
But it is becoming more like a U-curve with the middle class disappearing and instead Australia's population being divided starkly between the rich and the poor, with little in between.
So what do property investors need to do about this?
Look for areas where more affluent highly skilled knowledge workers live or rent, and you’ll often find these are gentrifying locations.
In other words, suburbs where wealthier people are upgrading and moving to.
This demographic can afford to and are prepared to pay a premium to live in these aspirational and lifestyle locations.
So how do you find these gentrifying suburb?
One of the easiest ways to find a suburb that is improving is to go for a drive and a walk.
You’ll “know it when you see it” because you’ll find evidence that people with money are moving in:
They will be spending large amounts of money renovating or extending their homes.
There will be SUV’s parked in the driveways rather than old Ford Falcons and Holden utes.
The nature of the shops is changing. The gyms are offering Pilates; the cafés sell cold press coffee, and the deli’s serve goat’s cheese pizza.
Other things you should look for are:
Are the number of children under 19 years of age decreasing faster than the state average?
Is the local population getting younger? The number of older people should be decreasing faster than the state average.
Are there more affluent two people households? Is the number of couples without children increasing faster than the state average?
What are the educational qualifications of the residents? Is there a larger number of people with tertiary education? Are there more professionals?
As a property investor, if you can pick an area going through gentrification, one that’s shifting from dreary to in demand, you can benefit from its accelerated growth.
And the good news is that you don’t have to get your timing perfect — the gentrification process lasts a number of decades.
Rule 3: Location, location, location
As always, investors should never forget one of the timeless rules of location.
Because when it comes to capital growth, location will do 80 per cent of the heavy lifting.
So, find a location where there is strong economic growth which will lead to job growth which will lead to population growth which will lead to demand for housing.
You’ll find this will occur particularly in our East Coast capital cities.
Then, given the long term trend of the rich getting richer and the widening gap between the rich and the average Australian is not going to change, you should look at wages.
You can look for suburbs where wages have grown faster than the state average – these are often gentrifying suburbs or established “money belt” locations.
And you should only buy in areas where the local demographic has higher income levels so they can afford to both improve and pay more for properties.
Because people living in many of the cheaper locations and regional Australia will experience minimal wages growth over the next few years, so there will be limited possibilities for capital growth of the real estate in these locations.
Rule 4: Remember rent affordability is linked to wages
As with the above, make sure you take into account the local going rate for rent when researching an investment property.
Because, as obvious as it might sound, rent affordability is linked to wages.
When you eventually retire, and enjoy the longest holiday of your life, your income will depend upon your tenant’s ability to pay the rent.
Fact is, some areas won’t be able to get higher rentals. These are locations with tenants that are often one or two weeks away from going broke.
On the other hand some people rent, not because they’re close to broke, but because they choose to live in aspirational locations or renting suits their lifestyle and this type of candy is more likely to be able to afford rental increases over time.
Rule 5: Focus on continued strong demand
Location is one thing, but buying the right type of property in the correct location is also very important.
Investors should always look for a property that will be in continuous strong demand by owner-occupiers.
The pandemic has changed the way we live, work and what we want from our properties.
Urbanisation has taken a back step as Australians increasingly relocate to smaller city suburbs and villages, working from home has become the norm, and unsurprisingly densely populated large high-rise apartment complexes are falling out of favour as buyers increasingly look for properties with more space and the ability to self-isolate.
Being locked in a Coronavirus Cocoon has also shown us the importance of our third place – our neighbourhood.
Third place is a term coined by sociologist Ray Oldenburg and refers to places where people spend time between home (‘first’ place) and work (‘second’ place).
These so-called “third places” – the restaurants, bars, gyms, houses of worship, barber shops and other places we frequent that are neither work nor home - have never been so important.
If you can walk out of your home and you’re within walking distance of, or a short trip to a great shopping strip, your favourite coffee shop, amenities, the beach, a great park, you will appreciate the benefit of the third-place – the importance of your neighbourhood.
Rule 6: A brand new property is like a brand new car
Buying a brand new property is like buying a brand new car in that it carries a premium.
Depending on the make and model of car, you can lose anywhere between 10-15 per cent of a new car's value disappears once you drive it off the dealership lot.
And you can apply the same concept to those brand new properties you’ve been looking at.
Sure, you get tax benefits and maybe stamp duty concessions, but they are factored into the price.
As are marketing costs and developer margins.
So instead of looking at new builds it would be a much better investment to spend your money on an older, established family friendly property.
So, remove the emotion of looking for something shiny and new.
Valuers recognise that these costs are factored into the price and on resale you would never recoup your contract price, so their valuations come in low.
Meanwhile, if that isn’t enough to convince you, most new complexes have minimal capital growth for a decade.
So by buying one of these you’d be giving the developer your capital growth profit - but it’s not his to have!
Rule 7: Have a financial buffer in place
Always, always have a financial buffer in place to see you through the rainy days.
If the coronavirus pandemic and widespread lockdowns have taught us nothing else, it’s that cash buffers are exceptionally important.
How much you need as a buffer varies depending upon your money management skills and cash flow circumstances, but it is often wise to hold between 6 and 12 months of living expenses in an offset account.
Whilst it’s unlikely that you will be without any income for between 6 and 12 months (and without income protection insurance cover), it does provide that “sleep at night” factor.
A cash buffer ensures you have sufficient time to make whatever adjustments that are prudent, including selling assets.
This reduces unnecessary stress and anxiety and pressure to sell assets quickly.
By having a financial buffer in place savvy property investors by themselves time, not just properties
Rule 8: Be careful who you listen to
Remember, as with anything, there will always be pessimists around willing to give their two-cents worth of advice.
And they're usually wrong.
While the Property Pessimists and Negative Nellies will tell you to avoid investing in property, there will always be people who tell you to buy property, or to buy a particular type of property or in a particular area.
But make sure you’re wary of their hidden agenda. These people represent the seller, not you.
Instead, get holistic wealth advice from independent experts who have no properties for sale.
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Rule 9: Avoid negativity
Similar to the above, when embarking on your property investment journey, try to avoid the negativity.
Sure, the future is uncertain, COVID-19 and continued lockdowns are taking their toll on us all, closed borders are leaving many frustrated and climbing property prices might cause a feeling of despair for some.
But as the saying goes: This too shall pass.
It’s important to remember we’re in a cycle and the good times will return soon enough.
"This too shall pass"
Yes the pandemic is causing havoc.
Falling confidence. Social distancing. Cancelled events. Closed borders. Talk of a double dip recession. The list goes on and on.
No good news anywhere.
There is little doubt that it is serious, but as I said this too will pass.
For mine it is always the property fundamentals that really matter. The long-term view outsmarts short-term thinking.
Over the last year or two the residential property market has shown its resilience.
People will always need somewhere to live, and homes are the true “safe haven” in the current environment.
It is always challenging to invest when everyone else is running around worrying about the end of the world.
But you shouldn’t make 30 year investment decisions based on the last 30 minutes or even the last 30 days of news
In fact these are precisely the conditions that present the best opportunities for those investors who have a long-term plan.
Now is a great time to get all your ducks in a row and take advantage of the property opportunities that markets are presenting.
Michael Yardney is a director of Metropole Property Strategists, which creates wealth for its clients through independent, unbiased property advice and advocacy. He is a best-selling author, one of Australia's leading experts in wealth creation through property and writes the Property Update blog and hosts the popular Michael Yardney Podcast.
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