I’m often asked what is it that drives someone to want to build a property portfolio? For many its as simple as creating wealth to fund their future, giving them the opportunity to have choices later in life rather than a forced hand. For some this might be as simple as bolstering the funds they to retire on, for others an important part can be to provide a head start in property for their children or a legacy to the family or chosen cause. Of course, to be in a position of any philanthropy, charity must start at home!
To achieve financial freedom, motivation is the key and with that in mind as with any big goal in life it is important to focus on the prize and plan accordingly. For many it can be as simple as they know they want to get ahead but still haven’t worked out how, that’s why we go to all the effort to ensure that they are making the right decisions and have the financial capacity to be successful.
Importantly from a financial perspective investing in property allows you to unleash the power of leverage by using existing equity in property to borrow against more property. This is compounded by tax breaks available through negative gearing, allowing tax deductions against your taxable income, a very useful addition from the Australian Taxation Office and one if you don’t know about well worth talking to your accountant about.
Unlike shares we can physically monitor property, we can check the fabric of the building and liaise with our property managers keep check of our tenants and income. How many of us fully understand the personality of a company we have bought shares in? Do we know the board, the direction and intent, have we interviewed the staff and understand their processes – doubtful. Sure investing in property can be less volatile than shares or other investments but there are also pitfalls that need to be considered, the most common being that those that enter either market blind (ie. without expert advice), in many cases can and do fail in their objectives and end up worse off than where they started.
So is investing in residential property easy? In short it can be but for the less experienced it can look like a minefield of obstacles to get to where you want to be. Understanding the market is not something you can skill up to quickly and not all opportunity is the same, indeed some might be deemed to not be opportunity at all! It can take months to find and assess a property and by the time you are ready to purchase the property has been sold elsewhere.
It’s also about team work. For starters you need a good team behind you not only in the research, selection and arrangements but also in terms of finance and law, all elements that can and do take time. So plan for success, engage with the right team, get the right advice and take your time to get it right. It doesn’t stop there, without and income your property could prove hard to hold so selecting the right property manager is also critical. Remembering all costs relating to buying and renting and servicing the property are tax deductable. With that in mind you will also need a depreciation schedule drawn up by a quantity surveyor and proactive relationship with your accountant to ensure that your claims are made in a timely manner.
It doesn’t happen overnight; good property will increase in value over time, but you can guarantee that there will be many fluctuations in the market over that period. The trick here is to be to be in a position where investing compliments your life by providing you with the outcome you need, by not over stretching you and allowing you to hold your investment until it’s the right time to sell, providing you with a good return. To do this requires a little bit of planning and risk management, ensuring you are financially prepared for any bumps in the market, the easiest way by ensuring you have a buffer that you contribute to for those unexpected times. This not only will allow you to get where you want but also in a stress free and manageable way, complimenting your life journey.
From one property, overtime you can leverage the equity into the next and so on over your investment lifetime. I promise it does get easier with experience and (you will hear me say this over and over again) the right team, so many of my more experienced clients really enjoy the journey and we have a lot of fun together.
By doing this we can achieve good capital growth on our property, growing our own net wealth and a providing a great income which increases overtime allowing us to pay back the debt. You only have to sight the financial pages to see that there are more property millionaires than anything else I can think of. It’s an old game traditionally played by the wealthy, the truth is it is available to all of us with an income and the ability to save. I’m reminded of the Paul Kelly and Kev Carmody lyric ‘from little things big things grow!’
We do this, with a little help from the banks. They rely on lending money to make a profit which is just the arrangement we want, with banks lending 90% and sometimes more against the security of property. I’m not sure I know too many places where I kind find someone to help with 90% or more of the risk. Love them or hate them, they are experienced at assessing and managing risk and will do their own due diligence ensuring you are good for the help and the property is being secured at the right value and importantly a deal they’d back. If you look at how residential property has performed over time you will see why our local banking system is pretty much underpinned by its’ growth.
Things do change, will it continue to be great security we cannot guarantee but by mitigating the risks it puts us ahead of the curve. Currently we are seeing a clampdown brought on by the Royal Commission banking inquiry, with lenders ramping up verification of borrowers’ income and living expenses. Whilst in many cases I agree there needs to be some changes to keep the industry honest and the nation on the right path, but there will always be the need for the ‘right’ property and that is where I earn my keep.
There is so much distortion in the media, the media sells fear and flourishes from it. This creates confusion, so much so that it can frighten a market to an almost standstill, what with the recent Australian Prudential Regulation Authority (APRA) regulations and the Royal Commission banking enquiry providing fuel for the fire. Rather than get caught up in the confusion let’s look at why I believe that investing in Australian residential property to build wealth does make sense.
Let’s start with simple economics 101, supply and demand. Even after the recent boom in property and completed and delivered new properties we will still have a property shortfall in Australia to cope with new demand, population growth from overseas migration and an ageing population living longer all helping to provide this. The shape of our housing is changing too, with many children living at home longer, staying single longer and the number of divorces and separations on the rise, resulting in many of us living in smaller households.
The issue of housing affordability is something we hear about on a regular basis. For the housing market to grow sustainably property ownership must be within the reach of most Australians. We will hear more and more about this over time, and no doubt once governments and councils have taken the initiative and provided change in our ‘one size fits all’ outdated planning laws will provide further opportunity in terms of homeownership and investment.
There will always be a workforce looking for career opportunities and lifestyle needs in areas where they just cannot afford to buy in. Noticeably, I have an increasing number of younger clients who rent near the city for work and invest in other cities for financial gain.
Interestingly there is now around one occupied apartment for every five occupied houses in Australia and almost one household in four was a lone person household, with an average of 2.6 people living in each household.
The home ownership rate in Australia is about 70%, leaving the rest to rent. Of that when I last looked 7.9% of Australians owned investment property, about 1.7 million of us. Breaking that down that’s 5.75% of the population owing just one investment property with 1.42% owning two, 0.43% owning three, 0.16% owning four, 0.8% owning 5 and 0.068% owning six or more.
Whilst owning one investment property will no doubt start your journey towards financial freedom, I doubt it will be the answer to your dreams. Conversely building a portfolio of carefully selected property at a steady pace over a lifetime can be just the ticket. Needless to say, this will not happen without a plan. Many believe that they can live off the rental income of positively geared properties with lesser chance of capital appreciation (think provincial areas) when the real smarts are in the capital appreciation of high growth property in areas that provide a good rental return.
Owning property that has good capital appreciation means that you can lower your loan to value ratios faster over time. By this the value of your property portfolio rises with the debt remaining the same. This debt can be further eradicated by paying it off either using superannuation, by paying principal and interest on your loans or simply by selling down a property or two leaving the rest mortgage free. Property is for the long term, always be in a position to hold it until you can sell in a good market. It goes without saying try not to sell until you are in retirement phase, which helps reduce some of the capital gains tax that will be due.
Loosely speaking if you are trying to achieve an extra $100,000 per year in retirement you’d need to have accumulated around $5,000,000 of property by then. Now while that sounds a lot how could you ever save that kind of money or even accumulate a portfolio of that size buying high yielding but low capital appreciation properties?
Again, this doesn’t happen without a plan. Within that plan it is paramount that you have the ability to ride the property cycle through a good risk management plan (think cash buffers) and a well thought out financial and tax strategy.
Getting past the first property can be a huge hurdle for many, especially those that buy the wrong property. I hear of too many people who end up having to prop up their investment with out of pocket expenses or worst still not being in the position to hold it through the downturns in the market and being forced to sell in a down market. An awful scenario, resulting in stress and misery, importantly stopping their investment aspirations in their tracks.
You can avoid all this by surrounding yourself with the right team, those that live and breathe the property market with years of experience through the cycles, the good times and bad. Those experts whose job it is to show you how to get ahead by empowering you with the right selection criteria, research and tools to make informed decisions, showing you how to buy better properties avoiding concentration, over supply and all the buzz words the media are currently throwing about.
Property experts that make it their business to introduce you to the right type of property for long term gain; properties that sit in the right location, surrounded by good employment opportunity, infrastructure and amenity and all for the right price. Properties that tenants will want to rent, whereby helping you to pay down your mortgage. Property that’s better than the rest, property that people will always want to buy.
Add this to the fact that you can be aided with other people’s money, courteously of the banks who will provide more leveraging for this kind of investment than shares or even commercial property.
So, by having the right partners, buying the right property and holding the required time for profit we can all get ahead. What you don’t read about in the media is that now is the time for great deals with opportunity available if you know how to look for it. The sheep have left the market and foreign interest is waning; developers and banks are keener than ever to keep their money moving and do business, leaving the discerning to cherry pick the market and that’s where I help.
Have a think; do I really have what I need to relax in retirement, maybe that’s your motivation?
Rob Stevens runs Positus, a Sydney based but countrywide investment property advisory. He can be contacted on 0405 212 464 or rob@positus.com.au