With all the talk about the property market, interest rates and changes to negative gearing, it’s easy to get confused when determining whether investing in residential property is best for you.
In previous articles we’ve discussed a perceived two speed property market in Australia, where Sydney and Melbourne prices have become marginally unaffordable due to demand pressures, a lack of supply and affordable debt. However, while our two major capitals have experienced strong growth in recent years, overall Australia’s combined capitals have had a 20 year change in dwelling prices of 346.6 percent (Source: Corelogic).
So regardless of where you live, if you have a property which is reasonably close to a major capital city, then over the past 10-20 years, your home and or your overall portfolio has grown in value.
Picking property market booms and crashes, like tipping the next big stock market darling, can be difficult, even for the experts, but sticking to some vital fundamentals and taking a long term approach to property can leave you sleeping better at night while building a greater financial future for your family.
Investing in property is like going to Jenny Craig
Believe it or not, investing in property and building a long term sustainable portfolio is a little bit like going to Jenny Craig (or any other weight loss consultant).
The first thing a weight loss consultant will help you understand is that a diet program for better health is far better than a program for better looks. When approaching and assessing a holistic diet program, you should understand that it’s more than just the plate. In other words, you should consider your lifestyle, your overall health goals, the food you eat, the exercise you do, the water you drink, and sleep you get, and the stress in your life.
All of these elements come together as part of a program where you work alongside a consultant or coach to help you stay on track to achieve your goals.
When approaching or assessing property investment, you should first understand that it’s more than just the property. You also need to understand that investing in property is more about time in the market than market timing and that not all properties are the same.
House and land (because of the land component) provides better long term capital growth and returns than apartments, and reasonable location to major capital cities with diversified education, employment and lifestyle hubs have greater long term demand.
It’s just as important to understand that investment in property, like a diet or health change, should be a carefully considered and managed program, not just an emotional and ego driven decision.
The fundamental considerations of an investment program
Investment goals
It seems like wealth has become a dirty word in Australia but in reality it has lost its true meaning. Investors should take some time to understand their investment goals and how they most closely align to your overall lifestyle and retirement goals.
Sure, the ultimate outcome is to make money but understanding what steps they need to make to become more financially independent and gain greater choice it a critical part of understanding the property investment that is right for you.
Do you need to reduce their tax and take home more pay each week? Do you need to use a cash flow management program to reduce your mortgage and pay off your own home sooner? Or do you want to have the choice to travel more during retirement?
All these things are achievable using the right program.
Location
While hobby farms or far away coastal retreats may seem romantic and idyllic, statistics show that regional areas do not provide the same long term sustainability for capital growth and rental returns like major capital cities.
Investors must remove their emotions when looking at property markets and take a long term approach to property investment.
Time in the market is critical as it not only provides capital growth but increased rental returns that eventually provide a cash flow positive and passive income model during retirement.
Capital cities provide sustainable population growth and therefore demand which is underpinned by a diverse range of industries for employment, a high standard of facilities for education and health services, and infrastructure for lifestyle and a greater standard of living.
It’s true that property prices will fluctuate over time but in the long term trend property prices increase in value. The right program will allow you to easily hold on to your portfolio while it increases in value.
Product
Not all properties are the same. Homes have consistently outperformed apartments for capital growth because of the land content.
While the dwelling itself depreciates (and gives you tax benefits), the land which is of limited supply grows in value. Land closer to major capitals and CBDs tends to grow faster than land in regional areas because of increased populations and demand.
While both homes and apartments provide income through rental returns and tax benefits, homes that tend to be larger than the average apartment will obviously rent for more and provide increased tax benefits making the cash flow returns greater and affordability easier in the long term.
These factors are important when considering building a portfolio with many properties and using a cash flow management program for mortgage and debt reduction.
Rental returns
The location and product type will help determine rent yields on property.
The closer to capital cities and CBDs, the greater than demand and increased chance of rent.
The closer to child care, schools, shops and public transport, the greater the chance of sustainable rent with less vacancy rates.
Investors need to consider rent yields (rent x 52 weeks divided by the purchase price) when choosing a property.
A program which delivers on strong rents and limited vacancy will improve your cash flow management for portfolio growth and debt reduction.
Property management
A property manager who understands the location and product type is a vital part of your property investment program.
Regular inspections, a thorough program for routine repairs and maintenance, and good communication will provide you with a more passive property portfolio which allows you to get on with your life while your investments work for you.
Property management with an all inclusive fixed rate will help you manage your cash flow better.
Tax effectiveness
One of the key benefits of negative gearing a property portfolio is the ability to reduce your tax and take home more pay each week. The associated costs and depreciation of the investment are tax deductible. This allows astute investors to receive their tax benefits back in each pay cycle by using an ITWV (income tax withholding variation) with the Tax Office. These tax benefits alongside a secured rental income helps fund the investment making it easier to hold onto the portfolio over time while it grows in value.
Mortgage reduction
The cash flow management program which comes from an effective property investment program will also allow investors to put in place a mortgage reduction program to reduce their mortgage and pay off their own home faster. By working alongside a mortgage and finance specialist and implementing a budget, an offset facility and automatic payments system, investors can achieve greater financial security and increased net investment wealth through reducing their bad (non deductible) debt while their portfolio grows over the long term.
Guidance and support
Just like a personal trainer at the gym and or a dietician at a weight loss centre, having an advisor or a property investment consultant can help you get the most out of a property investment program.
It’s the need to change your financial situation that gets you started, but its often the guidance and support of a consultant running a program which keeps you going.
Monitoring your success, tweaking your program and staying on track long term are the benefits of an expert coach.
Making the decision can be the hardest part of property investment
When there’s no much noise coming from so many different sources, it’s easy to get confused.
Ultimately, property investment is more than just the property. Its more than just the name of the street or the colour of the roof tiles.
Ideally it’s an integrated program which considers all factors important to you and all elements critical to achieving the benefits of successful property investment.
