Your long-term aim should be capital growth.
Demographics will drive our property markets.
Location does 80% of the heavy lifting.
Remember rent affordability is linked to your tenant's wages.
Focus on locations that have continued strong demand from a wide range of owner occupiers and tenants.
A brand new property is like a brand new car - you pay a premium and it depreciates.
Have a financial buffer in place to buy you time, not just a property.
Be careful who you listen to - everyone has an opinion on property, but that doesn't qualify them to give you advice.
Avoid negativity - be careful who you hang around.
We are in new territory.
After going through an unprecedented period of growth are now moving to the next phase of the cycle - the adjustment or correction phase of the property cycle.
We're experiencing high inflation, rising interest rates, more economic uncertainty and even talk of recession in some parts of the world.
The media is full of mixed messages with many people now claiming it's a bad time to be buying a home or investment property.
On the other hand, some more experienced, long-term thinking strategic commentators see it as a good opportunity to get set in the property market at a time when there is less competition.
I see it as a window of opportunity for those with a long-term focus because in due course interest rates will reach their peak (possibly early next year) and inflation will come under control and start to subside (hopefully later this year or early next year.)
And that time, greed will overtake fear, and buyers will be back in the market as they move on with their lives.
So, in my mind, this is the right time to make long-term decisions because...
The fundamental 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
It seems that everyone is a property investment guru when the property markets are booming.
In fact, I’ve jokingly said that’s when there are 25 million property experts in Australia!
But when times get tough, it’s important to take the correct advice on board from those who have the perspective of having lived through a number of economic cycles and who take a holistic approach to wealth creation.
And that's how the team of Property Strategists at Metropole advise our clients - they use frameworks and strategies that I've fine-tuned over almost 5 decades and that we've safely and successfully helped clients with for a number of decades now.
So 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 that 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%.
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 still 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 they achieve (even at the cost of lower rental income) the more wealth they will accumulate in the long term.
The bottom line is that if you build a substantial asset base over time you’ll have choices about 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.
It is certainly something we monitor very closely at Metropole as we understand that demographic changes will be more important in the medium to long term than the short-term effects of interest rate changes or government incentives.
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 this will have a lot to do with the demographics and affluence of the local population - both owner-occupiers and tenants.
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.
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 suburbs?
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 SUVs 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% 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, there will be limited possibilities for capital growth of the real estate in these locations.
As with the above, make sure you take into account the local going rate for rent when researching an investment property.
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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 who are often one or two weeks away from 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 because 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, barbershops, 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, or 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 the car, you can lose anywhere between 10% – 15% 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 had 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 them 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 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 are likely to project market is all salespeople who represent the seller, not you.
Instead, get holistic wealth advice from independent experts who have no properties for sale.
By the way…that’s what our team at Metropole specialize in - we have the experience, perspective, and know-how to point you down the right path.
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.
There are geopolitical issues in the world, rising fuel costs, high inflation and rising interest rates; and this 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.
There is little doubt that we are living in "interesting" times, but as I said this too will pass.
For me, 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.