Last year was another interesting year in property, wasn’t it?
While some properties investors have done very well, many have not fared as well as they would have liked.
So, what lessons can we learn (or relearn) from 2018 to make our investment journey smoother in 2019.
That’s the question I posed to 8 property experts – here are their answers:
1. The only certainty is change
Your long term property investment strategy should always remain capital growth focussed. But within that long term strategy you need to roll with the punches and tweak things to adjust and/or take advantage of changes in the market” says Forbes.
Changes to finance continued in 2018 and where it was always important to make sure that every last dollar of your borrowing capacity was working for you as hard as it possibly could, over the last few years it became crucial.
In the past we have often recommended selling underperforming properties but this year as a result of not being able to replace the exposure to the market, we have sometimes had to change those recommendations to holding the “dud” until the credit extension wheel turns.
Changes to allowable depreciation deductions have also been pivotal in terms of the need to roll with the punches strategy.
An investment needs to stand on its own feet and tax breaks shouldn’t be the overriding reason for the investment, but all else being equal a property with greater allowable depreciation deduction will make more sense than one with lower.
Adding value through renovations will now be even more important, and in some circumstances, and given all the other boxes are ticked and there isn’t a significant overpayment it will make sense to buy new.
In the past it has often made sense for those just starting out to “rentvest”, but because of changes to stamp duty for eligible first home buyers and the first home owners grant (plus other tax benefits) as well as obtaining finance for PPOR purchases being easier, it now may make more sense to live in the property for at least a year.
Of course, there are a myriad of factors that need to be considered before implementing any of the above, and that’s why you need an experienced strategist to guide you and help you adjust to the prevailing rules of the game.
2. ‘This is not a time for hot-spotting’
In 2018 we experienced changes in the finance climate with tighter lending conditions and affordability constraints that have no doubt softened the market.
As a result, over the next few years we will experience slower price growth in most locations and further falls in prices in other markets.
While it may be tempting to look for the next hot spot, 2019 will not a time for speculation or gambling.
Instead 2019 will be a time to be selective in your asset selection and a time to make boring investment decisions.
Focus on proven locations that have shown historical evidence of stable and long term growth and that have multiple local growth drivers such as jobs growth, population growth and the correct demographics and socio-economics to suggest future long term growth.
You’ll find these locations will be in select residential suburbs in the inner middle rings of our capital cities.
“Once you find the right location, then select an “investment grade” property within that location.
Remember to focus on the big picture, on capital growth and the future value of an asset to ensure your investment is the highest and best use of your funds.
In other words, it’s time to throw away the crystal ball.”
3. Review the performance of your property portfolio
One of the common mistake investors make is to continue to hold underperforming assets.
They are either emotionally tied to their property or have a belief, which actually a “hope”, that the property will perform better into the future.
In many cases it is clearly evident that the properties will not outperform over the longer term, as they are located in secondary locations where there is unlikely to be significant jobs or economic growth.
In these locations there is rarely a strong demand for housing as there are either few jobs being created or there are no superior school catchments or there is a lack of public transport, infrastructure or amenities.
While “overall” capital growth in Brisbane has been low and slow over the last few years, many of the areas we have been buying in have easily outperformed that number 5 or 6 times over, with one suburb in particular growing at a whopping 15.2%
If you were holding a $600,000 asset and it performed at 1.7%, your asset base would have only grown by $10,200.
If you had of purchased an asset in a superior location it may have made you up to $91,200 or an extra $80,000 more and given you many more options to widen your asset base faster.
Some investors make the mistake of thinking it is not costing them anything, when clearly it is.
4. Property investment is a game of finance
My 30 years in commercial banking has taught me that property investment is a game of finance with some real estate thrown in the middle.
This was confirmed in 2018 has been the continual changes in the lending environment after APRA’s tightening on credit extension.
These changes have impacted local and foreign investors plus home owners looking to upgrade into their next family home.
The rules of the game changed significantly, making it increasingly difficult to obtain finance even with strong serviceability and significant.
It is unlikely for the RBA to change interest rates over the next year and APRA has done it’s job having stifled the Sydney and Melbourne property booms.
This means it is unlikely that APRA will need to tighten the screws further, but on the other hand it is too early for APRA to relax its guidelines.
All this highlights the significant opportunity cost in having underperforming assets in your portfolio.
If you can only afford to own 2 or 3 properties, make sure they are all “investment grade” properties that are working hard for you.
5. Local factors drive property market performance
Despite all Australians enjoying the same low interest rate environment, the same tax system and the same government, some property market significantly outperformed others in 2017.
Looking at overall capital growth for the last 5 years it really has been a two horse race with the Sydney and Melbourne property markets strongly outperforming all other markets, underpinned by their robust economies and strong population growth.
It’s a fact that 57% of our population lives in NSW (32 %) and Victoria (25%) and these two states accounts for 54% of Australia’s economic activity.
Currently Melbourne’s population is growing at 2.5% per annum meaning our population will increase by 10% in the next 4 years. All these people need to rent or buy a home.
My tip for 2018 is to invest where economic growth and jobs growth will lead to demand for properties by an increasing population of people who can afford to pay higher prices.
Forecasts suggest that two thirds of new jobs creation will again occur in Sydney and Melbourne next few years so it’s likely these property markets will continue to perform well.”
6. Our property markets are fragmented
A lot has been made of the falling values in Sydney and Melbourne over the last year, however it must be remembered that in each State there are multiple property markets, defined by geography, price point and type of property, each at their own stage of the property cycles.
Yet most reports generalise about “the Melbourne property market” or “the Brisbane market”, but not all properties are the same and one can’t count on the rising tide to lift all ships.
Careful property selection is critical for investment success.
My 2019 tip is not to wait for the market to do the heavy lifting, but to “manufacture” your own capital growth by adding value to your properties through renovations or development.”
7. Minimise your risks to maximize your returns
The lesson this year is nothing new – while strategic investors structure their purchases to protect their assets and maximize their cash flow, most investors put little thought into which entity should own their properties.
As real estate is a long term affair, the name in which you buy your property investment can have significant ramifications when it comes to managing future cash flow or when it’s time to sell up.
The correct use of an appropriate trust to own your property could give you flexibility, improved your taxation outcomes and allow you to effectively manage changes in your personal circumstances.
As your life situation changes, from say a junior employee to being a business owner, you inherently move into a more litigious path, so it makes sense to set up the correct structures to minimise your risks right at the very start.
My tip for 2019 is to review your affairs with the view to minimising your risks.
- Do you have sufficient financial buffers in place?
- Do you have a will or a power of attorney?
- Do you have sufficient life and income protection insurance?
- Are your assets owned in the right name?
- id you know that equity in assets owned in your own name can be protected against personal litigation without the need to transfer the property which would incur both a capital gains tax and stamp duty imposts? These strategies do not require changes in title or refinancing and are relatively simple and cost effective.
8. Become a borderless investor
“Over the years I’ve come across many investors who strictly buy in their own state because it’s in their comfort zone, rather than because it made good investment sense, often to their detriment.
On the other hand, those investors who have diversified property portfolios have benefited as different capital cities each had their own day in the sun – as their cycles peaked at different times.
One of the benefit of this diversified strategy is that you always have one or two properties that are growing in value strongly allowing you to approach the banks for more finance.
My biggest tip for 2018 would be to have an independent property strategist help you assess your portfolio’s performance and help you plan your property future.
By looking at your investments like a business they may see opportunities that you have missed, or give you advice on which underperforming properties to dispose of, allowing you to acquire better performing properties.
WHAT CAN YOU DO TO STAY AHEAD?
As signs point to difficult conditions for Australian property over the coming months, independent professional advice and careful consideration will be as important than ever.
If you’re looking for independent advice, no one can help you quite like the independent property investment strategists at Metropole.
Remember the multi award winning team of property investment strategists at Metropole have no properties to sell, so their advice is unbiased.
Whether you are a beginner or a seasoned property investor, we would love to help you formulate an investment strategy or do a review of your existing portfolio, and help you take your property investment to the next level.
Please click here to organise a time for a chat. Or call us on 1300 20 30 30.
WHAT’S YOUR BIGGEST LEARNING FROM 2018?
I see every year as a time for learning and personal development – that’s one of the best parts of being involved in the property markets.
What lessons did you learn in 2018?
Please leave your comments below.
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