The popular theory of up and coming investment hot spots is not as failsafe as many believe. Instead, property investors should evaluate a property on its history and potential for strong capital growth, irrespective of its location. The same rules apply if considering a purchase in a regional area. Fundamentally, however, investors can be impatient and expect to see growth almost from the time the contract is signed.
Investment is a 10-year plan
When buying property, it's essential to consider that a property rarely shows growth within five years and any purchase should be part of a 10-year plan. We become wealthier by selecting an excellent investment property and holding on to it for a significant amount of time. However, few people understand that.
Most Australians think of themselves as property experts, simply because they live in a house. Unfortunately, it's not that simple, and I have spent most of my life cleaning up the property mistakes people make day in and day out. The growth comes out of the property and land itself, if you know what you are doing.
Negative gearing, stamp duty savings, government grants, or other tax incentives aren’t what make you rich. Trying to negatively gear a property in this market is difficult when the difference between interest rate and rental yield is so narrow. In a high interest rate environment, this is different, as higher interest payments tend to yield greater deductions. However, this is no longer the case, and when you take into account lower loan to value ratios and re-emergence of principal and interest borrowing, it's hard to get any negative gearing benefit at all.
What makes this a right investment property?
One of the most important attributes I look for in an investment property for my clients is the location. Consider proximity to the local village with cafés, shops, restaurants, public transport, schools and infrastructure.
Properties with close proximity to these local amenities have lower vacancy rates and attract premium rents, which is gold for investors. Many of the properties that sit in this bucket are not new developments, rather older style residences and apartments. It's this group that will lose negative gearing should if this government policy is introduced. It also means most landlords will increase their rent, and as property in these established suburbs is scarce, where renters want to live, they will get away with it.
The current rental market
At the moment, there's an acute shortage of rental accommodation of established homes in Melbourne and Sydney. Also, many people are finding it difficult to get a home loan and have given up and decided to rent. With an election and looming policy changes, it's not a great time to flip property. Transaction volumes are critically low as more people choose to rent rather than buy. As a result, rents have been increasing since the start of 2019, and in my view, that will continue. Labor's policy on removing negative gearing will reduce supply further in the inner suburbs where people want to live.
Encouraging investors to buy new developments, which is Labor's policy, will not only discriminate between new and old properties but also urges investors to buy only new property, often in suburbs that are not supported by transport infrastructure, shops, schools and villages. In my experience, this is incredibly dangerous. Buying a new property is like purchasing a new car. As soon as you drive it out of the showroom, its value depreciates.
As an investor, I want to buy a property that is underpinned by a highly expensive land component as growth comes through the appreciation of scarce land over time. Unfortunately, there's not much more land in the inner and middle cities, so many investors will be carolled into buying a new investment property in the outer fringe in areas where land is in abundant supply.
Becoming a successful investor
Many attributes drive property performance and growth, and it can be complicated and overwhelming for most property investors. If you take this above advice on board, you are less likely to make a mistake.
Greville Pabst is a property advisor, buyer's agent and valuer.
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