T H E I N S I D E R'S G U I D E T O PROPERTY INVESTING Practical advice from a professional property investment consultancy on what to consider when investing in property
CONTENTS INTRODUCTION THE THREE IRREFUTABLE LAWS CHOOSING THE RIGHT LOCATION CHOOSING THE RIGHT TYPE OF PROPERTY WHICH IS BETTER? THINGS TO REMEMBER WHEN INVESTING CONCLUSION 1 2 5 6 8 10 11
INTRODUCTION Whether you are looking to buy your first investment property or your tenth, you ll know that it can be a difficult and uncertain process. As professional property investment advisors, we are constantly asked a range of questions from people who are considering buying an investment property. Where should I buy? What type of property should I look for? How long should I hold onto an investment property for? We have decided to share some of these key strategies in this booklet. The Insider's Guide to Property Investing will give you a concise overview of what we, as professional property investment advisors, take into consideration when buying an investment property. 1
THE THREE IRREFUTABLE LAWS No discussion about property investing would be complete without mentioning the three irrefutable laws, which every investor should understand. These are: 1. Land goes up, buildings go down 2. Compound capital growth is an investor s best friend 3. Creating wealth is about holding not selling 1. Land goes up, buildings go down Investing in property is all about land. But you would be surprised at how many investors fail to realise this fact. So why is land important for investors? There are a few reasons. Firstly, people want land. There is a strong demand for it, which is part of the reason why it will generally make your investment grow in value over time. The second reason is that land is in limited supply. Buildings can be built but land can only be acquired. Because it is a scarce resource, land will inevitably grow in value as more and more people want to own it. The third reason, and most important, is that land goes up, while buildings go down. Buildings don t last forever. Over time, they will become run down and wear out. Buildings are a depreciating asset (an asset that loses value over time). Land, on the other hand, will generally go up in value. Land is an appreciating asset and therefore when you are looking at a potential property investment you must consider the property s land content. 2
2. Compound capital growth is an investor s best friend All investors love growth. But most probably don t see much difference between getting 8% per annum and 11% per annum return from their investment either way they are satisfied that they are making money. While 3% per annum doesn t sound like a huge amount, you might be amazed to discover the cumulative difference this small percentage can make to the amount of wealth created over time. If, for instance, you invested $500,000 in property and received a capital growth rate of 8% per annum (let s ignore income and expenses for this illustration to keep it simple) it would be worth $2,330,479 after twenty years. If you invested in a property that grew at 11% per annum, that investment would be worth $4,031,156 after twenty years. That is a staggering $1,700,677 difference. How much time would you spend on research before making a decision if you thought you could gain an additional $1,700,677 over twenty years? 3. Creating wealth is about holding not selling Too many people sell their investments to their own detriment. Often they feel they haven t received a sufficient return or they don t have the patience to realise that property is a long-term investment. Other times they sell because they want to buy in another suburb that they think is 'hot'. To be successful you must resist the temptation to sell your property. 3
Return on investing $500,000 with varying rates of compound growth $4,250,000 $4,000,000 $3,750,000 $3,500,000 $3,250,000 $3,000,000 $2,750,000 $2,500,000 Property Value $2,250,000 $2,000,000 $1,750,000 $1,500,000 $1,250,000 3% 5% 8% 11% $1,000,000 $750,000 $500,000 $250,000 $0 1 5 10 15 20 3% $515,000 $579,637 $671,958 $778,984 $903,056 5% $525,250 $639,662 $818,334 $1,046,914 $1,339,341 8% $540,000 $734,664 $1,079,462 $1,586,085 $2,330,479 11% $555,000 $842,529 $1,419,710 $2,392,295 $4,031,156 Years 4
CHOOSING THE RIGHT LOCATION Perhaps the most common question we hear from people is, "where should I buy?". While we can t give you a list of suburbs and street names, we can tell you that, generally speaking, we only buy in one area where there is high demand. We buy in locations where people want to live, such as near the city or other employment hubs, near the beach or near facilities that people want to live close to (such as café strips, shops, schools, public transport, amenities). Where people go, investors should go. Supply is just as important as demand Ideally, we want to buy in areas that not only have high demand but also have limited supply. If a high demand area has an over supply of properties, properties in the area will not be as valuable as if there was a more limited supply. Ultimately, it takes a lot of time and effort to determine which suburbs and areas are good to invest in. Some have high demand but also high supply. We have spent hundreds of hours of research developing a list of locations that we believe will achieve above average levels of capital growth. This is based on strict criteria that take into consideration all the above factors, and more. We are so confident in our research that we will only buy properties for our clients that are located in one of our approved suburbs. 5
CHOOSING THE RIGHT TYPE OF PROPERTY Another popular question we are frequently asked is, "what type of property should I buy?". There are many choices houses, villas, townhouses, vacant lots and apartments, just to name a few. But, again, the answer is not as difficult as you may think when you consider supply and demand. What type of property is (and will be) in high demand in that area? What do people want and what is not available in abundance? Inner-city apartments may be in demand, but how many of them are available? Never forget the importance of land You should always consider the land content of the property you are considering to buy. Houses, townhouses and villas are all good as they have a substantial amount of land content (when you buy one of these you own a piece of land). Land, remember, is what will increase the value of your investment over time. A special note on vacant land Because land appreciates in value, from a growth perspective buying vacant land is a very good investment in that 100% of its value is in the land. But land is not an income producing asset, and because it doesn t provide income, it doesn t help to pay the mortgage or let you claim any of the tax benefits that a building might. 6
A special note on villas Unfortunately, many investors miss out on many great investment opportunities by shying away from purchasing villas and townhouses. But when you understand the reasons why an investment grows over time you realise that this type of property can be a solid investment. Villas, in particular, have a considerable amount of land content and often achieve good rates of growth, especially in areas where people are demanding smaller, low maintenance houses. As an investor, you should keep an open mind as to the type of investment you would like. A special note on inner-city apartments We are often asked what we think about inner-city apartments. When you buy an apartment you are not buying any land (or at least your effective share of the land is very little) and therefore the growth potential is quite limited. In some low-rise complexes there may be a reasonable component of land in the property value, but in high-rise apartment blocks, unless they are unique (e.g. water views), then the land value component is usually low. It s fair to say we don t buy a lot of high-rise apartments. 7
WHICH IS BETTER? RESIDENTIAL VS COMMERCIAL There is clearly money to be made in commercial property. That said, for some investors, the preference remains with residential property. Commercial property generally generates higher rental yields, compared to residential, but it can experience longer vacancy periods and can be harder to finance. Thus, commercial property is usually a better option for established investors. OLDER VS NEWER We prefer older properties over newer properties, as more of the value of older properties is in the land and not in the depreciating asset (the building). Although newer properties offer better tax and income benefits, we believe the growth potential of older properties outweighs the depreciation and income benefits of newer ones. Rental income and tax benefits will not make you rich, but capital growth can. It s important to point out that new or near new property is not bad entirely; it can be a great investment if it has enough land value. CITY VS REGIONAL Sure, there are some beautiful properties to be found in our country s regional areas the large open spaces, the fresh air, the peace and quiet. There s nobody around. No people. And that s exactly why, in most cases, from an investment perspective, we stick to property within capital cities (metropolitan areas). The vast majority of people live in or near the city, which means there is more demand for city property. Historically speaking, growth of city properties is generally faster than regional properties. 8
CHEAPER VS EXPENSIVE Should you be looking at the cheaper end of the market or the more expensive end? This is not as easy to answer as you may suspect. As long as you have evaluated a property based on its demand and supply attributes and you are acquiring it at a reasonable price, even the most expensive property in a suburb can be a good investment. There is good value to be found at all levels. Generally speaking however, we stick to properties that are around the median house price for the particular suburb, where there is the most demand. CAPITAL GROWTH VS INCOME This is an easy one. While it is important to have extra income to pay for mortgages and life s other expenses, our focus is on capital growth. We believe you won t create serious wealth from rental income alone but you can with compound capital growth over the long term. The real money will be made from the growth in value of your property. LONG TERM VS SHORT TERM What time frame should you have in mind when buying an investment property? Generally, you should consider real estate to be a long-term investment, where growth is more stable. Because of the miracles of compound capital growth, the biggest increases in property values happen over time. If a property is worth $500,000 today and it is growing 8% per annum, in 10 years' time the property would have doubled in value (to around $1,079,000). But if you wait just another 10 years the property would be worth over $1 million more (around $2,330,000). Compound growth is a beautiful thing. 9
THINGS TO REMEMBER WHEN INVESTING Ignore the paint colour For many investors, one of the hardest aspects to overcome is learning to ignore the paint colour. What we mean by this is that many people fall into the trap of evaluating a potential investment based on their own personal tastes. Factors that may be important to you when buying your home may not be relevant when buying an investment property. You must evaluate the property on whether it will achieve strong rates of growth and appeal to prospective tenants, not whether you like it. Base your decision on research. Look at the figures, not the paint colour. Sooner is better than later When is a good time to buy an investment property? We believe the sooner the better. How many times have you heard someone say they should have entered the market much sooner than they did? Property will only get more expensive and less affordable. As property should be considered a long-term investment, trying to pick the exact time to purchase can prove futile. Hesitation can be a costly strategy. Choose the best property not the best deal Getting a good price is not as important as choosing the right property. A bad property purchased at a good price is not a wise investment. While it is human nature to seek good deals, many investors miss out on acquiring great properties for the sake of a few thousand dollars. It is important to focus on whether the property fulfils your investment requirements, not whether you are acquiring it at a bargain price. 10
CONCLUSION We hope The Insider's Guide to Property Investing has given you a good, general idea of what to consider when investing in property. You should now understand why land is so important, as well as the relevance of demand and supply. Obviously, there are a great number of factors that influence demand and supply and there are many aspects you should consider when deciding to purchase a property, far too many points to cover here. In fact, when we evaluate a property for our clients we have an extensive checklist. Many properties simply don't meet our criteria. The ones that do, we believe, will achieve above average levels of growth and help our clients accelerate their wealth. Clearly, if you are serious about investing in property, the best way to go about it is to appoint the experts at Momentum Wealth as your buyer's agent. Professional representation is the key to success. 11
Momentum Wealth Education Pty Ltd. Reproduction Prohibited. Momentum Wealth Property Pty Ltd Licenced Real Estate and Business Agent 53788 East Perth WA 6004 ABN 97 116 331 116 Momentum Wealth Finance Pty Ltd East Perth WA 6004 ABN 49 112 286 686