Understanding the market
Having been established for over a decade, Prowealth has seen many different trends, strategies and philosophies on investing in property. One thing remains the same, and the experts agree; well-located property tends to double in value every 7-10 years. So if you want to invest in property, you need to buy yourself enough time to get from one property cycle to the next.
Watch this short clip on the history of house prices in Australia
So what makes a good investment property?
‘Location, location, location’ we hear you say!
What makes a good location? Is it proximity to shopping centres, close to public transport options or hidden away from the hustle and bustle of city life? What about past or predicted capital growth performance? What about water, bush or city views?
The list goes on and on and a good location can be defined in many ways and will vary depending on whom you ask. Whilst all of these attributes are important your main focus should be on knowing in advance how to manage the cost of holding your investment properties before debating location.
If you can’t afford to hold a property through a property cycle (usually 7-10) years, you should not buy it, as you will end up selling it too soon, costing yourself thousands in taxes and costs, all because your bought on emotion rather then logic.
The best investment property is one based on your budget. Location and other attributes are important, but should be considered secondary.
The 3 most important factors to consider before purchasing a property:
1 – What are the ‘out of pocket’ costs? – After the rent and tax benefits come in, how much will YOU need to contribute towards the property to meet the loan repayments, council rates and other property costs? There’s no point in looking at a property that will cost you $200 per week if you can only afford $100. This means you may need to select the next best location to keep in line with your budget or you risk over committing and having to sell your investment property before you achieve the growth you want. We’ll talk more about these out of pocket costs in the finance chapter.
2 – How much will the bank lend you? - If based on your current commitments you could afford a $400,000 property comfortably, you should not be looking at properties priced at say, $450,000, no matter how well located they are.Always purchase within your budget and resist the temptation to spend more with the promise of cutting back on your lifestyle.
3 – How much deposit do you have? – Deposits can be in the form of cash or equity in another property. Depending on the amount you have access to, you may need to find a bank and seller who will accept the deposit you have (to get into the market now) versus trying to save a larger deposit and buying a few years later only to discover the property you wanted is now more expensive.
So remember, your new investment property must be affordable, obtainable and sustainable, delivering the long-term growth that will enable you and your family to achieve financial freedom.
View this short clip on how Prowealth establishes a 'cost to hold' for its clients.
Understanding how to make money from an asset class
Below are graphs of performance of an asset over time. Graph 1 shows an asset increasing in value to a peak, then falling in value to a bottom point, then repeating over a number of years. Graph 2 on the right shows an asset steadily increasing in value over a number of years. When faced with an investment decision, you need to understand how to make money from the asset class.
Despite all the fantastic positives that property investing can offer, there will always be somebody either in the media, wider investment industry or well meaning friends and family explaining why property investment should be avoided. At times these arguments seem to make sense, but history has continually proven them wrong. The average price of a home in the major capital and major regional areas of Australia has continued going up and up. What did your parents pay for their house? Who would not want to buy their parents home at the price they paid for it?
Graph 1
With the performance of this asset class over time, the best strategy to make money would be to buy at the low point, and sell at the highpoint. The hard part would be deciding when the peak or trough had been reached. There would be no point in holding onto this asset over time as the performance is consistently up and down.
Graph 2
With the performance of this asset class over time, the best strategy to make money would be to buy, at any point and hold onto the asset for a number of years. There’s no need to try and pick a low point, as the asset will rise in value over time. There’s also no need to sell, as the longer you hold onto the asset, the more it will be worth.
Graph 3
This graph shows the median house price in Sydney since 1970 through to 2007 plotted in red. Behind it is an annualised 10% compounding capital growth rate. The plot lines look pretty similar don’t they? This proves again that the property market (in this case Sydney) has grown at the average rate of around 10% each year for the last 40 years. There are certainly ups and downs, but the long-term picture is clear.
Graph 4
Graph 4 – This graph shows the median house price of every capital city on Australia since 1970 through to 2007 (where records exist). Compare the actual performance of our property markets to graph 1 and 2, which is it most similar too? Thus the strategy to make money in property is to buy (at any time) and hold for as long as possible to get maximum growth. Prowealth’s strategies are based around this time proven fact.