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

What makes a good investment property?

Location, location, location. What makes a good location? Proximity to shopping centres? Transport options? Past capital growth performance? Views – water, bush or city? The list goes on and on. Prowealth conducts thorough research into an area in order to consider all of these and many more (eg. the demographics and population movements of an area, development approvals and suburb regeneration). We also access independent research by groups such as KPMG, RP Data and Residex to help us cross reference key locations and support our recommendations right across Australia. Whilst all of this information is important, you need to know how to manage the cost of holding your investment properties before considering things such as; location, views, houses vs. units etc. You could find the best location, something with a great view which sits on a nice block of land – but if you can’t afford to hold the property through a property cycle (usually 7-10) years, you should not buy it. Rather, find the best property you can based on your budget. Prowealth has identified the 3 most important factors to consider before purchasing a property:

What are the out-of-pocket costs?

After the rent and tax benefits come in, how much will YOU need to contribute (if any) 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.

View this short clip on how Prowealth establishes a 'cost to hold' for its clients.

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.

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 buy a few years later only to discover the property you wanted is now more expensive.
Prowealth consultants take an in-depth look at these 3 areas to ensure your new investment property is affordable, obtainable and sustainable, delivering the long-term growth that will enable you and your family to achieve financial freedom.

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.

Since the 1960’s, well-located property has doubled in value every 7 to 10 years. But there will always be someone telling you not to invest...

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.

10 Simple reasons why you should choose real estate as your investment vehicle

There is no other investment class that gives you as much control as real estate, and control is the most important factor for any asset. As previously mentioned, many think investing is risky due to having no control over the asset in which they invest. There is little control for the investor in shares, superannuation and managed funds – for example, can you tell the company you bought shares in to raise prices or change the management? Here are the ten best control aspects of real estate.
1. Leverage – Banks will loan more money against real estate than any other asset class. It’s not uncommon these days to be able to borrow up to 100% of residential real estate’s value, where as, with shares, you’ll be lucky if your bank loans you 50-60% of the value. Leverage, and the ability to get finance will ultimately determine how rich you will be.
2. Cash Flow – your money comes in every month, you don’t wait a year to see if the company made a profit or if they intend to pay a dividend.
3. Amortisation – The tenant helps to pay off your debt.
4. Depreciation – The government offers tax benefits for real estate as the building, fixtures and fittings will need to be replaced over time. In reality, the government offers tax breaks to investors because they provide much needed housing, without which, they would have to provide themselves.

5. Creativity – You can improve the value of a property by being creative. This could be as simple as a renovation, or more detailed like a change in zoning, or building units and townhouses on the block.
6. Predictability – Once the management and tenant are in place, the result is predictable. The money comes in every month from your property manager. This sure beats watching the stock market for when to buy and sell. You can also choose to hire and fire the management of your property at any time.
7. Invest using pre tax dollars – By completing a Tax Withholding Variation, you can get your tax return back in your pay each week. Your cash flow is better as you don’t need to pay for your investment after having your income taxed – this means you essentially pay for it before paying tax.
8. Capital Growth – Well-located property has doubled in value every 7 to 10 years since the 1960’s. As the property improves in value, you can access that growth (called equity) to buy more property, spend, or fund your retirement. All tax-free.
9. Liquidity – You don’t need to sell your asset in order to get cash out of it. With shares, you must sell them to be able to access your gains, and when you do so, you’ll pay tax and brokerage fees. With real estate you can simply get a line of credit against the equity you have built up, thus avoiding tax and agent fees. This makes property far more liquid than shares, and especially superannuation, where you can’t access the money until retirement.
10. Time – Real estate does not change rapidly. If you own shares, you’ll have little notice that the share market is going to crash, it will just happen and then you’ll need to react when its too late. Real estate gives you the opportunity to see changing trends ahead of time (like hot spots, new infrastructure, rising interest rates etc) and make necessary adjustments to ensure you are well placed for the future – keeping you in control.