The biggest mistake people make when it comes to property is waiting for too long to get into the market. All sorts of excuses get in the way. Often people think they aren’t at the right stage of their life – they haven’t found a life partner or they want to travel overseas. Alternatively, they don’t think the economic conditions are right – prices are too high, the housing market bubble is about to burst, interest rates are going up, etc. The reality is the longer you wait to invest in property, the longer you must wait for a profit! There’s a future cost to putting it off and its huge! When it comes to making money in property, you need to get into the market sooner rather than later.
There is no simple way to identify the best way to make money in property, because everyone’s situation is different. And yet there are some undeniable truths. Statistics prove that capital city properties are much less likely to lose money than regional properties. Demographer Bernard Salt recently wrote a brilliant article for The Australian explaining why properties in Sydney and Melbourne are increasing in value so quickly. The article, entitled ‘Property prices: How high can our housing market go?’ (March 4, 2017) should be compulsory reading for every property investor. Salt explains how multiple factors influence property prices in Melbourne and Sydney, including the number of migrants settling in these cities, but he also talks about the changing Australian economy and how Melbourne and Sydney are at the fore of job creation.
In the past 12 months, property prices in Sydney increased by almost 20%, and 15% in Melbourne. According to these figures and the wise words of Bernard Salt, Sydney and Melbourne are the most desirable and profitable places to own real estate. This is one of the primary reasons prices in these two cities have risen so substantially over the last 3 years. However other cities are sure to follow with healthy rates of growth once these markets cool off if history is anything to go by. And believe it or not, it is still possible to buy a house on a large block in an Australian capital city with just $20,000.
When it comes to making money in real estate, patience is a virtue. In capital cities, properties sold at a loss were owned for an average of only 5.5 years, while properties sold at a profit were held for an average of 10 years. This demonstrates the importance of buying at the right time! Properties that doubled or more in value were owned on average for 17 years. Clearly you have a better chance of making good money in real estate if you buy in a capital city and hold on to your property long-term. But there are other keys to making money in real estate. Look to buy in a suburb where house prices are tipped to rise above the mean. This is easier said than done. Study up on where the real estate experts are pointing. Newspapers love to run stories on real estate hotspots but beware if prices have already shot up in the area, it may be too late to get on board.
Gross rental yield is another major consideration. This is the rent generated compared to the cost of the house. You can calculate it by dividing the entire years’ rent by the house price. For example, if the annual rent amounts to $30,000 and the property cost $500,000 then the rental yield is 6%, but if a property costs $400,000 and the rent is $30,000 then the property yield is 7.5%. According to realestate.com.au, Tasmanian property is offering the best rental yield in Australia. It is possible to buy a house within 10km of Hobart for under $300,000 that offers rental yield above 7%. The best performing suburb in Tasmania is Goodwood, where the average house price is $212,138, offering 7.7% on rental yield. But house prices in Tasmania will not rise nearly as quickly as in Sydney.
It is essential when investing that you buy a property you can value add to. If you value add, the property will rise in price more quickly than the market. Ways to value add include renovating, redeveloping, strata subdivision of a property, land subdivision and positioning for potential rezoning from low density residential to medium or high density. Subdivision is one of the quickest ways to make a profit through property, but it can be complicated. Most investors begin by buying a house on a large block and subdividing the land when the timing and prices are right. Some suburbs in Brisbane, Adelaide and Hobart are prime for finding sub-dividable property that pays for itself from day 1. That means there’s no rush to subdivide the land like with larger development sites. Of course buying the adjacent properties provides you with a bigger site and more profit when you decide to sub-divide or sell to a developer. Banks are still willing to lend up to 95% of the value of properties, but the rules are changing and it’s only going to get harder in the short term.
Tax rules in Australia are still very kind to investors, so investing in property remains one of the best ways to create wealth in this country.