Avoid these common property investing mistakes
Purchasing your first investment property comes with a mix of emotions. On the one hand, there’s the feeling of infinite possibilities – how far can you go to increase your wealth and financial security, will you be able to retire earlier or increase the quality of your lifestyle?
And then of course, there can be a little apprehension – will your investment pay off? What property investing mistakes do I need to avoid? Fortunately for first time investors there’s plenty of expert advice to be gained from those who’ve forged the property investment path for decades.
Here are five golden rules for first time investors to follow from the team at Providence:
- Leave emotions at the door
The best investment property will, more often than not, be a dwelling that you wouldn’t necessarily live in yourself; but will yield healthy returns and increase in value. Hence, when shopping for an investment property, you have to make a conscious effort to park your emotions – looking less at aesthesis and more at fundamentals like location, scarcity and practicality.
Many fall into the trap of trying to use their investment property as a holiday house, which doesn’t usually work. Holiday homes often have poor yields, less capital growth and require more maintenance. Love your investment property, sure, but stay focused on what its purpose is for you — ultimately, to build wealth.
- Lean on experts
The best investors are well-researched, do their due diligence and always turn to the experts rather than accept the well-meaning but often substandard advice they receive from friends and family.
But remember, it’s extremely difficult (and risky) to manage everything on your own.
Throughout the process of purchasing your investment property, it’s important to seek advice from high-quality professionals. Find an accountant you can bounce ideas off, a good solicitor who specialises in property, and consider using a group like Providence to assist you with finding and negotiating a property to suit your goals.
- Think outside your city
Writing-off interstate investments is one of the greatest missed opportunities we see people make. Australian states, cities and suburbs are not performing equally – some are peaking, whilst others are starting to seriously heat up. Locations such as Brisbane and Hobart for example still have plenty of potential for growth.
If you’ve done your due diligence, researched the market where you intend to purchase and have a good team behind you to help secure the sale and manage the rental – then there’s little reason for striking interstate properties off your shopping list.
- Don’t over-borrow
Most investors can’t afford to be short-sighted when it comes to borrowing. For example, investors borrowing at 90+ percent can find themselves in a pickle when interest rates go up and their rental returns don’t. Other changing circumstances need to be considered too – large expenses like weddings can bring on financial strain, whilst childless couples starting a family need to consider whether they can afford their mortgage if they drop to a single income.
Key takeaway – borrow smart and give yourself a buffer.
- Shop for value
The core objective of your investment is to make money, so shopping for value is crucial to kickstart the process right. Shopping for value includes understanding the market in real time, as well as how it’s performed historically. You should aim to secure a deal that’s in-line with trends or (even better) undercuts the average price. If you pay too much for your investment it will take longer to turn a profit and for you to achieve your goals, so make value-shopping a top priority!
You can be sure you will avoid making property investing mistakes when you work with property research specialists such as the team we have at Providence.
Surprising factors that can impact rental yield
For decades now, owning investment properties has been considered by most Australians as an outstanding means of building wealth and long-term security.
And for good reason.
Property markets in Australia have enjoyed moderate (and in some cases, dramatic) long-term growth over the past 50 years, which have provided excellent returns for countless investors. What’s more, many have taken advantage of generous tax deductions – including from negative gearing, which can reduce the amount of tax you pay on earnings at tax time. Meanwhile, the equity in investor portfolios has been a valuable resource, allowing investors to secure finance to achieve other goals – whether they be investment or lifestyle focused.
Pretty good, right?
Then there’s rental income – arguably the most obvious and sought-after motivation for investors to purchase additional properties.
Renting out your investment property gives you an income to contribute to your home loan, which usually means you can pay it off sooner. Provided you pay your mortgage off, investment properties can become a long-term income stream that typically increases over time.
At this point we should pause to mention that the aforementioned benefits depend on a few factors. Market conditions and economic trends play a significant part, as does the importance of choosing a good investment in the first place (we can help you with that). And even in an ideal environment, it’s important to be aware that fluctuations happen, including with rental returns. Let’s look at some of the reasons why.
Why rental income fluctuates?
Interestingly, weather is one of the biggest influencers of rental demand. According to a study conducted by realestate.com.au, data shows that demand for rentals drops at the start of winter and recovers before spring. This is particularly true of beach side suburbs, which typically reside in areas that are less popular in cooler months.
Rental properties up for grabs at the end of the year can also be impacted by decreases in demand. Both June (winter) and December are generally the easiest months to find a rental property, according to realestate.com.au, with far less competition in the market – which can force prices down.
Meanwhile, rental properties in suburbs close to universities can also experience fluctuations depending on the time of the year. During university breaks, demand often peaks, whilst throughout semester (when students are immersed in their studies), it plateaus.
Other factors which can impact rental returns include the economy of the town or suburb where the property is located – for example, an emerging or exiting major business or industry in the area, such as mining can drive demand up or down. How scarce similar rentals are in your area (i.e. supply and demand) is also another major factor. Whilst supply of new properties on the market is inevitable and can have a short-term effect, you can safeguard against this by buying in a suburb with low vacancy rates and by checking with the council on the number of new development applications in the pipeline. Another potential impactor includes the holiday season – availability of lease options via websites like Airbnb can create upward pressure on rentals when there’s fewer long-term options on-hand.
The key takeaway
Investors should expect some fluctuations in the rental yield of their investment property – it’s normal. Ultimately, the most important thing investors can do to shield themselves against fluctuations is to invest wisely in the first place. Choosing an investment property that will be ‘ever-green’ in its appeal to renters – through factors such as location, style and features is a way to help ensure consistent results that cannot be underestimated.
Like basically all investment properties, your rental will do best when viewed in the long-term.
Over the years at Providence we’ve gained a reputation for achieving superior results through research-driven insight, meticulous property selection and the highest levels of advice and customer service. Our services enable you to save time and money in the selection of property with ease, simplicity, confidence and proven results. If you’re interested in finding an ideal investment property, get in touch with our expert team.
The danger of misunderstanding figures for supply and demand in property
Supply and demand is always a hot topic in property. It’s something we get asked about all the time, and in investing it is very important to know whether the area you’re considering has an oversupply in property, or an undersupply.
This is something we keep a very close eye on here at Providence, and in this article we will take a closer look at some of the key numbers. It’s very easy to get distracted by photos or videos of lots of new homes being built in housing estates or new apartment blocks going up in a given suburb. We see plenty of articles in the media that jump to fast conclusions about the state of supply but provide zero quantitative research to reach their conclusions.
To draw our conclusions we use a range of data; some of it in the public domain, some of it from fee for service databases. This data may not be perfect, but we believe it is quite accurate and a good basis on which to draw our conclusions.
Supply and demand in Australia’s property market — the real figures
What we will look at today is overall capital city supply and demand data focusing on Sydney, Melbourne and Brisbane. This consideration is one of many – considering the supply within and around any given suburb where you’re considering investing is essential. As part of the work we do, we examine and analyse supply and demand data both at macro/city level and at micro suburb level.
Looking back a few years, through the GFC there was certainly an undersupply across the capital cities. Developers couldn’t get funding for new developments, so less developments were built. Meanwhile, migration rates stayed the same or even increased during that period and so there was a consistent undersupply for a number of years.
As we moved our way through the GFC and banks began to loosen credit for developers and home buyers to access construction funding, we’ve seen a supply response, particularly over the last 4 years. Whether you’re in Melbourne, Sydney or Brisbane, there have been a lot more cranes in the sky and more properties being built.
As part of our analysis, we’ve looked at population growth, establishing what population growth is occurring in each capital city. We then looked at the predicted demand based on a requirement of 2.6 persons per household (the average number of persons per household, according to the ABS).
Our research then takes into account the number of dwelling approvals and the approximate dwellings that will be completed based on those actual dwelling approvals. Then we have to make an inference about the number of dwellings that will actually be completed, because of course all the dwellings that are approved are not necessarily completed. So we’ve done this on the basis of the statistics for the last 30 years. We also make a subtraction for a number of demolitions, because not only are there properties being built, there are many properties being demolished to make way for the new.
We often see highly emotive articles about oversupply based purely (and erroneously) on the number of development applications that have been submitted – not taking into account these other factors. A significant proportion of development applications do not make their way to completion. The media frequently talks in crisis and generalities to drive circulation, to get eyeballs, and to do whatever it is that they need to drive advertising. So it’s really important that when supply and demand is discussed, it is based on facts and data, not emotion.
Supply and demand in Sydney
Take a look at the chart below and you’ll see that in Sydney in 2011/12 and 2012/13 there was a shortfall in required dwellings, moving into a surplus in all the following years. Not a massive annual surplus, but a small one. This has created an accumulated surplus of around 29,990 dwellings to date, which as a proportion of the total dwellings in the city is a very small percentage. We don’t see this as anything to be concerned about at a macro level. However it is certainly meaningful on a localised area basis, and there are absolutely areas where this concentration of excessive construction will have an impact. These would include Zetland, Epping and Holroyd.
Melbourne property oversupply or undersupply?
Now let’s take a look at Melbourne. We will see that once again during 2011/12 and 2012/13 there was a shortfall in required dwellings, moving into a small surplus in all the following years. This has created an accumulated surplus of around 31,521 dwellings to date which, once again as a proportion of the total dwellings in the city is a small percentage. We don’t see this as a concern at a macro level, however areas where this property oversupply is concentrated and would be of a particular concern would include Southbank, Docklands and the CBD.
What about demand? The ABS predicts that Melbourne is increasing in population by about 1800 people per week. So based on dwelling size, the number of people per dwelling being 2.6, Melbourne requires 700 new dwellings per week. So that 30,000 oversupply that we are talking about is about 40 weeks of excess supply based on current growth numbers.
Now we’ve seen from those numbers that supply moves in waves. There are periods of oversupply and undersupply, and what we’re seeing in bank funding to developers is credit has been tightening dramatically.
Importantly for the supply numbers not only in Melbourne but also in each of these three cities, we are seeing the trend of expected completions falling significantly. You can see that in the figures. We expect to continue to see lower completion numbers across Sydney Melbourne and Brisbane in the near term.
Brisbane’s supply shortfall
If we take a look now at Brisbane, we see supply shortfalls in 2011/12, 2012/13 and 2013/14 and again in 2016/17 and 2017/18 resulting in an overall undersupply/supply shortfall of 13,248 dwellings. This is interesting news considering we have seen reports of oversupply in various articles on Brisbane.
There has certainly been an oversupply in specific suburbs – such as Brisbane CBD, Fortitude Valley, Hamilton, Albion and the East side of Chermside. But an overall supply shortfall is an interesting revelation and is one of the reasons we think parts of Brisbane make it an appealing property investment destination.
Dwelling-type specific oversupply in property
Another interesting dynamic we’ve seen in areas with apparent oversupply in property is that there are always markets within markets. Although there may be an oversupply of a certain type of property within a specific suburb – for example, small living area, high volume, commoditised, apartments in high rise buildings – there can be in fact a very strong market in that exact same suburb for higher-quality, more scarce/lower supply property.
For example, higher quality, lower density dwellings or premium quality oversized apartments eg 3 bed, 2 bath, 2 car. We’ve seen a number of examples of this in various suburbs around the country where these scarcer types of properties have demonstrated rental yields, vacancy rates and capital growth as if there was no oversupply in the suburb. In effect, a two-speed market for properties in that suburb. This is something that we will explore further in later research posts.
If you would like further detail or to discuss supply in any particular markets you’re considering, please feel free to contact us and we can put you through to one of our research analysts.
Why savvy investors choose Brisbane property
Brisbane is a hot favourite amongst property investors and with a range of infrastructure upgrades and developments pegged for the city and surrounding regions over the coming years, the trend looks set to continue. So why invest in Brisbane property? There are plenty of reasons.
Brisbane (compared to Sydney and Melbourne in particular) is more affordable and benefits from a higher income return for property investors. Many experts agree that whilst interest rates are low, Brisbane is a standout city for growing your investment portfolio.
This sentiment is echoed by investors.
According to a survey by the Property Investment Professionals of Australia (PIPA), Brisbane remains the top capital city pick, with 43 per cent of investors choosing it as their preferred destination for property investment.
So, let’s take a look at what makes Brisbane such an attractive investment location.
The population is migrating
Sydney house prices are nearly double those in the other capital cities. This, combined with rising job creation in Queensland, is creating an influx of migraters. According to research, when these factors have aligned in the past, more than 134,000 people have trekked up north over a 3-year period, predominantly out of NSW.
Wealth is transferring
Migration shifts like the one described above result in a transfer of wealth – with estimates of up to A$8.1bn of equity being injected into the Brisbane and South-East QLD housing market over the coming years. In turn, this will impact consumer spending too – boosting the Queensland economy.
As interstate migration goes up, property oversupply balances out. In Brisbane’s case, this means balancing any current oversupply of apartments whilst putting upward pressure on house prices.
The city is booming
Perhaps one of the most exciting (and important) reasons Brisbane is becoming the property investors top choice is the significant services and infrastructure upgrades taking place across the city (and beyond) over the coming years. Some highlights include:
Brisbane Live – An entertainment precinct penned to be Australia’s equivalent to New York City’s Madison Square Garden. The development will include a 17,000-seat world-class arena along with a 4,000-capacity rock club, multiplex cinemas, restaurants and bars, and a giant screen and amphitheatre to accommodate up to 15,000 people. The precinct’s other attractions include a proposed signature 90-storey residential tower and dining precinct.
Queen’s Wharf Brisbane – This will develop into a world-class tourism, leisure and entertainment precinct in the heart of the CBD, which is expected to create permanent employment to more than 8,000 workers once completed in 2022. The development is estimated to attract 1.4 million additional tourists yearly via five new premium hotel brands, three residential towers, a department store, an iconic ‘Arc’ building that will feature a Sky Deck, a riverfront moonlight cinema, a Queensland Hotel and Hospitality School operated by TAFE Queensland, and redeveloped public realm covering an area of at least 12 football fields.
Cross River Rail – This project will improve Brisbane’s public transportation landscape with a railway connecting Dutton Park and Bowen Hills. Between the destinations will be five new stations at Boggo Road, Woolloongabba, Albert Street, Roma Street and Exhibition, including 5.9km of underground tracks beneath the Brisbane River and CBD.
Herston Quarter – Upon completion in 2027, this precinct will include a 132-bed public specialist rehabilitation and ambulatory care centre, a new private hospital, childcare and aged care facilities, retirement homes, student accommodation, private apartments, dining and retail areas and renovated heritage buildings. Approximately 7,000 new jobs will be generated over the development period.
Interested in investing in Brisbane property, but not sure where to start?
As you can see, choosing to invest in Brisbane presents an incredible opportunity for property investors, but knowing where to begin can be difficult. As a specialist property investment and advisory firm, we provide our clients with responsible and informed investing advice – with expert knowledge in major Australian cities. We can assist with all aspects of the investment journey from professional guidance, to property negotiation and purchase, finance and further assistance.
Satisfy your curiosity and get in touch with our team to find out how investing up north can supercharge your wealth.
Written by Lynton Stevenson, Managing Director, Providence Property Group.