It has been a while since we have crashed into a new year in the midst of a property frenzy, and while it’s not actually happening everywhere, there are certainly many parts of Australia that are either already too hot to handle, or where property is suddenly heating up beyond boiling point.
It always amuses me to see people who are too afraid to dip their toes in the water when the buying is great (that is, when no one else is doing it) suddenly joining the frenzied stampede, wanting to get in, at any price!
If you’ve ever had any interest in property at all, it’s likely that interest has been piqued of late, and you’re sitting eager for any tip to help you get the most out of 2014. So, as we close out 2013, here are some things to ponder – let’s call them my annual myth busters!
1. Blue chip properties, in city CBDs, grow best
Those who insist that only Central Business District (CBD) properties qualify as blue chip property, and only blue chip property grows well, clearly do little real research and are overlooking the significant evidence that proves that it is not the location, per se, that impacts on how well a property grows. While location may play a small role in property choice, (which occurs last in the purchase process), initially there is an abundance of factors, which actually play a vital role in whether an area will grow well, or not.
I’ve purchased property in many areas, but only two within a CBD of a capital city. In our entire portfolio, these two have had the worst performance. Amongst the rest, some have been exceptional and some have been ‘good’, but these two CBD properties have had, overall, the lowest rates of growth and provided the lowest yields.
2. The ‘regions’ have good cash flow but lower growth
While the regions definitely do often show a better rental yield, most probably due to the lower buy-in prices and the relatively higher rent returns, it doesn’t follow that they also perform less well in terms of their capacity to grow in value.
It’s true that ‘location, location’ may be the key to good growth, it’s not true that there is any link between that premise and the location being the seaside or the city. The characteristics that make property grow well have nothing to do with whether it is in the city or the country. Both the city and the country can grow well, and both can grow poorly.
3. You have to buy median priced property, or greater, to do well
When an area grows well, it’s usually the result of what I call ‘intrinsic’ growth drivers. Intrinsic growth drivers are those qualities of an area that exist within an area – factors that are sustainable and ongoing, such as population growth, infrastructure planning, growing affluence and economic vibrancy.
When an area exhibits an abundance of such drivers, all property in that area will grow well, regardless of whether it is low-priced or median-priced. Sometimes, in such an area, the highest priced property grows less well and has a lower relative yield along the way, as there is less demand in higher priced property in any area.
4. You cannot have cash flow and growth in one property
Investors normally place themselves in one of two categories – those seeking value growth and those seeking good rent returns.
The whole point of buying property as an investment is to see an increase to the value of the asset, and the greatest possible income from that asset during the time that the investor owns it.
The belief that you cannot have both from the one property investment is simply not true. While some property has good growth with low yields, and others have good yields with low growth, the best property is one that has both! Further, buying property that has both is not only highly possible, but such property always exists somewhere, regardless of the present state of the economy.
The thing is, value growth and yield growth are often cyclical in nature, and, except in rare cases, hardly ever occur at the same time in one area. The trick becomes finding a property that has not yet had a significant increase in either, yet has all of the required drivers of growth in existence.
5. Market timing
You’ll often hear property experts and those trying to sell investment property use the phrase, “It’s not market timing, it’s time in the market”.
My theory is that this is said to help you deal with any short-term negative performance that the property they sell experiences! If you keep any property long enough, the sheer time that you remain in the market will most likely smooth out short-term negative growth and cash flow losses, and the property will be worth more than you paid.
Whether its future value is high enough to have made the overall performance strong or not is another thing, and often once you consider the holding costs, the overall returns can be dismal indeed.
In order to build the best possible property portfolio that you can – one which outperforms the average and contains properties that consistently deliver high returns, giving the greatest possible growth during the time you hold it – market timing is the key. You want to find an area on the verge of its boom, and have that boom occur during your period of ownership, and you want this to occur with every property you buy.
6. Knowing the area
Don’t fall into the trap of believing that you should only buy in the area where you live because it’s an area that you know well. What you know about your area includes information relevant to you as an owner occupier. The information most crucial when you are looking to invest in an area, is data that local residents are unlikely to know.
You don’t have to live in an area to know it well. By the time I buy in any area, I can guarantee that I ‘know’ it better than the locals do. What I know about that area, though, relates to economics, and what the locals know is more likely to relate to lifestyle. Lifestyle features rarely create boomtowns, whereas economic vibrancy is the corner stone of a future hotspot.
And for 2014
The hotspots of 2014 most likely won’t be where you live – so get out there, spread your search area, look interstate if you need to and let your fingers do the walking. Ask the right questions and you never even need to leave your own home to build a large diversified national portfolio!
Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.
Also in the Switzer Super Report:
- Charlie Aitken: Picks for 2014 part 2 – three large-cap calls [1]
- Fundie’s Favourite: A new pharma to have faith in [2]
- Roger Montgomery: Measuring the shonks – or how to value a company [3]
- Penny Pryor: Short ‘n’ Sweet – Aussie dollar and property [4]
- Penny Pryor: Buy sell hold – what the brokers say [5]
- Tony Negline: Get your succession plan right – or risk losing everything [6]
- Questions: Currency risks and property trusts [7]