Understanding Diversification In Property Investment

 Information supplied by W Financial


WFinancial is a Melbourne based, leading group of mortgage specialists run by award winning broker and successful investor Michelle Coleman. They’ve written over $500 million dollars in investor loans and the company maintains a Blue Label reputation as group of intelligent, proven property investors themselves helping others become the same too. To learn more from WFinancial and to find out how they can help you, visit WFinancial.com.au or call today on 1300 891 714.

WFinancial is a Melbourne based, leading group of mortgage specialists run by award winning broker and successful investor Michelle Coleman. They’ve written over $500 million dollars in investor loans and the company maintains a Blue Label reputation as group of intelligent, proven property investors themselves helping others become the same too. To learn more from WFinancial and to find out how they can help you, visit WFinancial.com.au or call today on 1300 891 714.

What Market Indexes Teach Us

If it’s clear that price trends in one city will not be exactly represented by those of another, and that most property price indexes are therefore fairly meaningless, it follows that a long term portfolio should avoid having all its eggs in one basket. When Sydney goes flat, hopefully Perth is booming, when South East Queensland is in the doldrums, maybe it’s because Victorians are not moving interstate because their local market is going off and it’s better to buy in Melbourne.

The other big issue that pushes investors to extend their vision across State borders is Land Tax. This is levied on property values above a certain threshold applying to the unimproved value of the land. With units, it is generally easier to remain beneath the threshold because of the low land content of a strata title. Nevertheless, once incurred, Land Tax can be punishing indeed. It simply makes no sense to build up a portfolio of properties in one State, only to find that your rental income cannot provide you with the financial independence you dreamed of, because its being decimated by Land Tax.

By buying interstate you lose some of the reassurance of being able to drive by your investment, be there for your tenants if in need, and generally staying on top of things. You’ll obviously be more reliant on your managing agents, so they have got to perform. But you are entitled to 2 tax deductible inspection trips a year, so if the property is somewhere you like to visit regularly, you can always write-off the flight and hotel against tax.

Diversification equally applies to the kind of property you buy. You may favour one bedroom apartments near the CBD for their high yield and ease of finding a tenant (same thing really) but a house in an up and coming area with potential for subdivision down the track could make for a better balance of property types.

Keep your mind open and keep your ear to the ground. You never know where opportunity will arise next- here’s some possibilities.

Renovation

You don’t have to always sit passively on a property investment and wait for it to deliver capital gains. Experienced investors will snap up a bargain and achieve a significant increase in value by improving it.
 
With these propositions, it’s really important not to let your heart overrule your head. You are renovating the property to increase the amount of rent your tenant will be prepared to pay. It’s easy to overcapitalize and do things that simply won’t increase the rent. It doesn’t matter if an en suite bathroom might increase the sale price – in 10 years’ time. By then, it will be looking worn in any case and if nobody has paid more rent because of it in the meantime, it will represent money down the drain.

So “business is business” is the order for any renovation project in the investment property space. It always is, but especially so where you may be tempted to get creative. Also remember that every single renovation project since the dawn of time has come in over budget and over schedule. Time is money when you don’t have a tenant because the kitchen tiling isn’t finished. So project management is critical and even experienced renovators can get caught out.

Done right, though, and renovating older style units can be highly profitable. And it’s not just “tarting up” a place that can make money. In parts of Western Sydney today (2012) you can buy an ordinary 3 bed house on 600 square metre block for $250,000, install a prefabricated one bedroom modular home in the back yard for $75,000 and let the two homes for a total of $500 pw. That’s an 8% yield on a property you’d be looking at for long-term capital gains.

Renovation projects come in all kinds of shapes and sizes. They are hard to finance though because, even if you can find a lender to fund one under construction terms (making progress payments direct to the contractor) you will probably want to have multiple contractors working 24/7 for cash. Effectively then, you will have to fund the project from a “lazy” line of credit elsewhere and renegotiate the mortgage afterwards on the basis of a new valuation.

So renovating is not for the faint hearted or the cash-strapped. As with all forms of construction, project management is worth around 10% of the entire budget. What this fact serves to do is to put most renovation projects you will see out of the realms of feasibility – unless you are prepared to project manage the renovation yourself.

As much as anything else, this is a product of having too many starry-eyed owner-occupiers in the market. Everyone always underestimates the costs of renovation - and all those renovation TV shows don’t help here, by the way – so the price of un-renovated property is just too high on the whole for you to make a margin.

Commercial Property

So far we have only looked at a few of the considerations that you must ponder assuming you are looking to invest in more of the same – residential property. But there is no reason why you should not stop to consider buying a commercial property at some point.

Some of the main differences between the two are: Your tenant in a commercial property usually signs up for at least 3 to 5 years, with options to extend; they pay for outgoings such as rates and their lease allows for your rent to increase every year. If they go broke and stop paying your rent, you are almost certainly going to have a much harder time finding a new tenant; there is no owner occupier’s premium involved in valuing a commercial property, it’s value is just a factor of its “cap rate” and the passing rent or market rent (a vacant commercial property will likely be very hard to sell, but you could look to buying one cheaply if you have a tenant ready and waiting).

Capitalisation rates (cap rates) take into account such things as the location, the quality of the building, current market conditions, the state of the local economy, the quality of the tenant, the possibility of using the building for other purposes and much more besides.

It is much harder to value a commercial property and it is consequently much easier to pay too much. The whole proposition, being more reliant on a successful tenancy and a thriving economy, is far riskier. And this is why lenders will generally only lend you, say, 70% of the purchase price or valuation.
What is good about commercial property is 8%-11% pa rental yields. Not every one, obviously, but these are not extreme figures either.

The bottom line on commercial property investment goes something like this: “If your tenant survives for five years after you buy it, you’re probably going to be ok.” If your tenant is the Commonwealth Bank, that’s a fairly safe bet, but then you won’t be getting an 11% pa rental yield. If the property is a squash club, it will be hard for anyone else to make an alternative use of the building, assuming it goes broke, and a bank probably won’t lend against it at all.

Some commercial properties straddle the line between residential and commercial uses. Childcare centres (not big, purpose built ones) are good examples; doctor’s surgeries are another possibility. What you are looking for with these securities is something that yields well for as long as you want it to, then (with the minimum of renovation costs) it can be returned to residential use (assuming that is its “best use”) and sold at a substantial capital gain.

It might seem like a statement of the bleeding obvious, but the more specialized the commercial property, the harder it will be for you to break into the asset class successfully. There are specialist investors in industrial property, hotels and pubs, retail strips, car parks and just about every other category you could think of. These specialists must lick their lips in anticipation when some neophyte starts kicking the tyres on local deals that they know inside and out. So be wary but don’t dismiss the commercial property option out of hand. With a lot of research, a little advice and a modicum of good fortune, you could be a successful case study here in years to come.

Visit us as http://www.wfinancial.com.au/ to connect with us today!

Disclaimer: information supplied by W Financial. While due care is taken, the viewpoints expressed by contributors and/or sponsors do not necessarily reflect the opinions of Your Investment Property.

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