Not all strategies work in every market. How do you know which to adopt to maximise your profit now?
There is too much information about how to make money through property. A lot of it is complicated and confusing. Some of it is contradictory. It’s difficult to keep track of so many things while managing other aspects of your life.
So with this in mind, Your Investment Property tapped into the minds of the leading experts in the business to find out the best and worst strategies to use in the current market.
The BEST strategies now
1. Diversify your portfolio
Diversifying enables you to spread your risks. It also enables you to take advantage of the markets that are on the rise and avoid those that are still in the doldrums, says James Freudigmann, national manager, Propell Buyers Advocates. “There is no point buying in a quiet market like Adelaide
that will potentially take one to three years to provide growth,” he says.
“Look instead to diversify and follow the markets that are now starting to rise, such as Sydney, Brisbane or Perth
. Diversifying provides new thresholds for land tax, as well as getting you into markets that are near the bottom to get upside immediately rather than having to wait a number of years.”
2. Aim for a balanced portfolio
A balanced portfolio means you have a range of properties that are experiencing growth and healthy yield. “This ensures that, if interest rates increase, you can still afford to pay the shortfall on the loans and not struggle to pay the negative gearing on three, four or five properties that could cause problems at home or with personal finances,” says Freudigmann.
If you have negatively geared properties currently and are looking to buy the next property, Freudigmann recommends buying a property in a quality and low-risk area that has the ability to be renovated to create positive cash flow, or to buy one that is already providing positive cash flow.
“You could buy a house now and rent it out for six months; during that time obtain builder quotes and then complete the renovations at the end of the six-month period. The renovations then become tax deductible and it increases the value of the property. If you have purchased in a strong market, there may be equity that could be used for the renovations rather than cash,” he says.
3. Be quick, decisive and well prepared
All states differ, but for those capitals that have increased buyer competition and tighter timeframes on sales, the best strategy is for buyers to be quick, decisive and well prepared to make a swift offer, says Cate Bakos of Empower Wealth.
“In the case of the Melbourne market, this also extends to being prepared to (and equipped for) making strong enough offers to take auction properties off the market early,” she says.
Bakos cites a recent example of a client in Melbourne who is looking at the inner northern suburb of Fairfield where investor and first home buyer numbers are stronger.
“I have analysed the recent comparable sales in the area and made a decision to submit a strong and compelling offer to take it off the market prior to auction. This offer may have taken other buyers by surprise, and those buyers who have not completed their due diligence in time (ie contract legal review, building inspection, finance approval, etc) may miss out altogether. Ultimately I have diminished the level of competition and avoided the high chances of facing a high result at auction.”
4. Look for areas that are still undervalued
“Look for less-established suburbs that have higher-income families moving in and where the property prices are still relatively low in comparison to the average family income in the area,” says Bill Zheng, CEO of Investors Direct. “These areas are generally located in the outer suburbs in most major cities.
You would find that properties in these areas where lots of higher-income migrants are moving in, and there’s no oversupply of properties in the short term, generally hold their value pretty well and also have reasonable rental income.” Zheng explains that many traditionally more established suburbs have overshot their fair value over the last 15 years, so he expects them to underperform in terms of the average performance over the next few years until such time as their prices have become more reasonable.
WORST strategies in the current stage of the market
1. Buying purely negatively geared properties and waiting for growth
The reason this should be avoided in the current market, Freudigmann says, is that if the market doesn’t grow for a couple of years the property will cost you more to hold than the growth it will have achieved, putting you in a worse position than if you didn’t invest.
“Say you bought a number of properties in Brisbane or Perth in 2008–9 or Melbourne late 2011. These areas have all seen very little growth since these dates, and if your property was negatively geared it will have cost you more than what it is worth in today’s market,” he says.
While you may have the capacity to draw on the equity of your negatively geared property, you may not be able to pay the shortfall. “The banks like to see the ability to service the loans as well as the value increasing; however, if you only have negatively geared properties, you reach a ceiling of ability to purchase,” Freudigmann says.
2. Thinking more properties is better
Just because you’ve purchased 10 properties all worth $150,000 in remote areas doesn’t mean that your portfolio is going to be brilliant, says Freudigmann. “Generally speaking, these areas may not have strong capital growth, so just because you have more properties doesn’t make them a better performer than potentially two to three quality inner-city properties.”
3. Buying new or off-the- plan properties
This is a risky strategy in the current market because you generally pay a premium to buy a new property, and the valuation doesn’t usually support the figure you pay, says Freudigmann.
“We at Propell are valuers, so we can confirm this in multiple cases.”
Another downside is that once the next complex is built or the next housing stage is released, your property is no longer the premium product, which results in a lower value. “New property and off-the-plan purchases, while they’re great for depreciation, can result in losing substantial money because second-hand product is significantly lower than brand new product,” he says.
4. ‘Playing possum’ with the agents
The real estate agents now have strong buyer interest, higher-thananticipated sales results, and good, keen competition on good properties, according to Bakos. “They don’t have the inclination, like they did a year ago, to chase up buyers. They are pretty busy fielding offers and working with competitive situations. If buyers like a property but don’t communicate that with the agent, they may find that they miss out altogether.
“I had one situation in Kensington where my buyers thought it would be a good idea not to divulge their details to the agent at the door of the property they loved. The agent sold it prior to auction on the Monday and, by the time I called the agent to start negotiations, the sold sticker was on the board. Had they told the agent that they were interested and left their contact number, he would have called them to let them know it was going to sell and they would have had an opportunity to secure it.”
5. Buying in high-rise apartments in the CBD areas in just about every major city
Zheng thinks this is one of the worst strategies at the moment because the resell values of these properties are very poor in general. “This is mainly due to the fact that demand for a second-hand high-rise apartment is just not there. Overseas buyers, the biggest market for high-rise apartments, tend to go with new properties, so it would be difficult to find a buyer for these properties.”
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