Expert Advice with Philippe Brach 01/06/2018
Why is residential property constantly in the news? Real estate markets are discussed in the media every day, leading many people to feel overwhelmed, fatigued and confused about how and where to invest.
Why is this the case? The answer is simple: property is the single biggest industry driving Australia’s economy. It is also the largest component of Australia’s wealth.
Property can be divided into residential property and commercial property.
According to Corelogic, residential real estate alone underpins Australia’s wealth with the asset class worth $7 trillion. It is 7 times larger than commercial real estate which represents about $1 trillion.
By comparison, Australian listed stocks represent $1.8 trillion and the total superannuation savings represent $2.3 trillion.
This partly explains why everyone talks about residential real estate and there is much less coverage of commercial real estate. The other reason that ensures that residential property is prominently in the news is that it affects pretty much everyone individually, being a property owner, a renter or an investor. By contrast commercial real estate is not front and centre in the life of most people.
Overall, the real estate industry, including property-related financial, professional and construction services, contributes $180-$200bn to the economy each financial year – equating to around 11 per cent of GDP.
As a whole, the property industry provides more than 1.4m jobs Australia-wide, according to a recent report by AEC Group, knocking healthcare and social assistance off the perch as the nation's biggest employers. Furthermore, the property industry is growing; between 2013-14 and 2015-16, the number of jobs in the property industry grew by 22 per cent.
“Property is the single biggest industry driving Australia’s economy. It is also the largest component of Australia’s wealth.”
To summarise: property is our largest industry, our largest employer, our largest economic driver, and it’s growing. This means there are hundreds of ‘vested interests’ in real estate, all trying to shape public opinion.
Each is trying to profit in their own way, whether it’s through assisting people in buying, selling, investing, building, financing or renovating their property. As a result, there is a steady stream of news, reports, surveys, studies, success stories and more, flooding the media on a daily basis.
When property is ‘in your face’ all the time, it becomes very wearing. People often don’t know what to believe or who to trust, and they don’t know how to sort real news from phony headlines; they become so overwhelmed that they freeze, procrastinate or even back away from the idea of investing altogether. This is a real shame, because when you invest the right way, property has the potential to set you up for a financially secure future.
“People often don’t know what to believe or who to trust, and they don’t know how to sort real news from phony headlines”
If this currently resonates with you and you are wondering what step to take next, I have a few suggestions for you:
Clear the e-clutter
Firstly, you need to filter out the noise, so you can focus on your own situation. If your inbox is cluttered with e-newsletters, unsubscribe from the ones that don’t serve you, especially the controversial or “alarmist” ones that dish up stressful headlines.
Take a step back from the hype
Be wary of the “too good to be true” offers or advertising with a sense of urgency – Hurry! It won’t last! – type of aggressive approach.
Similarly, be wary of success stories of investors on very low incomes who manage to build a multimillion dollar portfolio. There is usually missing information that explains their achievements, or it may be that these stories are not quite true.
Review your strategy
Sit down and review your strategy - where you are at currently and where you want to go. This process implies that you know your numbers. Remember that investing in property is a numbers game. It is not about owning real estate. It is about making money from investing in a particular asset class. If you are unsure how to structure your portfolio and finances, how an investment property delivers a profit, or how cash flow works, then seek advice from a professional. Until you understand your numbers you can’t make a plan or devise a strategy.
The end goal is to generate capital growth but you also need to ensure the cash flow of the property will not cripple you financially. This is especially important if you intend to build a property portfolio. If you borrow 80%, it is not too hard to find
properties that grow in capital and are cash flow positive, providing you do not make mistakes in terms of location and type of property you are buying.
For example, did you know that your cash flow will be significantly different if you buy a brand new property compared to buying a one-year-old property? This is because of the impact of depreciation. On a one-year-old property you will not be able to claim plant and equipment depreciation which means that your claimable depreciation is reduced by about 50% compared to a brand new property. For a $500,000 property, this can make $3,000 to $4,000 difference to your yearly cash flow.
This is only one example. Understanding your numbers will make the difference between a successful strategy and a lame one.
Once you have a good grasp of the numbers you can then create a plan to ensure you’re on track towards your next goal. Does this mean buying a property in 2018, or is this year about managing and refining your current portfolio?
The most successful property investors are those who take consistent action towards their goals, regardless of what the broader market is doing. Whether it’s paying off credit cards, building a deposit or actively searching for your next investment, taking concrete steps towards your goal is a powerful antidote to those feelings of confusion and weariness that can get you down.
Philippe Brach is CEO of Multifocus Properties and Finance.
Philippe is an experienced property investment specialist,
mortgage broker and author of
‘Creating Property Wealth in any Market’
Disclaimer: while due care is taken, the viewpoints expressed by contributors do not necessarily reflect the opinions of Your Investment Property