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ReaL LiFe sUCCess stoRies

The US Economy And Housing Markets Are At Their Absolute Lowest Point In 30 Years!

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With the Aussie dollar at an all time high, international investors of all levels are swooping in and snapping up properties in the US, before the market bounces back.

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A dramatic swing towards rentals

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“ Absolutely Mind Blowing! Today [the US Property Tour] was a very intense and exciting day as we got to pick our properties. I started off with a little 2 bedroom condo for $42K as a nice entry point to the US Market. There is a pool, a play area and very good property managers.”

- Charlie Tusk

Call 1800 999 270 or visit www.21stCenturyUSProperty.com.au W 34TH, INDIANAPOLIS, IN E 68TH, KANSAS CITY,

Call 1800 999 270 or visit www.21stCenturyUSProperty.com.au

W 34TH, INDIANAPOLIS, IN E 68TH, KANSAS CITY, MO ARLINGTON, INDEPENDENCE, MO Bedroom 4 Bathroom
W 34TH, INDIANAPOLIS, IN E 68TH, KANSAS CITY, MO ARLINGTON, INDEPENDENCE, MO Bedroom 4 Bathroom
W 34TH, INDIANAPOLIS, IN E 68TH, KANSAS CITY, MO ARLINGTON, INDEPENDENCE, MO Bedroom 4 Bathroom

W 34TH, INDIANAPOLIS, IN

E 68TH, KANSAS CITY, MO

ARLINGTON, INDEPENDENCE, MO

Bedroom 4

Bathroom 2

Bedroom 2

Bathroom 1

Bedroom 4

Bathroom 2

Previous high Non members price Members price Montly rental Annual taxes (2011) Gross yield Net yield Annual revenue Annual expense Stamp duty

$76,000

Previous high Non members price Members price Montly rental Annual taxes (2011) Gross yield Net yield Annual revenue Annual expense Stamp duty

$79,000

Previous high Non members price Members price Montly rental Annual taxes (2011) Gross yield Net yield Annual revenue Annual expense Stamp duty

$112,000

$71,000

$39,500

$57,800

$66,000

$34,500

$52,800

$1,300

$567

$800

$1,200

$532

$723

23.64%

19.72%

18.18%

18.55%

14.47%

13.86%

$15,600

$6,804

$9,600

$3,360

$1,812

$2,283

NIL

NIL

NIL

HAYES DR, RIVERDALE, GA YANEZ AV, BUCKEYE, AZ LAKEWOOD DRIVE, KENNESAW, GA Bedroom 3 Bathroom
HAYES DR, RIVERDALE, GA YANEZ AV, BUCKEYE, AZ LAKEWOOD DRIVE, KENNESAW, GA Bedroom 3 Bathroom
HAYES DR, RIVERDALE, GA YANEZ AV, BUCKEYE, AZ LAKEWOOD DRIVE, KENNESAW, GA Bedroom 3 Bathroom

HAYES DR, RIVERDALE, GA

YANEZ AV, BUCKEYE, AZ

LAKEWOOD DRIVE, KENNESAW, GA

Bedroom 3

Bathroom 2

Bedroom 3

Bathroom 2

Bedroom 3

Bathroom 1.5

Previous high Non members price Members price Montly rental Annual taxes (2011) Gross yield Net yield Annual revenue Annual expense Stamp duty

$127,000

Previous high Non members price Members price Montly rental Annual taxes (2011) Gross yield Net yield Annual revenue Annual expense Stamp duty

$218,000

Previous high Non members price Members price Montly rental Annual taxes (2011) Gross yield Net yield Annual revenue Annual expense Stamp duty

$126,000

$68,800

$97,400

$65,500

$63,800

$92,400

$60,500

$895

$750

$895

$416

$966

$772

16.83%

9.74%

17.75%

14.04%

7.07%

14.22%

$10,740

$9,000

$10,740

$1,781

$2,466

$2,137

NIL

NIL

NIL

“ I have been very impressed how you are handling these sales. The fact that these are pre-rehabbed AND rented prior to sale is HUGE. I know many people who have purchased and 8 months later still don’t have their place finished, rented, nothing.”

- Matt Robson

contents issue 1

68

60
60

House

06

Editor’s Desk

08

The Property Beat

14

Q&A

16

Case Studies

66

Book it In

76

Property Showcase

82

The Last Word

CoVeR sToRY

10 AusTRAliA Vs. THe

uniTed sTATes of AmeRiCA

Investing in Australian and US property is worlds apart, but both have advantages that shouldn’t be ignored.

foundATions

AusTRAliAn PRoPeRTY

38 Don’t wait to buy property, buy

property and wait.

40 An education guide to property

investment.

42

Take on more to succeed.

44

How to avoid capital gains problems.

us PRoPeRTY

46

How to invest in the US.

48

What you should know about US

property investment.

50

Your due diligence checklist.

52

Property management requirements.

54

Tax and structuring when you invest

internationally.

feATuRes

22 THe PRoPeRTY

bubble mYTH exPosed

The Australian property market is not all doom and gloom. In fact, there is rarely a bad time to invest.

30 esTAblisHing THe

VAlue of ReAl esTATe

If you do your homework, there is no reason why you can’t maximise your profits.

32 WHAT An

inVesTmenT PRoPeRTY AnAlYsis sHould

AnsWeR

An investment property analysis gives real estate investors a basis for setting rent schedules, estimating income and operating expenses, and provides a detailed description of the rental property’s physical layout and marketplace position.

54

33 YouR due diligenCe

CHeCklisT

As an investor, checking off receipts of the standard items falls far short of what a suc- cessful property must deliver.

34 WHeRe THe

PAsTu R es

AR e gR eeneR

New property investors are priced out of the Melbourne property market, which is why you should invest in regional areas.

72

56

THe ARmCHAiR

deVeloPeR’s guide To lAnd bAnking

Land banking is just like winning the lotto.

60

ouT of THe box

WeAlTH building sTRATegies

Now is the time to buy into the US property market while combing this investment with

other non-conforming strategies.

22

64

mAnAging YouR

fuTuRe

fuTuRe

Self-managed super funds have become an excellent means with which to invest in property.

Self-managed super funds have become an excellent means with which to invest in property.

lifesTYle

lifesTYle

68

iT’s Time foR A

‘TRee CHAnge’

‘TRee CHAnge’

It’s often difficult to see regional centres as cosmopolitan, but that is exactly how to best describe Bendigo.

72 A neW WAY To look

AT THings

Unlike Bendigo, Phoenix is not a cultural hub and the lifestyle is not one of cafés, history or wine, however it is unique and they don’t call Phoenix the Valley of the Sun for nothing.

editor’s desk

The investment

conundrum

It is a confusing time in the investment market; what are the best options for long- term financial growth, do you want to make a quick buck, should you invest in property or stocks? Most savvy financial advisers will tell you to invest in a mixture of all of the above, however scepticism currently abounds with regard to property. So what do you do? Doomsayers are predicting a spectacular crash in Australian property prices and have been saying this for two years, but while the market has dropped, this seems more to be about a natural cycle than a market collapse. Property prices are lower, auction clearances are down and there is no doubt a soft correction has occurred. Yet, around the country there are areas that are still improving in market value; regional areas such as Bendigo in Victoria are experiencing strong growth, while certain suburbs with heavy infrastructure suited to young families are also exceeding price expectations. It’s true the more affluent suburbs have suffered a dramatic downfall, but these are not the suburbs you want to invest in. Look hard enough and there are bargains to be found and astute investments to be made. The same can be said of the US property market and Australians could do worse than consider US property as their property investment of choice. Riana King is general manager of US property company Real Property Management Platinum in Phoenix, Arizona. Riana says that the current outlook can be misleading. She is not alone; recent reports suggest the US is on the road to a slow economic recovery. “There is no doubt that Americans are still investing in real estate in the United States,” Riana says. “Individuals, who have the money, are buying all the property they can. Those who have suffered a foreclosure will eventually re-enter the market as home owners. Many of those people will not qualify for financing for up to seven years after the foreclosure. So, what are they doing? They are renting homes in the same neighbourhoods they lived in before and paying down their debt. They are also preparing their personal finances so that they can once again own a home.” If this is the case, the US property market offers great opportunity for Australian investors who want to buy and rent, with the view to selling in the not too distant future. This is not exploitation. “Although some areas of the US have been hit hard by job loss, by no means are the majority of Americans eating out of soup kitchens,” Riana says. “There are many companies still expanding, and in our case, moving their business and jobs to Arizona at a rapid pace. People can and do pay their rent. Our eviction rate is .013% which isn’t much when you look at the big picture. “There will always be people who cannot see opportunities in the darkness, but most Americans are continuing life as it was prior to the downturn. People are getting married, having children, going to college, taking vacations, buying cars and more. It is not taboo to have foreclosed or sold your home. It is okay. It is hard to come across someone who hasn’t these days. If anything, this has been a reality check on personal spending and savings. People are continuing to live, just with some hard lessons learned. We all need that sometimes though, right? Don’t spend more than you can pay.” This is sage advice. Real estate is a rewarding investment, but you must invest within your means whether in Australia or overseas markets. The same principles apply. The following section is the foundation of your investment knowledge. We take a look at what it means to invest in Australian and US property, the traps you should be looking out for and the ways in which you can best maximise your investment. Investing is like everything else. You must educate yourself to know if this is a choice that is right for you. pi

to know if this is a choice that is right for you. p i Property Inc.

PropertyInc.

PublisHing mAnAgeR Tony Maughan

ediToRiAl – ediToRs J 2 Media: Jonathan Jackson, Jonathan Green

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sub-ediToR

Dimi Kyriakou

AdminisTRATion – ACCounTs / disTRibuTion / subsCRiPTion mAnAgeR Kerry Gladman

mediA sAles ConsulTAnT Anamika Chowdhury

ConTRibuToRs Warren Black, Konrad Bobilak, Joel Dobson, Aneta Gorelik, James Kobzeff, Jamie McIntyre, Blake Ratcliff, Peter Vekelsman

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subsCRiPTions enquiRies T: 03 8637 1577 E: subs@tgrmagazine.com

WRiTTen CoRResPondenCe To:

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21sT CenTuRY mediA Holdings lTd Abn 26 140 795 777 T: 1800 999 270 F:
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CeO Of 21st Century GrOup

Jamie McIntyre

Head Of 21st Century Media

Tony Maughan

COpyriGHt

All material appearing Property Inc. magazine is copyright. Reproduction in whole or in part is not permissable without the written permission of the publisher.

iMpOrtant nOtiCe

Property Inc. magazine is distributed by Network Services. Property Inc. magazine publishes articles and information about people who have successfully devised and applied strategies that have proven successful for them. All information contained in Property Inc. magazine is intended to inform and illustrate and should not be taken as financial, real estate, legal or accounting advice. We do not endorse the views, statements, claims, strategies or ideas put forward by contributors to the magazine. We are merely relaying information. Any strategy in business or investment should only be applied after taking into consideration your own financial situation and objectives. Investing and business can be risky and you should seek independent professional advice before making any decisions. We are not liable for losses you may incur directly or indirectly as a result of reading Property Inc. magazine.Property Inc. magazine does not endorse any of the advertisers or their products that appear in this magazine, nor do we support any representations or claims they may make. Readers are encouraged to do their own appropriate due diligence when making a purchasing decision as a result of reading this magazine. Several individuals associated with advertisers in this edition of Property Inc. magazine have also contributed articles. These articles have been published because they fit the theme of our magazine. These articles are not advertorials. Publication of these articles is not in any way dependent on their respective authors or organisations taking up advertising space in this magazine. Where an article or feature has been included in this magazine in return for fee, it is identified as an “Advertisement” or “Advertorial.”

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1

property

beat

1 property beat Welcome to lilliput The financial crisis in Europe has decimated the property market,

Welcome to lilliput The financial crisis in Europe has decimated the property market, however as people look to downsize we have seen the rise of what are being termed ‘Lilliput properties’.

Lilliput properties are micro-apartments and have flooded the Italian market specifically. Costing approximately 50,000 ($AU61,600), these tiny homes offer as little as four square metres of floor space.

UK newspaper The Independent advertised a “Bachelor pad, near Pantheon” for 50,000. It offers “a sink, a toilet and a shower along the left-hand wall” and “three steps leading up to a narrow bed” on the right. The “pad” spans

a

luxurious total of five square metres.

New Yorkers have known about micro apartments for a long time. The narrowest home in the Big Apple is just 2.89 metres wide. US blog Curbed refers to the Bedford St address as ‘The Half’ listing it as 75 ½ Bedford St. The home does stretch back from the street to accommodate 91.97 square metres of room. This will set you back a mere $US3.95 million ($AU3.74 million).

Prices outside of New York are much more palatable and micro apartments are seen as an affordable option for low income earners or those who are forced to scale down.

Buy a piece of NaSa No, you can’t buy space on the moon, but you can buy space in a Space Centre. To ‘celebrate’ their 50th anniversary, NASA reluctantly turned its attention to renting disused facilities at its Kennedy Space Centre in Florida.

The organisation that put the first man on the moon is apparently a little cash strapped, so to maintain its famous Cape Canaveral hangars, it is looking for tenants.

Among the facilities available to rent are a space shuttle launch pad; two giant mobile platform launchers; two space shuttle maintenance hangars;

a

caterpillar crawler used to move rockets; a 52-storey Vehicle Assembly

Building with four rocket assembly bays; and a 4.57 kilometre concrete runway.

If

you were a James Bond villain, you’d be all over this.

Robert Cabana, director of the Kennedy Space Center, told the Washington Post: ‘I have a lot of facilities that we, NASA, no longer need.

 

‘I don’t have the money to maintain them; I don’t have the money to tear them down. They’re just going to sit and rot.’

Boom, Shake the room The Queensland mining boom

is having a clear affect on real

estate with the first million-

dollar home touted to be sold in Queensland’s central highlands town of Capella.

Two years ago Steve and Ruth Franettovich decided to sell as economic activity in the area began to pick up amid mining expansion. They have bided their time since, to wait for the economy in the area to peak.

Mining drove the median house price in the central highlands to a 16.1% rise in the September quarter last year, bucking all property trends.

The land on which they own

a sawmill was also sold to a mining company.

The pair is prepared to wait for the right deal as they have put

a lot of effort into building the

home: high wooden cathedral ceilings, with wide verandas that span the whole 420 square metre feature prominently. They believe it’s not a question of if, but when, their dream home changes hands.

Mr Franettovich said they had had many offers close to the asking price but would wait for the $1 million deal to come along.

NumBer cruNch

$4 trillion: The estimated worth of the Australian housing market, making it the country’s biggest asset class, representing 60% of bank balance sheets.

2

NumBer cruNch

£7.5 billion ($AU12.2 billion). This is the value of the most expensive house in the world. The Swiss abode is heavily invested with solid gold and platinum fixtures and fittings, including more than 200,000 kilograms of precious metal. The exclusivity is further realised by using meteoric stone with shavings of original Dinosaur bone from the 65 million year of Raptor, the T-REX, right throughout the flooring.

put your moNey oN the friDge Paul Hogan’s four-bedroom home on 2,000 square metres in

put your moNey oN the friDge Paul Hogan’s four-bedroom home on 2,000 square metres in beachside Malibu, California was listed recently for almost $US6.5 million ($AU6.1 million).

Hogan’s lawyer Andrew Robinson said it had nothing to do with Hogan’s much- publicised battle with

the Australian Tax Office. Apparently Hoges feels that a second luxury home, his other

is

in Santa Barbra an hour and

a

half a way, is a bit excessive.

It

is reported that initially

Hoges listed the Santa Barbara estate but because of the depressed high-end property market he decided to sell the Malibu property instead.

Hoges bought the Malibu property in 2009 for $US6.45 million ($AU6.08 million).

top tWeeN Twelve-year-old Noah Lamaide has also proved that you can beat the foreclosure crisis by being creative. Noah raised more than $US10,000 ($AU9,491) through his philanthropic website to save his grandmother’s home.

Since he was nine, Noah has been influenced by his grandmother to take part in community service. Janice Sparhawk, who fostered hundreds of local children in Wisconsin, was facing foreclosure of her century-old home. After taking out a loan to put a new roof on her circa-1900 home, the 72-year-old fell behind on the mortgage payments. Eye surgery and complications from asthma then forced Janice out of work. Her home, which had been in the family for three generations, was slated for auction on 15 February, 2012.

That is when Noah came to the rescue.

 

Noah had previously set up a website, Noah’s Dream Catcher. When he heard

of

his grandmother’s plight, he refocused the site to raise money to save

his grandmother’s home. “My Grandma, in case you don’t know her, has a heart of gold,” he wrote on the site. “If I have 400 friends give $25 I can give her home back for Valentine’s Day!!!” Donations poured in from all over the country, and within a month, Noah had raised $10,500. He signed cheques over to the local bank, allowing Janice to stay in her historic house.

DuDe, Where’S my car?

A

36-year-old Detroit mother listed her four bedroom home on Craigslist (it’s

like eBay) and suggested a straight swap for a new car would do.

While it doesn’t seem to be the smartest move, the short-term benefit is that the Detroit property market is so poor at the moment (as we state further in this magazine) that currently a car is worth more than a home.

The Detroit market is not supposed to turn around for some time, so LaWanda Flake has done herself a short-term favour.

You see, LaWanda only bought the neo-Tudor house for $US3,500 ($AU3,321) – the house is valued at $US96,000($AU91,114). However the mother of six feels that a car to take her kids to school is of more benefit to her.

“I

am having a little problem parting with it,” LaWanda told The Detroit

News. “I do love that house, but in the end

I’m really hoping I find the

perfect person who can help me get the car I need, and I can get them the house they need.”

LaWanda requested a 2003 or newer car or truck, but is yet to be satisfied by any offer.

Her plight is a reflection of the US housing market, but highlights what a great opportunity it is for US and international investors to seize on deals.

For instance a Bahrain company recently invested $US300 million ($AU284 million) in American real estate, attracted by discounted offices and residential property in California, Florida and Georgia. In Florida sales have jumped by 13% compared to October 2010.

[Cover Story]

So you want invest residential US? in start? Not sure to is helpful to It
So you
want
invest
residential
US?
in start?
Not
sure
to
is helpful
to It ‘foreclosures’,
first
that
there
three
faces
each
with
quite to characteristics, where are
Andy Heller.
very
different
writes

T he first face of foreclosure investing is the ‘pre- foreclosure’. The pre-foreclosure period begins when a home owner gets behind on his or her loan, and

ends with the foreclosure sale. The pre-foreclosure phase itself is divided into two stages. The first stage covers the period of time beginning when the home owner misses their first mortgage payment, and ends in the final month preceding the impending foreclosure sale. During this time if a home owner is not already marketing their home, it will be up to the investor to reach out to and find these distressed home owners through ads (“We buy homes fast” and “We have CASH for homes”) and networking. The second stage occurs during the final month leading up to foreclosure. The precise laws differ from state to state, but most states require some form of public notification of a pending foreclosure. Investors can seek out these notifications, and many have ample contact information for the investors to approach the distressed home owner. Many larger communities have a number of online and subscription services which compile the pending foreclosures in a specific geographic range. You can also network within your local real estate investors association and/or conduct an internet search (e.g. “foreclosure listings” in order to find these publications and services).

in order to find these publications and services). The pre-foreclosure period begins when a home owner

The

pre-foreclosure period begins when

a home owner gets behind on his or her loan,

and ends with the foreclosure sale

on his or her loan, and ends with the foreclosure sale The pre-foreclosure face offers wonderful

The pre-foreclosure face offers wonderful wealth generating potential to investors. They can approach distressed home owners, and give them some quick cash when there is ample equity in the homes. There are also opportunities to work with some of the foreclosing lenders directly (with the distressed home owner’s approval of course), as it is in the lenders interest to avoid costly foreclosures. Pre-foreclosures may be arguably the most written about method of finding discount property. It is amazing how many distressed home owners wait to the last minute with their properties, always thinking they would be able to bail themselves out. It is then, with little time left on the clock, that some of these distressed home owners realise that the only viable remaining option is an investor in a position to move quickly. On the plus side, pre-foreclosures can be very, very lucrative. A typical pre-foreclosure might have an investor paying off a distressed home owner’s $220,000 loan, giving the distressed home owner $25,000 in cash to restart their lives, and taking over the $350,000 property. The primary negative associated with pre-foreclosures is the taxing emotional element associated with constantly dealing with home owners involved in a downward spiral. Simply put, this will not be feasible for every investor.

The four pillars

In the 1990s, the Australian government adopted the four pillars strategy. This strategy prohibits the big four banks from acquiring one another or merging. It meant the banks were given no incentive to do “anything dangerous in pursuit of size or earnings per share ”. As a result, they now don’t have much exposure to problematic European debt. It also means they have been able to sit back and learn from the mistakes of their Western counterparts. In doing so they adapted funding and liquidity policies to boost deposits and liquid assets, thus strengthening their balance sheets. Australian banks are so strong at the moment they reported a collective 11% rise in full-year cash profit of $24.2 billion and lavished increased dividend payouts as a result. They have APRA to thank. It has set policies that induce Australian banks to be prudent and to adopt conservative approaches to lending and investments. The result was that careful regulation ensured that Australian banks did not share the fervour of many banks in the US and Europe to buy mortgage-backed securities. Subprime mortgages are, most would say, the cause of the current financial crisis. However Australian banks did not invest heavily in the securities backed by these mortgages, meaning they will not lose the enormous amounts lost by banks around the world. What will have an impact is the amount of credit being borrowed. It is now more expensive for banks all over the world to borrow money from each other. Despite this, the government’s strong budgetary position (the deficit is nowhere near as large as other countries) has held the country in good stead. The government set up a short-term deposit facility to infuse liquidity into the banking system. APRA also ordered banks to stress test their ability to withstand a sharp rise in unemployment, a collapse in the property market and economic recession amid rising anxiety over the European debt crisis. They had one week to do so. The purpose of this was to understand the impact of a severe external shock. The results were encouraging. Separate tests conducted by Fitch Ratings and Deutsche Bank found that Australian banks are well placed to withstand a severe property downturn. Both tests showed that low loan-to-value ratios, or the high level of equity within mortgages, provided a buffer in the event of house prices falling sharply. The Australian property market is in a far better position than the US. The banks are strong and their lending policies so stringent that there could be no sub- prime mortgage disaster here. While the market could be seen to be flat, it will not crash and that means no matter whether you invest in Australian or US property, you should feel quite safe.

it will not crash and that means no matter whether you invest in Australian or US

[Cover Story]

Almost 20 years ago we were one of those investors fresh out of one of those “get rich quick” seminars. Our model was to focus on pre-foreclosures, and we went to one and only one home. The family we visited was the most likeable family. The husband was a veteran, and both he and his wife lost their jobs within a short time of each other. When visiting the home their little girl took my hand and showed me the “doggie window”, the hole in the kitchen door for their family dog to go in and out of the house. I left this visit emotionally drained and with a sour feeling in my stomach. This was the last pre-foreclosure we ever visited.

STage 2: ForeCloSure Sale

The second face of foreclosures is the ‘foreclosure sale’. This occurs when the loan on the home is not brought current by the distressed seller or the home is not sold. Again, the procedures and process have slight differences from state to state, and prospective investors will need to educate themselves as to the foreclosure sale process in their respective state. For many states, the sale of the property takes the form of an old fashioned auction on the courthouse steps (in many states this occurs on the first Tuesday of every month). Like pre-foreclosures, this also can be quite lucrative. However, unlike pre-foreclosures, there is no emotion element other than controlling your adrenalin at the foreclosure sale. The main drawbacks are that often investors are bidding on property they have not been able to access (this makes assessing repairs and improvements quite challenging), an investor may need to quickly assess the title and any liens quickly (this can lead to mistakes and can be costly), and many states require certified funds at sale or within a very short time frame (such as 24 hours). While investors can make a lot of money with foreclosure sales, having access to large sums of cash or fast financing limits these to a subset of experienced and well-financed investors. If you’re interested in this face, we suggest you go to a foreclosure sale and see how one works firsthand.

STage 3: PoST-ForeCloSure

The third face of the foreclosure process is the ‘post-foreclosure’. If the property is not sold in pre-foreclosure and not purchased by an investor at the foreclosure sale, then it goes back to the bank or other lien holder who secured the loan. With interest only, 100% financing, and other loans offered today requiring little down payment, record numbers of properties are going through the foreclosure process without attracting investor interest in the pre-foreclosure or foreclosure stage. These properties eventually land on the desk of someone within a financial institution (bank, mortgage company, etc.) that has the responsibility of disposing these properties. Many institutional lenders dispose of so many properties that they have entire departments dedicated to this task. Oftentimes, these departments are referred to as REO (real estate owned) or Post- Foreclosure Departments. When contacted by investors, institutional sellers will generally

fall into one of three categories. There are many ways to find these institutional sellers. We teach how to find and approach institutional sellers as well as the agents that many institutional sellers utilise to sell their inventory of properties for more information please go to www.regularriches.com. The first category is those institutional sellers that will be happy

category is those institutional sellers that will be happy One of the key benefits of purchasing

One

of the key benefits of purchasing

post-foreclosures is that the sellers have no emotional tie to the property

is that the sellers have no emotional tie to the property to work with an investor

to work with an investor directly, bypassing listing the property with a real estate agent. The second category is institutional sellers that will at first indicate plans to list their REO property, but can be persuaded by the skilful investor to delay the listing until the investor has a chance to see the property and make an offer. The third category is those institutional sellers that will not consider working with an investor directly, but will instead list their properties with selected real estate agents. One of the key benefits of purchasing post-foreclosures is that the sellers have no emotional tie to the property. For financial institutions, this is a simple business transaction. Further, investors seeking post-foreclosures should remind themselves that institutional sellers are in the business of lending money, not managing real estate. At some point, if a bank or lender has too many properties on their books, the number of REO properties will need to be reduced, sometimes quickly, and oftentimes at a discount to investors. It is not as common to acquire post-foreclosures at 30%+ investor discounts as is possible with some pre-foreclosures (and even some foreclosures), but the available pool of properties at investor discounts of 10% to 20% is plentiful. If the investor’s sale or rental model minimises the marketing time and holding costs associated with each purchase, the investor will find post-foreclosures to be a good source of discount real estate. Many predict this source will increase significantly in the coming years due to record numbers of new loans today offered with little or no down payment required. Our model allows us to minimise holding costs and marketing time, so we have elected to focus on post- foreclosures as our primary source of finding discount real estate. ‘Foreclosures’ is a buzz word that attracts the interest of many new real estate investors. It is helpful to understand from the start that there are actually three very different and unique ‘faces’ to the foreclosure process. Most established investors that buy foreclosures are actually focusing primarily on one of these three ‘faces’. Therefore, for new investors who are just getting started, take a look at the characteristics (time, money, risk, emotion element, potential

profits) of each of these ‘faces’ of the foreclosure process and select the one that is the best fit for you. Whichever one you select, implemented properly, the three faces of the foreclosure process all have the potential of putting a smile on the face of the investor. That is the one common denominator of the three very different faces of the foreclosure process. pi

three very different faces of the foreclosure process. p i Why ausTralia is safe Andy Heller
three very different faces of the foreclosure process. p i Why ausTralia is safe Andy Heller

Why ausTralia is safe

Andy Heller is co-author of Buy Low, Rent Smart, Sell High, number two on Fortune Magazine recommended list of real estate investing books. Andy has helped countless people in their efforts to realise their dreams through sharing his knowledge to put you on the road to financial freedom.

Copyright© 2011, Andy Heller. All right reserved. For information contact FrogPond at susie@FrogPond.com.

In spite of a softer market, Australian properties remain

steady and while clearances have been slightly down, there has been no need to panic that the property market within this country is going to crash. There are several reasons for this and they all relate to the strong financial regulatory sector and market confidence. The Australian government notes: Economies around the world are facing the most challenging global financial and economic conditions in 75 years; throughout this time Australia maintained stronger growth through the worst of the crisis than any other advanced economy. The United Kingdom dropped 5.9%, the United States 4.1%, Australia’s unemployment rate remains steady and much lower than other developed countries and the labour market has fared much better. Confidence among the Australian people recovered quickly due to our strong institutions, frameworks and resilient economy and business confidence quickly rebounded. For the purposes of this magazine, let’s look at why the stability of the economy has prevented the property market from crashing. Regulation of Australia’s financial markets is viewed around the world as a model of responsible and prudential financial regulation. This is regulated by the Council of Financial Regulators (COFR) which includes the Reserve Bank of Australia (RBA), who oversee monetary policy, Australian Prudential Regulation Authority (APRA) who oversee deposit taking institutions, life and general insurers and superannuation funds, Australian Securities and Investments Commission (ASIC) who look after market integrity, consumer protection and corporations and the Treasury which gives advice on economic and financial issues, including:

gives advice on economic and financial issues, including: – Effective government spending; – Taxation

– Effective government spending;

– Taxation arrangements; and,

– Well functioning markets.

This stringent regulatory oversight ensures a sound macroeconomic environment and has allowed Australian banks to maintain their reputations globally; among the world’s 100 largest banks by assets, nine banks are rated AA or above – and four of these are Australian. This strength meant no bank in Australia required capital injections from the government during the recent financial crisis.

strength meant no bank in Australia required capital injections from the government during the recent financial
[ knowing your property laws ] What rental property laws are necessary to know when
[ knowing your property laws ] What rental property laws are necessary to know when

[ knowing your property laws ]

What rental property laws are necessary to know when looking for tenants?

Knowing your rental property law is the most effective way of managing your tenants smoothly and staying out of trouble, writes teo Zhenjie.

When you are screening and choosing your neW tenants

As a landlord you are allowed to screen anyone who is applying to be your tenant and choose people that you think will be able to pay their rent on time and follow the rules of your rental agreement. However rental property law prohibits you from discriminating someone as your tenant due to their nationality, race, gender, religion or physical disability. When you reject someone as your tenant, be sure to give them a valid reason and not lie to them that your property is already rented out – that’s how landlords commonly land themselves in hot water.

When you are setting your rent and late fees

If your tenants belong to a subsidised housing program or regulated tenancy, you may not be allowed to set your own rent according to the market rates. Instead, your local housing authorities will decide the rent rates for your rental property. You are generally allowed to set your own late rent fees if your tenants don’t pay their rents on time. However in

most areas the rental property law disallows the landlord from imposing late fees that are too high. Generally any late fees that are over 30% of your monthly rent will be considered too steep.

When you are handling your tenant’s security deposit

There are usually strict rental property law and rules regarding how you can collect and use your tenant’s security deposit. In most countries the landlord is allowed to collect security deposits equal or less than two month’s rent. Valid and common reasons for deducting money from your tenant’s security deposit include overdue rent, unpaid property expenses and property damages caused by your tenant. Whenever you take money from this security deposit, you will have to give your tenant a written list stating the reason and amount for every deduction.

When you Want to evict tenants from your rental property

You may have horrible tenants but your landlord tenant law will prohibit you from simply chasing away them away with

a broom. Firstly you will have to give your tenant a written notice to quit. The tenant will have a last chance to clean up his mess within a time limit before the landlord can kick start an eviction lawsuit. To formally begin your eviction lawsuit, you will have to go to your local authorities to obtain an unlawful detainer’s order. This will fix up a date for your court hearing and your tenant will be summoned to appear for it. If all goes well and you win the eviction lawsuit, your tenant will have to leave your rental property within three to seven days.

If you are a residential landlord, it’s important to know that your local rental property law does not grant you the right of self help. This means that you cannot change the locks by yourself or cut off the electricity and water supply to chase away bad tenants. You will have to wait for the local authorities to do that for you. pi

to wait for the local authorities to do that for you. p i Teo Zhenjie has

Teo Zhenjie has been showing landlords how to manage their tenants and rental properties effectively on Propertydo ( http:// www.propertydo.com/ ).

When you reject someone as your tenant, be sure to give them a valid reason
When you reject someone as your tenant, be sure to give them a valid reason
When you reject someone as your tenant, be sure to give them a valid reason
When you reject someone as your tenant, be
When
you
reject someone
as your tenant, be

sure to give them a valid reason

someone as your tenant, be sure to give them a valid reason [ knowing your rights
someone as your tenant, be sure to give them a valid reason [ knowing your rights

[ knowing your rights ]

What should I be looking for in a Contract of Sale?

Contracts of Sale are one of the most important facets of property investment. anthony alabakov and Ben reid answer the question of what to look for.

Signing a Contract of Sale to purchase a property can be an intimidating experience, particularly if you are signing one for the first time. But there’s no need for panic. Remember, you can’t become a home owner without signing one first. Here’s a few simple things to keep in mind to keep you out of trouble. The first step is to check the Section 32 Vendor’s Statement. It must be signed and dated by the vendor before you do the same, otherwise the contract could be considered null and void. You should also check that the vendor’s name on the title is the same person who has made out the statement, and who is specified on the contract. While you are looking at the Vendor’s Statement, pay close attention to the details surrounding the title itself. Are there any caveats under the

vendor’s name that you need to be aware of? The last thing you want is an ex-business partner or bitter ex-lover holding up settlement and costing you time and money. Also, be sure there are no easements on the title or heritage overlays that may affect your future plans for the property. You certainly don’t want to buy a home with plans for a major renovation or extension only to discover that they can’t be done because there is a drainage easement running right underneath your planned home cinema! Take a look at the outgoings for the property. Are there any Owner’s Corporation fees, and if so are they exorbitant? You may also want to ask for a copy of the most recent minutes of the Corporation’s meetings to see if there are plans to incur major expenses. It is also important that if any works have been done to

the property over the previous seven years, that a permit was obtained if required. Imagine receiving a knock on the door from a member of council and being advised that your wonderful new deck was actually built illegally and you are now up for the cost of demolishing it! These days Google Earth makes these things pretty hard to keep secret. Last but not least, even though you may have a ‘cooling off’ period, if you have any doubt whatsoever about any information or the wording of the contract, be sure to seek legal advice Before you sign. pi

be sure to seek legal advice Before you sign. p i Authors: Anthony Alabakov is general

Authors: Anthony Alabakov is general manager at My Mortgage Freedom and Ben Reid is the manager at Vendor Advocacy Australia.

[auS CaSe STudy]

life’s a beach

investment

Is property buying in Australia a goldmine or a minefield? Property Inc. asks one novice property investor about his experiences.

P roperty investment in Australia can be tricky business.

Over the past 12 months, blue chip suburbs across the country have taken a tumble in price, yet regional areas and outer city limit properties have gained strength. In fact, some consider the market a no go zone at the moment; invest at your peril if you will. Of course, in any market there are bargains to be found and while some consider the market to be correcting itself, the old adage that property investment is a long-term wealth-building strategy remains. Those willing to do a little homework and due diligence will come to understand that the rewards far outweigh the risks.

There are plenty of stories about investors making good in property, but it isn’t all bells and whistles and an honest account is always best. John’s story is as honest as they come.

Having struggled with shares investment, John tried his hand at property.

“After eight years of unsuccessful investing in shares through a managed fund I felt as though I needed to try a different strategy in order to build the financial future that I desired. A close friend of mine had been

successfully investing in property for a number of years and this also helped to motivate me.”

John wouldn’t take the plunge until he knew all he could about market movements and the risks involved.

“I felt as though I needed to educate myself on all aspects of property investment, but was most concerned about being able to buy a property in an area that was going to give me the greatest opportunity for capital gain. I also needed to develop the mindset required to be

an investor and become comfortable with debt and dealing with larger amounts of money. Other important areas I needed to improve included learning how to deal with real estate agents, mortgage brokers, accountants, solicitors etc. and to ensure that I understood every step of the property investment process.”

There were two things John did not want to do:

1. Lock himself into a large, 25 to 30 year loan (“My ability to service it was quite daunting at the beginning.”)

2. Buy the wrong property and end up in a worse financial situation.

To overcome his doubts, he began to attend seminars, read quality property investing books, speak to like-minded people, watch DVDs and complete a homestudy.

His research directed him to the bayside suburbs of Bonbeach and Carrum in Melbourne. He had viewed

prices for similar properties being sold in the area, investigated property trends, undertook building inspections and studied the

John’s Carrum property.
John’s Carrum property.

suburb and surrounding areas, with particular regard to what they had to offer.

John found the area to be affordable, close to the beach and within 30km of the city. It was also attractive because of the low vacancy rates and potential for value increase.

Carrum was John’s first investment.

John says he hasn’t seen the capital gains yet, but expects that he will make strong returns

gains yet, but expects that he will make strong returns “I purchased an off the plan
gains yet, but expects that he will make strong returns “I purchased an off the plan

“I purchased an off the plan property in Carrum which settled in March 2011; since then I have purchased another off the plan property in Bonbeach which will settle in mid-2012. My partner and I are saving for another deposit and plan to buy an additional property in early 2013.”

He says he hasn’t seen the capital gains yet, but expects that he will make strong returns. Then message here is don’t expect immediate profits.

“As I’ve only been investing in property for a short period of time my investments haven’t had enough time to realise any significant capital gains yet. However, the returns I’ve been able to make via rental income and tax benefits have given me confidence that I’m able to service my mortgages much more comfortably. As time progresses and values increase I expect to realise much greater capital gains.”

As a novice himself, he has some sage advice for other investors:

Educate yourself as much as

possible through attendance at investment seminars, reading books, watching DVDs etc.

Communicate regularly with

a mentor/s who can give you

advice and help you avoid any

pitfalls.

Set yourself realistic goals,

work hard to achieve them and re-evaluate regularly. Reward yourself when you achieve goals.

Surround yourself with the

best possible team including a mentor/s, solicitor, accountant, mortgage broker, property manager etc.

Commit to a realistic and

disciplined savings plan.

• Commit to a realistic and disciplined savings plan. The first thing you must overcome is

The first thing you must overcome is the fear of investment itself and the fear of being in large debt

of investment itself and the fear of being in large debt Property investment can be daunting,

Property investment can be daunting, whether you are a teacher, lawyer, journalist or even a single mum. The first

thing you must overcome is the fear of investment itself, the fear of being in large debt and the fear of parting with so much money in the beginning. John is just one of many who have done their homework to help overcome the fear and it

is likely he will have a passive

income that secures his future.

pi
pi
What are the five advantages and disadvantages that you have found when investing? aDvaNtageS •

What are the five advantages and disadvantages that you have found when investing?

aDvaNtageS

The increased value potential.

The ability to use equity in one property to buy more assets.

Rental income.

Tax benefits through depreciation and negative gearing.

Your money is working for you.

DiSaDvaNtageS

Can take time to save for the initial deposit.

If you aren’t well educated in property you can easily make mistakes.

Mistakes can be costly.

It’s a long-term strategy.

Purchase costs including LMI can be expensive.

[uSa CaSe STudy]

Buying into a new future

Polin Lengkeang is an unlikely successful investor. At just 29-years-old Polin is now reaping the benefits of property investment in the USA.

now reaping the benefits of property investment in the USA. a dapting to new cultures and

a dapting to new cultures and lifestyles can be

difficult. For some, especially those with a specific skill, not being able to find work in their preferred field is frustrating and disheartening. However, many come to Australasia with a strong work ethic and a determination to defy the odds.

Polin Lengkeak arrived in New Zealand from Cambodia in 1997 with his parents. There were the usual language issues, but Polin worked hard to graduate with a bachelor degree in Three Dimensional

Object Design in 2008 from Auckland’s Unitec.

What was supposed to be the start of a long career, turned into his annus horribilis.

“I couldn’t find a job after my graduation, but at the time my parents were planning a holiday so they asked me the join them. They offered to pay for my ticket as my graduation present, so I agreed to go. Meanwhile, I’d found a job and was working as a furniture assembler. I told the boss about my holiday plan and he told me he’d keep the job for me. When I got back the

job was gone. I was stressed, confused and lost.”

In the late 2000s the migratory patterns of New Zealanders to Australia were high.

“A lot of Kiwis were moving to Australia so I moved to Melbourne, where my two brothers reside,” Polin says.

Polin arrived in Australia without a job, friends and with a lot of spare time on his hands.

It prompted him to ask: what am I going to do with my life? What do I want in the future?

How am I going to get to where I want to be? There was
How am I going to get to
where I want to be?
There
was

always this thought that if you want to be rich then real estate investment is the way to go

want to be rich then real estate investment is the way to go “I don’t know

“I don’t know much about the real estate market, but there was always this thought that if you want to be rich then real estate investment is the way to go.”

Polin set the goal to buy

a property in Melbourne within two years. He sought work and secured a full time job as a forklift driver at a factory in Noble Park, where after several months he was promoted to a quality auditor position.

months he was promoted to a quality auditor position. I would never have guessed a house

I would never have guessed a house would only cost as much as a new car

have guessed a house would only cost as much as a new car He was putting

He was putting money away and looking for opportunities, when he happened on a Richard Branson-led summit.

“I paid around $200 for the ticket thinking I might learn something valuable from Sir Richard Branson and so I attended the event and that’s where I discovered the US property market. I knew that the US real estate market had crashed as a result of the Global Financial Crisis so prices would be cheap, but the prices I saw were a lot lower than I thought. I would never have guessed a house would

only cost as much as a new car.

I felt it was my opportunity to

get into the market because I had saved enough money to pay for one house.”

There were, however, concerns especially for someone unfamiliar with the investment market. Polin was not going to be taken for a fool.

“At first the biggest concern I had was whether the company

I would be dealing with was

fraudulent, but the event also

featured Eddie McGuire and Tim Ferriss as their guest speakers; these are credible people with conviction.”

Polin’s LaMirada property.
Polin’s LaMirada property.

He also did a bit of homework before signing up for a membership with 21st Century US Property.

“I went through the home

study course and did some more research into the US real estate market. My plan to buy one US property turned into six condos. The US real estate market is not just an affordable option but to me it is an opportunity of a lifetime.”

Other concerns Polin had were whether there would be

secure rent, if there would be

a decent tenant occupying

the building and who would

manage the property.

Polin felt the rewards outweighed those risks.

“There are talks that the

US could head into another

recession. If it does, wouldn’t

it be a good thing if you have houses to rent? As the old saying goes: what goes up must come down and what comes down will rise again.

The US real estate market went up during the Sub Prime credit explosion between 2003 and 2005; by 2008 the Sub Prime credit crisis began and caused

millions of foreclosures. The US real estate market fell 50% or more. Now, will the US real estate market rise again? Personally I think it will, although it will take some time.”

Polin understands that real estate investment is a long- term venture and is willing to ride out the economic storm until the market recovers. In

the meantime he will enjoy his rental returns.

He also offers this advice to would-be investors: “When it comes to real estate, location is very important. When looking at the US property market you need to look at the State and city you are

buying into, the economy of that region, GDP, employment rate and population growth. All these factors are important because they help predict

future growth. There are States that have strong potential and there are States that don’t have any potential growth. I would recommend anyone who wants get into the US property market to talk to an expert about these matters.”

Polin is still relatively new to property investment and to the US property market, but so far he says his experience has been a positive one and he is now looking to add a seventh property to his investment portfolio.

“This investment has changed the way I see my future, but the biggest benefit I have to say is it is giving me the confidence to take action in order to have a financially secure future. I have achieved my first goal of owning an investment property within two years, now my new goal is to make $10,000 per month from my investment properties. It means I have a lot more buying to do.” pi

new goal is to make $10,000 per month from my investment properties. It means I have

[uSa CaSe STudy]

The positives and negatives of uS property investment

Even real estate agents have a little scepticism when it comes to buying US property. Property Inc. speaks with Steve Ellery of Bathurst Real Estate to find out why he bought into the market and what advantages/ disadvantages he has found.

the market and what advantages/ disadvantages he has found. I t was price that first attracted

I t was price that first attracted Steve Ellery to the US property

market, but you can’t help but be a little wary when there are stories of houses selling for just one dollar. Immediate

questions are raised; where exactly are these houses that no property manager would touch, does the state of the US economy and the fear that

it may never fully recover have

a hold on the market? Further

to this, if everyone is broke will

they continue to pay rent?

As a professional real estate agent in the commercial market, Steve had some legitimate concerns. “From my professional point of view, my concerns were:

1. About buying in a market I knew nothing about.

2. What would happen if things went pear-shaped?

3. Who would manage it for me?

4. The control I would have

over things being so far away.

5. Legalities, insurance, litigation.

6. Tax implications.

7. The quality of my tenants and their ability to pay the rent.

8. The area I was buying into.

9. The quality of the house I was buying.

These were the main ones

but other little things kept popping into my head as well.”

Certainly being in the real estate market helps. Steve was able to conduct in-depth due diligence before committing to purchase. He began looking into the residential market to test the waters (however commercial real estate is high

on his priority list) and he travelled to the US to further

his knowledge.

“The education we received in the US was intense, but worth

it. We had local professionals

from tradies to lawyers explain what was happening in

Phoenix and how they could help. I was in overload but it

got me excited. There was this

guy from, ‘in Aussie terms’, the local council. He turned up in place of the mayor. He was

the manager of The Economic

Development Department in Phoenix. This bloke had staff of around 150 whose sole job was to attract business to Phoenix and develop existing business. He told me about a company called Intel beginning construction of

a factory in a suburb called

Chandler. It would employ approximately 4,000 people. Another well-known company

PayPal was already operating in this suburb and employed

a few thousand people as

well. I saw an opportunity in this area and thought it was too good to pass up. Also, something that hit home pretty hard was the growth rate of Phoenix. Being in the desert there’s plenty of land

to develop, plenty of water from the Hoover Dam, and bigger industries looking to develop this region because of the smaller costs. The main thing I was attracted to was the population of four million; this has been estimated to grow to eight million people in 40 years. It’s like doubling the population of Sydney.”

There were some risk factors involved. While Phoenix presents an excellent opportunity, it is important to be aware of what is available.

All of the houses Steve viewed were vacant and most needed development. The positive was that all houses came with a detailed report about what needed repair.

“From what I heard a few of these properties had other things come up which added to the cost,” Steve says. “My quote was about US$1500 more than the original quote, but I made the decision to get

everything done so I had a quality property to rent, which

I hoped would attract a good tenant.”

“I answered, ‘African Americans, Latinos, Asian and

whites’, wondering why he had asked the question.

Other problems are as follows.

- Vacancy.

- Quality property managers.

- Getting ripped off by

contractors who might jack the price of repairs up.

- Unknown or undiscovered

repairs and maintenance that

may be required.

- Bad tenants.

- Litigation issues.

“He said to me, ‘This situation

is as close to Utopia as you can

get’.

“Mixed races living together in a working class

neighbourhood with almost non-existent crime, no graffiti, clean streets, kids playing, was

to him a good place to invest.

Although the houses weren’t what I was used to in Australia, I was beginning to understand the logic.”

In fact, although US property investment can be lucrative,

it can also be a minefield

and people should make themselves very aware of the problems as well as the advantages.

Get educated by someone

who has been there and done it. Speak with agents, lawyers, tradies, bankers, accountants, insurance agents, economic development managers, councillors, investors, property managers and everyone that you would likely need

“There are a lot of bad deals out there waiting for

the unsuspecting investor.” Steve makes the following

recommendations: to answer questions about investment opportunities.

Do your due diligence. Talk to people and neighbours in the area you are considering for purchase. Remember the Australian market is totally different to US property.

Get the right team in

place. Find a manager who will spend time researching the market for you and set up a team of local people who are invaluable to the process. This was critical to me moving forward with my US

investment.

“On my trip to Phoenix there was a guy from LA who was investing there, he seemed like an interesting bloke so

I started chatting to him. I

found out he was from a police SWAT team in LA. We went to a place that looked a bit like a housing commission area and the guys selling us houses were telling me what

a great area it was to invest. I thought otherwise. So I spoke to Mike about what he thought

if it. He said, ‘Steve, tell me

what races do you see in this

neighbourhood?’”

Read. Read. Read. Watch

DVDs, look at the websites and become market conscious. Invest in educating yourself.

Enjoy it. I met some great

people over there and have

made some good friends and contacts. They become good local advisors. I’ve also got a

free place to crash when I go back!

Remember the Americans love Aussies. One lady said to me ‘we love your accent, but we also love the fact you’re helping our economy’. The Americans were all very warm, friendly, inviting, and courteous and took great care of us.

While Steve can only refer to the Arizona market, he says that the type of education mentioned above is critical because the Australian and US markets are chalk and cheese.

“It is totally different, however

I actually think it is easier to buy in the US and the returns on your money are far greater. When I see what you can get in the US and you compare it to the Australian market

I could buy two to three

properties for the price of one in Australia. It’s like buying

houses in Australia in the 1970s. pi

It’s like buying houses in Australia in the 1970s. p i Steve’s positives • The people
It’s like buying houses in Australia in the 1970s. p i Steve’s positives • The people

Steve’s positives

The people I have met and the friends I’ve made.

The tenants I have. One IBM computer engineer and another who works at the Bank of America.

Learning about property in another country.

The money I’m now generating.

My understanding of what’s happening in the US market and the opportunities for Aussie investors.

The massive opportunities in the US which I believe will be a once in a lifetime chance for us to cash in.

Now knowing that my twin boys are going to have their first property investment in another country, and be set on their 18th birthday when I hand it over. (Lucky buggers, all I got was a beer from dad.)

The professional team who are happy to Skype me and answer my stupid questions.

The fun I had doing this; it was a real adventure.

The beer in Phoenix.

Steve’s negatives

A few things with the rehab on the property I bought that popped up and cost me money.

Some of the tradies (no different to Australia). After a few emails all was sorted.

The time it took to get some things done when I was back in Australia.

Basically there was some to-ing and fro-ing between my property manger and workmen while fixing the place up, but all was sorted in the end.

[ Feature]

The

ProPerTy

BuBBle

myTh

exPoSed

The Australian property market is not all doom and gloom, writes Konrad Bobilak. In fact, there is rarely a bad time to invest.

T he extreme Armageddon-like Australian property outlook portrayed by the likes of Harry

Dent, Dr Steve Keen and Jordan Wirsz have been extensively publicised recently by the media, spreading wide concern among first home buyers and the largely

uninformed mum and dad home owners. While these views are not only unfounded, flawed and often sensationalised, they also have a tendency to rob the average Australian of the opportunity to invest into an asset class that has proven its resilience to global economic downturns and recessions for well over 100 years, essentially scaring them from buying an investment property. The most extreme point of view was voiced by US real estate analyst, Jordan Wirsz, who believes that Australia is heading towards a ‘property bloodbath’ as the global economic downturn spreads. “Right now is not a time to be buying

real estate in Australia,” Wirsz said. “The market has slowed substantially but residential prices are likely to fall up to 60%, possibly even more, within five years.” Similar doom and gloom opinions were voiced by visiting US economist Harry Dent who recently said Australian house prices were 50% overvalued and were destined to crash – just like they did in the US. Conversely, these extreme views have been largely slammed by Australian property experts, leading economists and property research-based companies including, but not limited to, Residex, RP Data, AMP, ANZ, HIA, BIS Shrapnel, HSBC leading economist Paul Bloxham and the list goes on. To put this statement into context, a 60% decline in property prices across Australia would translate to Sydney’s median house prices dropping from $660,000 to $264,000, Melbourne’s house prices dropping from $550,000 to $220,000, and Brisbane’s house prices

dropping from $580,000 to $232,000. It’s laughable, isn’t it? This proposed ‘market crash’ is supposed to take place in an Australian economic environment which includes low unemployment rates, historically low interest rates, a strong Australian dollar riding on the back of a resource and commodities boom and a massive surge in migration; most migrants will settle in the major capital cities. All of this is occurring against a back drop of declining housing construction and shortage of dwellings of approximately 160,000 by 2021. These ‘doom and gloom’ ravings of Steve Keen, Harry Dent and Jordan Wirsz remind me of the childhood story of Chicken Little. The main theme and phrase of this famous fable – The sky is falling! – has been used to make light of the behaviour of those paranoid individuals who incite panic and fear in others, sometimes to the point of mass hysteria.

These prophets of doom seem to reappear every time the property market enters its decline
These prophets of doom seem to reappear every time the property market enters its decline

These prophets of doom seem to reappear every time the property market enters its decline

reappear every time the property market enters its decline market defiance Before we examine the basis

market defiance

Before we examine the basis on which most of these doom and gloom arguments rely, keep in mind that this is certainly not the first time in the last 50 years that predictions of the Australian Property Market crashing have been made. In all instances they were proven wrong, as the Australian Housing Median Prices continue to defiantly appreciate decade by decade. The table below depicts median price

increases across the major capital cities in Australia since 1966. Here is a short list of major economic events, both local and global that triggered a flurry of media articles and predictions that the Australian property market would crash.

1. Early to mid 1960s Australia was

experiencing a major credit squeeze and finance dried up. Banks’ lending policies were tightened, resulting in an environment where it was very difficult to borrow any money to buy property. Due to the inability for most Australians to enter the property market, academics

and ‘experts’ predicted that the Australian property market would crash. They were wrong.

2. The late 1960s Poseidon bubble saw

the price of Australian mining shares soar, especially in late 1969, then subsequently crash in early 1970. This ‘stock market bubble’ was triggered by the Poseidon NL company’s discovery of a promising site for nickel mining in September 1969. As a result, academics and ‘experts’ predicted

that the Australian property market would crash. They were wrong.

3. In the 1970s, Australia, along with

most industrialised countries – except

Japan – experienced an economic recession due to an oil crisis caused by embargoes by the Organisation of Arab Petroleum Exporting Countries

(OPEC). The crisis saw the first instance of stagflation. Coined ‘the OPEC Oil Crisis’, this global event created a media frenzy of ‘doom and gloom’, and academics and ‘experts’ again predicted that the Australian property market would crash. They were wrong.

4. The early 1980s saw ‘a severe global

economic recession’, affecting much of the developed world in the late 1970s and early 1980s. The United States and Japan exited the recession relatively early, but high unemployment would continue to affect other OECD nations including Australia through to at least 1985. Long-term effects of the recession contributed to the ‘Latin American Debt

Crisis’, the ‘Savings and Loan Crisis’ in the United States, and a general adoption of neoliberal economic policies throughout the 1980s and 1990s. Academics and ‘experts’ again predicted that the Australian property market would crash in the mid 1980s. They were wrong.

5. After the Australian property market

refused to crash in the early to mid 1980s, many financial and economic commentators jumped onto the ‘doom and gloom’ bandwagon, fuelled by the

 

Sydney

Melbourne

Brisbane

Adelaide

Perth

1966

$15,000

$13,000

$9,700

$10,000

$10,200

1976

$42,000

$37,000

$30,000

$31,000

$38,000

1986

$97,600

$83,700

$60,400

$77,700

$55,100

1996

$202,000

$144,000

$132,000

$110,000

$127,300

2008

$554,000

$432,500

$475,000

$362,100

$460,000

Source: ABS and REIA $600,000 $500,000 $400,000 $300,000 $200,000 $100,000 Sydney MelBourne BriSBAne AdelAide
Source: ABS and REIA
$600,000
$500,000
$400,000
$300,000
$200,000
$100,000
Sydney
MelBourne
BriSBAne
AdelAide
PertH
1966
1976
1986
1996
2008
1966
1976
1986
1996
2008
1966
1976
1986
1996
2008
1966
1976
1986
1996
2008
1966
1976
1986
1996
2008

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media, stating that Australian house prices were way ‘overpriced’ compared to other industrialised countries, and that the ‘property bubble’ would ultimately burst. The prevailing argument here was that the average household debt had reached

a ‘peak’ level, and based on academic

deduction of the data, conclusions were

drawn that people would simply not be in

a position to borrow more money, hence

property would stagnate and eventually crash. At the time, property median prices in Melbourne and Sydney were about $85,000. They were wrong.

6. On 20 September 1985 the Australian

Government introduced Capital Gains

Tax. The implication for property investors was that any capital profits made from

a sale of an investment property was

now subject to a marginal tax rate of

the investor. Financial commentators,

financial planners, and so called ‘experts’ predicted that this was going to BE THE END of property investing as we knew it. They were wrong.

7. In 1987 we had the stock market

crash and what many referred to as a ‘1930s-type depression’. With consumer sentiment at record low levels, the media once again jumped on the ‘doom and gloom’ bandwagon. With super funds being wiped out virtually overnight, many financial commentators and academics predicted that this prolonged period of

economic uncertainty would be followed by a property market crash. They were wrong.

8. In 1989 to 1991 Australia experienced

historically record-high interest rates and inflation. The early 1990s were the beginning of another recession; many of us will remember it for the famous quote from Treasurer Paul Keating, “this was the recession we had to have”. Of the 18 OECD countries of reasonable size and development, 17 experienced a recession in the early 1990s — a similar situation to the mid-1970s and early 1980s global recessions. The cash rate reached a staggering 18% in the second half of 1989, and mortgage rates of 17%; many

loans to businesses were well in excess of 20%. Unemployment ended up peaking at 11.3%, and once again many academics and experts predicted that the property market would crash. They were wrong.

9. The ‘Asian Currency Crisis’, which

gripped many of the Asian countries in mid 1997, raised fears of a worldwide economic recession. The crisis started in Thailand, and soon spread to neighbouring countries, eventually reaching as far as China and Japan, which directly impacted the US and Europe. With major impacts on the various stock markets and managed funds around the world, many academics and experts predicted that the Australian property

5-year Metro Melbourne Median Price trends $625,000 $625,000 $600,000 $600,000 Recent peak, Dec Q 2010
5-year Metro Melbourne Median Price trends
$625,000
$625,000
$600,000
$600,000
Recent peak, Dec Q 2010 median $601,000
$575,000
$575,000
$550,000
$550,000
$551,000
$525,000
$525,000
Houses
Unit/Apts
$500,000
$500,000
$475,000
$475,000
$450,000
$450,000
$456,500
$425,000
$425,000
$400,000
$400,000
$375,000
$375,000
$350,000
$350,000
$325,000
$325,000
GFC
$300,000
$300,000
$275,000
$275,000
Sep-06
Dec-06
Mar-07
Jun-07
Sep-07
Dec-07
Mar-08
Jun-08
Sep-08
Dec-08
Mar-09
Jun-09
Sep-09
Dec-09
Mar-10
Jun-10
Sep-10
Dec-10
Mar-11
Jun-11
Sep-11

Source: REIV

market would crash. They were wrong.

10. The coordinated terrorist attacks

on USA that took place on 11 September, 2001, resulting in the collapse of the Twin Towers of the World Trade Centre, created

a virtual stock market freefall in the US

and considerable drops were witnessed around the world. The uncertainty of follow-up terrorist attacks created a downward spiral of negative consumer sentiment, and once again, academics and experts predicted that the Australian property market would crash. They were wrong.

the Australian property market would crash. They were wrong. These views are not only unfounded, flawed

These

views are not

only unfounded, flawed and often sensationalised

are not only unfounded, flawed and often sensationalised 11. The Sub-Prime Crisis in the US in

11. The Sub-Prime Crisis in the US in

2006 to 2007 was triggered by a rise in sub-prime mortgage delinquencies and foreclosures, and the eventual collapse of subprime mortgage backed securities. Being essentially blamed on poor banking credit standards, greed and speculation of assets continuously rising in value, the

impact of this crisis triggered a plethora of media articles and commentary warning that what happened in the US would eventually happen in Australia. In fact, many so-called academics and experts went on record to say that the Australian household debts in relation to house prices were unsustainable, and the bubble would burst somewhere in 2009 to 2010.

It didn’t. And as the table below depicts, the market slowdown was minimal, and was absorbed by the buyers’ market almost instantly.

12. In 2010 to 2011, after defying the

predictions of many academics and experts, the Australian property market once again continued to climb, with Melbourne hitting a new peak median price of $601K in December 2010. This defiance to conform to predictions of

collapse, lead to, in 2011 and early 2012, another campaign of predictions that the ever-mounting household debt locked in the Australian housing market would ultimately lead to a ‘bubble bursting’

– with many families and household

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owners losing their life savings when the housing market corrects by 30% to 60% of its current levels. Perhaps the most memorable example of a doom and gloom article is that of commercial property advocate, Chris Lang, who proclaimed that Baby Boomers who do not sell their homes in 2012 will have to wait until 2025 before they could sell them, as no one would be interested in large four bedroom houses in Melbourne and Sydney “Baby Boomers are facing an enormous challenge. And the sad fact is that they are probably not even aware of the problem. You see, if they haven’t sold their traditional inner-suburban homes before 2012 they need to be prepared to hold onto them until 2025, because there simply won’t be a market for that type of property before then.” There is, in fact, an exhaustive list of other arguments that all predict that the Australian property market has to crash, ranging from demographic reasons, to economic reasons, stock market-related reasons, to monetary and fiscal changes in Europe. One argument used excessively by various commentators is that Australian house prices are overvalued, with the average mortgage representing the equivalent of 9.2 times the average annual income. Hence, the argument is that this is unsustainable, as eventually people

 

Statewide projected population growth 2007 to 2056

 

State

2007 Population

2056 Population

total Growth

Avg Annual Growth

NSW

6,816,087

10,158,043

3,341,956

0.8%

VIC

5,126,540

8,482,497

3,355,957

1.0%

QLD

4,090,908

8,653,819

4,562,911

1.5%

SA

1,567,888

2,195,768

627,880

0.7%

WA

2,059,381

4,252,618

2,193,237

1.5%

TAS

489,951

571,015

81,064

0.3%

NT

210,627

397,322

186,695

1.3%

ACT

334,119

506,424

172,305

0.9%

AuS

20,695,501

35,217,506

14,522,005

1.1%

Source: RP Data, ABS

 

Capital City projected population growth 2007 to 2056

 

Cap City

2007 Population

2056 Population

total Growth

Avg Annual Growth

Sydney

4,281,988

6,928,400

2,646,412

1.0%

Melbourne

3,743,015

6,734,991

2,991,976

1.2%

Brisbane

1,819,762

3,936,363

2,116,601

1.6%

Adelaide

1,145,812

1,644,040

498,228

0.7%

Perth

1,518,748

3,323,089

1,804,341

1.6%

Hobart

205,481

278,845

73,364

0.6%

Darwin

114,362

240,171

125,809

1.5%

Canberra

334,119

506,424

172,305

0.9%

total

13,163,287

23,592,323

10,429,036

1.2%

Source: RP Data, ABS

will not be able to service or even qualify for these loans if prices continue to rise. This argument was addressed in a recent report issued by the ANZ bank, senior economist David Cannington and Paul Braddick, head of property research at ANZ:

“Despite the continued concerns about significant Australian house price overvaluation from some commentators, housing market fundamentals remain supportive.” The report goes on to state that majority of the capital growth in Australian median prices since 1986 can be attributed to gains in average household incomes and a structural decline in the cost of borrowing. (See Australian House Prices Vs. ‘Purchasing Power’ graph.) Furthermore, the report stated that some 92% of the median price appreciation since 1986, of the residential market, can be explained by these two contributing factors (shown above) which are interest rates, and household income growth.

Beating the odds

Here are my personal top eight reasons why the Australian property market will continue to beat the odds and continue to exponentially appreciate over time, especially over the next 15 to 20 years.

Australian House Prices Vs. ‘Purchasing Power’*

$700,000 Interest rate contribution to simulated house price** Income growth contribution to simulated house price***
$700,000
Interest rate contribution to simulated house price**
Income growth contribution to simulated house price***
Actual house prices
$600,000
$500,000
$400,000
$300,000
$200,000
$100,000
$0
86
88
90
92
94
96
98
00
02
04
06
08
10
–$100,000
Represents the average households purchasing power over the median priced home
Calculated using trend discounted variable bank mortgage rate
*** Calculated using average household disposable income
*
**
Source: ABS, RBA, RP Data-Rismark, ANZ Research

$547,861

 

low Build rate

Medium Build rate

 

High Build rate

 

Build rate

Shortage by

Shortage by

Build rate

Shortage by

Shortage by

Build rate

Shortage by

Shortage by

per annum

2016

2020

per annum

2016

2020

per annum

2016

2020

NSW

28,200

196,200

267,500

40,600

134,100

155,700

48,600

94,400

84,200

VIC

26,900

114,900

189,900

36,400

67,300

104,200

45,300

22,600

23,800

QLD

31,300

98,000

142,900

37,000

69,600

91,800

44,200

33,500

26,900

SA

6,700

30,800

49,000

9,400

17,200

24,600

11,500

6,800

5,700

WA

16,700

86,700

134,700

19,300

74,100

112,000

21,900

60,800

88,000

TAS

1,700

2,400

3,500

2,300

-300

-1,300

3,500

-6,600

-12,700

NT

1,000

11,200

15,900

1,400

9,300

12,500

1,800

7,100

8,500

ACT

1,900

3,100

5,500

2,400

800

1,400

3,600

-5,400

-9,700

total

114,400

543,300

808,900

148,800

372,100

500,900

180,400

213,200

214,700

* Negative value denotes a surplus

1. i ncreasing population growth via migration. If we look at the basics, the number one driver of house prices is demand, especially if that demand is growing, consistent and focused on specific areas and suburbs. This is definitely the case with the record high level of migration that is coming into the country on an increasing basis, year after year. Based on estimates released by the Treasury, Australia’s population will explode to over 35 million by 2056, that’s an increase of 14.5 million people, most of whom will come from overseas. It’s important to note that most of these people will be living along the eastern coast of Australia, concentrated around the major capital cities like Melbourne, Sydney and Brisbane. This point is further highlighted by the table below, depicting population increases in the specific cities around Australia. For example, the estimated influx of additional 3,355,957 people that will be migrating to Victoria, 2,991,976 of them will be living in Melbourne.

2. australians face a looming housing shortage and our housing industry cannot cater for the ever-growing demand. One of the most significant and perhaps challenging issues that will have to be addressed by Australian governments in the next five to 10 years is how to solve the increasing housing shortage which according to the Housing Industry Association (HIA) will stand

at approximately 160,000 by 2020 in NSW, 112,000 in WA, and there will be a shortage of 105,000 in VIC. As can be seen by the table above, the shortage of new dwellings coming into

the market is dire across the board, with

a prediction of over 500,000 dwelling

shortages across Australia by 2020. While these shortages are staggering, there are two more aspects of this issue that need to be appreciated in order to fully take in the gravity of this situation. The first is that the majority of new dwellings are being constructed on the fringes of the major capital cities in Australia in new estates. This is mainly due to established suburbs having height and density restrictions; large scale developers are usually left with fringe city farm land that has been rezoned as the place to establish new housing estates. In Melbourne, there are over 105 new housing estates located in all directions on the outskirts of the city. This means that the housing pressures on established suburbs and inner city areas are likely to keep increasing, along with their prices, due to the majority of jobs and infrastructure being concentrated in

the city areas of the major capital cities in Australia. The second point to appreciate is that currently Australia does not have

a workforce that is capable of building

500,000 new homes by 2020. This shortage of skilled labour, combined with the bureaucracy involved in creating new land estates will continue to underpin

property prices across the nation for decades to come.

3. australia has strong economic fundamentals in place that will underwrite the demand for houses for decades to come. With the Australian Government’s constant focus on the trade and strengthening economic ties with the emerging Asian markets since the 1970s, shifting from reliance on the western European markets has certainly paid off. Since the 1980s Australia has experienced extensive periods of economic growth averaging 3.3% in real GDP growth rates. This shift has turned Australia into one of the fastest growing advanced economies in the world. Australia is the 13th largest economy in the world according to nominal GDP (current prices) and the 17th largest according to GDP (PPP). In 2010, Australia’s GDP (PPP) was US$882.344 billion – a 3.94% increase from 2009. Australia’s nominal GDP (current prices, US dollars) growth during the same period was even more amazing – GDP (current prices, US dollars) grew from US$994.25 billion in 2009 to US$1.219 trillion, a 22.68% increase. With strong ties with China, who is about to relocate 130 million of its people into city areas, and skilled jobs, the likelihood is that China’s thirst for Australian commodities is likely to last for decades.

[ Feature]

4. a unique banking system that is underwritten by the residential property market. Our $3.5 trillion private residential housing market is completely dominated by the four major banks in terms of mortgage exposure, which only stands at about 30%. Putting aside unencumbered houses and investment properties, owner occupied properties in Australia have mortgage levels where the average loan to value ratio is located somewhere between 50% to 60%. This is a very important point for two reasons. One, properties would need to devalue by 40% to 50% before there would be any effect on mortgage sentiment, and even at that point in time, given the strength of the economy and emotional link to owner-occupied living, most people would be hesitant to sell their house. Perhaps more importantly, the mortgage debt is not evenly spread against all dwellings across all suburbs. Taking Melbourne as an example, top suburbs like Kew, Camberwell or Balwyn have 65% of all properties unencumbered, contrasted with new ring estates like Point Cook, Tarneit, or Pakenham with 95% debt. The reality is that there are a lot of rich people in Melbourne, Sydney and Brisbane, sitting in houses that are completely paid off, and completely unaffected by any property price movements. The other unique aspect making up the Australian banking landscape is the very stringent lending policies and credit scoring systems that are widely used in Australia, where the majority of loans written are full doc loans, insured by QBE or GE, resulting in an extremely low mortgage default rate of 0.7% per year. This is an extremely low default rate by international standards, and it’s a credit to our banking system, which has provided so much needed stability in recent economic times.

5. Strong social emphasis on house ownership, entrenched by government and developers. We have all heard at one time or another that the ‘Great Australian Dream’ is to own a four bedroom house on a 1200 square metre block. For many this is now all but a dream, with median prices around Australia’s major capital

dream, with median prices around Australia’s major capital cities hovering around the $550,000 to $600,000 mark,

cities hovering around the $550,000 to $600,000 mark, and realistically requiring $900,000 to buy a four bedroom house in an established area; many first home buyers or migrants struggle to buy into one of the most expensive markets in the world. Ranking ahead of London, New York, Rome, Los Angeles, Berlin or Hong Kong, the latest survey by the Economist Intelligence Unit, shows that Sydney leads the list of the five Australian mainland capital cities in the Top 20. Sydney globally is ranked at number seven, slightly ahead of Melbourne at number eight. Perth is the 13th most expensive place to live in the world, Brisbane is 14th and Adelaide is 18th.

to live in the world, Brisbane is 14th and Adelaide is 18th. The number one driver

The

number one driver of

house prices is demand

is 18th. The number one driver of house prices is demand One of the contributing factors

One of the contributing factors to the resilience of our residential property market is the extensive push by our government since the end of the Second World War into home ownership. This has, in large, been reflected in the various financial incentives, such as the First Home Buyers Grant, offered by both the state and federal governments. The other major contributing factor is the constant drive and advertising by major land developers such as Delfin, Vic Urban, Australand and others, depicting families in new house and land estates. This relentless push of home ownership has resulted in a deep entrenchment of home ownership as part of the Australian culture and rite of passage from one generation to the next. The point being made here is that one cannot underestimate the potency of the belief systems and values of a society that

has been developed and reinforced by family members and peers over decades.

6. geographically isolated premium suburbs and estates. One of the most unique features of the Australian housing landscape is that virtually every suburb in Australia came into existence within the last 200 years, and more importantly, each suburb was at one stage a ‘master planned’ estate that was sold to home buyers based on a stage released process. This means that each and every suburb at one stage or another had a similar price range, and housing design guideline, attracting a similar type of buyer based on demographic and income band. Needless to say, over time, some suburbs have transformed, with many of the traditional inner city suburbs which were originally made up of blue collar workers, such as Melbourne’s Middle Park or Port Melbourne attracting white collar workers due to their unique proximity to the city, access to infrastructure and the beach. However, there are always exceptions to this rule; many of the original affluent suburbs have also remained affluent over the decades, such as Melbourne’s Toorak, South Yarra, Canterbury, Kew, all of which shared a common thread of having land blocks in excess of 1000 square metres and houses of 25 to 50 squares being offered in the original suburb marketing plan. The end result being that Melbourne, Sydney and Brisbane have ended up with very distinctive and often fragmented property markets, virtually independent of each other, and have no real common links. In Melbourne for example, there is no correlation between Broadmeadows in the northern suburbs, where the median price is $350,000 compared to Toorak, where the median price is $2.75 million.

These distinctive suburbs have virtually nothing in common in terms of level of debt, income bands, job industries, etc. Due to this unique and fairly recent establishment of suburbs by international standards, within the main capital cities around Australia, we have ended up with a situation where the rich are concentrated in very specific areas or suburbs, as are the middle class, as are the less affluent. This has resulted in different suburbs and areas being affected in completely different ways depending on what the economy or interest rates are doing. During times of high interest rates for example, the outer ring suburbs in Melbourne experience much higher ‘mortgage stress’ levels than the ‘old money suburbs’, where over 50% of house are completely paid off. Further to this, suburbs within the 10km ring around the CBD have also been under mounting pressure due to their close proximity to major job hubs, transport, and lifestyle areas.

7. t axation system that is biased in favour of property investing. One aspect that has been a catalyst of property investing is the numerous tax advantages that are available to property investors due to a unique tax system. The list of tax deductions that are available under the current tax legislation runs

literally into hundreds of potential tax deductions that are available to individuals who choose to invest in property. Perhaps the most notable of these is the ability to claim the interest component of the loan as a tax deduction, not to mention building deduction of 2.5% over 40 years, depreciation of fixtures and fittings over five to 15 years (depending on method of depreciation, diminishing value or straight line) and a multitude of other deductions relating to upkeep, insurance, property management costs, and ongoing costs associated with an investment property. All of these factors combined have the potential to turn a negatively geared property (whereby the rental income from the property does not cover the interest only repayments) to a neutrally geared property or even cash flow positive. Essentially, the implications of a taxation system that is completely biased in favour of property investing means that accountants, mortgage brokers and some financial planners will recommend direct property investing as a holistic solution to wealth creation.

8. Social proof of property investing as a safe, predictable way to make money. Despite the recent international stock market volatility, according to an investment report by Russell Investments, the average house in Melbourne has

Historical and forecast average annual returns 14% Historical 12% Forecast 10% 8% 6% 4% 2%
Historical and forecast average annual returns
14%
Historical
12%
Forecast
10%
8%
6%
4%
2%
0%
Residential
Residential
ASX200
Govt
Commercial
Term
(OOH)
(Investor)
bonds
property
deposit

Source: ANZ Property Research

returned an average of 49.8% over a five year period until June 2011. This equates to an average annual return of 9.98% per year, which is a hefty contrast compared to the stock market, bonds, or commodities. What’s more astounding, is that despite all the doom and gloom predictions, and in light of major international economic turmoil, the Australian residential property market has managed to return an average of 10.1%

for the 10 year period until June 2011, and

a staggering annual average of 11.6% of a

25 year average until June 2011.

Similar results were documented in a

recent ANZ report, which showed that over

a 24 year period, taking costs, taxes and gearing into account, property was the winner compared to that of the ASX200, Government bonds, commercial property and term deposits (see table below). Further studies by RMIT substantiated these findings, showing that over a

20 year period of time, residential

property outperformed the ASX top 200 companies. The ANZ report called ‘Australian Property Research Asset Returns: Past, Present and Future’, showed that once all the associated holding costs were considered for the various assets included in the study, owner-occupied housing was found to have generated an annual return of 12%. Investment property 9.6%, stocks 8.9%, government bonds 4.8%, commercial property 4.2% and term deposits 3.7%. Despite these unquestionably outstanding results, every year there is a new breed of ‘doom and gloom’ seers, who eagerly wait for the mythical property bubble to burst. These prophets of doom seem to reappear every time the property market enters its decline or stabilisation part of the property cycle, and they disappear as quickly as they came, when the market shows signs of recovery and progresses, once again, to the upturn and boom part of the property cycle. They then

retreat into the dark cubicles, libraries, or university research departments, collecting new documents and data, preparing for

new opportunity to herald their next apocalyptic prophecies. pi

a

collecting new documents and data, preparing for new opportunity to herald their next apocalyptic prophecies. p

[ Feature]

eSTaBlIShIng The value oF real eSTaTe

If you do your homework, there is no reason why you can’t maximise your profits, writes Peter Vekselman.

you can’t maximise your profits, writes Peter Vekselman. y ou’ve located the property that you are

y ou’ve located the property that you are potentially interested in purchasing, have looked at it

and determined that it meets your basic investing goals. Before you pat yourself on the back for a job well done, you need to establish its value to avoid potential financial disaster. If you take the word of the seller or the tax rolls to establish its value, you could lose your shirt, especially in a real estate market that has seen values drop by tens of thousands of dollars within a matter of months.

Depending upon the kind of investor you are, you’ll utilise one of the three methods of establishing the value of a property. They are:

Comparable Sales - If you’re

investing in primarily single-family or multi-family properties with fewer than

five units, by far the most popular method of establishing value is the comparable sales method. This method consists of

locating recently sold properties that are substantially similar to the one you are considering purchasing and are located

in the same general vicinity. A skilled

appraiser typically has many years of experience in determining value, but you can do the same thing either by going to

your local courthouse and compiling the information yourself or by working with

a realtor who might be willing to provide

these figures to you. You can also get a rough estimate of values in many areas by utilising an online resource. Once you have your comparable sales figures you’ll need to compensate for any differences, such as the lack of a garage, fireplace, or even a swimming pool. In order to compensate for the differences in square metres of your subject properties, you

can divide the sales prices by the square metres of living space to come up with a cost per square metre.

of living space to come up with a cost per square metre. A skilled appraiser typically

A skilled appraiser

typically has many years of experience in determining value, but you can do the same

of experience in determining value, but you can do the same replacement Cost - While not

replacement Cost - While not

nearly as popular as the Comparable Sales method, another way of determining the value of a property is by estimating what it would cost to recreate the same property in the same area. You would need to determine building costs, the cost of materials and also make allowances for depreciation of the property so that it is substantially similar to the property you are considering purchasing. If you’re

experienced at estimating building costs accurately and are aware of the current cost of building
experienced at estimating building costs accurately and are aware of the current cost of building

experienced at estimating building costs accurately and are aware of the current cost of building materials and supplies, the Replacement Cost method may be one you will want to utilise. However, it isn’t utilised very frequently. If the Replacement Cost method is one that you’d like to use to determine value, you could very quickly arrive at a figure by contacting a local contractor and asking them how much they would charge you by the square foot to build a home in the area of your subject property. Don’t forget to factor in depreciation to match the condition of your subject property.

to match the condition of your subject property. Determine what the gross income is for the

Determine

what the

gross income is for the property

and then subtract all expenses, including debt service on an annualised basis

all expenses, including debt service on an annualised basis Income valuation – The third method of

Income valuation – The third

method of determining the value of a property is to use the Income Valuation method, sometimes referred to as the Net Income approach. This method is used to determine the market value of a commercial property or a residential property with more than five units. It’s a relatively simple process. First, determine what the gross income is for the property and then subtract all expenses, including debt service on an annualised basis. Multiply that figure by a factor of 10. The resulting number is about what your property is worth. What’s nice about this sort of property is you can increase its value simply by increasing its net income, reducing operating expenses, or both.

Once you’re able to determine the value of a property you can write an intelligent offer that doesn’t cause you to run

the risk of overpaying for a property. Remember, though, that real estate prices can be extremely volatile, so make sure any properties you use for comparative purposes are recent sales figures. If you have accurate numbers, you can write impactful, precise bids that stand a greater chance of being accepted and allowing you to turn average returns into explosive profits.

allowing you to turn average returns into explosive profits. Peter Vekselman has been successfully investing in

Peter Vekselman has been successfully investing in real estate since 1996. He has completed over 1000 real estate deals, owned a construction company, been a private lender and owned a property management company. Peter currently works with clients all over the US http://www. CoachingByPeter.com.

property stack up well against other properties, or not so well? Along these same lines,

property stack up well against other properties, or not so well? Along these same lines, could minor changes to, say, property management for instance, improve the property’s position in the market? Or are there issues like location, for example, that are unchangeable and will continually present challenges for you to keep the units occupied at market rents?

5) What are the operating expenses?

This, of course, is vital for you to know when real estate investing because operating expenses directly affects cash flow and profitability. In this case, you want to be sure to include those expenditures that keep the property in operation such as cost of utilities and trash, repairs and maintenance, advertising expenses, licenses and fees, and so on. But equally important is to be sure you use realistic numbers for your investment property analysis projections. Whereas the current owner might indicate an operating expense ratio of 40%, for example, you might discover upon closer examination that the operating expense ratio would be more realistic at 44%.

the operating expense ratio would be more realistic at 44%. James Kobzeff is the developer of

James Kobzeff is the developer of ProAPOD Real Estate Investment Software www.proapod.com.

[ Feature]

WhaT an InveSTmenT ProPerTy analySIS Should anSWer

An investment property analysis gives real estate investors a basis for setting rent schedules, estimating income and operating expenses, and provides a detailed description of the rental property’s physical layout and marketplace position, writes James Kobzeff.

l et’s take a look at five questions that an investment property analysis should consider and

address before an investor makes a real estate investing decision to purchase.

1) Where does the property fit in the market?

This is a fairly straightforward assessment where you would consider how the property is currently being used and then compare it with other similar-type properties in the local market. If the subject is a multi-family apartment building, for example, then you would want to know how it compares to other multi-family apartment buildings. Is it just as good, inferior, or maybe heads and shoulders above good (whether in its current condition or with minimal alterations)?

2) What do you expect of the property for the time you plan to hold it?

This concerns your investment objectives and the period of time that you expect to hold the investment. Whereas some real estate investors, for example, might simply want to add value by increasing the rents and then re-selling for a profit immediately, others might have their

sights on retirement and are looking for long-term ownership as a means to generate future supplementary income.

3) What are the physical and economic characteristics of the property?

This concerns the type of rental agreements already in force that might impede or inhibit you from making substantial improvements to the property. Whereas month-to-month rental agreements might not feel as financially secure as longer term agreements, for example, at the same time they offer you an opportunity improve the space when they become vacant and seek out tenants willing to pay higher rents perhaps on longer term leases. Likewise, when long-term leases are already in effect, you get some amount of financial security but essentially cannot as readily make improvements that might warrant higher rents and perhaps add value to the investment property.

4) how does the property compare to the competition?

In this case you are comparing the location, age and type of construction, condition, size of units, amenities and features with an eye upon specific differences. Does the subject investment

[ Feature]

your due dIlIgenCe CheCklIST

What does your due diligence check list include? As an investor, checking off receipts of the standard items falls far short of what a successful property must deliver, writes Blake ratcliff.

The usual items are:

Principal’s personal financialsmust deliver, writes Blake ratcliff . The usual items are: Property condition reports Phase I environmental

Property condition reports. The usual items are: Principal’s personal financials Phase I environmental reports Financials Leases Survey

Phase I environmental reportsPrincipal’s personal financials Property condition reports Financials Leases Survey Zoning and historical site info Pro

FinancialsProperty condition reports Phase I environmental reports Leases Survey Zoning and historical site info Pro forma

Leasescondition reports Phase I environmental reports Financials Survey Zoning and historical site info Pro forma financials

Surveyreports Phase I environmental reports Financials Leases Zoning and historical site info Pro forma financials

Zoning and historical site infoPhase I environmental reports Financials Leases Survey Pro forma financials Appraisals Unfortunately, ticking off

Pro forma financialsFinancials Leases Survey Zoning and historical site info Appraisals Unfortunately, ticking off these items leaves a

AppraisalsSurvey Zoning and historical site info Pro forma financials Unfortunately, ticking off these items leaves a

Unfortunately, ticking off these items leaves a great deal of risk on the table for the investor unnecessarily.

An effective checklist will provide:

Financial, experience and background of the principalsinvestor unnecessarily. An effective checklist will provide: Financial position of the key (largest investors) Physical

Financial position of the key (largest investors)Financial, experience and background of the principals Physical condition of the property Submarket and market

Physical condition of the propertyprincipals Financial position of the key (largest investors) Submarket and market situation Sales and marketing plan

Submarket and market situationkey (largest investors) Physical condition of the property Sales and marketing plan Resident factors Improvement plans

Sales and marketing plancondition of the property Submarket and market situation Resident factors Improvement plans Management and

Resident factorsSubmarket and market situation Sales and marketing plan Improvement plans Management and maintenance plan and resume

Improvement plansmarket situation Sales and marketing plan Resident factors Management and maintenance plan and resume Staff assumptions

Management and maintenance plan and resumeSales and marketing plan Resident factors Improvement plans Staff assumptions for the purchase Organisational and legal

Staff assumptions for the purchaseImprovement plans Management and maintenance plan and resume Organisational and legal documents and considerations

Organisational and legal documents and considerations including operating agreements, licenses, securities filings, etc.plan and resume Staff assumptions for the purchase Under each of these areas, investors should seek

Under each of these areas, investors should seek significant detail. In the following paragraphs, I provide a high level view of each of these items to support investors.

Financial, experience and background of the principals

The investor should have a financial statement on each of the principals and the investing entity. Additionally, the investor should have a resume of experience, references and a current background and credit check.

Financial position of the key (largest investors)

The investor should have a sense of the net worth and intended contribution of the largest investors. Key factors include liquidity, net worth, amount of multi-family investment and planned or formal involvement in oversight of the investment.

Physical condition of the property

This consists of the information from the property condition report (PCR), environmental study (ESA), and investors unit by unit, building by building, system by system and grounds punch list of issues. This should include survey information, parking density, encroachments, available land, and much more.

Submarket and market situation

Perhaps this is the most complex portion of due diligence. In this area investors need to know sales and rent comparables on the basis of square metreage, amenities, age and bedrooms. All sorts of demographic information is needed. Local infrastructure and economic facts are required. Shopping, restaurants, entertainment, and other community facts are important. All of this information needs to be correlated to distance from the property.

Sales and marketing plan

This plan should include items like local traffic counts, cost and availability of signage, and other advertising information. This information should be articulated as a cohesive well thought out executable marketing plan for the property.

Resident factors

If the market is new, tenant rights must be understood. The current leases

need to be examined. A detailed plan determining the specific plans relative to the disposition of the current residents, evicting problem residents and replacing with new residents must be developed.

Improvement plans

The property condition, condition of the submarket, the sales and marketing plan, and resident situation will all be used to develop a comprehensive capital improvement plan for the property.

Management and maintenance plan and resume

The management and maintenance plan should be reviewed and the resume thoroughly examined. If possible references should be checked.

Staff assumptions for the purchase

The investor should examine the position requirements, plans to fill those positions and if actual management is identified their experience, references, and past results compared to the project requirement. Organisational and legal documents and considerations including operating agreements, licenses, securities filings, etc. The investor should work closely with counsel to assure all appropriate documents and protections are in place. Additionally, the structure of the sales contract followed by an orderly detailed process at closing are critical to a good investment.

process at closing are critical to a good investment. Blake Ratcliff is an investor, business executive

Blake Ratcliff is an investor, business executive and management team member of 9 startups, former founder and operator of 1,000 unit portfolio, founder of the real estate association - http:// www.irreia.org, partner with the District REIA, and author of The Warrior’s Guide to Rental Investing and Management available at http://www. smashwords.com.

[ Feature]

Where The PaSTureS are greener

New property investors are priced out of the Melbourne property market, which is why you should invest in regional areas, writes Konrad Bobilak.

o ver the past five years I have witnessed a lot of new property investors in Melbourne being

completely priced out of the market, with the house median price in Melbourne reaching an all-time high of $601,000 in December 2010, currently hovering around the $560,000 mark as of March 2012. Looking more closely at the situation, it is difficult to buy any three to four bedroom house under $800,000 to $1,000,000 with a decent land component in top tier suburbs like St Kilda, Elwood, Brighton and Hampton in the bayside suburbs and Kew, Camberwell or Hawthorn in the eastern suburbs. The preferential inner city fringe suburbs, which are positioned roughly within a 10km radius of the CBD are in most cases completely out of reach for most new investors entering the market. Hence, the only viable option for these investors is to purchase an apartment or a townhouse, but in many cases, even two bedroom apartments in St Kilda, Bentleigh and Sandringham, are coming in at more than $550,000. In fact, these sought-after inner suburbs of Melbourne have soared in price over the last 20 years, as the figure below shows. While many new investors are becoming either discouraged from investing altogether, some are turning to the largely untapped regional areas, such as Geelong, Ballarat, Shepparton and

Bendigo in order to get their foot in the door. Many are finding this strategy very lucrative, with some surprising capital growth and rental returns. Before we explore the viability of investing in regional centres, it is important to reiterate the key fundamental components that experienced investors look for in an investment property, then

apply that regional centre template to see which pass the criteria and constitute a good long-term investment opportunity. The following is a short list of the top six key fundamentals that I look for in an investment property – insights which I have gained over the past decade as a real estate agent, and ex-banker, working closely with sophisticated property investors.

1. Capital growth of at least 10% over the last 10 years. (RP Data)

2. Low vacancy rates of 2.5% or less. (REIV)

3. Proximity to CBD and infrastructure, transport, shopping, schools.

4. Positive population of growth of at least 1%. (ABS)

5. Rental yield of at least 4% per year. (REIV)

6. Maximum depreciation on building and fixtures and fittings. (Quantity Surveyor)

Although this is a very short list, it can be used as a rule of thumb to eliminate

Five-year Melbourne Median Price History $625,000 $625,000 $600,000 $600,000 $550,000 $575,000 $575,000 Houses
Five-year Melbourne Median Price History
$625,000
$625,000
$600,000
$600,000
$550,000
$575,000
$575,000
Houses
Unit/Apts
$550,000
$550,000
$525,000
$525,000
$500,000
$500,000
$455,000
$475,000
$475,000
$450,000
$450,000
$425,000
$425,000
$400,000
$400,000
$375,000
$375,000
$350,000
$350,000
$325,000
$325,000
$300,000
$300,000
$275,000
$275,000
Dec-06
Mar-07
Jun-07
Sep-07
Dec-07
Mar-08
Jun-08
Sep-08
Dec-08
Mar-09
Jun-09
Sep-09
Dec-09
Mar-10
Jun-10
Sep-10
Dec-10
Mar-11
Jun-11
Sep-11
Dec-11

Source: REIV

more than 50% to 60% of the properties currently listed on the property market. And just in case you are curious, the next few key fundamental points relate to the land component and density of the project; in a nutshell, the bigger the land component and lower the density of the project, the better. After applying these criteria to all the major regional centres in Victoria with a population greater than 100,000 people, Bendigo shines with flying colours. In fact, apart from advantage of the major price difference, Bendigo beats Melbourne on all key fundamental components when it comes to analysing the viability of buying an investment property.

to analysing the viability of buying an investment property. Bendigo beats Melbourne on all key fundamental

Bendigo

beats Melbourne

on all key fundamental components when it comes to analysing the viability of buying an investment property

to analysing the viability of buying an investment property Bendigo is experiencing a second gold rush,

Bendigo is experiencing a second gold rush, but this time investors are scouring for investment properties. Over the last 10 to 15 years, Bendigo has become a destination of choice for ‘tree change’ for many Melburnians who are wanting to escape the fast-paced and expensive lifestyle of Melbourne, without sacrificing unique cafè culture and architectural heritage of 150 year old suburbs like St Kilda and Brunswick. Bendigo is located 130km north of Melbourne, only 1hr 45min by fast train and enjoys a population of 216,000 (as at 2011). Bendigo is experiencing record population growth of 2.7% and a potential housing shortage in the next five to 10 years. This has resulted in unprecedented vacancy rates dropping to 0.2% in 2012 according to REIV. With substantial infrastructural redevelopments in the pipeline, such as the $630 million redevelopment of the

hospital precinct over the next six years, not to mention Bendigo benefiting from the $4.3 billion Victorian Government regional rail link, key areas in Bendigo have the future potential of outpacing the capital growth of some of the most

favoured Melbourne suburbs.

[ Feature]

Here is a snapshot comparison of Bendigo vs. Melbourne;

 

MelBourne

BendiGo

MEDIAN

$563,000

$285,000

HOUSE PRICE

CAPITAL

10%

11%

GROWTH

(10 Years)

VACANY

2.3%

0.2%

RATES

RENTAL YIELD

4%

5.5%

POPULAITION

1.6%

2.7%

GROWTH

Below is a snapshot of the capital growth of the main areas in Bendigo over the last 10 years. Surprisingly, a number of key areas in Bendigo have outperformed some of the best suburbs in Melbourne in terms of capital growth and rental yields over the past 10 years. What makes this even more attractive for investors is the low entry price point, as the median house price in Bendigo is only $285,000, virtually half of that of Melbourne’s $563,000. Furthermore, upon closer examination of the driving factors of the local economy, it’s surprising that Bendigo is not reliant exclusively on one specific economic driver such as tourism or mining. Rather, it has a diversified economy consisting of manufacturing, financial services, health, education, mining, agriculture and engineering.

health, education, mining, agriculture and engineering. A number of key areas in Bendigo have outperformed some

A number of key areas

in Bendigo have outperformed some of the best suburbs in Melbourne

have outperformed some of the best suburbs in Melbourne It’s also worth noting that Bendigo has

It’s also worth noting that Bendigo has one of the few provincial stock exchanges which was founded in the 1860s, as well as the headquarters of the Bank of Bendigo. The area has a strong education sector, including Bendigo Regional Institute of TAFE, La Trobe University, Monash University, Bendigo Senior Secondary College and Bendigo Catholic College. Bendigo also boasts the oldest and

Bendigo school.

largest Art Gallery in Australia, which made headlines recently due to the Grace Kelly iconic exhibition that was hosted there.

to the Grace Kelly iconic exhibition that was hosted there. Bendigo is definitely a hot-spot, but

Bendigo is definitely a

hot-spot, but is by no means

the only regional area worth investigating

is by no means the only regional area worth investigating With a significant wine region and

With a significant wine region and splendid architecture stretching back 150 years to the gold rush era, Bendigo has a sophistication that is completely unique compared to that of any other regional area in Australia. Having ranked number 69 on Your Investment Property’s Top

100 in 2011, no wonder so many savvy investors are looking at Bendigo as their foothold into the property market. Bendigo is definitely a hot-spot, but is by no means the only regional area worth investigating. While a lot of investors avoid regional areas because of a perception of low capital growth and high vacancy rates, nothing could be further from the truth. That’s why smart investors, who know how to conduct unbiased due diligence, are winning the game, compared to those who hold false and limiting preconceived ideas of regional property markets. And with so many excellent investment opportunities outside of the major cities, before your next purchase, it really is worthwhile casting your eyes over greener pastures. pi

is worthwhile casting your eyes over greener pastures. p i location no. of sales House median

location

no. of sales

House median

1yr growth

Growth rate

Median yield

Bendigo

170

$285,000

22%

11%

5.2%

California Gully

65

$210,000

3%

10%

5.3%

Eaglehawk

80

$220,000

7%

10%

5.4%

East Bendigo

40

$255,000

11%

11%

4.8%

Golden Square

170

$250,000

14%

10%

5.1%

Ironbark

35

$240,000

9%

10%

5.4%

Kangaroo Flat

180

$245,000

6%

8%

5.2%

Kennington

105

$285,000

10%

10%

4.7%

Long Gully

55

$205,000

13%

11%

6.2%

North Bendigo

85

$220,000

5%

10%

5.7%

Strathdale

85

$315,000

5%

7%

4.6%

Source: Australian Property Monitors. “No. of sales” is house sales in the past 12 months. “Growth rate” is the average annual growth in the median house price over the past 10 years.

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How to

How to Finding the right structure to invest in property can be difficult. In the following

Finding the right structure to invest in property can be difficult. In the following section we aim to break down those structures by enlightening you on matters such as how to invest, how to best manage your asset, what sort of action plan you need and how to best educate yourself. Of course, it is up to you to do your own due diligence, particularly when buying overseas, but we hope this section guides you through some potential minefields to make you a smarter investor for both Australian and US property.

foundations

investor for both Australian and US property. foundations Don’t wait to buy Oz property, buy property

Don’t wait to buy Oz property,

buy property and wait

In spite of the doomsayers, there are ways to profit in the property market, writes Konrad Bobilak.

Charles Dickens’ famous novel, A Tale of Two Cities, best captures the economic and financial market turmoil that everyone has been experiencing in 2011: It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness.

Lately, I have seen many examples of the media thriving on the ‘doom and gloom’ of the current environment, and for most people it’s been one big rollercoaster ride, with the bailout of the US debt market, the decline and talk of the possible breakup of the European markets and single euro currency, and the near collapse, then subsequent recovery of the Australian stock market.

This fear-mongering bandwagon, which the media loves to jump on, has created a very negative overall consumer sentiment in Australia. In fact, Australians have reverted to increasing their spending equivalent to that of the 1985 era, delaying the purchasing of big-ticket items, and, many first home buyers are delaying their entry into the property market. This, in turn, has resulted in low clearance rates of 50% across the major capital cities in 2011, low volume of new listings and a slight decline in the median price across the major capital cities, seen in the table beside.

Simultaneously, all of this has created ideal buying opportunities for ‘cashed-up’, and market-ready property investors who are capitalising on the dire market conditions, by negotiating massive discounts on blue-chip properties, in premium locations across the major capital cities. Not only are there bargains to be had after a property is passed-in at an auction, I have personally witnessed developers slashing tens of thousands of dollars off existing and off-the-plan stock, in an attempt to sell out projects before the end of this uncertain and volatile year. It is truly a time of wisdom, and the age of foolishness.

My

advice

is not to wait to buy property, rather, buy property and wait

Change in dwelling values

Year-on-year change, seasonally adjusted % 0 Brisbane Melbourne Adelaide Perth Hobart* Darwin Sydney Canberra
Year-on-year change, seasonally adjusted
%
0 Brisbane
Melbourne Adelaide
Perth
Hobart*
Darwin
Sydney
Canberra
-1.1%
-1.1%
-1
-2
-3.1%
-3
-4%
-4
-5%
-5.2%
-5
-5.4%
-6
-7
-8%
-8
-9
-10
Source: RP DATA-RISMARK *HOBART DATA TO SEPTEMBER 2011

The

market

is simply a vehicle that transfers wealth from the uneducated to the educated ”

With a high probability of substantial interest cuts, coupled with escalating rental yields across the major capital cities, 2012 is looking like the beginning of the next strong upward trend in the property cycle, especially in Melbourne and Sydney. Many people will look back at 2011 and correctly identify it as the ‘best time to buy property’ under market value, and by that stage of course, it will be too late, as all the bargains will be gone, and the market would have moved into the next phase of the property cycle.

One of the most fundamental principles of investing in property in Australia is to appreciate that the market moves in distinct cycles which are characterised by periods of strong capital growth and demand for properties, through to periods of

a flat-lining market, following periods of distinctive

falling median prices, lower demand for properties, and a decline in property prices. The money is made by both the timing of the market, and of time in the market. Hence my advice right now to investors is not to wait to buy property, rather, buy property and wait.

The general rule of thumb is that these property cycles last seven to 10 years, and can be segmented into four main parts, the ‘Peak of the Market’ being the shortest of the four:

1. Peak of the Property Market – high capital growth, auction clearance rates of 85%+.

2. Decline of the Property Market – declining capital growth, auction clearance rates dropping from 80% to 50%.

3. Bottom of the Property Market – extended periods of low capital growth, auction clearance rates of 45% to 50%.

4. Growth of the Property Market – increasing capital growth, increase demand for property, increasing auction clearance rates, 55% to

75%.

It is interesting to note that not only do these

cycles vary drastically across the major capital cities in Australia, but the variance can be further observed on a smaller scale within the major cities themselves, for example in Melbourne the western suburbs and bayside are counter-cyclical to each other, while in Sydney, the north shore and the western suburbs at times have shown similar behaviour. Furthermore, these property cycles

can be further characterised by a shifting balance between capital growth and rental yields, this relationship being largely an ‘inverse one’. That is, during times of strong capital growth, rental yields tend to drop as a percentage; the reverse

is true during times of stagnant capital growth,

or declining capital growth, when rental yields

eventually catch up to the market, and increase as

a percentage.

So what iS the implication of all of thiS for the average inveStor?

In essence, successful property investors practice counter-cyclical investing, or they do the exact opposite of what the market is doing. When the consumer sentiment is low, characterised by low clearance rates of 50% or lower, they buy. When the market is booming, which is usually the shortest part of the property cycle, sophisticated investors focus their energy on ‘revaluating’ their properties, and lock in their lines of credit (LOC) at the highest possible level, waiting once again for an opportunity to snap up a bargain at the low point in the market.

Perhaps the best example of ‘counter-cyclical- investing’ is that of Warren Buffett, who by age 79 built Berkshire Hathaway into a $198 billion company, averaging an annual growth in book value of 20.3% to its shareholders for the last 44 years, while employing large amounts of capital, and minimal debt. Warrens’ famous style of investing was encapsulated in a quote:

“I will tell you how to become rich. Close the doors. Be fearful when others are greedy. Be greedy when others are fearful.”

Remember that the ‘risk’ always lies with ‘you’, not with the market. The market is simply a vehicle that transfers wealth from the uneducated to the educated. The sooner you gain the necessary skills and education to take advantage of the property market, the sooner you will be making money and taking advantage of rare opportunities such as what the current property and share markets are presenting right now. pi

advantage of rare opportunities such as what the current property and share markets are presenting right
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foundations

Get educated

foundations Get educated An education guide to oz property investment No matter whether you are investing
foundations Get educated An education guide to oz property investment No matter whether you are investing

An education guide to

oz property investment

No matter whether you are investing in property or shares, the principles remain the same. This article looks at how to invest and what makes you a smart investor. Indeed, what makes you a smarter investor is education.

There is no luck when it comes to property investment. Successful investment is all about diligence. A smart investor will ensure he or she is educated about basic investment principles. The skill comes in using those principles to develop a sound investment strategy.

So how do you educate yourself?

The first thing to do is:

1

Have a property investing strategy

A lack of a property investing strategy is probably the biggest mistake that new investors make.

Many investors will take the plunge and buy a property, and then try to figure out what their strategy is afterwards. This is doing things in reverse. To give yourself the best possible chance of success, you need to pick a strategy and decide what your long-term goals are, then find a property or properties to match.

There are many different types of strategies that can be employed by real estate investors and their relevance always depends on the investor’s individual circumstances, income and time of life.

They include:

The Renovation Strategy – This is a strategy used by real estate investors who buy properties, add value through renovations, and on sell them quickly.

Capital Growth Strategy – Investors who buy properties in areas with high rates of projected capital growth to provide equity in the future – e.g. as a retirement plan.

High Cash Flow Strategy – This is a strategy often used by investors who want to use their income from real estate investments to fund their lifestyles.

2

Know your market

Too many investors dive in without doing enough research on the suburb that the target property resides in. Here are some of the things you need to consider:

Suburb / postcode performance trends – are prices going up or down where you intend to buy, what is the make-up of mortgage holders vs. renters?

How long properties are taking to sell in your suburb – so you can get an idea of the level of demand.

A

smart

investor will ensure he or she is educated about basic investment principles ”

• The median price for similar properties in the area – so you can tell
• The median price for similar properties in the area – so you can tell
The median price for similar properties
in the area – so you can tell (broadly
speaking) whether your target property is
priced competitively.
Be first
5
Study the area on the council website – so
you can ascertain if there are planned
developments / infrastructure improvements
etc. locally which can increase prices in the
future.

Choosing the right experts will reduce your investment risk right from the start, and no doubt save you money and mistakes in the long run.

and no doubt save you money and mistakes in the long run. How many times have
How many times have you heard the phrase, “I wish I’d known can be a
How many times have you heard the
phrase, “I wish I’d known
can be a horrible thing.
”?
Hindsight
3
Know your price
Probably the biggest reason why
investors don’t make money is also the
most obvious: they pay too much for the
property.
The traditional way to find property investments
has been to scour classifieds or trawl through
listings. There are a million other investors doing
the same thing. So find a tool that can help you -
technology is amazing these days.
Note that the bank, valuer, vendor etc. will all have
In a nutshell you need to think ahead, choose your
investments wisely, then manage and monitor
them using all the assets available to you, including
expert advice.
a
different opinion about what a property is worth.
An educated investor will pick up properties at
a
discount and receive instant equity. To do this,
make up your own mind on what the property is
worth, and do it using the very latest data. As a
minimum, find out the sales history of the property,
the on-the-market history and what comparable
properties have sold for recently.
By educating yourself properly and following
through with your strategy you will come to
understand your goals and risk tolerance, your
risk and return and ultimately the power of your
investments.
Once you know how to keep track of your
investments, you will no doubt see your portfolio
expand.
The more information you can get hold of using