With 2012 off and running it was good to see so many groups through the opens on Saturday. It didn’t seem to matter what price range, there were people queuing to go through multi-million dollar homes in the leafy as well as $500k apartments just outside the CBD. With this happening I was surprised to note so many agents asking how interested we were. Many asking if I thought my client would want to make an offer. I thought this strange because most of the properties I went through were Auctions for later in February, and it is unusual for an agent to be actively seeking offers, unless they are genuinely desperate.
I do not know what will happen in Europe through 2012. I do not know whether the US will get out of their woes. Don’t forget it’s an election year over there!! I also don’t know whether the banks will pass on any interest rate changes that the Reserve Bank makes on Tuesday. What I do know is that everyone; vendors, selling agents, financiers, buyers and even politicians are quite nervous. Everyone is trying to work out what will happen next week. But it isn’t next week, nor next month that should be the focus of the buyer. It is the next decade. And unless our population stops growing, which is the one thing Australia cannot afford, then property prices in the top third of suburbs in Melbourne will most likely double.
A buyer should, however try to mitigate risk through reducing drains on cash flow. It is very unlikely you can buy revenue positive in the top third of suburbs in Melbourne, however you can get close to revenue neutral, especially if we get one or two more rate cuts. Looking for homes that will offer good rental return as well as a reasonable depreciation will assist you toward revenue neutrality. BUT this comes at a cost. If you eventually sell the property the depreciation is added back to the Capital Gain that you will pay tax on. So whilst the deduction has made life a little easier along the way, if you have chosen a property specifically for its massive depreciation, and it did not have a good capital growth, you will still be taxed when you sell and the growth will not be as good as it could have been.
Many property spruikers will tell you to buy off the plan or brand new in Mining towns. The reasons will be compelling. They will show you spread sheets and graphs. They will tell you the tax benefits are fantastic. You will actually get a few dollars a year back to you from the rent before you pay the expenses. These all sound good but when you go to sell all that depreciation on the building and goods within the property gets added back to the CGT equation. It is imperative that you seek good financial advice prior to purchasing any investment property that seems too good to be true. It probably will be!
Property area choices for investors can be simple as those for owner occupiers. Both should buy where owner occupiers want to live. Owner occupiers drive prices up. Investors only drive up rents. It can cost a little more to get into an area where there will be competition from those who may have an emotional attachment, but in the long run, when you go to sell the property or better still, refinance it, you will have achieved a much higher capital growth.
Once you have chosen the location, then you need to break down the suburbs into areas. For example there are 4 distinctly different sections of Camberwell. These areas have different property styles, such as period homes circa 1900, 1930’s Art Deco and Spanish influenced Californian Bungalows up to sections where a lot of contemporary homes are. There are differences in dollar per square metre prices, as well as land sizes. It is important that you have decided which style you want, and that it suits both your budget and your reason to purchase and that the area supports this. It is no use looking in an area that the land suits your budget but does not have any Californian Bungalows if that is the style that you like!!
Property choice is not all about rental returns; it is not all about capital growth. It is not all about working out what land you can afford, then hoping to find the house of your dreams if the style is not prevalent in the area you are looking.
It is always a good idea to get some help when making the biggest financial decision of your life. Some forethought and an experienced Buyer’s agent will not only save you a lot of money, but also a lot of wasted time and energy that could be better spent with your family and friends
Ian James
Director
JPP Buyer Advocates