Getting information from newspapers about how the property market is going is like asking a spin doctor to “just tell the truth”! But you can get information from papers and other sources; it is the opinion or the conclusions that are not necessarily accurate. Anybody thinking about property investment at the moment has probably seen or at least heard about the 60 Minutes program a few weeks back where they brought in an expert in US property and he looked at a mining town in Queensland as an example to extrapolate to the whole country. He has said property prices will fall 30% – 50% soon, most likely this year. I am not sure why 60 Minutes ran this story as it was so poorly thought out but I suppose they like “gloom and doom” headlines, whether they have any substance or in this case, NOT.
With clearance rates moving solidly in the 70% range we know from past experience that if these numbers continue, we will see approximately 10% growth in the main auction suburbs of Melbourne this year and most likely 8 – 10% in the outer suburbs. So we now have most of the media outlets screaming that it is a sellers’ market and that all property is going up. However, do not assume all areas of the market are the same. With massive apartment constructions delivered for Melbourne in 2015, up 300% since 2009 and another 60,000 due over the next 5 years, there will be a glut of small to medium size 1 and 2 bedroom apartments within the 5km ring of the CBD. This will hold back most of the apartment capital growth over the next 5 years except for prestige apartments.
Research is the key to getting ahead in the property market, but reading everything and understanding what it means will be the difference between breaking even and be able to retire with good money in your property portfolio. Most people with $100K equity in their own home and an income of approximately $80,000 can afford to purchase an investment property that will help them retire without having to worry whether the government will still be paying the pension in 30 years’ time.
I have people call me every day to ask me what properties they should purchase. And they are surprised when I say “I don’t know yet!” Let’s have a chat and I can give you some ideas. Everyone is different and everyone’s financial situation is different and this leads to the options of different properties. For an average Mum and Dad with equity in their home and a growing family the idea of something revenue neutral that is a set and forget option is usually pretty good. For $400,000 you can buy a family home that will easily rent out for $360 p.w. ($18720) and have outgoings (insurance, maintenance, rates and property management fees) of about $4000 p.a. If you purchased the property using equity from your existing home then you would be borrowing a total of $424,000 (stamps and fees) and in the current interest rate market you should be able to get a loan around 4.5% and so the interest will cost you about $19,000.
As we look at the equation there is $18720 coming in and $23,000 going out. But as we have purchased a fairly new property there will be about $8,000 of depreciation. You will get a tax deduction of approximately $4544 if your top tax rate is 37%. This means your shortfall of $23,000 – $18720 = $4280 and your tax deduction of $4544 means that each year you will actually have an extra $264.
So to hold a property like this cost virtually nothing and assuming that as maintenance costs come into play in 5 -10 years’ time or interest rates rise, you will have 2 things going for you to cover this. Firstly if rents increase even at a lowly 3% p.a. in 10 years’ time the rent will be $480 p.w. This would cover increases in interest payments and also the value of your property even at an average growth of 7% p.a. (which is low for Melbourne suburbs) would have doubled in the ten years. So you could borrow against some of the equity in the property in order to do any larger works on the property.
Let’s look at this over a 30 year period. If you purchased 1 property every ten years each at $400k (in today’s dollars) then in you would end up owning 3 properties worth $3.2m, $1.6m and 800k. Sell the first one with gross profit of $2.8m and lose 25% in Capital Gains tax ($700k), leaving $2.1m. Pay off the other 2 properties with $800k and you will be left with well over $1m and 2 properties giving you a passive income for life!
This is not rocket science, but you do need to make very good decisions on what type of properties to purchase, where to purchase them and you need an excellent property manager in order to maintain your assets.
If you are considering an investment property, or a property to live in please feel free to contact me for a no obligation chat.
Ian James
Director
JPP Buyer Advocates