Buy Residential Investment Property

Everyone wants a home to live in that is comfortable, close to amenities and close to transport, but investing in property has questions to answer before taking the plunge:               

1. How could I profit from this investment?

2. How could I lose from this investment?

3. What is the worst case scenario?

4. What form of protection can I put in place?

5. Do I want someone else to take/share the risk?

6. How can I improve the profit potential?

7. What is the probability of loss versus the probability of profit?

8. Exit strategy – at what point will I cut my losses?

9. How will I collect the profit from this investment?

10. Does this investment fit into my plan?

11. Is this investment balancing my portfolio?

12. Will it enhance my life?

13. Compared to other opportunities, does this investment provide the best return for effort? 

This is by no means a comprehensive check list but is designed to cover most of the issues which arise in property investing.  For sure, each investment opportunity and each individual has their own unique circumstances but a check list offers first time investors an opportunity to consider issues which can make the difference between success and failure in property investing.  Property investing will not always deliver the anticipated profits, particularly if you’re new to it. 

New investors will look at the past performance of property and see the obvious attraction of buying.  It is too naïve to assume that you can put a small deposit down and simply reap the rewards of capital appreciation and a high yield over time.  There are periods of time when property prices languish and even decline. That should not deter us in moving forward. 

People’s circumstances can force them to divest of property – usually at the most inconvenient time.  What looked on paper as a good opportunity turns into a lemon and leaves you poorer for the experience.  Indeed in the early part of the last boom from 2000-2004, many investors buying at the (then) peak of the market lost their deposits.  This was particularly evidenced in some Melbourne high rise, off-the-plan investment ‘opportunities’. 

Investment is about managing the process of investing and ensuring that all the factors that can contribute to a loss or a risk investment are mitigated against and dealt with. 

Profit Management  

We buy into property in order to increase our wealth.  Wealth building comes from growing equity.  Equity growth comes from capital appreciation of the property and the capacity to leverage your equity into other property investments.  The actual process of generating wealth involves generating profits.  Property investing in this respect is no different to any other business activity.  Profit is the difference between the revenue and the cost of generating that revenue. 

Profit comes from:

• Cash flow
• Equity
• Lump sum cash

Cash flow arises when income exceeds your investment outgoings. 

Investing is a learning experience.  Each investment experience, whether researching or actually buying and owning the property teaches us valuable lessons which we can use to further our skills as investors and to enrich our lives. There is much to learn in property investing and like many other investment activities such as share investing and business building, each experience is folded into the next to make us better at what we do. 

Property investing can be a deeply satisfying experience.  There is great security in wealth building around bricks and mortar.  We intuitively trust property. . . we can see and touch it.  This is very different to shares where we have little control over the underlying performance of the business.  In property, we can influence our outcomes through careful research and buying well and adding value. 

These are powerful lessons for us and each lesson can be even more powerfully applied to future actions.  Profit can also be in the form of knowledge, experience, network contacts, and opportunity for further investments.  One of my very favourite quotes is: ‘knowledge pays the best rate of interest’.

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There are two themes that are resonating through property markets and will continue to do so. One is housing shortages. The second is interest rates. Without question, these are the two drivers that matter for investors going forward.

You could be forgiven for feeling that there is another boom around the corner. The turnaround in the housing market is truly remarkable. Sydney in the last 6 months has provided more growth than was achieved in the last 24 months. Melbourne continues to outpace all markets (except Darwin) on a 12 month basis. The latest data from the Real Estate Institute of Victoria (REIV) revealed Melbourne’s median house price rising by a stunning 13% to $441,875.

Population growth

Melbourne’s population surge is set to continue well into the next decade according to the ‘Victoria In Future Report’. Further, The Age reported recently that Melbourne will add 70,000 residents each year for the next five years making it the highest urban growth area in Australia.

The data commissioned by the Residential Development Council firmly supports the view that Melbourne will have a significant under-supply of homes by 2013.

Figures produced by Matusik Insights indicate that Melbourne will need 29,000 a year for the next five years a figure which suggest that alternative housing solutions will be required such as houses on smaller lots, townhouses, villas and apartments.

Melbourne Record Auction Clearance Rates:

The REIV Weekly Auction & Sales Results, Market Overview released on Sunday 30 November 2009 showed a total of 547 of the 642 auctions reported to the REIV sold, resulting in a clearance rate of 85 percent.

The report said that, unlike other weekends this year there were more auctions scheduled than the comparable weekends over the last three years.  The fact that the clearance rate remained above 80 per cent for the 16th weekend in a row removes any remaining questions about the strength of the market this year.

It was reported that REIV chief executive Enzo Raimond had said that the Melbourne property market had moved from “healthy” to “strong” on the back of low interest rates and first home buyer incentives.

Capital expenditure booms in Melbourne

Victoria is at the centre of an investment surge. Business investment surged over 2009, nearly all of it accounted for by an astonishing 20 per cent rise in Melbourne.

Private capital expenditure in Victoria is now at its highest on record, even after adjusting for inflation. The figures have supported the overall in the national accounts which were released early September which showed an above expected growth in the Australian economy with economists suggesting that investment was coming as the impact of the Government’s infrastructure stimulus package is only beginning to be felt.

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