How one client made 109% return on their

investment in Australian property, in under three

years following the 2008 stock market crash.


We have a client, who read our CLIENT RELEASE on 25 November 2008, which

we released during the Global Financial Crisis.

We suggested people buy a property, and also take advantage of the lower

dollar, as after stock crashes, property usually acts as a “safe haven.”


When others were fearful, he took action. He already had 3 or 4 properties in

Australia, so was confident to move forward.

He purchased another based on what we had said in our client release.

Now think back yourself to the end of 2008. It was the financial crisis, the

Aussie dollar had dropped. What did YOU do? Stay in cash? Invest in shares?

We saw an opportunity for our clients.

(See our actual release below.)

 

Many people were simply too fearful, and sat on their hands, too nervous to

take any action.

As time would prove, this was very costly.

Who wouldn’t want to have turned $200,000 into $400,000 in less than 36

months? Or $100,000 into $200,000.

 

And if you DID make a decision to leave your money in the Bank, on deposit,

let’s say in Aussie dollars, at say 6%, your $100,000 would today be worth

around $119,000.

But, with the stock markets currently in disarray, it is timely to see what

would have happened last time the market fell, if YOU had taken appropriate

action.

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Our client, LS (his real initials, name protected on his request to keep his

privacy) purchased a property, a Melbourne apartment, and borrowed in HK

dollars (pegged to the USD so effectively the same) as suggested in our client

press release.

Here is his current situation nearly 3 years later:

Purchase price $450,000

Today’s value $503,000. (Source: Residex Price Index)

 

Now, I can see many of you saying “well, that’s $53,000, it’s OK, but not

spectacular in 3 years, but obviously better than the Bank return.”

In fact, when I mentioned this client to someone the other day, they said “I did

SO much better in the stock market, you can’t even compare. I invested right at

the LOWEST point during the Global Financial Crisis, and have made over 40%

compared to your guy, who made 11%. Thank goodness I didn’t buy your aussie

property.”

Well, maybe they did better, and maybe they didn’t. Let’s have a look.

Let’s say their stock market investment kept up with the Dow average over

that time, and let’s say they invested AUD$148,000.

 

As at today, 5 August, 2011, it is UP 54%. (Source: MSN Money)

So his $148,000 is now $227,920. Not bad. (MUCH better than the BANK.)

And better than the property.

But is it really?

Excluding the risk involved in the stock market, (all investments have risk) let’s

examine WHY so many people use real estate as their wealth creation tool.

Now, real estate is, or should be , a mid to long term investment of at least 5

years, and ideally 7 to 10 years to maximise returns. But...


Let’s now compare the return LS got even in this short time: (There is no need

to follow in detail all the calculations, but we have provided them here

anyway. The conclusions are in bold below)

Purchase price $450,000.

Costs on purchase: $13,000

Deposit $135,000

Total cash outlay $148,000

New value $503,000. (Source: Residex Price Index)

Loan in USD $ 201,021. (AUD $315,000) (Source: http://fxtop.com)

New value $503,000

If pay back loan today USD$201,021 (AUD$193,673)

Nett $503,000-$193,673 =$309,327

 

So on an initial cash outlay of $148,000-deposit plus costs- (the same as our

stock market friend) he gets back $309,327 (or 109%) compared the stock

market investor who made 54%.

Around 100% MORE than he made in the stock market.

A huge difference in just three years.

OK, OK, I haven’t deducted selling costs of the property.

 

(Stock market investors LOVE to say this: What about the Stamp Duty, legal

fees, bank fees, Body Corporate, Rental agents fees, selling agents fees, selling

stamp duty, council rates, water rates etc: I have heard ALL of this over the

past 20 years!)

So let’s do that.

Sell at $503,000, agent’s commission and legal fees are usually 4%, net

$482,880.

Blimey, he paid $450,000, how can THAT be better?

Same equation:

 

$482,880 less loan $ 193,673 =$289,207.

He is still some 27% better off.


So many people still just don’t “get it’ when investing in Australian property.

 

The Australian property market is so much more than just the return in

absolute capital growth terms:

1. You can leverage, exponentially increasing your returns.

(In fact, the longer our investor holds, the greater the % return will be)

Stock investors generally find it hard (and risky) to leverage, so will just look at

cash on cash return.

 

2. You can use multi currency loans, to again, decrease your interest rates

(thus also getting a rental yield) or using it as a currency play, as our

investor above has done.

 

In fact, as LS borrowed in a foreign currency, he got his loan at 2%, and the

rent return even after ALL costs was 3.5%, and as he borrowed only 70%, he

was actually cash flow positive by around AUD$9,000 a year, which adds

ANOTHER $27,000 to his return, that we haven’t bothered to factor in, to keep

it simple, and to NOT dismay TOO much those who left their money in the

bank.

 

3. Some investments are powerful, such as the stock market investment

above. But risky. Some are stable, such as bank savings accounts, but will

never generate outstanding returns. But only a few are both stable and

powerful such as is seen throughout history with well located Australian

real estate.

 

4. You can generate an income from the rent, at around 4% to 6%,

increasing around 4%-5% per year.

 

5. You can accumulate tax credits; effectively reduce future tax in Australia

from 45% to often 30% or less. This means in effect for future income (or

rental) you will make an extra 15% return on whatever that income is.

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Bottom line is this. Don’t wait to buy quality Australian real estate. Buy

Australian Real Estate and wait.

Most Australian properties go up after stock crashes, as people look for safer,

more secure investments than shares.

Learn from the past, take a long term view, protect the downside, buy and

hold, and it is entirely possible to achieve regular, reliable return on cash

invested of 15% to 20% per annum, with limited risk.

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Michael Bentley, Citylife Property Group 8/8/2011

This information was prepared by Citylife [mjb1]Property Group Limited of 24 Floor, On Fem

Tower, Central, Hong Kong. This article is for information only and does not take into

account your individual objectives, financial situation or needs. The past does not guarantee

results in the future will the same. You should assess whether the information is appropriate

for you and consider talking with a financial adviser before making an investment decision.

Information which is taken from sources other than Citylife is believed to be accurate.

However, subject to any contrary provision in any applicable law, Citylife, its employees or

directors, do not provide any warranty of accuracy or reliability in relation to such

information or accept any liability to any person who relies on it.

 

THIS WAS OUR ACTUAL CLIENT RELEASE ON 25 NOVEMBER, 2008:

(On this day 1 USD = 1.567 AUD)

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Silver lining for Overseas investors in stock

downturn?

 

Released 29 November 2008

 

Australians living overseas and international investors looking to buy into Australia's real

estate market are seeing a unique opportunity to secure a prime Australian property and be

cash flow positive at the same time.

 

Previously “cash flow positive “ properties in Australia, have tended to be either

substandard country properties, or “student “ housing or serviced apartments, none of

which promised much , if any, capital gains.

 

Now, at a time when rents are skyrocketing throughout Australia, interest rates are

dropping through the floor, prices have stabilised since 2003, and the Aussie dollar has

dropped 20%-30%, overseas investors have a unique opportunity to buy into Australia and

pay only 3%-6% interest on a property that may soon to be returning 6%-8% in rental.

Prime property in Sydney has traditionally shown around 3%-4% rental return, and financing

costs for mortgages have been rising in over recent years to over 8%.

 

This differential between rents and interest, have meant some people have put off their

property decision.

 

But the shortage of new supply in Australia has seen rents start to rapidly move up in recent

months.

In addition, the stock crashes around the world have created a situation that many

expatriates and overseas investors are moving to take to take advantage of.

 

Many are now choosing to borrow in their overseas currencies (now the Aussie dollar has

dropped) at rates of between 3% to 4% to buy prime Australian properties that are

returning over 6% in rental.

 

They also see property as representing a "safe haven". Even during the last three recessions

in Australia, (1974, 1982, and 1990) house prices never fell by more than 4.6%.

In fact, in Melbourne house prices INCREASED by 40% to January 1978. (no records for

Sydney at that time)

 

Investors are now seeing three potential ways to make money in the Australian market:

 

1. Currency appreciation

2. High rent returns

3. Capital growth because of the stock crashes. (see below)

 

They also see property as representing a "safe haven" so they get a triple benefit.

 

As up to 80% of the property costs (for new apartments) is also given back to investors in

the form of tax relief, they see this as an added "bonus."

 

THE RISKS.

 

If all this sounds too good to be true, there are currency risks attached if you decide to take

a loan in a foreign currency. If the Aussie dollar falls further against the currency you

borrowed in, you could face a currency loss and be asked to make a "top up."

To offset that, many have decided to borrow now in AUD as the interest rates fall.

They will consider to lock in the rate perhaps in the first half of next year, when we could

see the lowest interest rates in Australian history.

 

And here is the Kicker.

 

During the previous two major stock crashes in Australia's history :1974 ASX -59%, and 1987

ASX -50%, house prices and apartments in prime areas went up by as much as 80% in the 2

to three years following the stock crash, with even the median price of apartments

increasing by 40%.

 

The reason:

 

-Investors had been burned and were looking to get out of the stock market.

-People saw property as being much safer than stocks.

-People had cash, and needed to decide where to invest.

- Property offered tax relief on their personal income (not available on stocks further

increasing their cash flow in tough times)

- As most people are in fact owners, NOT investors, there was no panic selling.

-In addition in Australia people have to put in usually 20% to 30% of their own money, AND

must have a job to secure a loan to buy property. (Very unlike some of the countries now

suffering declines)

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Released by the Citylife Group. © 2008

www.citylifegroup.com All information deemed correct at time of writing, but not to be

relied upon. All investors are advised to seek professional advice prior to entering a foreign

currency mortgage.