AUSTRALIAN PROPERTY- FREQUENTLY ASKED QUESTIONS BY OVERSEAS BUYERS
Michael Bentley, Citylife International Realty
OTHER COMMON QUESTIONS
Should I look for capital growth, or go for rental yield?
That is the question that investors have grappled with forever. Prime locations give higher capital growth, but rental yields can be lower.
Lesser locations, or country areas away from the cities often provide a better “yield” or rental return, but give you less capital growth.
In reality both strategies have merit, depending upon your personal circumstances, financial circumstance and investment goals. If you are building a portfolio, then a mixture of the two often works well.
How complicated is property investment in Australia?
Not complicated at all. But you do need to follow the Golden Rules shown below. Freehold titles are available. There is strong landlord/tenant legislation. There is an increasing and available pool of tenants. The population is increasing, and land is diminishing. It does not have to be complicated. There are no constantly and complicated changing regulations.
There are no age barriers to investment. Seek advice from experienced, successful property agents.
Is it risky investing in property in Australia?
For short term property traders, negotiating a bargain price, finding the best interest rate, and deciding when to buy and sell are extremely important. For those hoping to “flip” or quickly turn off the property, it can be risky and difficult to do so. For long term property investment, the initial price, interest rates and timing have far less impact because of the levelling effect of time.
Long term property investment has been relatively unaffected by downturns in the economy, high interest rates, fuel crisis, stock market crashes, natural catastrophes, and unemployment for the past 100 years. A well located property has low risk, with good returns.
The best time to buy is when it suits you financially, and then look to hold for the long term.
What if interest rates rise?
Interest rates go up and down over time. However, you can also fix rates for up to 5 years.Or you can pay the loan off faster, to reduce the debt. And you will receive extra tax deductions on higher interest rates, reducing the impact. In addition, when rates are up, it tends to mean less people buy property and more people rent, giving you higher rental returns.
It is not unusual to see the rent increases more than offset the interest rate rises.
I was bought up to believe we shouldn’t borrow money. Were my parents wrong?
Yes and No. The golden rule for borrowing money is to borrow for appreciating assets and pay cash for consumables, cars etc. Borrowing to buy appreciating assets like property is an important tool in investing. Are properties self funding? Assuming you are borrowing between 60 - 70 per cent, and take an Australian dollar loan, then the rent will in most cases pretty much cover all the bank’s interest payments.
Why do you think the market will continue to rise?
Prices rise in response to demand. Demand is created by factors such as infrastructure improvements, new shopping business centres, access to transport, population growth, migration and shortages in supply of housing etc. It is important to know what is planned in the area you wish to invest in. Based on current population and migration forecasts, a healthy increase in the requirement for additional housing exists. In fact, Australia faces a critical shortage of new housing into the future based on current trends. This means buying investment apartments with starting rental returns at 4%-6% are a fairly safe bet and you can reasonably expect to continue to see healthy capital growth. Migration will continue, and for various reasons a shortage of property is likely to continue in Australia for some time to come.
What does Return on Investment (ROI) actually mean?
The Return on Investment (ROI) is a measure of the return a property will achieve after taking into account the amount of money outlaid, compared to the total amount returned at the end of the period. Investors usually only look at the capital growth or rental income a property achieves, but this is misleading. A property purchased for $600,000 and sold for $700,000 could be considered to have achieved a 16.6% capital gain. However, is this the real gain? No. Unless the investor paid cash. But if an investor outlaid 30% deposit on such a property, ROI may go as high as 55% - a substantial difference! Don’t underestimate the power of leverage when buying property.
Should I pay cash for an investment property?
Generally no! The golden rule for borrowing money is to use other people’s money to use leverage for an appreciating asset. Interest expenses are fully tax deductible. Everything looks attractive. But I’m still unsure whether I should leave my money in the Bank as the world situation remains uncertain? This is a common question and ultimately, only you decide what is best for you. Nervousness about making the “wrong” decision, and the apparent safety of leaving your money in the bank, often outweighs the “harder” decision of deciding to invest.
That’s why the ABS (Australian Bureau of Statistics) tells us that just 7% (of those ages 18 and over in Australia) owned, or were buying at least one residential rental property for investment.
And of those, 78% had only one rental property and just 13% owned two. Our computer modelling shows that an investment in property, (even a modest 5% growth rate) will outperform cash on deposit (at say 6%) by over 75%. “Annual inflation of just 3% cuts the purchasing power of a $100,000 cash hoard in half over 25 years… The impact of inflation shows putting money under the mattress (hoarding cash) is not a viable long-term strategy” (BlackRock Investment Institute)
How do I know a good area for capital growth?
Although it is human nature to want to find a bargain in an area of great capital growth, it is false economy to spend a huge amount of time searching for gems that are probably buried in your own backyard.
It is virtually impossible and really unnecessary to gauge just where the most valuable suburbs will be in the future. History has shown that the right type of property (see the Golden Rules) and one that is well-located should follow the pattern of steady rental and capital growth over the long-term. Rather than spending weekend after weekend looking at the internet you can maximise your returns and better manage your investment by organising your finances in the best possible way and ensuring that you buy a quality property in a good area, at a fair market price, based on research fundamentals such as vacancy rates, stock on market, amount of rental property available and shortage of supply etc.
Am I better off buying one property for $1,000,000 or two for $500,000?
It depends entirely on the area in which you are buying. A $1000,000 property may be the middle sector of the market in that area, whereas a $500,000 property in a provincial town would probably be a mansion. In the former case, a $500,000 property in the lower to middle end of the market has a higher rental yield, which results in a better cash flow.
Secondly, the lower rent should attract more tenants. Thirdly, if you wish to sell, there’s more flexibility in selling a lower priced small property than one large one.
And finally, if you are selling property in the middle part of the market it should attract other investors as well as first-home buyers, so there should be more potential purchasers. However, prime properties will often attract higher capital growth.
I don’t seem to have much spare money as it is now. Can I really afford to buy an investment property in another country?
If you have already made the commitment to pay for necessities first and luxuries last, then the only remaining stumbling block is more of a perceived problem than an actual problem. Too often, we think of an investment property in the same light as our own home.
This being the case, we tend to see only the interest bill. But remember after the tenant and the taxman have paid their share, what’s left may be as less than $100 a month in holding cost in the first year and it gets less over time as the rents increase.
Won’t there be a glut of vacant properties when everyone discovers the advantages of owning rental property?
There is such a small percentage of the population in the running to buy rental property. People have been renting property since time eternal, and with more than 30% of the population renting, tenants will not disappear overnight. There should always be a pool of tenants looking for rental accommodation. Australia’s population is expanding, and the demand for rental property is highly likely to keep increasing. Supply and demand in rental properties is cyclic and vacancies can and do occur from time to time.
But there are certain things you can do to keep this time to a minimum. Choosing the right location in the first place helps and well-located, well maintained properties with reasonable rents attract more tenants. Most people seem to emphasize position, position, position.
Should I pay more and get prime residential property in Australia?
Property in prime locations do experience strong capital growth, perhaps slightly higher than normal, however the real return cannot be measured by the growth alone. You should also ensure you get the current financing, advice and management services in place to maximise your returns.
Are there a lot of taxes?
Like many countries, Australia taxes it’s property investors by way of Stamp Duties on purchase, and also has other taxes such as on rental and capital gains. However, there are many ways to offset many of these taxes especially if you take a mortgage and buy new property.
Australian property remains one of the most popular and safe property investments in the world.
Is Australian property investment still worthwhile?
Yes. Property Investment is so good in Australia it works even though it’s not perfect. You’ll never find the perfect timing, financing, and property, but you’ll find something that can increase your wealth in a reasonable time. One barrier is simply that there is too much information mostly on the internet around now. People are suffering information overload, and that brings them to a grinding halt. Best of all, Australia still has among the lowest per square metre rates for new build projects in the world, and amongst the highest rental return, and very high rental occupancy rates.
What’s the biggest mistake a foreign investor can make?
That’s easy! They often seem to buy “student housing” or "serviced apartments”, which often are the worst investment you can possibly make in Australia.
Secondly, for some reason they seem to think investing in city centres is best, yet would not necessarily invest in the Central Business district of Hong Kong or Singapore, yet they seem to feel all Australian’s want to live in their CBD’S.
Well, if not CBD’S then where? Outskirts?
No no no! As a rule look to invest in prime residential suburbs within 10-20 kms of the city centres. Exceptional CBD buildings can definitely be considered as demand is increasing, but not substandard, “all the same”, average quality mass produced blocks.
What is a “simple formula” to follow?
You need to stick to basics; you need to find property that the Australian tenants want to rent in an area they want to live. And something that will resell easily to Australian “owner –occupiers” in the future. Then finance it in the simplest way, perhaps with an Interest-Only Loan that’s fixed for a certain time. Have a good property manager and agent you can trust, and be prepared to hang onto it for 10 or more years. There’s not much else you need to do. But of course, ALWAYS follow the “ Golden Rules”:
The “Golden Rules” for Australian Property Investment
Rule #1 Never buy anything under 50 m2. (Internal area) Never buy ‘student housing.’ Never buy a ‘serviced apartment.’
Rule #2 Don’t sell too soon! Hold your investment for a full property cycle. If it was a good property when you bought it, it will be an even better property in 5 years. Allow time to maximize the benefits of leveraging, compounding and inflation.
Rule #3 Always buy the “lesser” property in the best location you can afford. Prime locations in Australia are the last to fall, and the first to recover in a downturn, and hold their value better.
Rule #4 Think what tenants what, not what you could live in yourself. But remember to select something that will be able to be resold to local Australian “owner occupiers”, in most cases young couples or singles.
Rule #5 Always look for a ‘point of difference.’ It could be a different floor plan, a 1 bedroom in a block of 2 bedroom apartments, a great view, a never to be repeated location, or something else unique and not easily duplicated. Look for a mix of apartment types in the building for example a building with a combination of 1,2 and or 3 bedroom, not all 2 bedroom apartments, especially if they are all the same.
Rule #6 Check occupancy rates are over 95% in your preferred area, AND make sure they have usually averaged over 95% over the past 5 years also. Your agent can tell you this. (If not it’s time to change your agent.)
There you have our 6 Golden Rules to help ensure investment success in Australia.
Ideally, your investment property should have all 6 of these in place! If your property has NONE of these in place, then we suggest you implement additional Rule #7.
Rule #7 If you have made a truly poor buying decision, and have bought something that is highly unlikely to move up in value for years to come (if at all) such as student housing, or is getting a very poor rent return, then we suggest ignoring Rule #2 above, and cut your losses and sell sooner rather than later.
"Michael Bentley has such a wealth of knowledge and wisdom concerning Australian property investment that one can never learn enough from him"
Michael Bentley is probably the most experienced expert on Australian Real Estate as it relates to overseas buyers.
He brings decades of high level knowledge to the table, and with billions of dollars of real estate deals behind him.
To help you navigate through whatever Australian real estate situation you face, you need to be confident that you can get the research, help, information and advice you NEED to be able to make informed decisions going forward.
Citylife's exclusive Australian property buying service helps Hong Kong investors buy their dream Aussie property.
"Mike provided boundless energy towards our purchase, took care of the finance, arranged lawyers, a building inspection, helped us structure it correctly for tax, and when a last minute hitch occurred with the seller deciding NOT to sell, kept calm, and more importantly kept US calm, and used his experience and knowledge to get the deal back for us"
Colin and Elaine, Hong Kong, 2020