Build the wealth you've always dreamed of through property.
When it comes to investing, property is an excellent way for any Australian to build their wealth. Which is probably why so many Australians invest in property. Purchasing a home is generally the first major investment a person will make and, more often than not, buying another property is the second, even before putting money into shares and other asset class.
While the general trend was for people to purchase an investment property after buying their own home, things have started to change as many young Australians are opting to first invest in small units before purchasing their home. This is because they can rent an apartment out and accumulate funds, which can then be put towards paying for their own property. So, they stay at home or rent in another area, while purchasing a place they rent out.
Thinking about negative gearing? Learn about how it works and why there's so much being said about it lately
Why invest in property?
Property has always been considered a good investment and a safe haven because it tends to exhibit less volatility than shares and generally maintains its value, even when other assets are on the decline.
It also has the potential for capital growth, meaning that its value increases over time and can also offer a steady income when rented out. There are also tax benefits associated with negative gearing, which essentially refers to a situation where investment costs are higher than the returns. In essence, negative gearing in the case of a property means that the property earns a net rental income that is lower than the interest you are paying on the loan along with the deductible costs of property maintenance. In a low interest rate environment, investment properties can also be positively geared. In just depends on the latest interest rates that you are paying on investment home loans.
Despite the benefits, the fact is that there are no guarantees when it comes to any investment. The price of property can drop just as easily as it can increase. Sometimes it's difficult to rent the property out or find tenants who pay on schedule and look after your investment.
If you decide to invest in property, you need to do your numbers to see if the investment actually makes financial sense. You also have to make sure that the return your property generates is comparable to the return you would have made had you invested in another asset class, like shares.
Capital growth represents the increase in a property's value over a period of time and is why most people invest in property. The buy and hold strategy is more commonly sought out by the capital growth seekers.
The property market functions in cycles, with periods of growth, stagnation and decline, which have all been part of the Australian property market. Considering this, it's clear that investing in property should be done for the long-term, rather than expecting a quick return.
When it comes to purchasing a property with an eye towards investment, you need to purchase the right property in the right place and at the right price, to ensure you achieve some sort of capital growth. This means keeping an ear to the ground and when you are ready to make the investment, you need to research the market thoroughly and, hopefully, find the right property which can tread a consistent path of capital growth.
Rental income and yield
An investment property can generate regular income that has nothing to do with capital growth. Experts state that you should measure your returns from rental income to the returns other asset classes could offer you and to use said measure to determine whether investing in property is a good idea or not.
However, keep in mind that the ideal property should at least a decent level capital growth, as you probably don't want to lose large sums of money on the sale.
Additionally, there are tax benefits and other costs you can deduct. This means that you need to take these factors into account when comparing ROIs between asset classes to ensure you are getting an accurate picture.
An important figure is the yield of a property, which you calculate by dividing the rent you receive over a year by the price you paid for the property, which is then multiplied by 100 to get a percentage. For example, if you purchased a property for $300,000 and are renting it out for $300 per week, which is $15,600 per annum, the gross yield would be 5.2% per annum. This figure can then be compared to the yield you would get from investing in shares, for example.
Don't forget that as properties become more expensive, the yield decreases, unless rents increase proportionally. One way to tell where rents are going is to follow vacancy rates. The more properties without tenants, the lower rents will be as landlords fight to get tenants. On the other hand, if vacancy rates are extremely low in the area, tenants are likely to pay more to secure a property in the area.
Experts feel that if the vacancy rate is more than three per cent, you should be cautious and check if there will be an increase in property availability in the near future. For example, if there is a big residential development in the works, you might want to steer clear and head towards an area with lower vacancy rates or little likelihood of the supply increasing any time soon.
Also, don't forget that there will be periods when the property doesn't have tenants, which means that you need to consider those periods when calculating your overall returns from the property.
A lot of people invest in property because of the major tax benefits involved. Australia has some advantageous negative gearing regulations in place, which can help many people build wealth.
Gearing is a term that refers to the process whereby you borrow money from a financial institution with the expressed purpose of investing said funds. Negative gearing refers to the situation where you are making less money from your investment than it is costing you.
The benefit is that you can deduct these costs associated with your investment from your overall earnings, which means you can reduce your tax bill. This is very advantageous to people with high incomes because they are charged the highest level of tax.
And even if you are losing money in terms of income on the investment, theoretically an investment could still generate a good yield over the long term due to capital gains.
However, you shouldn't invest in property solely for tax deductions.
You also need to keep in mind that capital gains tax can apply to investment properties.
Property investment options
Now that you have a clear understanding of the benefits of investing in property, it's time to look at what types of property investment strategies make the most sense.
We'll be looking at the following:
- Renovations – i.e. purchasing a property and increasing its value by renovating it;
- Flips – i.e. buying a property and then selling it on to another party before the original purchase has to be settled;
- Wraps – i.e. purchasing a property and paying instalments to the seller over a certain period of time instead of taking out a loan;
- Holiday home – purchasing a holiday home you can use yourself but also rent out; and
- Defence housing
The fact is that you can make a nice profit from investing in real estate as long as you use the right strategy and have found the right property at the right price.
Some people feel that the current situation on the property market means that making a profit from property investment is a thing of the past, while others feel it's simply that time during the cycle when buyers can pick up properties for a great price and make a significant profit.
Regardless of whether you intend to touch up the paint or are planning something much more complex, like adding an extension, the goal of purchasing an investment to renovate is the same every time. Namely to increase its value which can increase rent earned equity in the property. Investors can then refinance it to gain access to that extra equity.
Case study: Brisbane renovation flip
James and Deirdre purchase an outer-Brisbane residence on the 1st of March, 2012 with a 30 day settlement. They pay $252,700 for the property, which is a classic old-style Queenslander weatherboard. It is well-positioned in terms of the area but looks rather worn and outdated since.
The home requires some immediate work, including a coat of paint both inside and out, carpet replacement since the toxic green shag is definitely out. Some of the floorboards have to be torn out and replaced because they are rotten while others have warped and cracked.
The buying couple have a vision for their new property that entails polished wood floors, a beautiful fence and a completely renovated kitchen with all new furnishings .
So, they went out and got a home loan with a 95% LVR and an interest rate of 7.5% per annum. They opted for interest-only repayments so their cash flow wouldn't suffer too much.
James and Deirdre have experience fixing up homes. They only intend to contract out the outside paint job, while everything else will get done on the weekends and during the evenings, when they get home from work. They've worked out that the repairs they want to make will cost around $30,000 and won't take them longer than six months to finish.
Once they start work, things take longer and are more expensive than expected. After eight months, their total expenditure is as follows:
|Outside paint job||$9,500|
|Inside paint job (only the materials)||$2,000|
|Flooring (materials, cost of equipment etc.)||$3,200|
|New kitchen (furniture and appliances included)||$11,000|
|New front and back fence||$1,600|
|New air con.||$2,000|
|Rubbish removal and tip costs||$1,700|
|Other materials and costs||$1,300|
Despite the fact that James and Deirdre obtained approval to start work early on the property before settlement, as mentioned, it still took them longer than expected to finish up, which meant they only put the property up for auction on the 1st of November 2012.
The property sold for $338,600 with a settlement period of 30 days. So, did James and Deirdre make a profit or was it all a waste of time? Here is a look inside the financial calculations:
|Price James and Deirdre paid for the property||$252,700|
|Interest costs on the loan repayments (April to November 2012)||$10,500|
|Auctioneer expenses and sale costs||$10,000|
The profit James and Deirdre would have made, before tax, is as follows:
Profit = Sales Price – Sale Costs – Loan Payout – Deposit – Closing Costs – Renovation Costs – Interest Costs
Thus, it works out as follows:
$338,600 - $10,000 - $240,000 - $15,700 - $12,000 - $33,800 - $10,500 = $16,600
So, James and Deirdre would have made $16,600.
Instead of selling the property right away, though, they could have had it re-valued and considered refinancing to gain access to the rest of the equity.
On the other hand, they could have chosen to hold on the property for a little while because they had done their research and knew property values went up by 21% in Brisbane between June 2008 and June 2012. So, what if James and Deirdre had decided to hold on to the property? They could have rented it out in the meantime.
Let's say that they decided to hold on to the property. They called in a valuer and discovered the property was now worth $310,000. However, they chose not to refinance at that time, choosing to wait until they sold the property. So, they looked to rent the property and found a tenant that was willing to pay the rent they demanded, which was $400 per week.
Five years later, despite the fact that property prices hadn't gone up by 21% they did see capital gains of approximately 18% as the property was valued at $365,800. At that point, they chose to sell the property and, after giving the property a new coat of paint and fixing a few minor issues that cost them around $5,000 in total, they found a buyer for $373,000.
So, how much money did James and Deirdre make using this approach? Well, let's see.
|Rent (December 2012 – December 2018 – 260 weeks)||$104,000|
|Interest costs (April 2012 – January 2019)||$100,500|
|Profit (before tax)||$55,500|
While the latter is a more long-term strategy, considering that it won't cause James and Deirdre significant financial hardship, it is a good option to make a significant profit on their investment.
The critical variables for success
There are certain variables that are critical to your success when it comes to purchasing a property for renovation.
What is a property trust?
When a group of people purchase a large property, or a portfolio of properties, they purchase the property in the name of a trust. The trust is responsible for the ownership of the property and the trustees all have a stake in the investment depending on how much money they’ve invested into the trust.
Property trusts tend to focus on commercial and industrial property rather than residential. These types of properties tend to move in line with the economy as a whole. According to Tong, “the emotional aspect of buying something you love to live in just doesn’t factor when it’s an office building.”
Property investors can get involved in two different types of property trust in Australia: listed and unlisted property trusts. The main difference between the two is whether the trust is listed as a public company on the Australian Securities Exchange (ASX) or not.
Listed property trusts are known as REITs, an acronym for ‘Real Estate Investment Trusts'.
Listed or unlisted?
If a trust is not listed on the ASX, there’s no exposure to stock market volatility. If a trust is listed on the ASX, it’s easier to sell your stake in the trust when you want out.
REITs offer the liquidity of the stock exchange coupled with an asset that is backed by real estate. You can buy and sell your shares in a REIT on the ASX and returns are relatively stable and easy to predict. However, this isn’t always the case. REITs are listed on the ASX and despite the fact that REITs are generally backed by a diverse listing of commercial property, the value of a REIT can rise and fall with the stock market.
Property managed fund
A third option is to invest in a managed fund. A property managed fund invests in both listed and unlisted property trusts. Like listed trusts, your share in the fund can be sold easily enough, but this comes at the trade-off of fund management fees.
Finding the right property
Firstly, you're looking for a diamond in the rough, which is a property that needs cosmetic work rather than significant structural repairs.
This means that you will need the advice of a professional, unless you are a builder. You need to make sure the property you are buying isn't going to come crashing down the moment you try to hammer a nail into the wall.
Some of the problems that are more expensive to resolve and you should avoid include:
- Leaking or rotting roofs
- Walls or floors that are sloping
- Redoing the wiring and plumbing
- Installing a shower recess
- Pest problems, especially white ants.
When purchasing a property that you intend to apply the renovation strategy to, a good approach is to negotiate a longer settlement period as well as early access to the property. This way, you can start work on the property and have some time before you need to start paying interest. Generally, you will have to give the vendor something in return for this concession, like promising to handle the insurance.
Note that you need to be objective when it comes to the amount of money you can make from the property, which means conducting market research to find out how much a property that is similar to yours and has been renovated would sell for. If you get too greedy and try to sell for more than the market is willing to pay, you could end up losing any profit you make because it will all be eaten up by holding costs while you are waiting to sell the property.
Remember, do your due diligence before buying so there is less chance of you getting a nasty surprise later on down the line, like spending too much on renovations and then being unable to sell the property for the price you want or having to sell it at a loss.
Implement an effective renovation system
To make a profit on a renovation you need to be very careful because every dollar counts. It's easy to get lost in the details and have the work take longer than expected and end up costing you a lot more than you had initially budgeted, which could eat up any profit you might be able to make.
The easiest way to avoid such a situation is to put together a system that will enable you to control how much time and money you spend on the project. This involves creating a budget that covers all the elements of your renovation, along with quotes. Make sure to get someone with renovation experience to look at it to make sure it's realistic.
Keeping the timeframes under control is somewhat more difficult but it can be done. You will have to create a schedule that covers all the steps of the renovation and then ensure that there is little rework to be performed and you have as little downtime as possible between jobs done by contractors.
Take maximum advantage of your time and money
A scenario to consider is one in which you use as little of your own time and money as possible. Initially, this might seem counter-intuitive because it would lower the returns you could make on a project. However, by getting other people to do the work for you, you can take a management role and have multiple renovations going at once, meaning that you will make a profit on multiple projects concurrently. This will allow you to build and scale up a business based on property investment.
Flipping is another way to invest in property and make a profit. This system involves you signing a contract to purchase a property and then selling it on to another buyer before you have to settle.
Case Study: David Flips
For example, David locates a great property that is undervalued in Richmond, which is one of Melbourne's inner city suburbs and is about five kilometres from the central business district. He knows the property is worth approximately $350,000 but the owner is asking for $260,000 because he needs the money quickly to pay off hospital bills.
David, unfortunately, doesn't have the money to close the deal but he is aware that he could sell it on to someone else who has the money. So, he does all the due diligence and then signs the contract, with a 30 days settlement. He makes a $4,000 deposit.
He then goes on to put the property up for sale and advertises it online, claiming that he's selling it for less than what it's actually worth. He gets a call from Roger, who has a property investing business. After viewing the property, Roger decides it's a good investment and offers David $335,000, who immediately accepts the deal.
They come to an agreement regarding the settlement so that the date when Roger settles is with David coincides with the date when David has to settle with the original owner. Thus, David makes quite a bit of money just by being an intermediary. Roger is also happy because he got a good property for less than the market value which he intends to renovate and will bring him a nice profit.
The critical variables for success
In flipping, you need to consider the following factors, which are essential to your success:
Locate a property that is undervalued
A flip requires a lot of time because finding properties that are undervalued in a market where prices are constantly on the rise and demand is high, meaning that properties sell quickly, isn't easy. It takes time and lots of research. The more time you spend, the higher the likelihood of finding the right property.
On the other hand, if you don't have a lot of time available to put into researching properties, then you are better off choosing another form of property investing, which won't require so much time. However, if you have plenty of time, one or two good deals a year could replace your normal paycheque. At the same time, there's no guarantee that you will find those deals or how quickly you will find the right property, so don't quit your day job before you have some savings set aside to tide you over.
Finding a buyer
In flipping, your job is to pass on your interest in the contract to another person before you need to settle on the property. Basically, you are taking on the role of a private broker by selling the property on to another person and earning a commission, which would be the difference between the purchase and sale price.
The problem is that finding the right property is only half of the formula. Without a buyer, you are going to be stuck with a property that you may or may not be able to afford. There's also the matter of finding said buyer within the time you have and getting them to agree to a quicker settlement than usual.
So, one option is to build up and maintain a database of people who invest in property but don't have a lot of time on their hands and are more than willing to pay you for finding them some good deals.
Can you afford it?
You have to consider the situation in which you don't find a buyer by the settlement date. In this case, you are going to have to purchase the property yourself, which means that you need to be sure you can afford to do so and consider how it will affect your profit. Remember, you can still sell it but it will involve some additional costs, so you might have to rethink your game plan.
There are other considerations you need to take into account when it comes to flipping. For example, you might find that stamp duty is payable twice on a flip. This might mean that you would have to pay stamp duty on the price you purchase the property for and your investor would have to pay on the amount you sell it to them for.
There might be ways you could avoid paying stamp duty twice, like purchasing an option to buy the property instead of actually buying the property, but the legal issues are pretty complicated and you should talk to a lawyer before you set up the deal.
There's also the issue of licensing. Since you are selling a property that you don't actually own and are making a profit on it, you may need a real estate agent license to flip it.
If you don't have a license and can't get one, it doesn't mean you can't complete a flip but it does mean you will have to work through someone who is licensed. This probably means that you will have to pay them a fee to ensure everything is in legal order.
You also have to remember that you are likely to have to pay capital gains tax in full. This is because buying and selling something that generates capital gains in less than a year means that you won't be able to take advantage of the 50% discount on Capital Gains Tax. The best option is to talk to your accountant to learn more.
So, taking all these issues into account, let's see how much money David actually made.
Capital gains (profit)
Capital gains tax
While this is still an excellent return for, essentially, a few days of work, it's still far from the profit as it looked at first glance.
Wraps are also known as vendor finance or instalment sales contracts. The standard selling procedure for most property is that the buyer puts down a 10% deposit and the difference has to be covered in approximately 60 days. After 60 days, the buyer's solicitor will have had sufficient time to complete the conveyancing process and financing will have been approved, all leading to the point when the buyer settles the purchase. At this time, the property title will pass on to the buyer.
On the other hand, there is also another way property can be sold and that's via a procedure known as 'vendor's terms' or 'instalment sales contract'. In such a case, the buyer still has to put down a deposit, but instead of settling within 60 days, the balance is split up into a series of instalment payments that buyer must make over a certain agreed upon timeframe.
When the final payment is made, the property title is transferred to the buyer, regardless of how long it takes. A wrap is another niche property investment option that can offer great flexibility for a variety of situations.
Note that vendor terms sales are legal in all of Australia except for South Australia.
Case Study: Liam wraps
Liam has a property investing business. He's bought a property for $85,000. Currently, the property has Robert as a tenant and, despite the fact that Robert would like to buy it, he can't get traditional financing because he wouldn't qualify as he only has $2,000 to his name. His financial situation, however, shows that he would be eligible for the First Home Owner's Grant and he knows he can easily cover a repayment of $200 per week.
So, Liam proposes vendor terms. Thus, he would sell the property to Roger at $110,000, who would have to pay the property off within 25 years. The interest rate Liam will charge will be equivalent to what he is paying for the financing plus 1.5%. Note that Roger can pay off his debt in full at any time.
Liam gets financing with an LVR of 80% and a variable rate of 6.4%, which means that Roger will be paying 7.9%.
So, the figures would be as follows:
The variables that will influence your success
As with any other type of property investment strategy, there are variables that will determine whether or not you succeed and your degree of success.
Lender rather than landlord
When it comes to vendor terms, you aren't as much a seller or a landlord anymore as you are a lender. When it comes to wraps, all the costs related to running and maintaining the property, including rates, maintenance and so on, are now the responsibility of the person taking on the wrap, which in our case would be Roger.
In other words, the person is more important than the property because if the buyer is unreliable then you could have a serious problem in terms of cash flow, which will make life a lot tougher for you.
Create win-win situations
There are many people who can't get financing from traditional lenders and will be interested in vendor terms. However, it is essential that you pre-qualify these people to ensure that everyone wins. And the key to pre-qualifying is making sure these people can afford to make the repayments. If they can't cover them, then you aren't going to be helping anyone, least of all yourself.
Stick to the rules
Each state has slightly different regulations when it comes to wraps. This means that you need to do your due diligence before you get started with this investment strategy. The good news is that there are plenty of resources and tools available online to help you with that.
Some regulations you want to watch out for include:
- Privacy laws: when doing a formal credit check or requesting information about a prospect, you have to be especially careful when it comes to privacy laws;
- Consumer credit laws: providing credit is a heavily regulated area. Ensure that you seek legal advice before jumping into vendor finance, otherwise you may find yourself falling foul of the law.
Does investing in a holiday house make sense?
In terms of types of property to invest in, many people think that investing in a holiday property makes a lot of sense. But does it really? This is one question we will be answering below.
Clearly, investing in a holiday house has some serious lifestyle advantages. However, besides being able to use the property for your own pleasure, you can also rent a beach home out when you aren't using it. You might also, eventually, be able to sell it and make a profit, especially since the Australian real estate market has exhibited sustainable growth over the long-term and population growth and continued economic prosperity indicate this trend will continue.
There are some things you have to consider when buying a holiday house as an investment. Firstly, tax rules on holiday properties can be somewhat complicated in terms of renting them out and selling them, especially if you intend to use the property some of the time and will be renting it out the rest of the time. Thus, it is imperative that you know exactly what you can expect in terms of taxes so you can determine whether or not it's a good idea to invest and to have a strategy in place if you choose to do so. Your best option is to talk to your accountant or a tax expert to find out all the details before you make a purchase.
How to purchase a holiday property
Limit your choices
If you already have some idea of where you want to spend your holidays, then you're in luck because you can skip this step. However, if you really aren't sure about where to buy, keep in mind things such as:
- how close the property is to water;
- how many properties are available in the area;
- how many rental homes there are in the area;
- how popular the area is with tourists;
- how close is it to major roads and highways; and
- the price range.
Also, consider the distance from your home. If it's too far, you might not be able to drive down for the weekend, whenever you choose. So, you probably want to buy in an area that's less than a three or four hour drive from where you live.
Calculate how much you can afford
Don't make the mistake of taking into account rental income when determining how much you can afford to pay for the property, unless you have all the money and will be buying it without a mortgage. There is no guarantee how long the property will be rented out for and how much you will make. This also means that you need to be prepared to cover the costs for the period when the property is empty. Don't forget, at those times, you will have to cover the mortgage for your primary residence as well, so make sure you can afford it.
Work with a local realtor
Your best bet is to speak with the local community in the area where you are considering purchasing your property. This means speaking to business and home owners and getting their input. They can also let you in on all the secrets of the area.
Decide on the main purpose of the property
If your main goal is to rent the property out on a regular basis, then invest in furniture and appliances that aren't too expensive. Consider getting floors designed for heavy traffic and don't forget there will be wear and tear involved as well.
If the property is solely for your use, then invest as much as you like in furniture and buy whatever makes you happy.
You also have to consider the number of bedrooms and bathrooms that are available. Will you be taking friends or extended family with you? Other factors to consider include:
- Car access
- Boat storage
- Is the property pet friendly?
Also, don't forget about tides and how they can impact the property. If it's too close to the water, it might be at risk of flooding.
Hire a property inspector
Once you've identified the property you want to purchase, secure the services of a property inspector who is well-versed in the local area to ensure that the building and foundations are sound. If you've always lived in the city or in a suburb, there are problems you might not be aware of that are the result of sandy soil and vegetation. Which is why the services of a property inspector can be invaluable.
Renting your holiday property out
If you intend to live in the property full-time at some point, you will probably want some neighbours who are around full time as well. This means you need to look at the proportion of residential to rental homes in the area you are analysing. If you want your renters to pay off the investment, then you might have to make some concessions.
Choose the right area
You need to look for an area that is popular with tourists. This will make it easier to find people to rent it to. To get an idea of what properties are available and how much can be made in different regions of Australia, sites like homeaway.com.au are useful.
Get advice from local realtors
You really need to speak to someone who has been working in the region for a while because holiday property markets often have hidden peculiarities and factors that you might not be aware of.
Check the weekly rents so you can make sure you are asking for an accurate price and that you are also competitive, which will ensure a decent occupancy rate.
Work out your budget because there are a lot more costs involved than merely purchasing the property. Remember, there's the deposit, mortgage carrying costs, insurance, furniture, maintenance, improvements, rental commissions and so on and so forth. Compare these costs to how much rent you will earn, which should help you in making your decision of where and what to purchase.
Get more advice
Since it's a serious investment, make sure to get tax and financial advice from a professional to make sure you are doing the right thing. A financial planner can help you work out all the figures, which will make it easier to decide on where to go.
You also have to consider how you will be managing rentals. You can either manage the property and its rental yourself or you could use the services of a rental agent. Realtors that are established in holiday communities charge a percentage of each rental but some of them also provide additional services, including a bit of light maintenance, advertising, and helping the tenants out.
Remember to plan with your agent
You are putting a lot of work into making sure this works, so make sure to schedule a few weeks so you can enjoy your new holiday house too.
As long as you find the right property, as with any investment property, a beach house can make a lot of sense from an investment viewpoint. Not only can you make a decent rental income but you can also have a place to take a holiday each year, and also a place to retire to if you are in it for the long haul. But it's imperative that you find the right property and the right area, so make sure to do your research.
Is investing in Defence Housing a sensible idea?
Defence Housing is a unique leasing arrangement structure. Defence Housing Australia is a branch of the Defence Housing Authority that has one directive and that is to build homes for defence force personnel and sell these properties to investors using a leaseback scheme.
The terms of the scheme force the landlords to rent the properties to employees of the defence force for a certain timeframe, which can vary from three to twelve years. The DHA website states that they administer in excess of 18,000 housing units in Australia, which include various property types, including houses, apartments and townhouses. The DHA offers property management services, which would seem to be a good idea at first by acting as a bridge between tenants and landlords.
Defence Housing properties are advertised as being a safe investment that requires little maintenance due to their ability to source long-term tenants and the fact that they manage the property. However, the first critical aspect to determine the benefits of such an investment is to treat it like any other type of investment. Unfortunately, once you take a closer look at investing in Defence Housing, you might find that things aren't quite as attractive as the DHA would have you believe.
Upon closer inspection, people investing with the Defence Housing Authority should be cautious, Terry Ryder notes they:
- Are generally over-priced when compared to the local market
- Generate low a rental income;
- Are associated with high management costs;
- Are generally in areas that have little potential for growth
- Restricted to a limited and illiquid resale market, meaning that it's going to be hard to sell the property.
If you look at DHA properties, they tend to be new houses and, looking at what's available at the moment, part of master-planned estates.
Capital gain is one of the main reasons people invest in property, which means buying at the right price and getting a property whose value will increase.
DHA properties don't deliver in terms of capital gains for two reasons. Firstly, there are always sold at prices that are above the market value. Secondly, they are generally positioned in areas that aren't likely to generate growth, since most of them are close to military facilities. While the DHA admits they sell their properties for higher-than-market prices, they claim they do this because the investor is offered security via the long-term lease.
Many realtors shy away from Defence Housing because of the high prices. They claim that the returns guaranteed by the long-term leased are eaten up by the purchase price.
Another issue is the potential for capital gains. Most analysts state that Defence Housing properties tend to be in areas that have little potential for growth, which means that most of the value resides in the improvements rather than the land. In fact, Paul Nugent, general manager of Wakelin Property Advisory in Melbourne, explains that 60 – 70% of the purchase price of a good investment property should be from land value, whereas the reverse is true when it comes to DHA housing.
The high prices also means that DHA housing offers low returns, with most featuring gross yields that do not exceed four per cent and in some cases as little as three per cent.
To compound the problem, the DHA charges a 16.5% management fee that is calculated on the gross rental income, which is sky-high when one considers that mainstream property managers generally charge between six and eight per cent.
The DHA claims they charge so much because they cover property management costs as well as much of the day-to-day maintenance. However, it appears they aren't doing such a good job considering that there is a Facebook page dedicated to 'I hate Defence Housing Australia' and it already has 1,700 members out of 18,000 properties.
The long-term government lease is not seen as something positive by everyone, either. This is because you have no control over your asset and there is little room for negotiation. The DHA has restrictions on everything, including how you can market the property, because they want to protect the privacy of the Defence tenants. And if you want to sell during the lease period, you have to sell it with the balance of the lease term and all other conditions intact, which can make life difficult since you can't sell to someone who wishes to purchase an owner-occupied property.
The crucial element of any investment strategy: finance
These strategies are useless if you don't have adequate finance to fund your investment. Compare investment property home loans below or speak to a mortgage broker to find out more about your options.
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