Sydney leads for post-GFC price growth

New research by CoreLogic shows Australia’s capital city housing market has been “extremely interest rate-sensitive” since the GFC.

According to the data, dwelling values grew by 54.9 per cent for the combined capitals between December 2008 and June 2016.

Sydney led the way with a massive 87.9 per cent increase in home values during the post-GFC period, followed closely by Melbourne (71.8 per cent).

Canberra was next best for dwelling value growth with 26.9 per cent, followed by Darwin (20.9 per cent), Adelaide (14.8 per cent), Brisbane (14.6 per cent), Perth (9.0 per cent) and Hobart (6.4 per cent).

However, CoreLogic research director Tim Lawless noted that from December 2008 to October 2010, dwelling value growth across the combined capitals slowed to 21.8 per cent.

“Official interest rates were first increased coming out of the financial crisis in October 2009, rising by 175 basis points to November 2010,” he said.

“The boost to the first home buyers grant was partially removed in September 2009 and completely removed after December 31, 2010.

“Combined, these factors saw the rate of value growth slow, followed by a decline in dwelling values.”

Mr Lawless said that between October 2008 and May 2012, when official interest rates were at 4.75 per cent and stimulus was removed from the housing market, combined capital city home values fell by 7.4 per cent.

Furthermore, dwelling values for the combined capitals increased by 37.3 per cent from May 2012 to June 2016, during which time the cash rate fell by 200 basis points to 1.75 per cent.

“The data indicates that since the financial crisis, the capital city housing market could best be described as being extremely interest rate-sensitive,” Mr Lawless said.

“A deeper dive into the data shows that in reality, only Sydney and Melbourne have responded to the stimulus of low interest rates. The relative strength of the Sydney and Melbourne economies and the much greater employment growth have clearly driven housing values higher in these cities.”

Mr Lawless said that until economies outside of these two capitals improve, it is unlikely that an era of sustainable home value growth will return to these areas, despite extremely low interest rates.

“While affording to purchase a home in Sydney and Melbourne is becoming a stretch for many, existing home owners in these cities have experienced substantial equity increases,” he added.

Foreign investors facing $65,000 tax

A new report has revealed just how much foreign investors face in stamp duty costs to enter Australia’s property market, following increases by some state governments.

The latest edition of the Housing Industry Association’s Stamp Duty Watch report found that the purchase of a typical Melbourne unit by foreign a investor will incur almost $65,000 in stamp duty and fees.

“The situation is not much better in Sydney, with foreign investors hit for over $58,000 on the acquisition of a unit of average price,” HIA senior economist Shane Garrett said.

“Under the new rules, foreign investors in Brisbane units will be charged $29,000 in transaction taxes alone.”

As part of its state budget, the Victorian government recently increased its stamp duty tax for foreign buyers from 3 per cent to 7 per cent, while NSW introduced a 4 per cent stamp duty surcharge, and the Queensland government introduced a 3 per cent surcharge.

The report also found that stamp duty is adding an estimated $91 per month to household mortgage repayments for a median-priced home.

According to the HIA, the typical stamp duty bill was $17,811 for a non-first home buyer owner-occupier in June 2016, “which added another 3.6 per cent to the cost of purchasing a home”.

“This means that stamp duty eats up almost four months’ worth of after-tax income,” the association said.

Government given property ‘wake-up call’

There is an “acute problem” in our capital cities which governments are ignoring – but will property investors bear the brunt of the inaction?

The Household, Income and Labour Dynamics in Australia Survey has ignited new discussion on the level of relevance the government places on the relationship between negative gearing and housing affordability.

Following findings in the HILDA survey that fewer than half of Australian adults will own a home by next year, the Property Council of Australia has issued a statement saying that this should serve as a 'wake-up call' to governments on the case for fixing housing supply and affordability.

The Property Council of Australia’s chief of policy and housing, Glenn Byres, said sliding home ownership is a damning report card on the collective failure of governments to act.

“Housing affordability has remained a public policy orphan for too long, and there is a compelling case for change given the acute problem in our capital cities.

“Neither side of politics took a comprehensive plan to the last election. Instead, we saw a tax debate on negative gearing masquerading as a housing affordability debate.”

Meanwhile, founder and executive chairman of The Hopkins Group, John Hopkins, shares the sentiment that negative gearing policy and housing affordability issues should not be confused as one and the same.

“In the eighties, whilst I disagree with what Keating did, I said to [him] ‘it's not right that people can buy an investment this year, claim the losses as an investment, sell it next year, make a capital gain, and claim the losses as well’,” Mr Hopkins said.

“That's wrong. But not if someone is a genuine long-term property investor, the type of investment they purchase is relevant, and the time that they own it is relevant to prove that they are genuinely waiting to get an income.

“Where does the Labor party think the accommodation will come from that Melbourne and Sydney need, let alone Brisbane — because Brisbane’s percentage increase in population is bigger than Melbourne and Sydney — where do they think it's going to come from?”

According to Mr Hopkins, the greatest proportion of The Hopkins Group’s database is “just ordinary Australians”.

“Sure, there are some wealthy people on there, but it's not the predominance. The predominance by 85 to 90 per cent is easily just ordinary Australians,” he continued.

“I'm not trying to be political, because I'm happy to look at both sides of politics on various issues, [but] Labor are very much impacted by this sort of class thing, and it appeals to the worker to think they are getting into the wealthy people.

“But don't we want people trying to provide for their own future? Property is part of it. And in addition to providing for their own future, relying less on government, they are also providing accommodation. I don't get it.”

Property market confidence falls further

New research has revealed that Australians are continuing to lose confidence in the property market, with sentiment in the residential sector now at its lowest level since December 2012.

According to the latest ANZ-Property Council Survey, confidence in the property sector dropped 0.2 index points to 129.4 during the June 2016 quarter, and has fallen further to 126.8 in the September quarter so far.

The continued fall is said to be driven by the residential segment, which continues to cool from the peak of 2015.

“Sentiment in the residential property sector is still easing, and is now at its lowest level since December 2012,” it said.

Furthermore, the results show an increasing number of industry firms expect growth in both construction activity and capital values to ease over the next 12 months.

“This softness is largely to be expected given regulatory changes introduced last year and tightening of finance criteria by many lenders,” it said.

“Tighter borrowing conditions for developers and investors are certainly having an impact on the market, with firms reporting that the availability of debt finance continues to worsen.

“The decline in sentiment continues to suggest that the housing sector’s contribution to [economic] growth will ease from here.”

Commercial property sentiment has also fallen slightly, led by a drop in the industrial segment. However, post survey analysis reveals that confidence in commercial property has been consistently stronger than the residential sector for the past year, and the outlook for the sector is more positive than its residential counterpart.

Established Perth apartment blocks in high demand

While house prices in the WA capital have declined for six consecutive quarters, demand for older-style apartment buildings is rapidly escalating.

Small blocks of older-style apartments in Perth's fringe CBD suburbs are becoming one of the hottest investment tickets in town, according to leading agent Knight Frank.

Knight Frank has reportedly sold more than $20 million worth of apartment blocks in the last 12 months, across suburbs ranging from South Perth, Inglewood, Jolimont and Daglish.

They have ranged in price from $1.2 million to more than $6.5 million, and have extended to suburbs as far from the CBD as Shoalwater.

Knight Frank's senior director of capital markets in Western Australia, Todd Schaffer, said demand for older-style apartments had escalated significantly in recent months and the trend was set to continue.

“Each sale has been hotly contested by a range of potential buyers, from individual investors through to small family companies,” Mr Schaffer said.

According to Mr Schaffer, more than 90 per cent of sales negotiated by Knight Frank had been cash, unconditional deals.

“The sales are primarily coming from apartment blocks in established residential areas where there is little or no scope for larger scale residential redevelopment on the site,” he said.

“Buyers are recognising the value in these properties and are opting to either hold or refurbish them and establish long-term, strong, reliable cashflows, with future development.”

Unlikely city's house prices outpace Sydney

One capital city has topped the rest for house price growth over the June quarter, hitting a record median price – but it may come as a surprise to many.

According to the Domain House Price Report for the June quarter, the average house price increased nationally by 1.5 per cent with median prices hitting a new record in Melbourne, Adelaide and Canberra.

Canberra experienced the strongest growth of all the capital cities with an increase of 3.1 per cent over the June quarter to hit the record price of $654,306.

Melbourne house prices also reached a record high of $740,995, growing by 1.5 per cent over the quarter.

In Adelaide, prices also saw strong growth, rising by 0.9 per cent to hit a record of $498,927.

Looking at the other capital cities, Sydney’s median house price increased by 2.4 per cent to $1,021,968, edging back up over the $1 million mark.

In Brisbane, house prices grew by 1.2 per cent to $521,915.

Hobart’s median house price also grew by 0.3 per cent over the quarter to $345,880.

Meanwhile, prices continue to fall in Perth and Darwin.

Perth prices saw a decline of 1.7 per cent to $568,132, marking a sixth consecutive quarter of price falls for the capital with the median price now at its lowest point since March 2013.

House prices also fell in Darwin by 0.7 per cent to $613,590.

Domain chief economist Dr Andrew Wilson commented that these results indicate that recent house price falls are at an end, brought on by a revival of investor activity and a drop in mortgage rates.

“With the prospect of further interest rate cuts, it’s likely that house prices will continue rising in 2016 as improved affordability stimulates a surge in market confidence for both buyers and sellers,” Mr Wilson said.

Generation Y or 'generation selfish'?

Another industry commentator has slammed young people who claim they can't get onto the property ladder, saying they are missing out on home ownership because they aren’t prepared to make sacrifices.

Malcolm Gunning, principal of Gunning Real Estate, has said that when it comes to home ownership, young people are an uncompromising generation.

“There are lots of young people who are complaining that it is too hard to buy in Sydney, however they won’t forgo their material possessions,” Mr Gunning commented.

“More and more we are seeing a victim mentality associated with the high cost of property, yet this ‘generation selfish’ sees widescreen TVs, designer clothes, international holidays and eating out as everyday essentials,” he said.

“They simply won’t do what is necessary to cut their lifestyle in order to save a deposit.”

Mr Gunning also said that young people are not prepared to invest in a ‘stepping stone’ property in a less desirable location.

“They want the Surry Hills pad, right now and won’t modify their expectations,” he said.

According to Mr Gunning, this issue can mostly be seen in Sydney.

He commented that unlike Sydneysiders, young people in regional areas who are earning less are making sacrifices to get into the property market.

“They recognise that getting onto the property ladder should be a priority and do everything they can to ensure they are saving to get to their end goal,” Mr Gunning said.

Majority of investors ‘losing’ money

Despite most property investors seeking out wealth and cash flow, a new report has revealed that over 60 per cent are making a loss on their rental properties. 

CoreLogic recently released its Investor Report: A profile of residential property investment across Australia, which found that 61.9 per cent of residential property investors declared a net rental loss, according to ATO data.

When analysed across age cohorts, the report found that a majority of loss-making rental properties are owned by individuals who fall within younger age groups.

A total of 78.4 per cent of property investors who declared a net rental loss were aged less than 40, while 59.8 per cent of individuals aged 40 to 64 declared a loss.

The age group with the largest percentage of property investors claiming a net rental loss was the 25 to 29 cohort, with 82.8 per cent claiming a loss.

Only 22.5 per cent of those aged 65 years or older claimed a net rental loss.

The report suggests that the younger age cohorts would potentially include some first home buyers who are choosing to purchase as investors rather than owner-occupiers.

Meanwhile, 77.5 per cent of those people above retirement age (65 years-plus) are claiming a net profit from their residential property investments, compared to just 33.1 per cent of individuals below retirement age.

The age group with the largest percentage of property investors claiming a net rental profit was the 75-and-over cohort, with 90 per cent claiming a profit.

“While younger owners of investment properties – those under 40 years of age – are the most likely to be claiming a net rental loss, the size of the average loss is greatest for those aged between 45 and 59 years of age,” the report said.

“The 25 to 29 year age group is the most likely to be claiming a net rental loss (82.8 per cent of individuals). However, the proportion of individuals claiming a net rental loss incrementally reduces across every age group thereafter, to a low of 10 per cent of individuals above 75 years of age.”

Property spruiker cops four-year ban

The chief executive of a real estate group which gave dodgy property investment advice has been banned from providing financial services for four years.

Ronald Cross of ParkTrent Properties Group has been handed down the penalty afterthe Supreme Court of NSW found in October last year that the company had unlawfully carried on an unlicensed financial services business for over five years by advising clients to purchase investment properties through their SMSFs.

The court also permanently restrained ParkTrent from providing unlicensed financial product advice to clients regarding SMSFs.

ASIC found that, as the key decision maker of ParkTrent, Mr Cross was knowingly involved in the company’s contraventions, making all of its major strategic and business decisions and intending to influence clients to purchase properties through SMSFs.

The regulator also found that Mr Cross was willing to ignore legal advice and warnings about ParkTrent’s practices, “demonstrating that he is likely to contravene financial services laws”.

“ASIC’s action against Mr Cross shows that we will not hesitate to exclude property spruikers who provide unlicensed financial services from the industry,” ASIC deputy chairman Peter Kell said.

How much money do I need to invest in property?

Property investment is an incredibly popular form of long-term wealth creation. But just how much of a hit will your back pocket take during the early stages of building your investment portfolio?

There is no magic number to summarise how much money you will need to start investing in property. Primarily, the amount you will need will be determined by the location and type of property you are targeting. Costs vary considerably between houses and units, and regional and city-based locations. Property varies considerably between Australia’s capital cities, primarily due to population, but also due to other economic and employment drivers.

What’s more, your investment strategy will impact how much you need to spend on your property. It’s important to remember that a low entry cost doesn’t necessarily mean a property is primed for significant growth.

Many investors choose to purchase a more expensive property in what is defined as a ‘blue-chip’ suburb (usually in close proximity to the CBD of a capital city) and utilise negative gearing concessions – hoping the property will undergo significant enough value growth to offset the short-term losses.

However, for some investors who place a higher value on cash flow, a low-cost property with a high rental yield may be an ideal investment.

It’s also important to remember that a property investment’s success will depend not just on its location, but its individual attributes.

Spending the same amount of money on two properties will not guarantee that each will perform as well as the other. Growth and yield will come down to how well a property’s attributes stand up to the market. With this in mind, any investor needs to conduct thorough research into the property they are planning to purchase to ensure it stacks up and maximises their investment dollars.

How much will a property deposit cost me?
The most commonly cited cost of a property purchase is the deposit. This is the amount of money you put down at the start of the purchase in order to secure the property and financing. The amount of money you will need to put down as a deposit will depend on the purchase cost of the property. Deposits are calculated as a percentage of the purchase cost.

A commonly cited statistic is 10-20 per cent of the purchase cost, although the figure may be higher for some lenders, property types, or buyer profiles. Changes to lending guidelines in 2015 by the Australian Prudential Regulation Authority have led to many lenders requesting a lower loan-to-value ratio (LVR) on prospective purchases, putting the onus on investors to come up with higher deposits.

Lenders will often require investors with a lower deposit (usually below 20 per cent) or those purchasing a property deemed as being at higher risk of default, to pay for lender’s mortgage insurance (LMI). This is a type of insurance that protects the lender (not the borrower) if the borrower defaults on their mortgage. It is a one-off payment but it can be capitalised into the ongoing repayments on a home loan.

It is also important to consider how the amount of deposit you pay (as a proportion of the property’s value) will affect your investment strategy. Paying a higher deposit may increase the amount you can borrow, allowing you to secure a higher-value property. It may also allow you to avoid the cost of lender’s mortgage insurance. However, if you plan on building your property portfolio rapidly, paying a higher deposit may eat into your capital and reduce your potential to make
further purchases in the short term.

Investors will need to pay stamp duty on their property purchase in the majority of circumstances. The amount of stamp duty varies by jurisdiction and property value, but can range anywhere from $20 to tens of thousands of dollars. 

Stamp duty is also charged on the registration of a mortgage. This is a charge imposed by state and territory authorities, and varies by jurisdiction. It is typically paid on an investor’s behalf by a lender and absorbed into mortgage repayments. Some states, such as NSW, have signalled their intention to abolish mortgage stamp duty.

Pest and building inspections, an essential component of any investment purchase, will attract a fee. A combined pest and building inspection can cost upwards of $400, depending on the size of the property.

You will also be required to pay conveyancing fees to the legal representative facilitating the purchase of the property, and for your legal representative to conduct any title searches on a property. These costs will vary from business to business.

Ongoing costs of property investment

Securing an investment property is one thing, keeping it is something else!

There are myriad ongoing costs associated with maintaining an investment property. Some of these include:

Loan repayments: The cost of servicing the loan taken out on an investment property will vary, depending on the amount borrowed, loan term, loan type and any associated loan servicing fees.

Council rates and land tax: Paid on an annual basis, these rates vary by local government area.

Water rates: Whether or not a property investor will be liable for the water costs of their investment property depends on whether that property has provisions for the separate metering of utilities. Many older apartments will not have separate metering of water, meaning the owner will typically be liable for water rates.

Insurance: In addition to building insurance, many property investors choose to take out landlord insurance in order to limit the financial impact of unforeseen repair costs and tenant-related liabilities.

Body corporate fees: Paid quarterly, body corporate fees are intended to assist in the upkeep of apartment and townhouse complexes. Detached houses will not incur these costs.

Repairs and maintenance costs: The most difficult aspect of property ownership to anticipate and control are those costs related to maintenance and repairs. These costs can arise at any time and can vary greatly depending upon the nature of the repair and the age of the building – as well as any insurance policies in place.

Property management fees: If you go through an agency, you will need to take into account listing fees each time your property is re-let, as well as ongoing agency fees taken as a proportion of the monthly rent.

Tax on rental income: If your property is working as an investment then it should be providing income in the form of rental payments. These rental payments, along with any reimbursements associated with outgoings, are subject to taxation and must be declared on an investor’s tax return.

There are further costs to consider when it comes to holding an investment property, and thankfully, some ways to claim tax benefits for being an investor. 

Keep some change left over
It might be tempting to go all out and tip your life savings into your investment portfolio – but that would be short sighted and would almost certainly come back to bite you. Properties are tangible assets that are susceptible to damage from the people residing in them, and the outdoor elements.

But even non-tangible things, like home loans, are susceptible to change, both inside and outside of your control. Thus it is important to maintain a buffer for emergency repairs, ongoing maintenance and periods of vacancy, or where your primary income might be subject to unforeseen change.

It might mean making sacrifices to your day-to-day living expenses, or limiting your initial investment amount, but maintaining access to emergency funds will pay off in the long run – often in ways you might not expect.

New versus old properties: Which are the better investment?

Whether to buy an established property or a brand new one is a decision investors have to make each time they purchase – so what do you need to know before you buy?

Why buy a new property?Buying a brand new or relatively new property is often the more appealing option, as it usually means less initial repairs and maintenance. Depending on the area in which the property is located, prospective tenants are often attracted to more modern homes. This is particularly the case in blue-chip and coastal suburbs.

Buying a new property limits the need for work to be done in the first few years after purchase. This is an attractive trait, as it also means there is less demand for the investor’s time and money following the initial purchase of the property. As they are purchased at a standard suitable for tenants to move in, vacancy rates for new properties, when purchased in the right areas, are low, meaning more immediate cash flow from rental payments.

Newer properties also come with maximum potential for depreciation claims, meaning more money in investors’ pockets at tax time (more on depreciation below).

One huge advantage of buying a new property is that they are generally a lot more energy efficient and environmentally friendly than older properties. It can be an enormous expense to install energy- and water-saving features in an old property.

Why buy an old property?As a general rule, older properties are more affordable than new properties. Although an older property may have a dated appearance or layout, it also gives you the opportunity to renovate, with improvements ranging from small DIY jobs to large-scale structural renovations, which you can tailor to your budget and preferences.

In many circumstances, it is beneficial to be able to replace old fittings and fixtures. Take a case in which a property investor decides that he or she wants to list a property as apet-friendly rental property. Purchasing a new dwelling with plush carpets would not make this a viable choice, but an older property with dated carpets allows the investor to choose appropriate flooring (e.g. timber or tile) for the rental property they desire.

Not only will these improvements attract a larger pool of prospective tenants, they will immediately create capital growth for an investment property. A new property is less customisable and has less, if any, opportunity for instant capital growth early on.

There are also certain desirable features that new properties generally lack. For example, it is common for older properties to have high ceilings and hardwood flooring.

How do depreciation and tax benefits differ for new and old properties?A property will inevitably depreciate in value from wear and tear over time and, much like a car used for business purposes, the depreciation of an investment property can be claimed as a tax deduction – as an investment property is purchased for income-producing purposes.

Property investors can claim depreciation on a property for a maximum of 40 years from the date of construction completion – which means investing in newer properties will give you greater depreciation benefits.

There are two main categories investors can claim for rental property depreciation – plant and equipment deductions and capital works/building deductions. Both new and old properties can be eligible for each category, but new properties will see greater returns from structural depreciation claims than old ones will.

Capital works deductions involve anything to do with structural elements of the property, such as:

• Structural walls
• Wiring
• Brickwork
• Windows
• Plumbing

Although deductions on capital works apply for 40 years from the property’s date of construction, renovations to the structural elements of the building can be claimed from the time of renovation, meaning both new and old properties can benefit in some way from depreciation claims.

Plant and equipment deductions involve anything that is easily replaceable within the property, including:

• Tap fixtures
• Carpets
• Blinds
• Water systems
• Appliances

These parts of the building will depreciate from the time of instalment. The ATO has standard measures that determine the age of individual items. Once an item has reached the end of what is deemed to be its effective life, you can no longer claim depreciation of its value.

In order to make a depreciation claim, an investor must obtain a depreciation schedule, which lists the deductions available on a specific property. Depreciation rates are determined by the original construction cost of a property. When there is no record of the construction cost, a quantity surveyor can estimate it for depreciation purposes and produce a depreciation schedule.

Buying old properties and renovatingAn older property will generally be more affordable – but that doesn’t mean you can’t update its appearance.

A cosmetic renovation is an effective way improve the physical appearance of a property. Even the smallest cosmetic renovations can greatly change the feel of a home, attracting a wider pool of tenants.

In addition to provoking increased interest in your property, cosmetic renovations keep it well maintained. Tenants tend to have more respect for properties that are well presented, and when it comes time for resale, a renovation will add value to the property.

Renovating your older property also opens up opportunities for depreciation claims that may not have been initially available to you.

Even if funds are tight after purchasing your property, there are still ways to change its dated appearance. A cosmetic renovation could involve improvements as simple as:

• Painting
• Replacing flooring
• Replacing light fixtures
• Replacing door handles
• Replacing cabinet handles
• Adding a splashback to the kitchen sink
• New blinds
• New plants or fencing in the garden
• Replacing bathroom tiles
• Change of colour scheme
• New window fittings

In addition to these small updates to the appearance of the property, cosmetic renovations can also involve much larger-scale and typically more expensive projects, such as:

• Ripping out the kitchen and replacing cabinets, benchtops and appliances
• Ripping out the vanity in the bathroom
• Replacing an old combined bath tub and shower with a more easily accessible shower
• Pulling down non-load bearing walls to open up space; for instance, the walls of an enclosed kitchen

A cosmetic renovation to an old property could add hundreds of thousands to its value, and significantly broaden your prospective tenant pool.

To decide which option is right for you – new or old – make sure you understand your target tenants (where they want to live, what amenities and property features they desire), the area you’re buying, how this property will function in your portfolio and its capital growth potential.

What investors need to look out for at open homes

Visiting a property that is open for inspection is about much more than just seeing what it looks like. Here’s what you need to know before you explore open homes to ensure you buy a safe and secure investment property.

What do you want from your investment?

Open-for-inspections, or open homes, are an essential part of the real estate process in Australia. They’re your first opportunity to match reality to a real estate agent’s copy and find out whether a property is right for you.

The trouble with some investors, particularly early on in their portfolios, is that they tend to approach open-for-inspections from an owner-occupier’s perspective. They look at a prospective investment as though they are going to live in it, and ask emotive questions based around this.

That’s not the right approach if you want to ensure you spend your precious time and money on a property that will perform to your investment expectations.
So the first and most important thing to know when inspecting a potential investment is what you want from it.

What kind of yield do you want? Are you prepared or equipped to conduct renovation work? What kind of tenants do you want? Will you want to subdivide or construct additional dwellings in the future?

Your answers to these questions will dictate exactly what you look for in a property, but the guide below should provide you with a basic outline of what to keep an eye out for at open-for-inspections.

Some things might seem minor at the outset, but small costs add up quickly, and the name of the game with property investment is maximising earnings and minimising costs.

What to look out for inside a property at open-for-inspections:

• Water stains on the shower/bath walls: while not a structural defect, these look terrible and are costly to rectify.
• Sagging ceilings: both expensive to fix and potentially dangerous.
• Damp in kitchen and bathroom cupboards: open the cupboards and take note of any smells inside. Is the cupboard trim warped? This could be a sign of a water leak or a damp/ventilation issue in the building.
• Cracks in the wall: can indicate structural defects.
• Water pressure: turn on the taps to check the pressure and take note of the water colour to gauge its quality. See how quickly the water drains – slow drainage may indicate that you’ll need to do significant plumbing work.
• Sticking windows: this can be a sign of rusting or warped window frames, which may require replacement.
• Leaking toilets.
• Hot water unit: how old is it? Has it been serviced? How long does it take to heat water?
• Light switches: it might sound simple, but the age of a light switch can provide a good indication of the state of electrical wiring in the building. Older switches may indicate the wiring is in need of replacement.
• Variations in paint: this is a tell-tale sign of paint being used to cover up an issue such as damage from damp.
• Insulation: if you can, inspect the roof cavity to gauge the state of insulation in the property. Ask the agent if the property is fully insulated.
• Pests such as cockroaches: getting a property fumigated can be a significant expense.
• Power points, TV antenna points, internet connections: the location and number of these features can make a big difference to tenant appeal.
• Floor coverings: have the carpets been well looked after? Replacing carpet is an expensive job, but may be required to enable the property to appeal to tenants.
• Window furnishings and fly screens: are they in good condition?
• Kitchen appliances: are the oven, stove top and dishwasher modern and in good condition?
• Air conditioning and heating: do these systems work efficiently? Have they been serviced?
• Floorplan: is the floorplan logical and convenient? Unusual floorplans can severely limit your tenant pool and rental price.

What to look for outside a property at open-for-inspections:

• Building and block orientation: this has significant ramifications for how hot and cold the house will be.
• Pipes and gutters: check the external plumbing for signs of leaks and rust.
• Fuse box: is it safe to access and in good condition?
• Roof: are the tiles intact? Is the roof sagging at all?
• Asbestos: is there any documented history of asbestos being used in the construction? If the property was constructed or renovated before 1990 there’s a chance that asbestos may be found in some of the building materials.
• Outbuildings: are they properly constructed? Ask to see permits for any outbuildings.
• Termites: termite activity will be picked up on a building and pest inspection, but it pays to keep an eye out for obvious termite damage, particularly to wooden components of the house that make contact with the ground (such as verandah beams).
• Trees and plants on the block: are the trees in good health or rotting? Rotting trees will need to be removed. Are any trees located close to the property? They may present a risk to the property and drive up insurance premiums.
• Fences: are the fences upright and in good condition?
• Garden: is the garden well-maintained or landscaped?
• Drainage: are there any patches of soggy lawn or wet pavement? These can be signs of poor drainage, which may present a flood risk.

What else to look out for at open homes

There are some things that can’t be checked by a physical inspection. These include whether there are existing planning permits in place, results of any soil contamination reports, and land boundaries.

Most of these can be obtained from the real estate agent marketing the property, but you should also conduct a title search and consult local council documents to find out as much as you can about the building.

Things to ask about/investigate include:

• Council rates
• Land tax rates
• Existing planning permits
• Property zoning
• Flood and fire risk
• Soil and groundwater contamination
• Utilities provision (is there a gas line to the property; separate water meter?)
• Owners’ corp fees

What to do after an open-for-inspection

If you haven’t identified any major issues with the property and it aligns with your investment goals, you will need to engage professionals such as a building inspector and valuer to inspect the property more rigorously and uncover any hidden issues.

You may also consider engaging a legal professional to investigate the building’s documentation.

Should I hire a property manager?

Managing your investment property and its tenants comes with a lot of responsibility, and can at times be stressful. So is it worth outsourcing the job to someone else?

What is a property manager? Property managers are real estate professionals who work on behalf of investment property owners (landlords) to lease and manage properties. Good property managers make the ownership of investment properties less stressful and take care of many of the day-to-day responsibilities associated with managing a property portfolio. 

Some of a professional property manager’s main duties include:
• Marketing the property to prospective tenants
• Going through potential tenants’ applications
• Selecting tenants for your investment property
• Collecting rent
• Liaising with tenants about potential repairs and property maintenance
• Deciding whether requested repairs and maintenance are required/necessary
• Arranging repairs
• Advising on market rents
• Negotiating leases and rent reviews
• Keeping on top of legislation and advising you how it affects your properties
• Advising the landlord what to do when the tenant is in rental arrears or in breach of the lease
• Representing the property owner at tribunal hearings

Property management costs
Property management fees are typically structured around a percentage of the rental income produced by your property. Fees within the range of one to 10 per cent are a standard indication of what to expect, although this varies from market to market. Tightly contested city markets tend to attract the lowest fees, with fees rising the further you go from the CBD.

Some agents also charge a monthly incidentals fee to cover administrative costs such as postage.

Agents may charge the equivalent of a week’s rent as a fee each time they re-let your property.

They may also charge a marketing fee when the property is being re-let.

What are the advantages of hiring a property manager?

Time and expertise are the key points driving many investors towards property managers.

Many property investors are full-time professionals, and don’t have the time during their working week to attend to the demands of their tenants, or any issues arising with their investment property.

Similarly, property management is governed by a range of legislation, some of which can be quite intricate. Property managers undergo training in order to achieve their accreditation, which involves learning the ins and outs of this legislation.

In addition to helping you run your property portfolio on a day-to-day basis, property managers can play a key role in helping you maximise your income.

Property managers with a sound knowledge of the local area will be on top of market movements – both in terms of capital growth and average rental incomes.

Effective property managers will be able to advise you when you should increase the rent you’re charging and can handle the implementation of this increase in a way that reduces the chances of you losing tenants along the way.

Similarly, good property managers will know when the market has taken a bit of a dip and can help you establish if you need to reduce the rent you’re charging.

While this may seem far from ideal, a $10 per week reduction in rent will lose you $520 over the course of one year. On a property that charges $500 per week, however, if you fail to keep your rent in line with market conditions and the property is vacant for just three weeks while you scramble to re-tenant it, you have already lost $1,500 – not to mention all the fees associated with marketing and re-letting the property.

Market-leading property managers can also advise you on small cost-effective cosmetic improvements that will appeal to the local market and increase the amount you can charge for rent (and ultimately increase your resale value as well).

Is hiring a property manager the right choice for me?
Whether hiring a property manager is the right choice for you is dependent upon how willing you are to become engaged with your portfolio on a day-to-day basis. You need to be prepared to answer the phone at any time of the day or night in order to respond to an emergency request from your tenant.

Likewise, you need to be prepared to learn the legislation applicable to your investment property and set aside the time required to attend any tribunal hearings.

You will also need to develop a marketing process for your property and be prepared to dedicate time to holding open-for-inspections, analysing applications and checking tenant references.

If you do decide to engage a property manager, ask the following questions of them to make sure they’re the right fit for you:
• How many properties do you manage personally?
• How many properties does the wider company manage?
• How can you demonstrate knowledge of the current rental market in my area?
• What action do you take if tenants go into rental arrears?
• How will you collect rent from the tenants and how frequently will you pay this money to me?
• What is the process if my property needs urgent repairs?
• How do you assess whether maintenance is necessary?
• How do you reject a tenant’s request for upgrades or repairs?
• How do you attract the best possible tenants?
• How do you screen tenants?
• How frequently will you inspect the property?
• How much can I expect to pay for your services?
• How will you ensure I’m receiving the best possible rental return for my property?
• What sets you apart from other property managers?

Property versus shares: which is the better investment?

When it comes to building wealth for the future, which asset class is safer and more sustainable? Will shares or property better help you reach your investment goals?

Investing in property

A lot of investors prefer property as it is a tangible asset. You can see it and touch it, and it is a physical representation of your money. People tend to feel more comfortable with such a significant financial commitment when they have something physical to show for it, as opposed to a piece of paper.

Property investment is also said to be less of a risk, as there is less frequent fluctuation in the property market – cycles tend to take longer. Shares can go up and down in value every day, but in the property market values move a lot more slowly. On top of this, shares e

xpose investors to the risk of losing everything in the case of a company going into liquidation.

Investors who prefer property tend to believe it’s harder for them to lose everything, as the physical asset remains on the land despite value fluctuations or changing market conditions. Regardless of the position of the market, a property will always be worth something and, if you purchase well, its value will continue to increase over time – even if it moves at a glacial pace.

You can borrow a larger percentage of your property value from lenders than you can to invest in shares. This helps with the bigger financial commitment that comes with property investment.

Investing in shares

When you have a share portfolio, access to certain information is readily available. You are able to check every day to see exactly how much your shares are worth. This level of accessibility of information is restricted for property investors, as an exact asset value can’t be known unless the investor lists the property for sale.

Owners of shares can also access specific amounts of their money in a relatively fast and easy manner, by selling off part of their shares to the amount that is required by the investor. This is more difficult with property because you can’t simply sell a portion of a property off – and even if you do decide to sell the property, it is a long, complex process.

There are not a lot of extra fees involved with buying shares. Buying property incurs thousands of dollars of initial and ongoing costs in addition to the purchase price. Buying shares only requires brokerage fees to be paid.

An aspect of investing in shares that is particularly appealing is that you can invest in shares even with a limited amount of money – which makes this form of investment a much more achievable goal for many people. Investing in property requires investors to save a large lump sum before purchase.

Which offers better long-term returns?
Working out whether shares or property investment will bring in better long-term returns is anything but straightforward, and in the end has a lot to do with the duration of the investment.

According to the 2013 report on long-term investing released by the ASX and Russell Investments, shares continually outperform property in terms of capital growth across both the 10- and 20-year time frames. The 20-year growth, however, showed a very close result between shares and property, suggesting that time plays a big part in capital growth for properties.

It is possible to generate income from both types of investment. Property investment brings with it cash flow from rental payments, and shares pay dividends.

A strong argument in support of property offering better long-term returns is the comparison of returns with the initial investment amounts. Even though over a 20-year period the returns from both shares and property are in the same ball park, investing $100,000 in shares will give you a different result to investing $100,000 in property. This is because home buyers typically take out a home loan to purchase property, while it is less common for investors to take out a loan to invest in shares. Therefore, if you have a $100,000 deposit towards a $500,000 property purchase, the return will be a percentage of the $500,000. Meanwhile, the return on $100,000 in share investments will simply be a percentage of $100,000, meaning there is a much greater return on property over time.

Is one safer than the other?
Neither investment comes without some level of risk, but you can minimise risk in both property shares by doing your due diligence.

The biggest argument in support of property investment is that property is a tangible asset. You will always have something to show for your investment. Shares, however, are subject to the success of the company in which the shares are held. If a company goes into liquidation, you could lose everything. The value of a property will also always be relative to those around them, whereas shares fluctuate regularly across different industry sectors.

When you buy a property, you typically borrow a large portion of the purchase price. When the property is purchased as an investment and is tenanted, the tenant pays rent that essentially pays off the mortgage. If, for example, you buy a $500,000 property with 20 per cent deposit, once the mortgage is paid off, you have a $500,000 asset from an investment of only $100,000 – and this is before capital growth.

If you buy in the right area, a property will always have demand, and will in turn grow in value over time. The same can’t necessarily be said for shares.
It is not all smooth sailing with property investment, though. The bigger your deposit on a property, the better, as this will provide fall-back should anything unfortunate occur.

Negatively gearing a property in the short term, in the hope that its value will increase over time, can be a risky approach to investment, and inexperienced investors should be very cautious before making decisions based on this tax policy.

Advantages of investing in both property and shares
Where possible, it is a smart idea to spread your risks and have a portfolio of both shares and property. Diversifying your portfolio means that if one of your investments sees poor performance over a certain period of time, other investments may help to balance out your portfolio by performing well, as they are unlikely to be affected by the same factors. Factors that could affect the performance of your investments include:
• Currency markets
• Interest rates
• Current market conditions
• Supply and demand
• Lending policies

As well as diversifying your investments across different asset classes, it is also advisable to spread your capital within asset classes, such as by buying shares in different industry sectors. Each sector will likely achieve different results over the same period.