Smith Street is one of Melbourne’s oldest shopping strips. It is located at the boundary between the suburb of Fitzroy and Collingwood. The street is filled with cafes, restaurants; a lifestyle street welcomed by Generation Y who loves action and wants to be close to the Melbourne CBD. Perpendicular to Smith Street is Johnston Street where nightlife is prevalent with hip pubs spanning almost the whole street.

Smith Street is analogous to Lygon street of Carlton where countless Italian restaurants are located. Collingwood is often touted as the poor cousin of Fitzroy and Carlton because of its older style developments and its ‘industrial’ looks. Its proximity to the CBD prompted numerous residential developments over the year. Gradually, warehouses are being renovated and converted to residential units to meet the growing demand of inner-city suburb living.

Watch this space!

When it comes to marketing properties overseas, many developers are pretty keen to sell their stocks that are primarily off-the-plans. Off-the-plan properties are pretty popular with overseas investors because of stamp duty savings (e.g. buying off-the-plans in Victoria, investors need only to pay stamp duty on the land value) and the fact that only a 10% of the purchase price is required as a deposit and no further payment is required till settlement.

When it comes to building a portfolio for investors, it may not be necessarily a good thing to buy off-the-plan projects. The reasons are as follows:

Off-the-plan projects usually have ‘growth’ built into the price – e.g. if the project is going to be completed in 3 year’s time, it will be priced at its worth in 3 year’s time, NOT current market price. With rising construction and material costs, developers tend to price the units with a certain percentage increase so that the development remains economically viable.

The process of building equity starts only when the property is completed. It means that if you purchase a property off-the-plan today and it settles in 3 year’s time, your wealth building process actually starts in 3 year’s time, NOT today. For investors who are looking at building a portfolio aggressively, buying off-the-plan is not a strategy recommended for them.

Also, if an investor buys off-the-plan during the peak of the property cycle, he may get himself in a sticky situation when settlement happens. The valuation might not stack up and he will have to make up the difference with cash or available equity in his other assets.

The safest bet is to go for properties that are under construction or completed. Given the situation in the eastern seaboard, where new projects are far and few between, it is not easy to find good units that are still available during the construction phase.

A good alternative would be to go into house/land packages where the land title is registered. That way, investors can settle on the land within 30 days and building can commence right after the settlement of the land. The house would be up in 6-8 months and the investor can start his wealth building right away! That shortens the ‘waiting time’ for serious investors.

Lately there have been quite a number of developments being marketed in Singapore. Some clients asked me if they should buy South Yarra or Lygon, or along Queens road. All of these areas in my opinion are great areas. If you are in for the long term, you cannot go wrong.

The other day, I had a client who asked me a similar question. I told him whilst they are good areas, he could get carried away looking at so many new developments and the fact that he can’t possibly buy all of them means that there is something more than just looking at new projects and adding them to his already ‘messy’ portfolio.

I explained the importance of having a STRATEGY in place. It allowed him to have a helicopter view of where he is going and chart the course for his acquisition strategies. At the end of the day, it is down to a 15-year strategy and possibly looking at an annual income of $100,000 or more from his rental income. He was happy with it and it is not at all aggressive and definitely realistic; looking back at the past performances of the Australian property market where median price growth averages about 9% per annum.

Folks, at the end of the day, you can buy anywhere, for that matter; anywhere in the world. I guess the key is to have a holistic strategy. Just like what Stephen Covey said, ‘BEGIN with the END in mind!’…

About a month ago, I spoke to an associate about investing in Australia. She is married to an Australian who lives near Geelong in Victoria. She is adamant about not wanting to invest in a 1-bedroom apartment in the city. When asked why, she said, ‘who’s going to rent one-bedroom apartments?’

The question shocked me a little. She mentioned she would like to get at least 2-bedroom ‘and above’. I found out later that she has actually related to what had happened in Singapore and assumed the same set of conditions apply to Australia.

IMO, a one-bedroom apartment in the city fetches good rental yield, it is also easy to get rid of if the investment turns pear-shaped. Property managers would agree that renting a one-bedroom apartment in the city out will be quite easy as it is a lifestyle product that appeals to singles or couples without kids who wants to enjoy city living.

In Australia, the demographic movements are quite predictable.  When kids gets to about 18, they moved out of their parents home in the suburbs and gather a few mates to rent in the city. They want to be close to where the action is. The idea of having pubs, trendy restaurants nearby is a major attraction for them. Once they met their other halves, they get married and moved into the suburbs. Depending on their income level, they may move into a more desirable suburb if they have the capacity, otherwise buying or renting a house in a ‘growth area’ seems like a possibility.

They have kids later on and when their kids grow up, the kids move into the city and when their kids are gone, they may stay put or move into the city depending on their level of comfort.

A one-bedroom apartment usually is the first to be rented out in good times. It is also the hardest hit during a recession. The one-bedder is not popular for families with more than 2 members. With the emergence of Internet, some couples even rent a 2-bedroom and make one of the rooms as a home office where they can work from home. Having said that, a one-bedroom is not without its value. The fact that it has only one bedroom means that it appeals to a smaller market segment. Then again, the market segment of singles/divorced is increasing at an alarming rate in developed countries like Australia.

Investors need to be aware of the dangers of buying a unit less than 50sqm. In the past, banks do not really favour financing such units. But with increasing construction costs and land costs, banks are now willing to look at it more favourably.

My take is: Study the demographics living in the area you are investing in and watch your budget. At the end of the day, investing in properties is down to dollars and sense and if one-bedroom is what you can afford for the time being, it may be the best decision given the present circumstances you are in.

After debating this issue for a few years, and having spoken to many investors some of whom are very successful investors, I conclude the following findings:

1. Investors who embrace the concept of interest only loan have an exit strategy in mind. They know what they are doing and is fully aware of the risks, and rewards involved.

2. The so-called ‘risk adverse’ investor who pays down on the loan rarely goes beyond one investment property.

In simple terms, the advantages of interest only loan are as follows:

1. It maximizes ‘cash flow’ for the investor. Depending on the term of the loan, the investor services the interest only leaving the principal of the loan untouched. This means lower repayment and better cash flow for the investor.

2. The interest component accrued by the investor is tax deductible. Together with the depreciation allowance of the building and fittings, it allows the investor to build up ‘tax credits’ for purpose of offsetting capital gains tax should the investor sell his assets in future.

The risk of an investor is the holding cost – rental income less all outgoings including interest costs. If an investor manages his holding costs carefully, with buffer for the downside, he should be able to build a very effective portfolio.

So to pay down or not to pay down? It is really down to individual investors….if they have an overall strategy; taking into account cashflow and tax benefits etc…

An associate of mine told me his vision of wanting to help people generate a secondary source of ‘active’ income through FOREX trading. He has been researching and putting his whole head into it for the past few years. A young man with a passion I would call him; he has been making an active income consistently through FOREX trading. His strategies are profound and definitely practical for PMEBs(Professionals, Managers, Executives and Business people).

When I started looking at property, I came across many people who ‘traded’ properties for a profit. What do I mean? These ‘traders’ buy low and sell high. In some circumstances, they buy high and try to sell higher.

It’s common for investors to say that ‘timing is very important’ in the entry to property market. While I never attempt to refute that saying, it also goes to show the mentality of these investors are no more than trying to take profit when the market rises and sell for a tidy sum.

I explained to my associate how many property investors adopt the mindset of ‘traders’ when it comes to property investment and if they are caught out in the wrong end of the cycle, they often have very little way out but to sell for a loss(if they cannot hold). These property ‘traders’ then blame the vehicle – properties, as the culprit for their downfall.

One of my best property mentors, Zak Thaker said, ‘you can flip, trade, buy and sell properties once you have a base’. There is a keyword there - BASE.

I asked him what he meant by that. He explained to me the foundation of successful investors is to have a base of accumulated assets and equity in them. If you uplift equity within this solid foundation to acquire more properties, whether to ‘trade’ or invest for the long term, you find yourself better off than others who plainly just ‘trade’.

Makes a lot of sense to me. My associate’s idea is for individuals to make more than decent profits from a secondary active income source and channel part of that income to acquiring passive income vehicles like properties. So on one hand, you can continue to trade while on the other hand, you start building your asset base.

It cannot sound more logical to me. Folks, have you laid the foundation for your base?

The other day, I had an investor who is a Singaporean. He has invested in Australian properties and held on to them for the last ten years. Both properties – one in Sydney and the other in Melbourne have more than doubled in value. Both properties are positively geared. He asked me, ‘KS, what do you think about negative gearing?’

Negative gearing is a strategy used by tax paying residents in Australia. Essentially, it involves making a ‘loss’ in the property and getting a tax refund from the taxman. The end result might result in ‘positive cash flow’ after the tax refund from the taxman. However, most properties will require an ‘actual cost’ which is minimal per week (e.g.$50/week) depending on the type of properties the investor acquire. So why would an investor buy a property and make a loss every week?

Simple, the investor lowers his tax bracket if he is advised properly and pays less tax. On top of that, there is potential capital growth and investors can build up a property portfolio leveraging on borrowed funds.

I personally believe unless you are tax resident in Australia, you should not embrace negative gearing. As international or offshore investors, we have the privilege of borrowing in an alternative currency that is ‘cheaper’. E.g. Singapore investor can borrow in SGD, and Japanese can borrow in JPY. The lower interest rate can be an attractive option for investors. There are also strategies to mitigate currency risks.

My reasons are simple: If your properties are structured properly, they will be self-sustaining, and you will lessen the risks of holding costs. When that happens, you will find yourself building a portfolio faster and more efficiently. The whole game of property acquisition and portfolio development is a function of time. When time is on your side, it’s easier to accumulate wealth. If properties double every 7-10 years in Australia as what’s commonly said, how fast should you acquire and how much?

Post your comments.

With the recent increase in interest rates in Australia, it is no surprise many Australians are now considering renting as a more viable option over buying. The factors that favour renting over buying are as follows:

1.  Rental yields are usually about 4.0% to 4.5%pa – while mortgage interest rate is at least 7.5% now (with new cash rate of 6.75% in November), it is more economical to rent than to buy.

2.  Most first home buyers borrow almost 100% of the property price with the cost of funds at 7.5%pa at best – almost double renting before you pay one dollar off what you borrowed!!!

3.  Australians find it hard to forego lifestyle benefits over property ownership.

4.  Renting does not require a deposit – Australians aren’t exactly the best savers hence to fork out a deposit for a property can be tough for them.

5.  Renting allows Australians to live in a desirable location at a more affordable price versus being pushed into the ‘outer less desirable’ locations where they may be able to afford to buy.

6.  Younger Australians will rent in three or four locations before buying a home.

7.  Australians are taxed to the maximum both directly (PAYG tax & GST) and indirectly (stamp duties, fuel excise tax, sales tax etc). This also makes it hard to save for a deposit once basic living expenses are taken into account.

8.  There is no tax relief to buy an own owner occupied home while there is, when they purchase an investment property – It is not uncommon for a relatively high-income earner to be renting and he may have half a dozen of investment properties, negatively geared to maximize tax benefits. It also allows the investor to build up a property portfolio as quickly as possible.

Article contributed by Clinton L. Waters, More Rosh & Waters a Melbourne-based company specializing in Australian Property Finance – Email Clinton

I am not a great fan of apartments in the CBD for major capital cities like Sydney
and Melbourne. There’s nothing wrong with them and it’s perfectly all right
for investors looking at prime city locations, close to shops, shopping
etc…however, it may not exactly be the best of investment you have made…

To put it simply, ask yourself whom you will be renting your properties to?

Most developments right in the city centre are high-rise, often 25 stories or more.
The facilities that come with it, gym, spa, lap pools, etc often attract high
body corporate. Most tenants do not necessarily use the facilities and I can
understand why…pardon me for saying this but what can you do in a 25m lap pool
where you cannot swim with more than two or three people at the same time? Make
sense to you?

I have looked at developments on a large scale closely. Most of the time when the
development has more investors than owner-occupiers, there will be short term
situation where many units will be out in the market for rental at one time
after settlement. The enormous number of units available meant that the rentals
could not stack up as previously appraised by property managers. Potential
tenants come along and pick the one with the cheapest rental, often below the
appraised market rental. When that happens, all the other property managers drop
their rent jus to get a tenant. I am sure you can quite figure out what happens
to the cashflow of these properties afterwards.

Boutique developments, when chosen correctly, can help boost your portfolio
exponentially. Usually between 30-80 units, these developments can be really
attractive if location is right in a cul-de-sac and the absence of facilities
within the development meant lower body corporate fees, which returns a higher
rental yield. The locations of such developments may not necessarily be less
desirable.

If these developments are within minutes drive into the city or located near to
cafes, shopping, restaurants, and most importantly, near to private schools and
colleges, they will have tremendous capital growth potential.

Take Melbourne for e.g., most of the eastern suburbs have done very well in the past.
The presence of private schools, coupled with excellent transportation
infrastructures meant that the areas are highly convenient for commuters and
highly desirable for raising their kids. Like what my President of Rotary Club
always says, ‘it CANNOT GO WRONG.’

I wouldn’t give two hoots about a location near to Casino in Melbourne. Why
bother? It is a place for foreigners to lose their dollars to the gambling
house. I cannot see how it has a correlation to capital growth and how
Australian tenants will want to raise their kids there…

I invite you to post your comments.

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