The one unique thing about property as an investment class, when compared with other types of assets, is that you have the ability to Manufacture Equity in Property, and therefore, add more value to your investment portfolio. This is a powerful tool, used by some property investors, to increase a property’s value, and also to increase the potential rental income that can be achieved on a particular property.
Property is made up of a land component, as well as a building component, and in most instances, it is the value of the land that appreciates (or goes up in value), and the value of the building itself depreciates (or goes down in value).
This is why, as property investors, we are able to write off the value of the building through depreciation. When a property has a significant portion of its value in the land, and the building itself is somewhat run-down, then there can be huge upside potential for refurbishment, renovation or redevelopment, which are all methods that force more value into the property by increasing the value of the building component, therefore “manufacturing” additional equity into a site. But it is not as simple as it sounds. You need to be strategic about how you can use this strategy in your property investment portfolio so it delivers the results you desire.
1. Manufacture Equity in Property through Refurbishment
Refurbishment involves working within the existing building structure and updating or replacing areas in the property that add the most value to Manufacture Equity in Property.
Generally, this involves the kitchen and bathroom, although street appeal, paint and outdoor areas also have an impact. Many people can perform this work themselves, or with the help of basic trades such as painters, plumbers, tilers and cabinetmakers. This is usually lower cost building works, but the value uplift can be $2 for every $1 spent – sometimes more.
2. Manufacture Equity in Property through Renovation
Next is renovation, which often involves a refurbishment as well as a structural change to the property such as an extension or addition to the existing dwelling such as adding an extra bedroom or extending the living as a way to Manufacture Equity in Property
This is a lot more involved as generally you will need a plan of the work proposed (prepared by an architect or draftsman), building approval, and sometimes development approval from council, to undertake structural changes to a property. Unless you are a qualified tradesperson, it is advisable to use qualified builders who provide home warranty insurance cover for this type of work, in case something goes wrong in the process. Obviously, the cost of this type of work is greater than refurbishment, but structural additions can significantly improve the value of a property – providing it is in the right location and providing the property appeals to the right target market.
3. Manufacture Equity in Property through Development
The final way to manufacture equity in property is through development.
This is a strategy that carries the highest level of risk, involves the most work, but also comes with the highest potential reward. When you develop a property, it means you demolish the existing building and replace it with something new which is usually of a higher and better use. For example, you may demolish a house and replace it with a duplex or 3 townhouses. The site selection for this method of manufacturing equity is critical because you need to consider, among other things, location, market demand, council restrictions (such as zoning) and maximum allowable density. I have seen many “mum and dad” developers buy a property believing they can undertake a development, only to be told it is not possible. In this area, you need to work with an experienced team who can guide you and ensure that the project is possible and feasible so that your investment strategy is able to be implemented.
There are some fundamental steps involved in ensuring you can manufacture equity in property, regardless of whether you intend to add value through refurbishment, renovation or redevelopment, to ensure you lock in your returns. These are as follows:
1. Choose a location that has wide price disparity between unrenovated or old and renovated or new properties
2. Ensure the unimproved land value makes up a significant portion of the purchase price of a property and check council mapping to find out what you can and can’t do on a particular site.
3. The layout of the property should reflect the strategy you are following. If you are only refurbishing a property, ensure the layout is already suitable. If you are renovating a property, ensure you get professional advice on the existing structure, so you know what you are already working with.
4. Understand your costs. It is best to get professional advice on actual proposed costs before you start so that you do no overcapitalise and spend more than what the property will be worth upon completion.
5. Upon completion, it is always a good idea to get your property re-valued. This enables you to “lock in” the additional equity you have created, which can often then be used towards the deposit for your next investment property, depending of course on your individual circumstances.
So, don’t assume that all property investment strategies are a ‘set and forget’ type of investment. Look for opportunities in your existing property portfolio, or seek out properties that will deliver additional returns for you, with your next purchase. When you manufacture equity in property you supercharge your results. The power that we have to unlock the hidden potential in many properties, provides enormous opportunities for those who wish to force more value into their portfolio, with a more aggressive property investment strategy.
Contact us today to discuss how we can help you achieve these results and learn more about how to Manufacture Equity in Property.
AS PUBLISHED IN AUSTRALIAN PROPERTY INVESTOR MAGAZINE(click here)
Property investment can mean different things to different people. For many investors, purchasing a property, renting it out long term and generating an income from it through rental yields and waiting for it to grow in value, is what property investment is all about. But for others, sophisticated property investment strategies might be more suitable. These strategies are for those investors who think more strategically, because there are additional ways to generate greater returns. It all comes down to asset selection and buying the right property that will deliver above average results.
So, what do we mean by sophisticated property investment strategies, and how are property investors currently benefiting from this type of investment?
Well it comes down to uncovering a deeper understanding of the property you are buying, and what hidden value lies in the land component of that property. You see, not all land is the same or equal in a given location. When you drive through a city, suburb or town, the land that every building occupies is zoned in a different way – depending on the intended use. Generally, each council region provides a planning scheme which defines and controls how a particular area can be developed in the future. This is usually guided by macro and micro economic drivers, as well as local population growth trends, predictions and other infrastructure development.
Put simply, in terms of property investment, you can never assess the true potential of a property unless you understand the layers you cannot see. For many, these are the things that are “unknown” and therefore when you understand what to look out for, there can be some enormous gains to be made.
For example, in Brisbane and surrounding regions (Moreton Bay, Ipswich, Logan and Redlands), each council releases a new and updated planning scheme from time to time as our population increases and our councils plan for increasing population density (ie: more people living in the same area, so higher density living). With each update, land zoning can change and properties that have previously only ever had the potential to be used for a single dwelling house, may have a higher and better use.
This means that updated zoning may unlock hidden potential in properties that may allow development of duplexes, townhouses or multi-level units at some stage in the future.
This opens up so many opportunities for property investors to purchase a house with higher density zoned land, and rent it out as a house for a number of years. But it also provides different exit strategies for that investor because an alternative option to selling it as a house in years to come, may be to sell to a developer, who will usually pay a premium for land with a higher and better use. This increases an investor’s returns as they have effectively been the “land banker” for the future development site.
Whilst there may be no current market for development of a higher density in some regions that have already been zoned for higher density living, we must remember that our cities are growing every year with increasing population growth. In South-East Queensland this is driven by both interstate migration as well as overseas migration, and the fact is that every new person that migrates to an area, needs somewhere to live. Therefore, the demand for housing continues to increase as our population increases.
It is important to not only consider the underlying potential use of the land in the future when considering sophisticated property investment strategies, but it is also important to factor in where there will be future opportunities for jobs growth. Obviously, areas where there are opportunities for jobs which are higher paying jobs will be more desired by those who are able to fill those roles, and so the demographics of an area can be driven by the opportunities that are available in that location.
The other important thing to understand is that zoning alone, is not the only determinant of increased value.
You see for a parcel of land to be attractive to a developer, if that is to be considered as an alternative investment exit strategy, then there are a few more things that need to be checked when finding the right site. These include things such as site contours, land frontage, underground services and other applicable council overlays. Looking at opportunities through the lens of a developer, regardless of the current use, opens up so many future opportunities for a property investor.
So, before you purchase an investment property, make sure you consider all property investment strategies available to you and decide what strategy might be best for you. It is important to understand the value in the things you cannot see. Then you can maximise your opportunity for value uplift in a property by buying quality investment grade assets in locations that may also have upside development potential. You increase your exit options and lock in the future opportunity that exists in a property at today’s prices. These sophisticated property investment strategies work, therefore it might be worth exploring if it is right for you too. Get in touch if you think this might be right for you.
You have probably heard the term unimproved land value a few times now but are not sure what it means or why it is important. In this article, we are going to explore everything there is to know about unimproved land values and how you can use this to your advantage when purchasing your own property. We will also be talking about retail or site value and comparing the difference between the two.
What is unimproved land value?
Each year, land valuers review land values in selected local government areas around the state. Land value is just one of the many factors used to calculate local government rates as well as state land tax and state land rental.
The land valuations also hold information about the property market, which allows you to monitor the movement in the value of your land.
Land valuations are conducted in accordance with the Land Valuation Act 2010, and are completed on all properties in Queensland that are rate-able. When land gets valued, there are a number of considerations taken into account, which I will outline below.
Property market Research
Considering the land zoning under the relevant planning scheme
Physical attributes for example, city views, slope of the land, size and shape of the block
Considering recently sold properties in the area
Unimproved land value is simply the valuation of the land with no improvements. Improvements can mean things like, fencing, houses, clearing, leveling or earthworks.
Where can you find the unimproved land value of a property?
The most up to date and current platform to search for a property’s unimproved land value is via the Queensland Government website. Click HERE to start searching today.
Once you have entered the address and selected from the drop down menu the property details will show along with the current land value amount.
Underneath the land value information there is also a map which you can select surrounding properties to see what the land value is for properties close by, and how it compares to your land value.
There may be instances where the neighbouring properties have a superior and inferior land value to the site you are searching and this can be due to the following factors.
Valuation Methodologies – this is more common if the surrounding property is rural, they use a different methodology to calculate the land value
Physical Attributes – the neighbouring property could have inferior views, steeper typography or may be a triangle shaped block which restricts access in comparison to a rectangular block
Constraints of the use of the land – This relates directly to zoning, there may be some restrictions on what the land can be used for or the neighbouring land may be flood impacted or have registered easements.
Land use – the neighbouring land may be used for a different purpose (residential vs commercial use)
There may be instances where your land is less than neighbouring properties do not be too concerned, as it doesn’t always equate to retail land value when you go to sell. A positive is you will have lower council rates as the rates are calculated based on the unimproved land value.
What is retail land value?
Retail land value is very different to the unimproved land value and affects the sale price of a property. The retail land value is the retail price that buyers are willing to pay for a site in the current market. Retail land value is driven by scarcity, demand and the number of buyers who are active in the current market.
The retail value is what people are prepared to pay to secure that location which is typically more than the unimproved land value.
What is the difference between retail value and unimproved land value?
When talking about the difference between retail land value and unimproved land value there are a few key factors that separate the two. Unimproved land value is simply the land with out taking into consideration the market demand for a site.
For example, a recent sale in Power Street, Wavell heights of a block of land sold for $625,000, the land value for this site is $530,000.
Another example is land sold on Fingal Street in Tarragindi, this site sold for $935,000 whilst the land value sat at $710,000.
Desirability of a block of land drives the price especially when in areas that have highly desirable school catchment zones, parks, lifestyle precincts and block of land with city or mountain views. Even though unimproved land value takes into consideration city views it can no accurately determine the real market demand of a site.
It is also common for retail land to sell higher due to being in a ready to build stage, unimproved land values do not take into consideration improvements to the land however retail land value will take into considerations any improvements made to the land including earth works completed, fencing, underground services prep and infill.
How land value should be used when purchasing a property
When it comes to investing in property, or buying your home, it is always wise to take the land value into consideration when assessing a site to purchase.
You may find that land values reduce as you move further out of the CBD. This is because land is more scarce (land banked), often more desirable and more conveniently located when it is close to the CBD. Therefore the unimproved land value is generally higher.
When you are further away from the CBD, there is a lot of available land, and it is less conveniently location, so the land values are lower.
When assessing sites we look at the land to asset ratio. This is calculated as a perceptage of the purchase price. We like to understand what percentage of the purchase price is made up of the land component versus what percentage is make up from the house itself.
This is how to work out the land to asset ratio:
Land value – $475,000
Times by 100
Divided by Purchase price – $620,000
Equals = 76.6% land to asset ratio.
This means 76.6% of the purchase price is attributable to the land value.
Property investors often target a higher land value as a percentage of the purchase price. The reason this is so important when investing is because the land appreciates over time and the house depreciates over time.
Sometimes, you may find a much lower land to asset ratio, even when close to the CBD. This often occurs when the value of the house is much higher. For example the house might be a brand new build or the house might be freshly renovated. Obviously when a property is newly completed, the finishes have not depreciated in value, which is often why some properties have very low land to asset ratios.
Now that you understand more about unimproved land values, you can use this tool to help you find where the value lies in each property that you look into. Whether you are purchasing your own home or for and investment property, Streamline Property Buyers are able to assist you in your property purchases. Please check out our blog for further educational content or subscribe to our podcast HERE where we share a lot of valuable content each week.
You might also like our other content?
Would you like to understand more about working with a Buyers Agent in Brisbane?
We are the Most Qualified Team of Brisbane Buyers Agents
As a Qualified Property Investment Advisor, it always amazes me how much information people think they know and understand about property. Yet time and time again when I’m speaking with people, I realize that it is everything that they don’t know that is the biggest problem. The sources that a lot of property investors rely on for information is also a big surprise. Let’s take a look at the 5 most dangerous sources of information that people are relying on today for property advice.
1. Online Forums and Facebook Groups Whilst I do sometimes read through information on some of the largest online property related forums and facebook groups, I often cringe with what I read. Every participant has their own opinion and often the opinions of some participants are taken as gospel. When this happens, the Mum and Dad investors are often buying in locations recommended by others, or applying strategies learnt from others that may be completely unsuitable for their own personal investment circumstances.
I speak to a lot of people who are interstate and who are looking to buy in Brisbane. It is a function of my role as a Buyer’s agent. But what truly surprises me is the number of Clients that tell me they would have bought in this suburb, or that suburb, based on what they have read about the area. When I seek further information, I often find out that their information source is online property forums! This is very dangerous, and my advice is to proceed with caution and verify your facts before relying solely on this source of property advice.
2. Family and Friends Relatives and friends have always got our back … or have they?
It seems that our family and friends are experts in many areas – and especially when it comes to property. Who hasn’t been to a BBQ and talked about the house around the corner which would make a great investment?
The truth is, that unless your family and friends have built a successful property portfolio themselves, how do you know that their property advice is going to be right for you? And even if they have built their own portfolio, are their goals and circumstances the same as yours?
It is wonderful to feel supported by those closest to us, but when it comes to receiving advice around property investments, it might be better left to the professionals in most cases.
3. Real Estate Sales Agents When searching for properties, I often see listings which describe a property as a “perfect investment opportunity” for the astute buyer. Says who? Sales Agents are there to sell a property on behalf of a vendor, so they are certainly not in a position to determine if a property is going to be a good investment for a buyer.
In fact, it is highly unlikely that a Sales Agent would be asking enough questions to understand what a buyer’s property investment objectives area, what their risk profile may be or what property investment strategy they are utilizing.
Just because a property is well maintained, or low maintenance, does not automatically qualify it as a good investment. There is far more that goes into the selection of a suitable investment opportunity than what a Sales Agent is likely to provide, so avoid falling into the trap of relying on property advice from Sales Agents.
4. Property Marketers The role of a property marketer is to sell properties on behalf of a developer. Many Property Marketers do provide a lot of information about property investment metrics, so it can quite often be difficult to determine if they are acting in your best interests or not. The best way to determine if you are being “sold” to by a property marketer is that they will most likely not be charging you anything for the property advice.
Now I don’t know if there are many people who actually work for free, and I can guarantee that these people don’t work for free either. They are being paid by the developers and their commissions are built in to the price you pay for the brand new property they will be recommending for you to buy.
Property marketers are often referred to as “property spruikers” because they tend to attract large crowds to attend free “property investment” seminars. Then during the sales presentation they provide all the reasons why the product that they have to offer it the best investment for everyone in the room – without much consideration for their personal circumstances.
Often, the person providing the investment advice is just a sales person working through a script, and is not in fact someone who has a lot of experience in providing property advice. Tread with caution if you are caught in this situation … and never sign up for anything instantly. Take yourself away and use time to your advantage to determine if the strategy they are recommending is in fact the best strategy for your investment needs before diving in.
5. Mortgage Brokers, Accountants and Financial Planners Mortgage Brokers, Accountants and Financial Planners are all licenced or qualified in their own field of expertise, however most are not qualified to provide property advice or most don’t understand the intricacies of the real estate markets and investment strategies to know how to find properties that are best suited to a Client’s long term goals and risk profile. This is because Property Investment is not considered a “financial service” and therefore it falls outside of the legislation in relation to how it is regulated.
I’ve heard of accountants that recommend their clients purchase property for the tax depreciation benefits. I’ve also heard of some financial planners taking commissions from developers to recommend their excess development stock. It is unfortunate that this happens. Thankfully this does not happen with the majority of operators, and by no means am I implying that it does.
But consumers should always be aware of the recommendations they are receiving, regardless of who is making the recommendation, and seek an alternative opinion if they are not 100% certain that the investment property advice is right for them.
In summary, these are just a few sources of information where property advice can be shared with the every day property investor. But it is very important that you understand if the advice you are receiving is going to be right for you. The world is full of unscrupulous advice and when it comes to property investment in Australia, things are no different. Tread with caution, never make rushed decisions, and seek out professional assistance if you are unsure. Property investment involves a lot of money, so if you really don’t want to make a costly mistake.
If you liked our article on sources you shouldn’t rely on for property advice, you might also like our other content?
Would you like to understand more about working with a Buyers Agent in Brisbane?
Australia is a very big country, so it may be daunting to begin the process of understanding where to buy an investment property and where the right location to invest in property might be.
But it doesn’t have to be overwhelming.
With a few handy hints and a defined path, you should be able to decide for yourself where and what type of property investment might be right for you.
And not surprisingly, the best place to buy an investment will vary from one investor to the next because it depends on what you want to achieve, how much money you have and what your tolerance to risk may be.
Let’s explore in more detail how to find a location that will deliver the results you are after.
1. Define your Investment Goals
The very first step in determining where to buy an investment property, is actually quite simple, but often overlooked.
As an investor, you need to understand what your property investment goals are.
See, I said it was simple! You already know where you are, but you need to define where you want to go and then put the steps in place to get there.
Some investors are looking to increase and supplement their income now, and others are looking to build long-term wealth for the future. Some investors may also have the capacity to add extra value to a property through renovation or development. The skills that you have may help with the steps to achieving your goals, so it is a good idea to understand what type of investor you are going to be.
Goal setting is also important so that you understand what type of strategy will be required and therefore what locations might be best suited to your investment strategy.
The time frame and risk appetite of an investor for achieving those goals also matters because this helps to determine location and investment strategy.
For those needing help to set their goals, there are some useful resources available including Goal Setting Guides.
Property investing should never be a one size fits all approach, because there are a lot of variables that should be considered based on an individual investor’s personal circumstances, and different locations will be better suited to different investment strategies.
2. Understand what investment strategy you wish to implement
Once your goals are clearly defined, the next step is to understand the investment strategy that is right for you.
For low risk investors, the strategy might be a simple buy and hold approach.
For others who may have more time available, or have some level of home improvement skills, a buy and renovate strategy may work.
What ever the strategy ends up being, there are obviously some geographical constraints to some strategies – especially if you intend to get your hands dirty and do it yourself. These all need to be factored in to selecting the location that will best work for you.
3. Understand the Supply and Demand for an Area to determine where to buy an investment property
The one thing fundamental to all property prices is supply and demand. You can get an idea of the supply of new dwellings by seeing how much land is available in an area that is yet to be developed.
To do this, simply check out google maps, enter the property details and select satellite image. You will then see if there is a lot of land around the site that is not yet developed.
Some suburbs are what we call “land banked” suburbs which simply means the only way the density of housing can be increased is by infill development as there is no spare land available.
So, new supply can come in the way of higher density development as well (think townhouses or multi-level unit developments). Understanding the dwelling approvals and building commencements for an area may also help you to determine if the area you are considering may be impacted by new supply to the market in the foreseeable future. This should definitely be considered before you determine where to buy an investment property.
Demand can also be influenced by a number of things. Population growth to an area usually indicates increased demand as people need somewhere to live.
New jobs created in an area, the development of infrastructure and an improving local economy is likely to also increase demand.
Suburbs that are gentrifying, as evidenced by a changing demographic, more cafes and lifestyle precincts are also more desirable and therefore likely to be in higher demand.
Studying the vacancy rate trends of a suburb can provide some insights into the underlying supply and demand for rental properties in an area and can uncover seasonal trends that can impact on the investment return for a particular location. Often very low vacancy rates can also be a sign of very high demand in an area, and this can sometimes result in upward pressure on prices.
Having a good understanding of all of these drivers at a local level in the area you are looking to invest, will help you to determine if there are a lot of properties, but not enough buyers (which tends to result in prices stagnating or dropping).
Alternatively if there are not enough properties available for buyers but an increasing number of buyers looking to live in an area (which tends to result in upward pressure on prices).
These factors all need to be considered when you are working out where to buy an investment property.
4. Study the ripple effect
Riding the wave of the “ripple effect” in property can have its advantages in identifying a suburb that is likely to grow in value in the near future.
The way experienced investors identify these areas is by studying the suburbs that have already experienced a high level of growth, and then looking at the nearby suburbs that share many of the leading suburb’s characteristics.
Of course, this needs to be considered with caution, because the “ripple” suburbs need to have features like access to quality schools, leisure facilities, health care, transport and infrastructure that match as closely as possible the features of the suburb that has already experienced the superior capital growth.
Combined with the other tips, this can be a useful strategy to identify those suburbs that are likely to experience some superior capital growth in the years ahead. When you buy an investment property, this type of research is critical to understand what the future performance of that asset might be.
5. Understand the demographics of a location
Identifying who lives in a certain location can help you as an investor to understand who your tenants are likely to be in a particular investment area.
Demographic data such as household income, median age and % of owner occupiers to renters can provide a snapshot of the area you are looking to invest into. You can search this data using FREE online resources available on the property data websites.
Here is a quick video on the important of checking the income growth in an area before you buy.
It is always important to understand, based on this type of information, who a suburb is made up of as this often helps to determine if the suburb is right for your strategy. Again, this is another important part of the puzzle to research at a local level before you work out where to buy an investment property, regardless of the city or town you are considering.
6. Consider the Rental Yield before you buy an Investment Property
Achieving a high rental yield is obviously important if a cash flow strategy is going to help you achieve your property investment goals. But determining the rental yield of an area can also be a helpful indicator to determine where to buy an investment property for other strategies as well.
Areas with higher rental yields are often made up of a high proportion of investors, but not necessarily a lot of people looking to buy.
The percentage of owner occupiers to renters is usually out of balance with the natural distribution of buyers in the market at any time.
This means that capital growth can often be compromised as the property value is not driven by owner occupiers (who tend to buy with more emotion) but rather by investors (who buy with a calculator).
This can result in higher risk when it comes time to sell, as it may take longer to offload a property when the size of the market is restricted when the dominate target market is limited to property investors.
7. Select an area you are confident will deliver results
When planning where to buy an investment property to add to your overall portfolio, location is the key to getting the results you desire.
The land component is the part of the purchase that usually appreciates over time, whereas the building component depreciates as we have previously outlined in detail. The best advice I can give is don’t invest in a location, unless you understand all of the above indicators about that area. Then if that location matches your goals and strategy you can move forward with confidence. If not, don’t just jump in for the sake of it because you could be exposing yourself to risk.
For those looking to buy investment property data can provide some useful indicators. For an in-depth review on the caution you should take when relying on investment property data alone, you can access our article on Relying Solely on Property Data for a complete summary.
Property Investment should involve a lot of research to ensure you achieve your desired results. If you don’t know what or how to find the location, get expert help. And even then, ask your advisor to provide a detailed description of why a particular location may have been recommended for you. Ultimately if you are spending the money to purchase an investment property, you should be confident that the location, and the property itself, will deliver the results you are after.
Asset diversification is a risk minimisation strategy that is recommended for investors to ride out the ups and downs of different markets. It applies to all asset classes – including property. This article will explain how property investors can diversify their portfolio and why property investment diversification within a property portfolio is an important consideration to adopt for a successful holistic investment strategy.
1. Diversify by Property Investment Strategy
Property is typically regarded as a “growth” asset which has the potential to deliver high returns over long-term investment time frames. Property investors can diversity by Strategy by having a mix of properties that deliver capital growth, cashflow and value add opportunities such as renovation or development potential.
When investors are seeking to build wealth, they tend to have an appetite to build a property portfolio quickly. This requires careful consideration of what strategy might be best to deliver the desired long-term results.
Many residential investors will focus on long-term capital growth as their primary wealth creation strategy. This is a fairly low risk strategy, and for people with good serviceability, it presents as a safe way to build out their asset base during their younger years.
For other investors who may be on lower incomes, cashflow investing can become more important. In the current lending environment, the opportunity to purchase a property that has a neutral or positive cashflow is increasing, which presents opportunities for investors to get into the market even if their serviceability is somewhat limited.
Investors with a higher risk tolerance may also look towards more aggressive equity-building strategies such as renovation or property development to accumulate wealth across a shorter time frame. These strategies typically involve higher risk, but for those who have the capacity and appetite, can also carry greater potential return.
Determining which strategy is right for an individual investor at a particular point in time involves careful consideration of personal circumstances including investment goals, the investment time frame, risk appetite, and lifestyle considerations such as an investor’s income and living expenses.The examples mentioned above give different options for property investment diversification.
2. Diversify by Asset Class
Property has a number of different asset classes including residential, commercial, industrial and retail. Residential property is the asset class which typically comes with the lowest risk, and it is also the most common asset class that property investors turn to when starting out.
As property investors approach retirement, their allocation to different asset classes often becomes more relevant. From a cash flow perspective, residential properties will generally provide a lower rental return than commercial assets. This is due, in part, to the high proportion of costs borne by residential landlords, with owners usually being responsible for ongoing expenses such as maintenance, rates and land tax.
Property investment diversification to improve cashflow often results in investors exploring commercial property as an investment option because typically yields are a lot more attractive. The value of commercial property will largely be based on the income returns they provide to investors.
The higher yield of commercial properties, which typically range between 7-9%, is largely due to the fact that commercial investors are able to pass on their rental outgoings as part of their rental rates, with tenants typically responsible for expenses such as land tax, council rates and maintenance.
Property Investors with higher risk appetites often explore investment into commercial, retail and industrial properties. These asset classes do come with the potential for higher vacancy (which is one reason why they are higher risk) but they also have the potential for much higher returns, and therefore careful consideration needs to be given to an individual investor to determine if diversification through asset class is appropriate.
3. Diversity by Geography
Possibly the easiest way for many investors to diversity their property portfolio today is by location. There is not one Australian property market and in fact there are hundreds of smaller property markets all at different stages of the property cycle around our country.
Whilst they are all driven to a large extent by macro drivers such as access to funding and government policy, it is the micro drivers that really determine how a local property market is going to perform.
The local economy, jobs, population growth, and lifestyle elements all contribute to local demand for housing whilst building approvals and commencements, the availability of land and listing volumes can determine what the local supply is likely to be in the short term and longer term years ahead. When there is an imbalance, there is often price change (either up or down depending on which way the pendulum swings).
Concentration risk can come if an investor’s portfolio is restricted to one location, so often the easiest way to diversify and minimise risk, is by looking at opportunities in different geographical locations.
4. When is the right time to diversity within property?
Although real estate investments are often held for years this doesn’t mean portfolios can’t change. Investors who understand what they want to achieve can reduce property investment portfolio risk and boost returns through diversification at any time by re-balancing their real estate investment portfolio. But getting the investment strategy right up front is often the most cost effect way to build a successful portfolio. Transaction costs are high, which can often be prohibitive to a restructure, but on a case by case basis, often the opportunity cost of holding on to under-performing assets is not worth it.
Property investment diversification is one of the main ways real estate investors mitigate risk and boost returns in a property investment portfolio. Before diversifying a portfolio, investors should have a clear idea of what their short- and long-term investment goals are as well as their risk appetite and investment time frames. But understanding the different options available for diversifying a property investment portfolio is the first step towards planning and building a portfolio that will minimise the volatility of investment returns and perform well over the longer term. For those that need help with property investment diversification – get in touch today!
If you enjoyed our content of Property Investment Diversification, you might also like our other content?
Would you like to understand more about working with a Buyers Agent in Brisbane?
From a property investment purchasing point of view, tax depreciation should be low on your priority list. However, from a cashflow point of view, there’s not much challenging it on the podium!
Why is depreciation important? Well, take our client’s average 1st year depreciation deductions of $9,414 as an example. If you are earning $100,000 p.a., these deductions will net you $3,483 in your back pocket each year. Now I will have to do the annoying; “This is intended as a guide only and you should seek accountant’s advice” thing but from a cashflow perspective, those deductions are giving you $67 a week.
When investing in property, the cashflow is a balance of the rental income coming in each week, and the expenses going out. Now that analysis is certainly not going to win me a Nobel prize in economics, but investors frequently underestimate the expenses of investing in property. For example, there is;
Property Managers Fees
Strata Fees (if in a complex)
Smoke Alarm checks
And of course, the mortgage!
It adds up, and what seems on paper like a lovely little neutrally geared investment, can certainly start having you chip into your back pocket to keep it running. That is where the true value of depreciation is. It is an essentially an on-paper loss that minimises your taxable income. In fact, many investors utilise PAYG tax variations to estimate their tax payable weekly to get an ever better handle of the cost of the investment.
So now that we know its property investing’s golden-haired child, what do you actually need to know about depreciation? I will zero in on the ‘need’ part here. What you need is a quantity surveyor to estimate the potential deductions for your property. We have always done this free of charge and with as little as a property address, we can see whether it’s worth paying for a report or not. To go one step further, there’s the three triggers that tell you you’ll benefit from a schedule;
The property is brand new, or
The property was originally constructed after 16th September 1987, or
The property was constructed pre-September 1987, but it has been substantially renovated to the tune of $40,000 or more. (Think bathroom and kitchen reno, reroofing, extensions etc).
You’re welcome to dive neck deep into the million or so articles I’ve written about the nuances of construction, depreciation, legislation and so on, but armed with the basics, you can take full advantage and ensure you’re not missing out.
Mike Mortlock is the Managing Director ofMCG Quantity Surveyorsand is an industry leader in tax depreciation. Mike has worked as an expert depreciation consultant with several major firms such as McDonalds, CMC Markets, Deloitte, PwC and more. He has completed thousands of depreciation schedules for commercial and residential property and is in demand as a public speaker and property commentator having been featured in The Financial Review, ABC Radio, Domain, Real Estate.com, Sky Business and other print and radio publications.
Please get in touch if you would like help with your investment property search.
It’s a popular debate… is buying a unit in Brisbane a good investment? There is a lot of discussion around this topic, but it is important to highlight that it can be a mistake if an investor has not done their research and due diligence.
Buying a unit in Brisbane seems like a no brainer for some property investors due to the attractive cash flow benefits. Units also have a much lower entry price point. And, they often provide people with a desired lifestyle, especially when the units are in popular precincts.
We are going to touch on some risks associated with purchasing a unit in Brisbane so you know what to watch out for.
1. Oversupply Risk with Buying a Unit in Brisbane
It has been a strong discussion point in Brisbane for some time now. The issue that investors will uncover when purchasing a unit in Brisbane, is that the Brisbane Unit market has been in a state of oversupply since the peak unit construction in 2016, which presents as a potential supply risk.
Areas like Newstead, West End, Chermside, Mount Gravatt and Coorparoo have all gone through physical growth spurts where large unit developments have been constructed, replacing the lower density housing that once stood in its place.
This has happened off the back of a change in the Brisbane City Plan in 2014. At that time a lot of land use zoning changed to make way for higher density living. The consequence of this change was that developers moved in very quickly and the completed unit developments were being delivered to the market very quickly and in high volumes, all at once.
Oversupply in any one area can affect old and new apartments. From an investment perspective trying to rent a unit when there are 300 other identical units to yours can affect the performance of the investment. Vacancy rates tend to rise and this puts downward pressure on rents.
You may have a property that you purchased brand new four years ago, however due to brand new developments being constructed nearby since, selling your asset can be tricky when you are located in an older complex and competing against brand new stock.
2. Appreciation vs Depreciation with Buying a Unit in Brisbane
When purchasing a brand new unit you do get some great depreciation benefits. However, what you will find is that the value of the unit will depreciate at a faster rate than the capital growth appreciates. This has resulted in many property investors who have purchased brand new units in Brisbane over recent years, realising a loss when the time comes to sell.
There have been many horror stories of properties selling over $100,000 less than what they were originally bought for due to the depreciating condition of the property, and the new supply of brand new properties for Buyers to choose from. The greater the supply, the less scarce the property is, and this puts downward pressure on prices.
When you purchase a property with a larger component of land (for example, a house on its own block) the land is the component that experiences the capital growth. In the case of a unit, you are increasing your downside risk by only owning a very small share of the land that the complex sits on. In some instances hundreds of units can be constructed on multiple levels. In this instance the proportion of land owned by an individual unit holder is minimal.
3. Off the plan Risk with Buying a Unit in Brisbane
When thinking about purchasing a unit it is very easy to get drawn into buying off the plan. Many developers need to meet pre-sales targets to obtain funding before construction commences. Generally, developers create a targeted marketing campaign to draw buyers in. Amazing quality images along with the promise of fantastic resale value and high yielding benefits are the focus. It is not uncommon for other bonuses to be thrown in too … but what ever the bonus may be is simply built in to the purchase price!
Yes we have seen this before.
Many investors have been burnt by purchasing off the plan for a number of reasons. There can be significant changes in the market, between when you purchase the unit and when it is due to settle. You may select a location where your unit complex might be the only development around at the time you enter an off-the-plan contract. However when completion comes up (which can sometimes be a couple of years later or more) you find that the complex may be surrounded by other brand new developments. This can cause the value of the unit to drop, once again due to oversupply issues.
You are usually paying a premium price for off the plan properties. Remember, off-the-plan sales have not been tested in the market. Also when you buy brand new, there will be a lot of hidden costs. You can read about 5 Traps to Buying Brand New in a previous blog post.
If a developer is offering attractive incentives with your purchase, chances are you are paying for those in the purchase price.
Another scary thought is not receiving the product you were promised and what you paid for. Some developers will switch out quality products for cheaper alternatives. Because the property is not built yet these changes are normally made after you have committed to the purchase. Good project management and understanding the complexities of off-the-plan contracts can avoid you getting caught out in this regard.
4. Risk of Being Built Out when Buying a Unit in Brisbane
So, you may have just secured a property that has city views!
You can’t wait to show your friends and family.
Imagine the years and years of river fire and city lights to watch.
Then you realise that a building is going to be built right… in front…of your view!!! This is common in the higher density areas of Brisbane. It is definitely something that buyers need to be aware of when buying a unit in Brisbane. There are searches that can be completed to check what development is approved, or likely to be build on adjoining lots or in the line of a view. That’s where getting professional assistance helps.
If you are unsure if buying a unit in Brisbane is the right thing for you, I would recommend seeking professional advice for you situation from a qualified property professional. Click HERE to learn more.
You might also like our other content?
Would you like to understand more about working with a Buyers Agent in Brisbane?
In this article I am going to outline for you the two types of properties in Brisbane where an existing home can be removed from a site and two new homes can be create from the one original block. One of these types of properties requires a subdivision, whereas splitter blocks in Brisbane already sit on two titles, so no application to council is necessary. This means a Brisbane splitter block can potentially save you, when you develop the site from one property into two, up to $40,000 in total development costs. Now, let me explain.
An example of what is NOT a Splitter Block in Brisbane
The first type of property is where you purchase a home or vacant land in Brisbane that sits on a single title. If you’re wanting to reconfigure or subdivide that into two lots it is NOT a typical splitter block. You will see below that this type of property will only have a single title and the property will usually sit across the center of this site.
Now, in this instance, a development application does need to be made to Council to reconfigure that lot from one title into two. This will require the land owner to consult with a town planning, who will prepare a town planning report to lodge with the development application to council. You will also need a civil engineering report to document where the new services for sewer and water will be located. A solution for the storm water run off will also need to be documented.
This is an area which often confuses buyers, especially inexperienced developers. If a site falls from the street to the rear, the storm water solution might not be so easy. Either the site will have to be built up and retained at the rear so that the stormwater can fall to the kerb, or alternatively consent from the rear neighbour will be necessary.
This can present as high risk, because if the rear neighbour does not consent to you building a stormwater pipe through their yard (and of course this would also involve reinstatement of the property following completion of the works), then the council may not approve the subdivision proposal. I have seen many instances where those new to development make a BIG mistake when they buy – simply because they did not understand this requirement.
The final thing that will be needed to accompany a 1 into 2 subdivision application to council is survey data, so that a proposed subdivision plan can be assessed.
Assuming all goes well, and council approve the application to subdivide the land, you will be liable to pay infrastructure charges to both Council and to Queensland Urban Utilities.
The combined cost to obtain these approvals, and factoring in the infrastructure charges payable, is in the order of approximately $40,000 and that’s going to add significantly to your development costs. So it does need to be considered upon purchase.
An example of what IS a Splitter Block in Brisbane
The second type is a property which sits already on two titles. In this instance, if you’re looking to demolish a single home and build two new homes an application to Council to reconfigure the lot is not required, nor is the payment of infrastructure charges. So that’s a potential saving of up to $40,000.00 to that development.
Here is an example of what a splitter block looks like when one property spans across two titles.
Splitter Blocks are very popular in Brisbane and a lot of buyers are purchasing these sites to land bank them for future development. This is a clever investment strategy for those in the know.
The difficulty for many buyers is finding the Brisbane Splitter Blocks. Because they are so popular, many sell off-market so it is very difficult to find these types of properties on the major real estate sites. Of course, if you are looking to tap into the off-market opportunities to source a Splitter Block in Brisbane, or if you want to have expert advice and due diligence BEFORE you buy, get expert help.
Many property investors fail to understand the value that a Tax Depreciation Schedule can add to an investment strategy. This article will explore why property investors should consider if a tax depreciation schedule will be of benefit to them and what advantages a tax depreciation schedule can bring.
A tax depreciation schedule, for those who don’t already know, is a comprehensive report which identifies depreciation allowances for an investment property. It is a document that tells your accountant how much depreciation to claim for several parts of a property, which is basically the amount you can be compensated for wear and tear over a period of up to 40 years.
Benefits of a Tax Depreciation Schedule
The benefits of a tax depreciation schedule can be far reaching. Depreciation deductions can significantly reduce your taxable income and help your property return a positive cash flow sooner. Basing your purchasing decision purely on tax depreciation benefits, however, is a mistake because it fails to consider the long term goals as to why an individual is investing in the property market. A more holistic approach needs to be considered.
How to Complete a Tax Depreciation Schedule
In order to complete a tax depreciation report for a specific property, an investor would need to engage a Quantity Surveyor. They will arrange a physical inspection of the property to determine what tax depreciation’s are applicable.
Tax Depreciation Schedule Analysis
MCG Quantity Surveyors recently completed an analysis of the data that they collect, as a result of completing these tax depreciation reports for property investors. This report is available for download HERE.
The results demonstrated that the trend in buying behaviour since 2016 indicates investors are increasingly moving towards new/off-the-plan units and townhouses and new house-and-land package holdings rather than investing in existing homes. The four year increase in the percentage of investors buying new property was 107.53% according to this report. I caution investors to review a previous Blog Post of ours HERE before considering a brand new investment property purchase.
Of interest, this report also showed that townhouses have provided the most tax effective investment type, with the highest total deductions as compared to detached houses and units.
The most alarming figure in this report was the fact that Australian investors who’ve delayed ordering a tax depreciation schedule have potentially missed out on $2.9 billion in deductions! On average this equals approximately $20,537 in depreciable benefits for an individual investor. These missed tax deductions due to inaction are at epidemic proportions!
In closing, it is evident that property investors are becoming more aware of the benefits of obtaining a tax depreciation schedule. This type of report allows investors to minimize their tax and ensure investors can keep more of their gains, therefore bringing the dream of retirement a little closer than otherwise might be the case.
The Brisbane Property podcast hosts an episode with Mike Mortlock who is the Managing Director or MCG Quantity Surveyors. They highlight what is depreciation, why it needs to be considered and what benefits are available to property investors through depreciation when they complete their annual tax return.
Mike shares some valuable guidance on the types of renovation work that delivers maximum depreciation benefits – especially in Queenslander style properties that are so typical in Brisbane. you can watch the episode below.
Our Buyers Agent services include recommendations for property investors when a Tax Depreciation Schedule is needed. For more information about arranging a tax depreciation schedule for a property please visit MCG Quantity Surveyors.
You might also like our other content?
We are the Most Qualified Team of Brisbane Buyers Agents
With National News Headlines stating CBD’s have been hit hard by Covid-19 lockdowns, with rental vacancies surging, I thought it would be an interesting exercise to dive deeper into the data for Brisbane to investigate the Brisbane suburbs at risk due to Covid-19.
The latest SQM Research found that the national rental vacancy rate recorded a one month jump from 2.0% in March to 2.6% in April, but certain areas around the country fared better than others.
In Brisbane’s CBD, a sharp rise in residential vacancies was observed from 5.3% in March to 11.3% in April 2020. By all accounts, the vacancy rate in March was already higher than what we would allow for when selecting an investment grade location, but let’s explore this a little further.
A Vacancy Rate helps us understand the number of rental properties in a location or market that are currently vacant or without a tenant, at a particular point in time. It is the opposite of an occupancy rate. The vacancy rate is expressed at a percentage. For example, if there are 100 rental properties in a suburb, and 10 of them are vacant, then the vacancy rate would be 10%.
A low vacancy rate means more confidence in a market, more security of income for an investor and a better net yield. A wise investor should know the vacancy rate before buying into a particular market. It should also be represented in the projected cash flow to ensure that an investor can afford to be without the rental income for the number of weeks as indicated by a locations’ vacancy rate.
Vacancy Rates can also be a growth indicator because a location with a low vacancy rate often correlates with a low supply of properties and a high demand for those properties. Remember, the balance between supply and demand is what drives property values.
That said, the Australian National Average Vacancy Rate is 2.5% and some commentators suggest that a vacancy rate of 3% indicates a balanced market where there is an equal number of properties available for rent and tenants looking for those properties. Anything higher than 3% might indicate there is a risk that a property will remain vacant for longer, and therefore for an investor this presents a cash flow risk. Anything lower minimizes the vacancy risk for an investor.
We have analysed every postcode in Brisbane to determine the most “at-risk” suburbs in the Brisbane City Council Region (excluding Ipswich, Logan, Redlands and Moreton Bay) based on the most recent SQM Research as at the end of April 2020.
See below a table of those suburbs in Brisbane which have a current vacancy rate above 4% at the end of April 2020 and that have also experienced the largest spike in vacancies between March 2020 and April 2020.
Current Vacancy Rate as at April 2020
Increase between March and April 2020
Eight Mile Plains
What we can draw from this data is that the majority of these suburbs have higher density dwellings (investor type units for example), or are located in university precincts where there may be lower rental demand from students at the moment – particularly international students.
Of interest is that other suburbs in this list that do not have higher density dwellings, but still have such high vacancy, are suburbs where occupants are predominantly born outside of Australia and where there is a very large proportion of households where a non-English language is spoken at home. What this means, I don’t quite know but I thought it was an interesting trend as it tells us a bit more about the demographics of occupants in those locations.
Of course there are many suburbs across Brisbane that still have record low vacancy rates, despite Covid-19 and its related impacts. It always comes back to the local drivers of supply and demand. If there is demand from tenants, it is safe to assume the location is a desirable area to live. Desirable areas attract renters and home buyers alike.
If a location becomes attractive to live in, tenants will move there before home owners. This is due to their mobility and ease of getting into the market. They will put downward pressure on the vacancy rate making the location appealing to an investor to buy there. If home buying and demand in an area increases, what typically follows is capital growth.
This provides some insiders tips on one way you can select an investment grade location when purchasing an investment property. There are many things to consider and vacancy rates are definitely important to understand, among many other things. But be sure to understand how different property types and different locations can have different vacancy trends, because it is times like now where property investors who have purchased in high-risk locations will be feeling the pinch.
For more information about how we can help you with your investment purchase in Brisbane, please get in touch with our team. We are here to help!
For many people, thinking about their long term future may be difficult when the short term outlook can appear so bleak. Yes the impact of COVID-19 is changing so much about the way we live and work, but for those who are able to focus beyond this pandemic to “the other side”, there can be a low risk way to move forward if you have been considering investing in property, and it is about quantifying the risk and taking a long term approach. This article explains how to invest in property during covid-19 … with minimal risk.
Firstly, as we focus solely on Brisbane Property Markets, the data that is referred to below is relevant to Brisbane only. Remember there are many different property markets around our country, so it is important to understand local numbers and apply these to your investment strategy.
What we are seeing at the moment in Brisbane, is that there has been a significant decline in consumer sentiment which has resulted in a very large fall in real time buyer demand for property. This has occurred very quickly in the space of less than one month. Whilst there are still some home buyers in the market, many investors are sitting on the sidelines taking a “wait and see” approach.
Since the World Health Organisation declared that the novel coronavirus (COVID-19) outbreak became a global pandemic on March 11, 2020, the number of cases around the world rapidly increased. On that date, Australia had a total of 127 confirmed cases which has since escalated to a total number of 6,444 cases as at 15th April 2020. Across all of Queensland we had 2 cases on March 11, 2020 and as at 15th April 2020 we had a total of 999 cases. More importantly though, is the fact that over the previous 11 days since 5th April 2020, Queensland saw only 92 additional cases, averaging just 8.3 new infected people per day across the entire State. This looks very promising indeed.
But you may be wondering how to even consider an investment in property at this time – given the uncertainty that surrounds us. You may also be glued to the news headlines whereby journalists are consistently publishing articles about “Australian Property Markets set to lose value due to Coronavirus Impacts”. But is this true? Will this really happen? And remember Australia is not one property market!
It is almost certain we are heading into a recession here in Australia, so let’s examine what happened to property values during the last recession in our Country where we notched two consecutive quarters of negative GDP growth in 1990-1991.
Nationwide, house prices were fairly flat in the lead up to the recession, but even before the recession ended, house prices began to increase which demonstrates that the relationship between house prices and economic growth is not direct and simple.
Now, let’s look at Brisbane compared to Melbourne at that time. Melbourne bore the brunt of the last recession with house prices falling more than 6% during the recession, whereas Brisbane did quite well over the same period.
So, the idea that housing markets around the country all react differently at different times, is not foreign and the data above shows that there are many different markets around our country and they all cycle in different ways – even during a recession. Also, the cause of a recession is likely to hit different property markets in different ways and it is important to focus primarily on the underlying fundamentals for each investment area – even in times like now.
In Brisbane, we have been moving through a period of huge buyer demand since the start of 2020 and we were definitely seeing real time price growth in some suburbs due to the competitive seller’s market that we were in. Now the tide has turned, and we are seeing opportunities where we may be able to negotiate on quality properties without the depth of buyers creating such a high level of competition.
Of course, for an investment property, it is also important to understand the ability to secure a tenant to lock in your rental income as well. To date, we have seen continued rental demand from tenants and although there has been a softening of rent prices achieved according to local Property Managers, this can be quantified, accounted for and therefore planned as part of an investment strategy.
Say, for example, 2 months ago the rent that could be achieved on a property was $500 per week and now that same property might be able to secure a stable tenant for just $450 per week. We can quantify that difference to be $1,300 over a 6 month period.
However, imagine being able to secure a property for $10,000 less than what we might have had to pay when competition was so tough just a few weeks ago? I’m not suggesting that property prices are falling here in Brisbane, as we have seen no evidence of this to date. But we are seeing some motivated sellers and a lot less buyers, so it gives people more scope to negotiate!
We must all remember that COVID-19 will come and go. There is no denying that. We also know that Australia, and especially Queensland, is doing so well. Commentators around Australia are reporting a “V” Shaped recovery for the economy once we get through this health crisis and then the Brisbane property market is going to be driven by record low interest rates, pent up demand and underlying fundamentals where there is a shortage of supply and a growing population needing housing. We will also have a huge number of properties that will be either cash flow neutral or positively geared due to our relatively high gross rental yields compared to Sydney and Melbourne. Our Company have been receiving new inquiry from investors wanting to move “once things improve”. The hardest part for those sitting on the sidelines right now will be trying to determine when the “right” time to buy will be. How can we determine the perfect time to enter the market right now?
What we do know is that when the majority of buyers determine that “things are better” the competition will be fierce and we will return to a seller’s market very quickly where the extent of the buyer demand determines the purchase price. The opportunity is between now and then for those that want to go against the majority and focus on the long term opportunity, whilst safely quantifying the short term risk. Providing your income is secure and you have adequate financial buffers in place there may never be a better time to secure an a-grade investment property here in Brisbane!