For Capital Growth, What Beats Location, Location, Location?

For this week, I would like to blow away another “secret” of property investing.

It is often said that the only three words that you need to be concerned about when investing in real estate are these – location, location, location.

But then both you & I know that’s a load of rubbish. Sure, location plays a huge part in what makes a property sought after. If you have been reading my recent blogs, you will know that money supply and what is available to borrow to purchase property, plays a big factor too. Other things to consider are how you finance your property and what property managers you have to look after your investment – these can dramatically affect your return.

But what factor beats location for above average capital growth?

It’s called – infrastructure. In particular, changing infrastructure. Some basic examples of this might include the addition of sewerage, which could enable a block to be developed. More sophisticated examples would be the addition of new transport options like a rail line, or the opening up of a new freeway which shortens travel times.

But even better than this – changing infrastrucutre, in an already established, popular area.

On a recent trip to New York City, I had the pleasure of walking along what is now a famous tourist destination called “The High line”. (http://www.thehighline.org) It is, or was a railway line that runs about four stories above street level from West 30th street, south down to about West 10th. It was built in the 1930’s and was used up until 1980 to transport all sorts of goods, including bulk meats down to the meatpacking district. Trucks eventually replaced the old rail line and by 1999, the High Line was under threat of demolition when moves were made to save it.

With private donations and public funding, the rail line was preserved and turned in to a park where thousands of people can enjoy a walk on the west side through several New York districts, enjoying fantastic views to the Hudson River and east across the city skyline. A really fantastic job has been done with the renovation and conversion to a unique park 30 feet above the streets of New York, running about a mile and a half in length.

The northernmost part of the line was completed in 2009, with the southern section finished in 2011. The first picture above shows the northern section. If you look carefully at either side, you can see many new apartment buildings that were constructed when the line was complete. The picture below is of the more recently complete southern section – you can see the green garden area where the walkway has replaced the old rail line running down the middle. What else do you notice?

If you answered a lot of construction on either side you would be correct. But what is important about that?

Before the High Line was fixed up and turned in to a park, the areas along the line were rundown and decaying. Living in the rotten old apartments next to the line would have been noisy and not very pleasant, Now, because of a change and improvement in the infrastructure, it is one of the hottest areas of reasonably priced real estate in New York.

Find locations where there are significant infrastructure changes or improvements happening – or better – planned to happen and invest there. You will have significant capital growth over and above the market.

A last thought for you – nothing changes, if nothing changes.

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If Money Makes The World Go Around, How Can You Get Some?

Last week I shared with you the truth about what really moves property prices – and that’s money. If you have it, that’s great, you are in the game. If you don’t – then you need to get some.

It’s a good thing there are very profitable businesses out there that cater for that exact need – they are called banks. To accelerate your chance to gain wealth through real estate you simply must be able to borrow money, at least until the point you can sell down what property you have to pay off the debt and still have plenty of income for your lifestyle from the property you still own.

To give yourself the best chance of getting some of that cash, there are six important steps you need to take before applying for a loan – and all of these need to be done well before you get out in to the market place looking for property. Some of these are self-evident, but nevertheless important.

1. Have a steady job – the banks like it better the longer you are in your job. If they see job-hopping on your application, they assume you are not stable in your work and therefore your income is at risk, therefore you are not a good person to lend to. If you are running your own business, you need a minimum of two solid years of profitable, up to date tax returns to submit as evidence of your income. Minimising your profit (legally) through a business might save you some tax, but it won’t help your borrowing capacity.

2. Savings – Your friendly lender will want at least 5% of your purchase price in savings over a 6 month period. They prefer 10%, but really start to warm up to you if you can put down 20% as a deposit – if you can do that, you can avoid the real gods of money – the mortgage insurers. Every loan that has less than 20% deposit must have insurance to cover the bank if there is a loss, and of course you have the pleasure of paying for that insurance. If you aren’t saving yet, start now. I’ll talk a bit more about how to take charge of your finances next week.

3. Get your debts under control – the first step to dealing with those evil pieces of plastic in your wallet is to cut all but two of them up and limit your use of the remaining two. Do what you can to pay them off each month. Start a debt reduction plan, focusing on one card at a time. If you have many credit cards, the bank will assume that you could go out and do cash advances on all of them at once. They will reduce the amount you can borrow for your investment property because of that.

4. Check your credit report – your credit report will contain any loans you have applied for or been approved for and any outstanding debts, even over a number of years. This is more important than ever as recent law changes mean that even for the most trivial of debts or late bill payments, creditors like electric companies for example, can report your debts after just 30 days late – so make sure you pay your bills on time. There are a number of agencies that offer a free initial credit report, which takes ten days or so, or you can pay for an instant report. Some will charge you for ongoing services or to help you clear your report if there is a problem or if you need other financial advice. Without making a recommendation, some of these are – www.creditrepairaustralia.com; www.checkmyfile.com.au; www.fixbaddebt.com.au. Getting a copy of your report can alert you to any issues you may not be aware of.

5. Determine Your Credit Score – the friendly banks also have a way of rating you to determine how credit worthy you are – they look at your age, postcode, length of job, banking type, how long at your address, whether or not you own or rent and so on. The average score out of a scale of 1000 is 750. Find out what yours is and do what you can to increase it. Don’t do anything to decrease it – for example, moving house can drop your score by 80 points, changing banks by 30, and getting divorced drops your score by 100! Some of the websites above can help you determine your score for free – though www.checkmyfile.com.au works well.

6. Set up a meeting with a competent finance broker – a finance broker has access to many different lenders and they can assess your situation and guide you towards the best solutions for the kind of loan/s that you need. A really good finance broker will do the best he/she can to ensure that the loan you get will be a springboard for your next property. A fantastic broker will sit with you and help you work out your long term plan for the number of properties that you want. If you don’t have one of these people on your investment team, I can proudly recommend my friend Margot Whittington, who has a strong financial counselling background and is a gun finance broker – you can reach her at Margot@wamoney.com.au.

And a last thought from Earl Wilson – Today, there are three kinds of people: the have’s, the have-not’s, and the have-not-paid-for-what-they-have’s.

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What Really Makes House Prices Rise?

To understand this is one of the truths I was referring to earlier in my writings – it is critical in your thinking and planning as an investor. The most obvious conventional answer to this is supply & demand – how much property is available versus how many people want to buy. If there are more buyers than sellers, price goes up and vice versa. But what affects supply & demand? And which is more important?

There are a lot of things that on the surface can seem to affect the price of housing. At a macro level you would consider the economy, interest rates, unemployment, number of houses constructed, retail spending, government policy (like taxes, negative gearing or first home owner grants). At the micro level, the number of bedrooms, bathrooms, location of the home and its nearness to amenities can all seem to affect pricing. In reality though, these are just peripheral factors that can affect property prices. The truth is a little different.

I have spent the last fortnight in the USA, particularly in San Francisco. It is a fascinating city stuck at the northern end of a peninsula facing to the Pacific Ocean, making it a windy place. It is home to some of the most expensive property in the world, with the median price of houses topping $1M USD in June 2013. In touring around the city, I noted the extraordinary disparity in the wealth of people here and how they live. In one suburb called Nob Hill, just to the immediate west of the CBD, most homes are in the $10-15M plus range. At the bottom of the hill, in an adjoining suburb called Tenderloin, live squatters and homeless people in their thousands in old run down tenement buildings, shelters or on the streets.

San Francisco has over 40,000 homeless people – they are very evident as you travel around the city. If you remember the movie “The Pursuit of Happyness” starring Will Smith about a man who battled his way out of homelessness, that film was shot in this area of San Francisco. I didn’t know how real that film was until now. I still can’t figure out how so many people don’t have a home in a city with unemployment less than 4%.

A little further south, about 45 minutes travel, is the fabled Palo Alto, home to companies like Google and Microsoft, where the median housing price is an eye watering $1.94M USD – and rising fast.

Since the GFC, housing across America has been very much in the doldrums, with evidence of falls in values of 30-60% in some states, particularly Florida. There has been and seems to be an ongoing recovery of sorts happening over the last 12 months to two years. Yet right through that period, San Francisco and surrounding areas hardly missed a beat with real estate prices remaining very firm.

Why?

It is easy when you think of it – San Francisco and Silicon Valley are recognised are the tech capitals of the world, with many innovative companies created, nurtured, grown and sold, for millions and billions of dollars. Often when this happens, the specialised high income employees holding stock options become very, very rich. As a results, they have plenty of money, usually cash, and very supportive banks willing to loan such wealthy high income people for housing.

And so the prices rise, and keep rising.

So house prices really rise because of demand – fuelled by the amount of money accessible to the buyer – be it cash or a mortgage. If banks pull out of, or restrict housing funding, you can be sure house prices will fall, no matter how many bedrooms or how good the neighbourhood. And those who supply property – the property developers like me, won’t do anything unless there is sufficient demand for their product, unless they want to go out of business fast.

A last thought for you – you have heard the old saying – “money makes the world go round” – and now you know why.

 

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What Type of Property Will Suit Your Investment (Property) Portfolio?

Last week we determined that you would need somewhere between $1.25M & $2.5M worth of property owned free & clear to produce you a living passive income of $100,000. You need a lot less property if you buy high yielding property – check out the website under my signature below. Or you need a lot more property, if you go with more conventional capital city property.

This week let’s dive a bit deeper in to what type of property you want in your portfolio.

Before we do though, I want to share with you that I will mix up the content of my blogs from week to week – sometimes a bit about investing or property and other times we will work on our mindset and beliefs and our goals and actions. Because 90% of your success results will not come from what you learn about property, it will be about what you do about property. And you won’t do anything unless you believe you can. That’s why we work with your inspiration.

There really are only two types of residential property to consider – that is you will be buying houses or apartments. It’s an age old discussion about what is better – bottom line is they are both good, but our answer to what you buy is – you will buy what will be what is best for you.

When asked by my investors “should I buy a house or a unit?” I know what they really mean is “which will make me the most money?” Again, at the risk of sounding like a broken record, there is no absolute right or wrong answer. Houses and units, though both are real estate investments, each have different characteristics, advantages and disadvantages.

It is worthwhile acknowledging however, that over the last 30 years or so, the great Australian Dream of a home with a big backyard has been the type of property in most demand by Aussie families. Therefore it was the type of property that has had the highest growth potential, since it had the highest demand. The difference in investment returns in historical terms between houses and units has been in favour of houses by approximately 2% annually.

I did say historical returns. When you invest in property, you are not buying history, you are in fact buying the future, or explained another way, you are buying a future income and capital growth stream. You must realise that what produced an outstanding result in the past may not necessarily hold true for the future. It is important to understand that the type of property that was in the highest demand in the past is changing rapidly.

The Australian Bureau of Statistics calculates that by 2020, households that have two people or less will be approximately 80% of the total population of households. This has a profound effect on the type of property we should be accumulating since the family style home will be in far less demand than previously. Units, apartments and townhouses will assume more prominence than before and the population will far more readily accept and expect to live in this style. Particularly property located on transport lines (rail, bus) and closer to the city – we just don’t want those long waits in traffic anymore.

I am not saying that you should not buy houses, but I maintain that your portfolio must include some of all types of property – and consider the future demand from people wanting to rent your property.

Another common question that creates confusion is the misconception that houses must appreciate faster than units because they have more land. After all, it is the land component that increases in value, while as the building ages it lowers in value. Therefore, the bigger the block of the land, the better right? My answer is always the same – not necessarily.

Consider this – given the choice between buying a 1000 sqm block located 30km north of the CBD in a new sub-division and a 300sqm block just 4km east of the CBD in an established redeveloping suburb, both of which are single residential lots and valued at $350,000 – which would you buy? The answer every time would be the smaller block, that is, if you were buying for investment reasons.

You may choose the larger block away from the city for lifestyle reasons (like bringing up your family) but the closer in block will undoubtably have stronger capital growth over the long term. So I put to you – it is not how much land you buy, it is where that land is located. The inner city location is going to have a far more limited supply of blocks than fringe suburbs, where if demand increases, the developers just rub their hands together and create more blocks.

Units then, will have a higher proportion of their value in the building itself, since the blocks or land component is far smaller. This means that units tend to have higher proportionate depreciation allowances than properties with a high land value. Units therefore have a lower land cost component and there is an argument that more of your investment dollar will be returned to you by way of higher rental yields.

At my stage of investing, I am focused much more on yield since I have built a sizable portfolio using a capital growth strategy (negative geared & land) but what I want now is steady relatively passive income that will pay for my lifestyle. You need to determine where you are at in the investment cycle – building wealth or building income. If its wealth, load up on ore houses. If you want income, you could consider having more units in your portfolio.

And why are we doing all of this? So you can do what you want to do rather than what you have to do.

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What Will Our Homes & Investment Properties Look Like In The Future?

As property prices continue to rise, builders, developers and governments are all looking at ways to produce homes that are stylish but still affordable. There are so many reasons Australian real estate is among the most expensive, relatively speaking, in the world. The principal reason in my opinion are the myriad of levels of government red tape and semantics around producing a block of land. I have a project in Perth that so far has taken nearly four years just to get to an outline development plan approval stage. And now we have to go through another similar series of procedures to get a subdivision approval. It will take more than six years to go through the regulatory hurdles just to create land that people can build on. In Texas, USA, the same process takes about nine months – their land prices are about half of ours. I don’t see the industry or the self-interested government bodies giving up their power and changing any time soon, so that’s good if you own property and bad if you don’t.

There are major advances being made on the construction side, which will in time mean much less expensive homes. It is now possible to fully manufacture a modular home, or even apartment complex, off-site in a factory in a matter of weeks, have it transported to site and complete construction in just a few months. The quality of the product is first class and it would take someone skilled to realize that the construction is not something conventional. The technology has been used in Melbourne to build apartment blocks of 30 storeys. In 2012, the Chinese built a 30 storey hotel in just 360 hours, check this 2.5 minute video:

The very same technology is being used right now to construct a 202 storey apartment block – city! – in a staggering 6 months – again in China.

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So while there aren’t yet significant cost savings, the massive difference is in the time it takes to complete the product and bring it to market. Or in remote locations, where it is hard to keep labour on a site, having pre-fabricated homes, solves a number of construction issues.

A good Australian example of this is my project at www.daylesfordplace.com.au – Have a look at it. This is the future of housing – and your investment properties – and it’s here right now.

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How Can You Plan Your Investment (Property) Portfolio?

Over the last few weeks we have been talking a lot about the “why” in our lives and what it is that we really want. We have also spoken about property as being the simplest and most effective vehicle to produce regular income – but really, you could choose any investment asset that suited you. Property just happens to be the favoured asset of most Australians. And we have talked a lot about having assets that will produce the income we need for the lifestyle we want.

But how do we achieve that? How do we know what we need to do? How much property do we need to have that freedom & choice?

The answer is simple – we must start with the end in mind.

That might sound a bit counterintuitive, but we can’t start on the journey unless we know which way we are headed or where we are going to end up. Otherwise we are just going to go around in circles and not end up anywhere in particular.

So your first decision is – how much income do you want to have for your lifestyle? This is income that you don’t need to exchange your time (work) for.

That number could be wildly different for each of you. For the sake of the exercise, I will assume that an income of $100,000 would provide a reasonable standard of living – your own personal number may be much higher or much less than that – only you can decide how you want your life to be. The first part of the exercise is some mathematics. No groans please – you need to be able to do some basic math to understand the what’s and why’s and wherefore’s – and if you can’t – pay someone to explain it to you!

If you decided that you wanted a $100,000 income flowing from your assets, you would need to be able to calculate what net return your assets could, would or are flowing to you. For example, most capital city residential real estate will produce around 4-5% return. For easy math, let’s just say 5%. To work out the value of the assets needed to produce a $100,000 income with a 5% return, you divide $100,000 by 5%. Your calculator will tell you that you need $2,000,000 worth of capital city residential real estate, to have a freedom & choice $100,000 lifestyle.

Easy right? That’s only about 4 houses. Everyone should be able to do that? Not so easy I know, but over time with a good plan, it can be done. The key is, this simple math also assumes that you completely own these houses – no mortgages. So, either you get very good at paying off your mortgages, or you find a way to buy, say eight properties. Then when you are ready to do so, sell down four, pay the tax and pay off the four you have left, leaving you with free and clear property earning you $100k per year. Again, easy right?

But we have to also deduct costs in running our houses – that could be 20-25% of our gross rent. That means you probably need about $2.5M free & clear property owned to get your $100,000 net income. Or if you are expanding your portfolio to later sell off and pay down debt, you would probably need to own 10 houses. The mountain becomes steeper.

The way to lower the amount of property you need to own to get that $100k income is to have property with a higher return – positive cashflow property – something north of 8% rent return. If you could own property that provided you a 10% income return, you would only need to have $1M worth of property owned free and clear to achieve your $100,000 income – the mountain is now not so steep. Or perhaps you could have a mixture of positive cashflow property at 10% and some capital city growth real estate at 5%, blend your return so your portfolio makes 7.5%? Then you need to own $1.5M worth of property to achieve your $100,000 income target – all of this of course is not including the home you live in.

Over the next few weeks, we will spend a bit more time on planning and designing your investment portfolio, so you can do what you want to do rather than what you have to do.

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