Home Ownership – Dream Or Reality?

I am going to start off this blog where I ended off last week with my last thought for you –

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“You can be young without money but you can’t be old without it.” — Tennessee Williams

One of the absolute simplest and best ways for most people to generate some wealth for their senior years, is to own a home. And the younger the better, to have the time to pay it off. I also think that owning a home is for most people the easiest and safest way to build some wealth. I am a strong believer in the concept of everyone who wants to own a home, should be able to do so, which is why I support Habitat for Humanity (www.habitat.org)

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Foreign Investment – Something to Fear or Something to Favour?

I am noticing a lot of chat in the media and in public commentary on blogs, about the negative effects on our real estate market of foreigners buying up our real estate – this is nothing new – it has been an issue since Japanese money started arriving in the 70’s and 80’s. Right now, there seems to be particular angst about Chinese buyers. People are saying that our marketplace prices are being forced up by the high level of Asian investors, which means that Australians are being forced out of the market. There has even been enough media noise for an inquiry to be commenced by the Federal Government, headed up by the Treasurer Joe Hockey.

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Let’s challenge the thinking.

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Is Renting Better Than Buying?

In recent days the Reserve Bank has released a report which basically says that renting is better than buying. The report says that “if housing increases in price at its traditional 2.4%, buying beats renting when the home is owned for more than eight years”. They then go on to say that “the rate of increase experienced over the last ten years has only been 1.7%, then owning only beats renting over a thirty year period.”

This is just another “shot across the property market’s bows” as the Fed continues to try to slow the property market without raising interest rates. They are thinking they can talk the market down while leaving rates “low” so that the rest of the economy can continue to grow – unemployment at 6% has them worried.

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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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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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The Urban Sprawl Is Changing – Is The Big Aussie Backyard Dead?

This week’s topic is something we all need to consider as we begin to build or even to reshape our investment portfolios.

The rapid explosion of suburban development from the 1960’s came along with access for most people to their own car and strong population growth. With it, the dream of the quarter acre block, 3 kids, dog, Holden Car and a big backyard became real. Urban sprawl is the type of thing you tend to forget about if you’re living in it, except maybe when you’re stuck in traffic inching home after work. But it does a lot more than cause road rage.

According to a new US Study, Measuring Sprawl 2014, urban sprawl also makes us fatter, sicker & poorer and it is the source of 50% of the carbon footprint of the USA. It is reasonable to expect similarities with the Australian market.

The study finds that people who live in densely populated regions benefit in many ways. In brief, they have greater economic mobility, they’re healthier, and they live longer.

It’s also cheaper to live in dense cities. In those areas, people spend slightly less of their income on the combined cost of housing and transportation. (They have more low-cost transportation options like trains, subways, light rail, and walking, which of course is free.)

People who live in compact cities also tend to live about three years longer than people who live in less compact cities. The gap is probably thanks to more driving (which means more fatal crashes), a higher Body Mass Index, higher blood pressure, and more diabetes in less-compact cities.

The environmental impact of suburban development is also under scrutiny. According to a new study by researchers at the University of California, Berkeley, population-dense cities contribute less greenhouse gas emissions per person than other areas of the country, but these cities’ extensive suburbs essentially wipe out the climate benefits. Dominated by emissions from cars, trucks and other forms of transportation, suburbs account for about 50 percent of all household emissions in United States.

The lower cost of cheaper homes in far flung suburbs is rapidly being recognized as not real savings at all – when you consider the cost of fuel, time spent in the car travelling, parking and other direct costs, let alone the benefits to the economy and environment of more dense living styles.

It is not something that has been palatable to Australians in the past, but that is changing – for economic, environmental and lifestyle reasons.

And that means as investors that you need to consider carefully the choice of property that you want to own. Because investing is about the future – future returns from growth and rent. And the future will mean higher demand for less expensive, more compact, well located property that is on or near transport links. And higher demand is likely to mean higher rental returns & capital growth.

 

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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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