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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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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