Wealth

Ride the property cycles

Written by Peter Comben

Property values double every 10 years; so anytime is a good time to start building your portfolio.

All people, as soon as they able, should invest in property.

Aim to purchase an investment property before you attempt to buy your own home to live in. With an investment property you can offset the costs against your taxable income.

Why purchase an investment property? The main reason is its value that it will double value every 7-10 years. This assumption is based on 50+ years of recorded property prices.

In fact if you consider that property will double every 10 years then it means it must grow on average at 7.5% per year. This growth is not consistent as the property cycle affects the rate of growth in any particular year.

However, if we factor in the effect of the property cycle over the past 50 years we will find that it has doubled in value every 7.3 years and that there have been three full property cycles each 21 years.

Being armed with basic knowledge such as this investors can safely and confidently build a residential property portfolio knowing it will double at some time in the nottoo- distant future.

Not all residential property is a great investment, investors need to maximise their opportunities by buying in good growth locations. Where can these be found in today´s market?

Investors have, for a long time, found tried and true properties in and around the capital cities of Australia. Capital growth in these locations statistically meets the criteria of doubling in a seven-to-10 year period.

Investors wanting their properties to grow at this fast a rate need to take account of locations where demand way outstrips supply and where capital growth plays a prominent role.

So what are some current ´hot spot´ locations investors could look at the moment other than the major capital cities?

In an article last year in the Australian newspaper Bernard Salt, well known Australian demographer, pointed to "regional locations on the east coast – particularly between Bundaberg and Townsville in Queensland – where the jobs growth and money is at the moment. These areas are being driven by the masses of wealth concentrated in the mining communities".

The article predicted strong growth in towns such as Yeppoon and Bowen, in central Queensland, and Esperance in southern Western Australia as the resources sector continues to surge.

Your own due diligence as an investor is essential, if you are to profit from opportunities available in the market today. It is no good saying I should have invested in Western Australia five years ago. Rather you need to look for the next potential massive growth location.

Other than finding the right growth location, investors can help to maximise their property portfolios by doing the following:

1. Creating the correct structures to protect their existing assets.
2. Learning how to access the tax benefits they are legally entitled to.
3. Seeking out and learning from mentors who have invested.
4. Accessing the best funding for their investment property.
5. Buying investment property from a reputable source.
   We have all been made more aware of rip offs that have occurred and still occur in the market place. It is in the buying of a property that we make our potential profit, so make sure you don´t pay inflated prices. Take responsibility for the due diligence off the Real Estate Agent, the developer, the marketers, even the investor clubs who all offer property at over inflated prices. The purchaser often still pays commissions of five per cent and more and it is not unheard of to find back commissions of up to $40,000 being added to the purchase of a $350,000 property. Overpaying for an investment property can put you behind the eight ball from day one and it may take several years to make up the over inflated price, leaving you unable to access equity to re invest.
6. Confirm the value of your proposed investment property. The lender´s valuer is the best person to assess the true value of your property.
7. Rental income is an important element, again make sure your investment property is going to appeal to the market, and that there is an ongoing demand for it.
8. Take account of the property cycle. The property cycle can help the investor to find properties poised for accelerated growth. A great time to buy is at the end of a property slump and the beginning of an upturn. If you had bought three years ago in the eastern states of Australia in places like Melbourne or Brisbane you would have benefited from a significant upturn. Other eastern states capitals have had growth to a lesser extent. Research will unearth a number of potential growth areas that will significantly outperform the market over the next five years. You need to have a balanced property investment portfolio, with some properties in more traditionally consistent growth locations, and some in the regional growth locations where demand way outstrips supply.

Buying investment property is not a short-term investment strategy; properties need to be held for at least five years. After that period you will be in a position to know whether to retain the property or not. Advanced property investors end up with a portfolio of properties they will never sell.

In fact, they eventually plan for them to transfer to their children who in turn can benefit from the future income and equity growth.