Optimistic Outlook on Property Investing
Optimistic Outlook from a Residential Investor’s Point of View…
Hi fellow budding property investors,
I’d just thought I’d share my thoughts and opinions on why I invest in property and what I believe shall occur over the next year or so with Australia’s residential property market and where also I reckon should do well. Please note that it is only my views and I’m happy to receive any constructive criticism or feedback from fellow investors.
But before I start, I’d like to provide a brief background about myself, where I’m at and my ultimate goals in life.
I was born in Vietnam and came to Australia as an excited 6 y.o. with my parents and younger brother (as a boat refugee) back in 1980. We came here with nothing but the clothes on our back literally. My parents had to work real hard to make ends meet and to try and sponsor my sister who was still left back in Vietnam. Anyway, my upbringing was based on a solid education so that I could be competitive in getting a good job. This was my parent’s way of saying, “study hard, get good grades, get a good job and move out”!
I did study hard, I did obtain reasonable grades and did get a good job, but I didn’t move out though! I guess in my 20’s I felt living at home with my folks was great. No rent, no bills or board to pay and what I was earning, I’d spend it all on having a great lifestyle and traveling. Suffice to say, when I got married in 2002 I did not have a cent to my name. My wife was pretty disappointed as she herself worked overseas and had managed to save much much more than me!! The penny had dropped that if I were to start a family (and not drown financially), that I had to change my spending habits and have a real focus towards budgeting and saving.
After living in Melbourne since 1980, we moved up to Canberra in early 2003. As you can imagine, it was only for work purposes and it was our intent to return after a few years. Forward the clock to 2008 and we’re still here in Canberra (but with 2 young girls and a teenage nephew to look after) with no intentions of going anywhere for the time being.
Being new to Canberra (and not knowing anything about investing) we decided to find a place to rent. At only $120 pw at that time for a small granny flat in Braddon (suburb right next to city centre), we thought that would do us fine. That lasted for only a couple of months until we realised with the impending birth of our first child, we needed somewhere bigger. Suffice to say, we had to upsize to a 3 bedroom townhouse for $250pw. It wasn’t until we had dinner with friends of mine (one who already had a mortgage back in Perth) did we realise that rent money was dead money and that we should buy our first home. I recollect very clearly that night when my friends said to us, “yes it may take you 20-25 years to pay off your house, but you own the toilet door after your first year, then the whole bathroom by the second…….” that we opened our eyes. We were both working and had steady income, so we took the plunge and bought our first home in August of 2004. It was scary at first, just looking at the massive debt in which we took on.
This became a lot easier though once we sat down and budgeted our finances. We knew that we had to cut back on certain things and our objective was to pay off our house as quickly as possible. We didn’t buy our first investment property until late 2005, and by then I was starting to have a keen interest on how the mechanics of property investing worked. I had researched the Perth market for pretty much most of 2005, but was afraid to take the plunge because it was so far from where we live and rental returns were so low. I had a gut feeling that Perth would do well due to all the mining activities that were about to take place, but was doubtful that that market would take off. After all, Perth’s market from 1993 to 2002 had only increased by $100,000 (from a median of around $100,000 to $200,000 respectively). But there were signs that the market was on the rise, because the median had increased by another $100,000 but this time only over 3 years (from 2002 to 2005 to $300,000). I was all pumped up to buy one in Perth, but due to my noted fears, I eventually settled on a small 3 bedroom house in a good suburb in Canberra instead (so I could see it and manage it a lot easier)! Suffice to say, Perth went through the roof, but Canberra has provided good returns also.
One thing in my life I don’t think too much about is regretting what could have been? You can only make the best decision you can with the information at hand at a particular point in time. You just get up and move on to the next opportunity!
As a relatively new investor (and in-experienced investor who hasn’t been through 1 property cycle yet), it’s been a very challenging but exciting ride over the past 3 years for us. Through constant research and dedication, we have managed to accumulate 10 properties (including 2 off-the plan and our own PPOR). Even though the property market has sort of stagnated, we are optimists who are in this for the long haul! We don’t speculate (as some might do on volatile shares or purchasing in mining towns with an anticipation of a boom) and stick to investing in prospective steady growth areas (i.e. suburbs within a 0-12km radius of capital cities). Our goal is to hang onto all of our properties over at least the next 10 years with the hope (I say hope because based on statistics it should double by then) that they will provide strong capital growth for us.
After subscribing to countless property magazines and attending a host of property seminars, I am of the firm belief that investing in residential property is the way to go for us. Just by looking at the BRW top 200 rich list, most of those people got to where they are today due to investing in property (whether residential or commercial). Therefore, I have a self-belief in that if they are able to do it, then why can’t I? I’ve come to realise now that people from all walks of life differ on only two things, that is their “Mindset and Self-Belief”. In mindset, my parents raised myself with a notion that all debts were bad. As a result, I never ever took out any sorts of debt whatsoever until I took the plunge in buying my first home. In self-belief, I had always thought that becoming rich (or should I say financially independent) was just a pipe dream. That there would be no possible way that you could become rich by taking on more debt!
I have developed a strong mindset and self-belief in myself now that in order for me and my family to become financially independent, that investing in property is the vehicle to get us there. We know that it cannot happen overnight, but with strong determination and sticking to our guns, I feel that we’ll get there one day. One thing I’ve learnt is that, if I had of known (or were exposed to property investing) at an earlier stage in my life I would have been in an even better position now. But as I have indicated earlier, I have no regrets whatsoever when it comes to property investing and can only strongly advise those that aren’t investing yet, to do so NOW!
Based on various reports, it looks like the economy is slowing down and consumer spending and confidence have drastically declined. The RBA have done a good job of that through their rate rises over the past 6 years. With inflation figures lower than predicted for this quarter, it now seems possible that further increases in inflation have been reigned in. Unemployment is slowly starting to creep up again and with petrol and food prices so high, people have had no choice but to cut down on their spending in one form or another.
As interest rates remain high for now, this will soften the housing market (if not already). But I genuinely believe that rates may drop sometime next year. Therefore, the best buying time is now! I’m so highly leveraged that I cannot buy another property at this point in time, hence I’ve resorted to buying off-the plan which won’t settle until 2011!
My rationale for buying these two off-the plan apartments are as follows:
* One is in Cairns only a few hundred metres from the beach and the other is in Surfers Paradise which has uninterrupted water views.
* That I only need to fork out a small amount for the deposit bond for the next 2-3 years.
* That as they are well located so close to the water, shops and restaurants, that they will always be in demand for prospective renters or owner occupiers.
* With high population growth for Queensland (particularly towards the coastal areas) and rental returns to continue to increase, yields may just reach that magical 7% by the time they settle! Current rental yields in Cairns and Surfers Paradise for units are 5% and 5.4% respectively.
* Projected growth for both areas will be around 20% to 22% by 2011. Average growth for the past 10 years has been 8.4% and 11.9% per annum respectively.
* I have the opportunity to on-sell should I decide not to keep them nearing settlement.
Yes, there are negatives which I could discuss in buying off-the plan, but I have weighed up all the pros and cons and have that firm belief that locality and timing of settlement should produce a positive outcome for these two units.
With interest rates to remain where they (and a likelihood of it going down next year ), couple this with not enough houses being built to meet our ever increasing population, I reckon 2010 will be the year where the housing market may go through the roof. With wages increasing in line with inflation and with lower interest rates, this will attract back home buyers and investors alike…….
Onto my analysis of where best to invest in the current climate, I believe Adelaide is the way to go. Based on an article in the Business Spectator they have indicated that Perth has gone through the resources boom and that more likely than not Adelaide will be next! The construction phase for most of the mines in SA will commence soon. Along with the resources boom, the defence contract to build destroyer ships (totaling $8billion with an extra $16billion to maintain it once completed) will lead to massive job requirements in the northern parts of Adelaide. I honestly believe Adelaide will have another great couple of more years and hit a median of close to 500k in 3-5 years time (same as where Perth is at right now). As you can see from the chart below, Adelaide’s median is currently only at $373,000. There’s a lot of growth left in Adelaide still I believe! So if you’re really keen on looking for somewhere with strong capital growth, I STRONGLY SUGGEST ADELAIDE……
Property Investment Areas Chart
If you look at the table (Composition Adjusted House Prices 1993 – 2006 page.5) in this Home Price Guide Report for Perth, you’d notice that the median for Perth was around $320,000 in 2005. In the space of 3 years it went to a record $520,000 and is now back around the $500,000 mark!! All this was ONLY due to the resources boom in WA. As you can see, Adelaide’s growth was just like Perth’s. There was nothing remarkable about Perth’s growth until the resources boom hit! I reckon the next few years Adelaide will go through exactly the same phase! With the current rental yield at 4.19% this ain’t too bad at all, and with the vacancy rate at around the 1.7% mark, there will be further scope for rental increases over the next few years. All in all, this works out to be very very positive for an investor with a foot in the Adelaide property market!
I’m pretty content with the two I have in the northern suburbs of Adelaide. Conservatively speaking, both have returned 14% and 11% capital growth so far for the past 12 months. I’m well aware that they haven’t returned close to the average 17% -20% growth that a lot of other Adelaide suburbs have over the year. But I’m always of the opinion that those that didn’t grow by that much will need to catch up sometime (during boom times) as quality suburbs next to them become out of reach of the average investor.
Anyway, I’d thought I’d share my views and thoughts and do hope to hear back from other fellow property investors on their thoughts on where they believe the property market is heading. Along with this, it’ll be great also to hear from others on where they feel the next best location to invest your hard earnt will be!
Thanks and happy investing.
Quyen
Filed Under: Property Investment
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