Listener questions – Top investment tips #2 – Selecting a state, city, suburb & dwelling, buying within the bell curve, the role yield plays, debt retirement strategies, median alignment and more (Ep.124)

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In this week’s episode, Dave, Cate and Pete take you through:

Which state or city should you invest in? The trio discuss the considerations of selecting which state or city to invest in, including diversification, market cycles, land tax that eats into your yield, the plans around your future home purchase and the dangers of hot-spotting.
Your budget should drive the choice. Data confirms that Melbourne and Sydney have outperformed other capital cities over the decades. Selecting an outperforming suburb can make a reasonable difference to your end position over a long period of time. However, it’s critical to select a quality asset and if your price range means that you are purchasing a compromised asset, it may pay to look at investing in a different capital city that better aligns with your budget.
Buying within the bell curve. The Property Buyer shares a hot tip for selecting a state or city, and that’s to look at the median values and compare it with your budget. Staying within 20 to 30% of the median is often a good way to go, as this is where the majority of people can afford to buy and where most of the demand will be. If your aim is to target the lowest quartile and buy a bargain, you are introducing all sorts of risks into your investment strategy.
Selecting a location and how that impacts asset selection – houses vs units. The trio get into the nuts and bolts of selecting a location, and depending on your budget, location choice could impact whether you’re able to purchase a free-standing house or a unit. For example, do you purchase a townhouse closer to the city or a house further away? You must go through this process to work out what you can afford and what is the best choice for your investment strategy. Generally speaking, if your aim is capital growth, the data is clear that houses are generally the way to go.
How the yield, cash flow and your debt retirement strategy feeds into the dwelling selection. Even though interest rates are at all time lows, yield is still important. If your retirement strategy is to hold onto your properties and live off the rent, then a yield that allows you to pay down the debt is a critical consideration. On the other hand, if you plan to sell some of your portfolio to pay off the debt on the rest of your portfolio, then capital growth could be a key factor for you. Generally speaking, houses will have a lower rental yield than units and apartments.
Different strokes for different folks – get the right advice for you. Everyone’s goals and circumstances are different. The right strategy for person A may not be the right strategy for person B. Educating yourself with general information is a great way to go to increase your knowledge, but it’s certainly worthwhile to get qualified property investment advice that is tailored to you.
Strategies for engaging with agents to improve the property buying experience. The Property Buyer shares her top tactics for how to get information from agents and when is the best time to do so. Making yourself memorable for the right reasons is key, as agents can provide a wealth of information to help you on the journey.
Finding a property manager. A quality property manager will have deep knowledge of the area that you are purchasing in and can give you key intel, such as what kind of tenant you are likely to get, what will the likely rent will be, and what tenant tenure you can anticipate for the property in question.

Resources

Show notes

Which state or city will you invest in?
The best performing suburbs in the smaller capital cities, were nowhere near the lower performing suburbs in Sydney.
You cannot change location – which city will do the best for your timeframe. The longer you hold it, the less important it is, because you’ll ride out the decades and cycles.
Timing the market or making a short gain
Hotspotting – just pick something good and stick with it.
Do it sooner rather than later.
Ideally own one property in Melbourne or Sydney – they have outperformed other capital cities, that can make a reasonable difference over a long period of time.
Do you plan to purchase a future home?
Does it make sense to try and purchase the investment in and around where they want to purchase the home – tracking with the growth rate.
Where do you own properties already, diversification, land tax of owning lots of property in one state and eating into yield. What is the price range and what does that allow you to buy in that capital city. If you’re going to be compromised and won’t get a quality proeprty, then maybe you do need to look at another capital that aligns with your budget.
Diversification is very important – interstate and regional. Having a look at median values and comparing it with your budget, is a great tip. You want to stay in the bell curve – 20 to 30% either side of the median is where most of the demand will be, because that is where the majority can afford to buy.
Bargain buying
If you are going for the lowest quartile, you are introducing all kinds of risks.
Standalone dwelling normally outperforms units.
Go back and forth between suburb and dwelling type and working through the process of determining what is the best that you can afford. There is no black and white answer to this.
What sort of dwelling type you should be considering – cash flow = holding costs and rental.
Tight vacancy rate area and you know what the standard rental yield is – units is a very broad location
Older style units and apartments could be looked at.
If it’s capital growth you are looking for, you are far better off looking at houses or bare minimum townhouses.
The independent umpire that decides is the yield or the cash flow. But it is not as black and white as going for a townhouses in an inner suburb vs a house in an outer suburb.
Does yield matter that much when interest rates are so low?
Yes, if the strategy is buy and hold and live off the rents. If your plan is not to sell the property, then you do need a good yield to pay down the debt, so you can hold onto it in your retirement when you can’t afford a mortgage.
People need to get qualified property investment advice, mainly because everyone’s goals and circumstances are different. It’s fine to get general information, but when it comes to creating your wealth, pay a professional to get some decent advice.
Applying tactics that enhance the experience and the result in property buying
Getting information from an agent – if particularly keen on a property, ask questions, but only after you’ve decided that you’re interested. Otherwise they will get sick of you.
They can give you their comparable sales.
Don’t harass them, or ask them stupid questions.
Once you’ve decided on dwelling type and location, call the local agents and let them know what your price range is (roughly), tell them what is your brief.
Make sure that you’re the memorable buyer for the right reasons
Tell the agent why the property is not for you
Finding a local property manager – work on a couple of suburbs, they will have deeper knowledge of the area. What kind of tenant are you likely to get, what kind of rent, or how long do the tenants usually stay?

Gold Nuggets

David Johnston – The Property Planner’s Golden nugget: once you’ve determined the asset type and suburb, you need to decide the pockets and A-grade streets that you’re going to target. Starting tip – look at the map and look at the streets or pockets that have one way streets and are within 1.5km distance of the key attributes of the suburb. You need to work out what these would be: shopping strip, schools, park land, river, lake, views, higher altitude. By looking at this, you’ll be able to narrow down to the best streets and pockets within the suburb. Walk around the streets, have coffee and have lunch, this is the final step.

Peter Koulizos – The Property Professor’s Golden nugget: the seven S of property investment – State, (s) city or town, suburb, street, style, size and soil (land). Ideally you want to be buying something with a land component.

Market update

Investor activity and the impact on our rental markets. CoreLogic data shows that from early 2017 through to 2019, investor lending started to drop away due to APRA intervention. That means that less investors have been buying rentals property since pre-2017, resulting in less rental properties on the market. This has created a tight rental market with vacancy rates going down and rents increasing. A lot of investors are happy that rents and prices are going up, but this spells some challenges now for the community of renters, which will only increase when international migration picks up again. Supply is inelastic, so the government needs to consider how we’re going to increase the supply of property to cater for new entrants to Australia.
Predictions on APRA measures. The measures instituted by APRA from 2017 to 2019 ground investment lending to a halt. The Property Buyer predicts that we may see a change in policy, where higher buffer rates may only apply to the asset being purchased and not to existing debt, as significant issues will be faced if investors are chased away from the market. The Property Planner predicts that the current APRA measure of raising buffer rate by 0.5% is unlikely to have a large impact and the regulatory body will need to consider other measures to put in place.
Parity between median house price and median unit price per suburb. Recent data from CoreLogic compares the value of units against houses from 2016 to now for each suburb. There is an emerging opportunity for buyers who are looking at units, where you can identify a sweet spot for advantageous purchasing in a particular area. Older style apartments in the east have taken a hit over the last 10 years, due to gentrification of inner-ring markets in the northern and western parts of Melbourne. This shift saw an outperformance of houses, which were at one stage priced the same as eastern units, as people wanting to buy something for the longer-term and closer to the city and looked to the North and the West.
Australia in pole position in the transition to renewable energies. Over the next two decades, the IMF expects a sixfold increase in demand for critical minerals worth $17.6 trillion, driven by the race to hit net zero emissions. The IMF has singled Australia to be in the top position to benefit in this transition, as nickel, copper, lithium and cobalt are key components in batteries and renewable energies and crucial in the transition away from fossil fuels. Australia is among the top three for global reserves for each of the four critical minerals, leaving us in a prime position to benefit from the new electricity storage and generation shift.

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