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10 T HIN G S TO C ONS I D E R B E F OR E BUYIN G A N IN VE STM E N T PROP E RT Y

5. 3. YIELD

ASPECT

4.

GROW TH

6. 2. TIME AND TIMING

NEW VERSUS OLD

7. 1. L O C AT I O N

SIZE OF PROJECT

8. RESALE TO OWNER-OCCUPIER S

9.

INFR ASTRUCTURE

10.

VA L U E O F A D V I C E

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Dear Reader, We are delighted to provide you with a free copy of this ebook. We hope that some part of what you read in this ebook is beneficial and of service to you. As financial advisers with years of experience, we help people make educated financial decisions throughout various stages of life. Ring us today on (02) 9248 0444 to make an appointment or directly via www.wealthadviser.com.au Introductory meetings are free and carry no obligation. Best regards, Frank Paul CEO Wealth Adviser

Contents
INTRODUCTION

1. LOCATION 2. TIME AND TIMING 3. YIELD 4. GROW TH 5. ASPECT 6. NEW VER SUS OLD 7. SIZE OF PROJECT 8. RESALE TO OWNER-OCCUPIER S 9. INFR ASTRUCTURE 10. VALUE OF ADVICE
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IN T RODUC T I ON

Congratulations, you are on the right track towards successful property investment. As anyone in the business will tell you, research is a huge part of the process.
If youre interested in finding out more about how to invest in property this book will serve as a primer on what you need to start thinking about. One point we would like to clarify before we go any further is that we are investors rather than entrepreneurs, and this book has been written with this in mind. When we talk about property investment we are referring to buying and holding for the long term, as in 10 years or more, rather than entrepreneurial activity where one buys with a view to renovate or develop and then sell.

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1.

LO C AT I O N

Think of location, and comments such as its a block from the beach, theres a school within walking distance, or the train station is two blocks away probably come to mind. Thats because a person looking for a place to live typically has these considerations at the front of their mind.

As a property investor you also need to consider location in these terms, because your prospective tenants and most of your future potential buyers owner-occupiers will care about these things too.

Essentially though, an investor needs to consider location on a higher, more strategic level. In residential property investment, location matters in terms of what it means to the market a prospective property is in.
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What do we mean by this? If youre thinking about buying an investment property, consider the location in terms of finding the right market to invest in, because real estate markets are defined by specific geographical areas.

Lets say your recently purchased investment property is a duck, floating on a pond, and that pond is the suburb youve bought in. As it rains and more water enters the pond, the water line rises, and so does the duck. Just as house prices overall in your suburb rise, so does the value of your house. Gains in real estate investment are about the water line rising in your pond. If the area youve bought into is increasing in value, its likely your property will too.

Make sure the specific market you are in is healthy and vibrant, because if it rises even if you have got some other decisions wrong you are going to be dragged along with that specific markets overall performance.
You can buy junk in a rising market and it will not matter because everything ends up going up. If youd bought junk in the Eastern Suburbs of Sydney 10 years ago, today you would be sitting on some very expensive junk today. Were not advocating buying property that is below par. Were only suggesting that your first consideration be the specific market your property is located in.

So if its deciding between Sydney or Brisbane, thats only the start of the decision-making. Pay attention to how close a prospective investment is to basic amenities, and other aspects of its location, but focus on which specific market the property is located in, and what that market is likely to do in future.

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2.

T IM E A ND T I M I N G

They say timing is everything, and in real estate this certainly can hold true, but it all depends on what your objective is. Timing is often the primary focus of real estate entrepreneurs, who make a very big deal about when to buy, and when to sell. Indeed timing is very important if you are going to be in the market for only a couple of years. In this case, if you overpay just slightly for a property, and the market doesnt behave itself, youre in trouble.

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As investors though, the focus needs to be on paying fair value for a property and buying in the right market (which refers to our first consideration, location).
Buying at the right time is a secondary consideration. If you pay a fair price for a good property in a market with the potential for growth and you are holding it for the long term, timing is much less of an issue. Lets face it, no one has the ability to see into the future, or to pick the bottom or top of the market. You do have the ability though to implement a strategy which views time in terms of duration. Focusing on buying a fair value property is more integral to the success of a property investment than just trying to get the timing right. Once youve decided to invest long-term, and to find a fair-priced quality property in an area with good growth potential, timing becomes a secondary consideration. Thats because theres an inverse correlation between the term of the investment and the need to get the timing right. If you hold a property for 10 or 20 years, timing becomes less and less important. The classic example of this is your typical mum and dad, who bought a property 30 years ago for $30,000. If theyd overpaid by 10% (it was actually worth $27,000), would it matter? Today that property is worth $600,000, so the fact that they overpaid becomes irrelevant. Time has reduced the importance of timing.

Timing matters, but what you really need to consider is how long youre going to be holding onto a property. If youre an investor, rather than an entrepreneur, dont fret about timing.

As long as youre paying fair value, time will take care of the rest. If you overpay then its obviously going to take much longer to make up for that mistake. So the focus should be on finding a property of fair value, and then holding it for the long term.

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One of the negatives of excessively worrying about getting the timing right is the bargain-hunting mentality, because it often leads to inaction, and an unnecessary delay of a purchase.
The bargain-hunting buyer expends huge amounts of time and energy looking for the cheapest deal, and two to three years later no property has been purchased yet, because they are still trying to squeeze out a bargain every time a property comes up. Meanwhile, the markets gone up 10% and the bargain hunter has missed out on growth in the market.

Now were not going to tell you to ignore everything weve said about holding for the long term, but it should be said that no amount of time can save you if youve entered into a market you havent properly researched. Buying fair value and holding for the long term is the essence of no-frills real estate investment, but first and foremost, be aware of the market you are entering into.

You must be armed with as much knowledge as possible in order to make a good decision. If you dont have the time to do the necessary groundwork, find someone who can advise you. Holding for the long term is an excellent strategy for an investment as illiquid as real estate, however, its not always going to save you if youve chosen the wrong market to buy in.

When it comes to timing, the message to investors is clear: dont focus all your valuable time and energy trying to forecast the troughs or peaks of the real estate waves. A long-term investor understands that real estate on average increases at or faster than the rate of inflation, and that paying fair value for a property in a carefully selected market is what matters.
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. YIE L D

The higher the yield the better, right? Certainly this is the traditional take on yield.

To calculate yield, total up the income you will receive from a property in a given year and then divide this by the value of the property. Yield is expressed as a percentage. It pays to be aware of the dynamics behind high yield, because the higher the yield the better is not necessarily always true.

An example of a situation where high yield alone may not be enough for a sound property investment is in recent trends in some mining towns around Australia. When a mining company sets up a local division of its operations in a small town, it brings a raft of new workers with it. These new temporary residents need somewhere to live, so the company might lease 200 houses in the one town, paying $400 per week to rent houses that are worth around $200,000, for example. This works out to around 10% yield, which is fairly high for residential property.

Does high yield alone make this property a smart buy? Not necessarily. As the yield goes up dramatically, house prices start to follow, as other investors, spurred by the high yield, come into the picture and buy houses in town. This unnaturally inflates the market.

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The problem arises when the company decides to wind down or pack up its operations, say five years down the track. Rents return to normal in the area and house prices follow again, this time going down.

If youd been unlucky enough to buy a property in this town at the peak of the price rise, and then wanted to sell after the company had left town, the prospects of either high yield over the long term, or high capital growth would both be very unlikely.

High yield must be treated with caution because it can come at a big cost to growth. As an astute investor you must have an understanding of what the dynamics are behind abnormally high yield. To determine this, youll need to do some research, gain local knowledge, and understand what trends are active in the relevant market.

in Sydney, for example, yield has been rising and is approaching close to 5% at the moment (2008). This is driven by a number of factors such as an influx of new immigrants and a shortage of dwellings, which indicate continuing future demand. This bodes well for the long-term capital growth prospects of the city.

The aim is to find an equilibrium between yield and capital growth. You also must consider that markets are determined geographically, with yield changing from area to area.
In the ideal scenario, an investor is able to strike some sort of equilibrium where a property with a reasonable yield (which then keeps the costs down of owning it) also has good capital growth prospects. Generalisations such as high yield is always good and low yield generally means overpriced real estate should never be taken at face value. A little knowledge can be a dangerous thing, and it takes an experienced, educated mind to see through it.

For example, waterfront real estate has a long history of low yield, but that does not preclude it from being a good investment. The potential for capital growth of a waterfront property is so significant it could, in certain situations, outweigh the deficit in yield. So the goal is to find a balance.

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4.

G R OW T H

Capital growth refers to the increase in the value of your property over time. You buy a property for half a million dollars and then 10 years later, its worth a million dollars. As discussed earlier, yield is part of the property investment equation, but particularly in residential real estate, capital growth is just as (if not more) important.

When considering the growth prospects of a specific property, it helps to begin by identifying what drives property growth in general.

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First and foremost are the forces of demand and supply, in other words people wanting houses and the availability of houses. Demand includes the existing population and the new population arriving or departing. Supply covers both existing houses and new houses being built. Naturally, demographics play a big part in the supply and demand equation, and therefore in the capital growth potential.

The demand for housing is strong, but as intelligent investors, we would not stop our analysis of the region here, because supply needs to be considered as well.
Inflation is another factor which can put upward pressure on house prices and result in capital growth. Demand and supply can be static, but if the cost of building a house goes up then so do house prices overall. As builders salaries and materials become more expensive, the price of building one house goes up, and it makes that house more expensive. This price rise spreads to every other house around, even if they were built for less.

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Another factor which impacts property prices, and therefore capital growth, is money supply. Interest rates affect money supply the more they drop, the more money banks will lend based on the way their formulas work internally. The invention and engineering of financial products also affects money supply. Not long ago, no one would have dreamt of lending you more than 80% of the purchase price to help you buy a property, but times have changed, and on the whole it has become much easier to borrow. In some instances 100% can be borrowed.

All capital growth can be explained by supply and demand, inflation, and/or the supply of money. So if youre looking at a property that has doubled in value, it has doubled for one, two or all three of these reasons.

On the other hand, you could have had dropping interest rates, finance product innovation and an increase in supply of money, just fewer people to buy houses, so prices do not move.

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5.
that north-facing is good. A north-facing aspect usually means more direct sunlight, for more of the day. When considering any property then, is it a matter of north or nothing?

A SPE C T

Aspect refers to which way a property faces. The accepted truth in Australia is

In a recent development of 20 units in Maroubra, in Sydneys east, quite a few of the units faced south but they looked over the water. If north-facing only was our stipulation, we would have missed out on these properties in the development, which may well have had more potential for higher yield, higher capital growth or both.

Every property needs to be taken on its merits, so there is no absolute truth when it comes to aspect. What really matters is how aspect affects a particular property and what that means in terms of brightness and sunlight.

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A north-facing property that receives direct sunlight all day can sometimes receive too much sunshine, and not everyone wants to have to keep the blinds drawn and the air conditioning on all day.

What really matters is how the design of a property interplays with the direction it faces.
When considering aspect its not just a matter of north, south, east or west, but what this means for a property given its design, and how this plays out it terms of light. Viewing a property at different times of the day is a good tactic, as is looking out for areas with minimal light and the potential for mould and dampness problems.

Every property needs to be assessed on an individual basis. Shying away from anything other than north-facing, for example, could mean you potentially miss out on a more suitable investment.

You may have a general idea of what is desirable in an investment property, but there is no substitute for being out in the field, doing the research. If you dont have the time to do the legwork yourself, consider using the services of someone who can do it for you.

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6.

NEW VE R SUS O L D

You and I buy a renovators delight, pay for land value, demolish, build a brand new house on it, and make lots of money. Thats being entrepreneurial, and it makes for great dinner party conversation. Buying a new property, holding it with minimal capital expenditure and forgetting about it for 10 years may not make such great conversation, but it can be a much better way for someone with a day job to invest intelligently.
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Not everyone has the time or desire to spend endless weekends renovating a property. If you have the time, knowledge and dedication, then you may want to stay away from new, but many people either cant or dont want to spend their weekends renovating. If you are one of those people, it is worth considering why a new property can be a much smarter, cheaper and more carefree way of investing in real estate.
Lets begin by understanding what goes into the value of a property. When you pay half a million dollars for a property you are buying two things: land (or space), and bricks and mortar (the physical structure). The land itself is an appreciating component (assuming demand is fuelled by immigration and other factors), so it only becomes more valuable with time. The physical structure, on the other hand, becomes less valuable with time; its depreciating. So property has two components: land value and physical structure. One goes up in price and one goes down.

If you were to buy a property and not spend a cent on it for 25 years, you can imagine how deteriorated it would be. When you sell the property, all you are going to get back is the land value. But this is not typically what happens.

In reality, what happens is that the structure deteriorates, and then gets upgraded with a new bathroom, a new kitchen, new floors, and more. One thing that does not get measured in real estate is the spending involved in keeping a place up to scratch, known as capital expenditure.

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When a half-million dollar property becomes a million dollars, what isnt mentioned is the amount of capital expenditure that went into the property during the time someone owned it.

Every year, billions of dollars and countless hours are spent on improving the structure of investment properties. Its a significant amount of money, yet its not mentioned in any real estate data. When median house prices are measured, and their growth is documented, capital expenditure is not factored in, but it should be.

The costs of owning an old property are big, yet an estimated 90% of property investors buy an old property. Why is this the case? One can only assume that when it comes to choosing old versus new, people associate new with costing more, but not everything is as it seems.
When the extra tax benefits of owning a new property are considered, the ongoing holding cost of an old property is about three times the cost of a new property of the same value. For example, if you were to purchase an investment property around $500,000, it might cost you $15,000 per year to run if its old, and $5,000 per year to run if its new.

An entrepreneur would never consider a new property because they would be looking for the opportunity to add value. But if youre an investor after an invest and forget strategy, new makes sense. Old properties not only cost more to own, they often require more time and effort to own. Buying new gives you a property with no capital expenditure for as long as possible. It might be five or six years, sometimes even 10 years if youre lucky, before you start having to spend $20,000 for a new kitchen or bathroom. A new property also requires minimal or no investment of time, and no calls from real estate agents about the hot water system or the plumbing. If you select well, and youre able to buy a new, rentable property with good yield from day one, and it costs you next to nothing to hold, you can forget you even have it, and that is the value of buying new.

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7 . SIZE OF PRO J E C T
When considering an investment property, its worth thinking about what size of development a property is in. The size of a project matters because it can have far-reaching implications for exit strategy, which is something investors often dont think about when they are entering a property transaction.
If you are considering buying an apartment that will be one of 200, youll need to think about what that means if you want to sell your property down the line. In large developments there are almost always 10 others for sale. When this is the case, the most desperate vendor determines the price for everyone else. Because the apartments are so similar, it only takes one or two vendors who want a quick sale to bring down prices. By willingly accepting a lower price than what their property is really worth, these vendors cause a downward pressure on prices for everyone else. This is one of the risk factors to consider in large developments.

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Another reason you will need to consider size is because large developments can result in investor ghettos. These are projects that have been predominantly sold to investors rather than owner-occupiers. This is another situation where the selling price can be negatively impacted. A much better option is a smaller development that has a healthy mix of owner-occupiers and investors. Owner-occupiers create better prices for a number of reasons. Instead of being driven by calculators, they are driven by emotion, so they are willing to pay more for a property. Pride of ownership means they will also tend to look after a place better than renters.

Small projects of 20 to 30 apartments are often the best size because the risk of competing for buyers is much lower when you are selling. The risk of an investor ghetto is also smaller. In some instances it may be out of your control, but it should be part of the consideration process. One way of deducing whether you are potentially buying into an investor ghetto is by speaking to the developer of a project beforehand. They will often be able to tell you how many owner-occupiers versus investors have bought into the project.

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8. R E S A L E TO OWNE R- O C CUPIE R S
Understanding the characteristics of a property that make it easy to sell is an important yet unconsidered point when buying a property.

You dont consider exit strategy when buying shares because it costs $30 to sell your shares, but it sure doesnt cost you that to sell your property.

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Selling a property costs time, money, energy, real estate commissions, negotiations, heartache and stress. So anything that can reduce that stress and increase the final price in your hands is good. The best way to deal with exit strategy problems is to buy something that an owner-occupier would be happy to buy later.

At any given time, about 80% or more of buyers in the market are owner-occupiers, and the remainder are investors. So if you are trying to find an investor to buy your property, you may be looking for a needle in a haystack.
A serviced apartment, for example, may seem like a good option at first. A holiday rental in a newly discovered resort town, with its high rent during weekends and holidays, would be enticing. Down the track when you try and sell it, however, you only have a small number of potential buyers. Compare that to a unit in a small block, on a quiet street in a leafy area of Sydney, with transport to the CBD nearby. You are appealing to a much larger pool of buyers, and it will make selling your investment property a lot easier, and generally with a better end result.

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9.

INF R A ST RUC T UR E

Picture a house in the desert, with nothing around it. This property, just standing on its own, has a certain value. Someone comes along and builds a big, blue lake next to it. The value of that property is no longer the same it has (presumably) increased in value because of something thats happened next to it. Someone else comes along and builds a shop nearby, and not long after someone else comes along and builds a school and a road. All of these things affect the value of that property.

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In the same way the house in the desert gains huge value from a lake, school and road appearing nearby, a suburban Brisbane unit, for example, can grow substantially because of what is going to be around it. It pays to consider what existing infrastructure is nearby a prospective investment, and what future infrastructure is in the works.
For example, in the area where you are looking for a property, the local council could have plans under way to turn an unsightly industrial zone into retail space, including a supermarket. This one change could affect the whole face of the area, and increase the value of your investment.

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Infrastructure also plays out on a much larger scale. For example, the state government decides to build a $2 billion port in an area which was once purely industrial. What that normally results in is a marked change in the whole area and surrounds. A sharp increase in employment produces an injection of money into the area. More people will look for somewhere to live nearer to work, which puts upward pressure on housing. Big infrastructure projects are a reasonable leading indicator for what will happen for the future of house prices in an area two or three years down the line. So, it is helpful to know where and what infrastructure is in the pipeline. Infrastructure can also work the other way, and negatively impact an area and the value of a house. For example, the addition of a tunnel or freeway nearby might bring down property prices in an area. Infrastructure can and does have a far-reaching impact on property values. You need to have the knowledge to be able to make a good property decision, which means either undertaking research or employing someone to do it for you.

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10.

VA LUE OF A DVI C E

As youve gathered by now, there are a lot of considerations which go into making an educated real estate investment decision. The more knowledge you have, the better the decision you are going to make. You can go out and collect the information that you need, or you can get people to help you with the decision-making process.

So what are some of the sources for advice? Your local real estate agent, a get-rich-quick seminar, or the local library, are the mainstays. Reputable, knowledgeable and accessible property advice is not easy to find.

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In Australia, the property advice sector, relative to other financial advice, is largely unregulated. Federal legislation and the Australian Securities and Investments Commission (ASIC), which enforces company and financial services laws to protect consumers, investors and creditors, do not recognise property as a financial product. Both are silent on how it should be treated and how it should be advised on. State-based legislation, which applies to real estate agents, mainly covers the mechanics of a property transaction. Because of this legislative vacuum, it is very difficult to find a reputable adviser specialising in investment property. Unfortunately, in the past, this area has been tainted by many unwieldy, unregulated operators who have profited from the desire of everyday Australians to get advice on how to enter the investment property market. A new breed of advisers is emerging and proactively filling that void, bringing a planning and research-based ethic that is enshrined in federal law. We are proud to say that we are part of this new generation, and we believe we are on the cutting edge of delivering this new type of service. We voluntarily bring the same ethos we apply to financial advice to investment property, treating it as though it were any other financial product. This means we research it, provide strategy around it, bring expertise to the selection of it, and help with its implementation. Do you like what you see? We aim to provide a no-nonsense property advice service based on research and disclosure. What we do is simple but not easy, as locating a good property requires extensive and exhaustive searches, combined with expertise and local knowledge.

Our objective for all of our clients is essentially to locate a good property, in their price range, with minimal stress and cost, and maximum profitability. Let us show you how we can help you make the right property decision. Call us today on (02) 9248 0488 to book an introductory meeting with one of our advisers.

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C ON TAC T DETA IL S Wealth Adviser Level 4, 99 Bathurst Street Sydney NSW 2000 PO Box Q1470 QVB NSW 1230

Tel (02) 9248 0488 Fax (02) 9248 0433 E-mail infot@wealthadviser
www.wealthadviser.com.au

W E A LT H A D V I S E R I S A D I V I S I O N O F T H E M O N E Y T R E E W E A LT H A D V I S O R Y G R O U P

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