Property as part of your investment portfolio: Three of the best of Mark Bouris

Now is a good time to become a landlord, but you must do it properly

I suggest a serious look at investing in property and renting it out to tenants.

There are several reasons for this outlook, including soft house prices, strong rental demand and the prospect of solid total returns.

You ideally want to buy the property at a time when real estate is in the downturn phase of its cycle, you want to rent it out when rental demand is high, and these two factors should come together to produce a total return that not only beats inflation but also compares favourably with alternative investments.

One of the first rules of buying property is that you must not overpay. This is important for two reasons: firstly, you don’t want your income from the property being overshadowed by high mortgage repayments; and secondly, capital growth in the property is as important as the monthly cashflow from rental income, and you will enjoy greater capital gains when you buy the property for a lower price.

With property prices having been flat or going backwards for two years, it seems like a good time to buy.

Property can also be looked at in terms of affordability, and affordability is attractive for investors right now.

Rismark says disposable incomes per household have risen about 15% further than capital city dwelling values since the end of 2003.

When many people buy investment properties, they simply want to buy the cheapest place they can find and rent it for the highest rent they can charge. I advise potential landlords to hold out for a property that is in a sought-after area, close to shops, transport and schools.

There is no point having a rental property that you can afford when no one wants to pay you to live in it.

Then you have to look at rental demand because when you buy an investment property, you are going into business as a landlord.

On this score, there’s some good news for property investors. Weekly rents across the capital cities rose 1% over the December 2011 quarter and are 6.3% higher than at the same time last year.

This suggests rental demand is exceeding supply, which is good for landlords. Anecdotally, you hear stories of people queuing to see the good properties and offering to pay more rent than advertised to secure the property.

While this is a good result financially, it’s also a benefit in terms of tenant management. One of the biggest headaches for a landlord is a bad tenant, but when demand is strong you don’t have to take the first applicant. You can pick the tenant who is best suited to your property and who has the best record.

If you feel you can buy cheaply in the current property market and you can take advantage of the strong rental demand, then you have to think about your total return.

As a final hint to first time property investors, I would urge you to take professional advice before entering into this: consult a solicitor or accountant about your tax position as a landlord, use an insurance broker to get the right insurances, and spend some time finding the right property management company.

It’s a good time to be a landlord, but only if you do it properly.

 

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A smart savings portfolio comprises property, bonds, bank accounts and term deposits

These last few years have been confusing for Australians thinking about retirement: when they look at what the experts have done with their money, they see it going backwards, or growing very slowly.

The 2010-11 APRA figures over the decade to June 2011 show that the average return in large super funds was 3.8%per year. That was the overall average: retail funds earned just 2.9%. After accounting for inflation, which has averaged about 3% over the same period, savers have received little-to-no “real” return.

One of the standard “expert” remarks about investing is that you have to skew your super to higher-returning equities, or you won’t have enough to retire on. But global shares suffered 40-50% losses in 1987, 2001, and again in 2007-08.

The other extreme is to ask you to accept very low returns on your money for little or no risk.

I believe in a “middle way” solution: a portfolio comprising a mix of short-term bank accounts and term deposits combined with variable rate bonds.

By diversifying your portfolio across these investments, the risk you are taking is not much higher than cash and much lower than equities – while receiving very attractive returns.

Many big fund managers and most financial planners do not steer their clients into these products. While many offer bond-based products, when you select the ‘default’ setting in your super fund, you are normally placed in a “balanced fund”, which typically gives you a total exposure to cash and bonds of not much more than 10%.

In other words, the super option most Australians are in – “balanced” – will have you about 80% to 90% exposed to Australian shares, global shares, and “equity” risk in commercial property, private companies, and hedge funds.

Recently, one of our branch principals at Yellow Brick Road dealt with a retiree in Queensland with $800,000 in a bank account, earning less than 2% per annum. By putting his cash into a portfolio that exposed him to both institutional bank accounts and variable-rate Australian bank bonds, this retiree will now earn an extra $25,000 per annum.

Another case is a Sydney family who sold an investment property and needed to park $705,000 before they bought another home in six to 12 months’ time. This family was going to put the money in a bank’s “bonus” savings account paying 5.2% for a few months, which then dropped to a very low 3.5%.

Instead, they will now likely earn an extra $9,000 per annum by investing in a diversified portfolio of bank deposits and bonds.

The point I try to get across to those who are worried about retirement – or who are unhappily retired – is that they have to get their minds out of the approach of 100% or 100% bank accounts.

There are smarter solutions out there for you. Start by becoming informed, and always get advice before you act.

 

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Do your homework and don't be greedy when investing in property: Mark Bouris

 

Most of us have focused on the cash rate cycle in recent times, but there’s another cycle I’m interested in: property.

Australian property prices were inflated leading up to the GFC, and then they started falling. Property prices fell more drastically in some of the major cities than in others. However, investment property was hit hard. Many investment apartments were liquidated, as households switched their outlook from debt to savings.

But it could be time to look again.

There are a few observations behind this: firstly, interest rates are near 50-year lows, so debt is cheap.

Secondly, rental vacancies in capital cities are low, meaning strong demand for rental properties.

Thirdly, although house prices are now moving upwards in some cities, it’s a slow recovery nationally, meaning there is value for smart buyers.

Lastly, employment is still strong in Australia, meaning you can find a lender for an investment property.

Where would you start? Personally, I would rather make a profit on my property and pay the tax than be negatively geared, which entails booking a loss. Going for “yield” means buying well and having good equity in the property, so the costs don’t overcome the revenues.

However, if you want to negatively gear a property you must ensure you have an adviser because the ATO does not accept mistakes in your calculations.

But for the basics of what to look for in an investment property, I really like the check list used by RUN Property:

Location: buy close to shops, train stations and schools; Scarcity: Art Deco and scarce architecture increases demand; Features: properties with views, outdoor living spaces or units with off-street parking; Demand: which can be seen in median valued properties, low rental vacancy rates and infrastructure which can support employment; and don’t forget capital growth and rental yield.

Regionally, it’s the mining areas where rental yields are strongest: the Bowen Basin and Port Hedland provide high gross rental yields.

When it comes to owning rental property, always do your homework, talk to experts and be realistic (not greedy).

And good luck.

Mark Bouris is executive chairman of Yellow Brick Road, a financial services company offering home loans, financial planning, accounting and tax, and insurance.

These three articles were originally published on Property Observer in 2012.