THE ULTIMATE GUIDE TO PROPERTY INVESTING IN BRISBANE

Introduction

Brisbane is the third largest and one of the fastest growing cities in Australia. Famous for its meandering River, Brisbane’s evolution to a world city is being driven by significant investment in infrastructure and community amenity. With forecasts the city will add the equivalent of a Gold Coast to its population by 2031, Brisbane is well placed for continued strong demand for property both short and long term.

Brisbane Property Market Overview

Where the Market Has Been

The Brisbane property market is a stable and consistently strong performer, with median house prices increasing 6.8% per annum on average between 1996 and 2016.

Figure 1 charts the median dwelling price in Brisbane between 1973 and 2016 highlighting points of market and economic strain:

  • Negative gearing is removed in the 1980’s
  • Capital gains tax is introduced in 1985 and forecast to devastate property markets
  • In 1989, interest rates hit 17% and it cost a Brisbane household 45% of their income in mortgage repayments, almost double the 2016 figure.
  • 2008 – 2012: The mining boom ends.
  • 2011 – a one in a hundred-year flooding event hits Brisbane.

Figure 1: Brisbane median house price: 1973 – 2016

Source: House Prices In Australia: 1970 to 2003 by Peter Abelson and Demi Chung, ABS 6416 and Full Financial Property Research

Prices in the city have proven well insulated to both external economic shocks and property market specific disturbances. Figure 2 charts the yearly price growth of the median priced house in Brisbane between 1974 and 2016. Over the 43-year sample period, prices declined only twice, coinciding with the GFC (-4% in 2008) and the Brisbane floods (-7% in 2011)

Figure 2. Brisbane – Median House Price Growth: 1974 – 2016

Source: House Prices In Australia: 1970 to 2003 by Peter Abelson and Demi Chung, ABS 6416 and Full Financial Property Research

Where the Market is Going

Australian capital city property markets move in clear cycles, knowledge of which can be used to determine when to invest. The relationship between the Sydney and Brisbane property markets is one example; as Sydney approaches the peak of its growth phase, a trend emerges where demand for Brisbane property increases. That demand is a result of:

  • Affordability
  • Internal migration
  • International migration
  • The lure of relatively high rental returns

Figure 3 charts how much more expensive the median priced house in Sydney was compared to Brisbane between 1974 and 2016. A result of ‘2’ would indicate that a house in Sydney was twice the price of one in Brisbane in a given year (defined as the Sydney premium). A result of ‘1.4’ would indicate a premium of 40%.

Figure 3. Premium of a House in Sydney Over a House in Brisbane: 1974 – 2016

Source: House Prices In Australia: 1970 to 2003 by Peter Abelson and Demi Chung, ABS 6416 and Full Financial Property Research

A clear cyclical trend can be seen where the premium reaches a peak (typically no higher than two) after which it declines for around five years. An upward trending premium is indicative of a rising Sydney market. Conversely, a premium in decline reflects a Brisbane property market in the growth phase of its cycle (as price growth in Brisbane outpaces that in Sydney, Sydney becomes relatively less expensive and the premium declines).

Between 2008 and 2016, the Sydney premium increased from 17.3% to 88%, close to a historic high. This resulted in Brisbane having the highest rate of internal migration in 2015/16 with a gain of 10,149 people. Brisbane’s largest intake of migrants came from Sydney, with a total of 9,900. Sydney lost 23,176 people over the same period.

With an affordability ceiling being reached in Sydney, our research indicates increasing demand for Brisbane property in the near and medium term.

Brisbane Opportunities for Property Investors

Economic Growth

As of June 2016, the value of the Greater Brisbane Economy was $153 billion, representing 49% of Queensland’s total productivity. Figure 4 charts the contribution to gross domestic product (GDP) of New South Wales, Victoria and Queensland between 1990 and 2016. Since 1990, Queensland has been the only eastern seaboard state to witness an increase in contribution to GDP.

Figure 4: Contribution to Gross Domestic Product: NSW, VIC and QLD – 1990 – 2016

Source: ABS 5222 and Full Financial Property Research

Total employment in Greater Brisbane was recorded at 1,180,507 at February 2017 with the National Institute of Economic and Industry Research forecasting the creation of an additional 350, 000 jobs by 2031. Deloitte Access Economics forecasts an outperformance of the Queensland economy relative to the national level with product growth of 3.4% per annum between 2016 and 2020. The resurgence in commodity prices and resulting increase in export earnings will drive job creation and demand for property in the medium term.

Key Economic and Demographic Insights in Brisbane

Total population = 2,270,800

662,000 extra residents by 2031 – It’s like adding the current population of the Gold Coast to the City

2015/16 internal migration = 10,149 people – higher than any other capital city

Young Workforce – 20-39 = 30%.

$250 billion: expected size of Greater Brisbane’s economy in 2031. A 67% increase on 2017 levels

Rented Dwellings: 34.5% (+31,000 households between 2011 and 2016). The highest rate of any Australian city

Low risk profile: Less than 30% of households have monthly mortgage payments more than $2,400, compared to 50% in Sydney

Unemployment rate at July 2017 = 5.7%

280,000 new homes needed by 2031

50 million: Number of passengers expected to pass through Brisbane airport is more than double the current figure

Top Five Industries by Employment

Industry Total Employment (February 2017)
Health Care and Social Assistance 155,300
Retail Trade 118,900
Construction 109,200
Professional, Scientific and Technical Services 107,800
Education and Training 90,700

Infrastructure Projects Driving Growth

Infrastructure investment improves liveability and community amenity, in addition to creating jobs and demand for property. In the coming decade, particularly in the five years to 2022, Brisbane will benefit from investment in excess of $18 billion. Key projects include:

1. Queens Wharf Resort and Casino – $3 billion

4 million new visitors to Brisbane

8,000 jobs once operational

2,000 jobs at peak construction

12 football fields of public space

50 new restaurants and bars

Completing 2022

2. Northshore Hamilton – $5 billion

21-kilometre line with 18 stations

17 stations upgraded with a focus on speeding up boarding

Services every three minutes in peak periods

Completing 2022

3. Metro Transport System – $1.4 billion

Queensland’s largest waterfront renewal project

A 304-hectare open, active environment with riverside living, commercial and retail space

Completing in stages by 2031

4. Brisbane Airport Second Runway – $1.3 billion

7,800 jobs will be created for the Brisbane/Moreton region by 2035 due to additional capacity

Flights are forecast to grow from 227,000 in 2014/15 to over 360,000 by 2035

Tourism revenue facilitated by the airport to double to$ 7.6 billion by 2035

Completing in 2020

5. Brisbane Quarter – $800 million

Occupies a complete city block with Brisbane River views

Will house Australia’s first purpose-built W Hotel

40 levels of prime office space above two levels of riverside dining and luxury retail

Completing 2019

Education

University of Queensland – 35,000 students

Queensland University of Technology – 41,000 students

Griffith University – 3,500 students

Southbank institute of Technology – 30,000

Risks in the QLD Market

Supply

Apartment approvals in Brisbane increased between 2013 and 2015 due to low interest rates, higher investor activity and a council eager to stimulate the economy through construction. Figure 5 charts the number of apartments approved each quarter between September 2007 and June 2017.

Figure 5: Quarterly Apartment Approvals: Greater Brisbane – September 07 – June 2017

Source: ABS Building Approvals by Greater Capital Cities Statistical Area and Full Financial Property Research

Approvals fell 75% between June 2015 and March 2017as a result of:

  • Rising Construction Costs: The Rider Levett Bucknall Oceania tender price index indicates that construction prices in Brisbane increased by 7.2% in 2016 – the highest of any capital city.
  • Stringent Lending conditions for developers: Rising interest rates together with developers being required to sell more of their project (95% in some cases) have meant fewer projects are now feasible.
  • Foreign Investment: Australian Government restrictions on the proportion of a project that can be sold overseas and international limits on capital flight have constricted project sales rates.

Government and banking regulation together with declining project feasibility will see supply and demand fundamentals edge closer to equilibrium between 2017 and 2019.

Sydney vs Brisbane

Affordability

Between 2008 and 2016, the difference in median house price in Sydney and Brisbane increased from 17.3% to 88%, close to a historic high. Figure 6 charts the percentage of income a household in Sydney and Brisbane spent on a mortgage for the median priced house between 1970 and 2016.

The proportion declined in Brisbane declined by 7% between 2008 and 2016, while Sydney households saw an increase of 36%. As of December 2016, the average household in Sydney spent $2,000 per month for a mortgage on the median priced house than the comparable household in Brisbane.

Figure 6: Percentage of Household Income Spent on Mortgage Payments: Sydney and Brisbane – 1970 – 2016

Smart Buyers Looking North

Between 2008 and 2016, the difference in median house price between n Sydney and Brisbane increased from 17.3% to 88%, close to a historic high. This resulted in Brisbane having the highest rate of internal migration in 2015/16 with a gain of 10,149 people. Brisbane’s largest intake of migrants came from Sydney, with a total of 9,900. Sydney lost 23,176 people over the same period.

According to Macquarie Bank, the economic fundamentals had aligned ‘for another great wave of interstate migration into Queensland… Sydney house prices are nearly double those in the other capital cities and job creation in Queensland is on the rise’.

Macquarie forecasts that 130,000 people will make the trek north over the next three years, bringing with them an equity transfer of around $8.1 billion into the region, with $7.3 billion coming from NSW.

When Should You Invest in Brisbane?

An often-neglected aspect of property investment is timing i.e. when should you invest? We can understand why; market timing is arguably the most difficult component of investment. What we do know is that markets tend to move through repetitive phases. While there’s a degree of long term performance consistency across Australian capital cities, there are shorter term price growth disparities. This means an investment in one city (or more) could yield a higher short to medium term capital gain than the national average.

Figure 7 charts (the faint series) the percentage growth in combined capital city house prices between 2004 and 2017 and illustrates clearly the cyclical nature of property markets:

Figure 7: Combined Capital City House Price Growth: 2004 – 2017

Source: Full Financial Property and ABS 6416.

How can we determine when a market will likely transition from the bottom of its cycle to the upswing portion? Our research indicates that price growth tends to occur after growth in:

  • Sales numbers (indicates demand)
  • New dwelling finance
  • Private capital investment (indicates business confidence)
  • Construction rates
  • Employment
  • Clearance rates

    Do all capital cities operate on the same or a similar cycle?

    Long term (40-year sample) there’s a pattern of outperformance in Australian eastern seaboard capital cities. Had you invested $100 in a capital city housing market in 1973 (when consistent data became available) you would’ve achieved the results outlined in table 1. Results to the end of 2016:

    Table 1: Gain on a $100 investment in Australian capital city housing markets: 1973 – 2016

    City Return
    Sydney $3,540
    Melbourne $3,409
    Brisbane $3,142
    Perth $2,774
    Adelaide $2,769
    Hobart $2,532
    Canberra $2,420
    Darwin $2,320
    Source: House Prices In Australia: 1970 to 2003 by Peter Abelson and Demi Chung, ABS 6416 and Full Financial Property Research

    While there’s a degree of long term performance consistency (particularly for Sydney, Melbourne and Brisbane) there are shorter term inconsistencies that can be exploited for capital gain. Table 2 breaks down price growth by city for very five-year period ending December 2016. The middle and last columns show the best and worst performers in each period.

    Table 2: Capital City Price Growth Differences – 1973 – 2016

    Time Period Best Performers Worst Performers
    1986 – 1991

    Brisbane 90%

    Sydney 85%

    Darwin 28%

    Adelaide 41%

    1991 – 1996

    Darwin 48%

    Perth 27%

    Melbourne 3%

    Adelaide 7%

    1996 – 2001

    Melbourne 72%

    Sydney 53%

    Hobart 14%

    Darwin 15%

    2001 – 2006

    Perth 180%

    Hobart 132%

    Sydney 55%

    Melbourne 60%

    2006 – 2011

    Melbourne 38%

    Darwin 36%

    Perth 2%

    Sydney 7%

    2011 – 2016

    Sydney 82%

    Melbourne 36%

    Darwin 2%

    Perth 9%

    Source: House Prices In Australia: 1970 to 2003 by Peter Abelson and Demi Chung, ABS 6416 and Full Financial Property Research

    Looking at table 2, a trend emerges where a city that recorded the best performance in a five-year period has a reversal of fortunes in the subsequent five-year period. Investing at the right time expedites equity uplift enabling you to grow your portfolio sooner.

    An Opportunity in Brisbane

    Interestingly, Brisbane hasn’t been one of the two best performers since between 1986 and 1991, nor has it ever been one of the two worst performers. This is indicative of the Brisbane property markets’ long-term stability. The increasing price divergence between Brisbane property prices and those of its eastern seaboard counterparts will likely spur price growth in the city in the medium term given increasing rates of interstate migration and economic growth.

    Where Should You Invest in Brisbane?

    Given property price growth is a function of supply and demand, where you should invest is largely dictated by the level of demand, both current and future, an economy will likely produce.

    In property markets, demand is primarily driven by population growth and investor activity, both of which are a result of:

    • Economic growth
    • Improvements in affordability/cheaper credit
    • Capital investment
    • Gentrification and demographic evolution

    Benchmarking these on a city level against the national rate, or on a local government area (LGA) level against the city provides an effective measure of the potential for outperformance of a city or LGA provided market timing restrictions are satisfied. The Brisbane property market ticks all the boxes above, positioning it well for growth in the near and medium term.

    Areas of Opportunity in Brisbane

    • The Local Government Areas of South-East Queensland (SEQ) are some of the fastest growing in the nation. Of particular note are the LGA’s of Brisbane, The Gold Coast, Ipswich and Moreton Bay.
Figure 8: Population Growth in the LGA’s of Brisbane, the Gold Coast, Ipswich and Moreton Bay: 2016 – 2041

Brisbane Population Growth: 2016 – 2041

Figure 8 charts the population growth in the LGA’s of Brisbane, the Gold Coast, Ipswich and Moreton Bay between 2016 and 2041. The population of SEQ is projected to increase from 3.4 million to 5.3 million, an addition of 1.9 million people between 2016 and 2041. Brisbane LGA is forecast to accommodate only 20% of this growth on account of existing population density. Surrounding regions will be the beneficiaries of much of the increase in population as shown in the figure below.

Source: ShapingSEQ – South East Queensland Regional Plan 2017

Dwelling Requirements

Figure 9 charts the dwelling requirements in the LGA’s of Brisbane, the Gold Coast, Ipswich and Moreton Bay between 2016 and 2041. Population growth, and the resultant demand for housing, in these LGA’s positions their property markets well for long-term stability and price growth.

Interestingly, only 20% of the growth in dwelling numbers for the Gold Coast is forecast to be delivered on land outside the existing urban area boundary, compared to 45% in Moreton Bay and 75% in Ipswich. This is largely a result of a higher population density on the Gold Coast and indicative of lower levels of potential new land supply in this market.

Figure 9: Dwelling Requirements in the LGA’s of Brisbane, the Gold Coast, Ipswich and Moreton Bay: 2016 – 2041

Source: ShapingSEQ – South East Queensland Regional Plan 2017

Employment Growth

Figure 10 charts employment and population growth in the LGA’s of Brisbane, the Gold Coast, Ipswich and Moreton Bay between 2016 and 2041. Employment growth in Brisbane is forecast to outpace population growth, leading to a reduction in the unemployment rate. In the other LGA’s, population growth outstrips employment growth indicating a continued reliance on Brisbane as an economic and job creating centre.

Figure 10: Employment and Population Growth in the LGA’s of Brisbane, the Gold Coast, Ipswich and Moreton Bay: 2016 – 2041

Source: ShapingSEQ – South East Queensland Regional Plan 2017

Brisbane and its surrounding LGA’s are forecast to increase in population at a higher rate than the national average between 2016 and 2041. The resultant demand for housing will likely lead to long-term property market stability and positive price pressures. In assessing the investment worthiness of a particular property, additional factors you need to consider include:

  • Value – How is the property priced relative to comparable assets. This minimises the risk of a price/value mismatch particularly when it comes to off-plan investment
  • Design – Our research indicates that larger, well designed properties have higher rates of capital growth than properties without those attributes
  • Cashflow – Rent less holding costs
  • Build quality
  • Developer/builder reputation and experience
  • Amenity – In a competitive market place residential amenity adds another dimension to demand
  • Part 2: The Property Investment Process

    Introduction

    As of 2017, 20% of Australian adults– more than 2 million individuals – owned an investment property. The appetite for property investing increased significantly post GFC after the Reserve Bank slashed interest rates to insulate the Australian economy from the worst of the global turmoil. The reduction in interest rates saw the weekly cost of owning the typical investment property decline by more than 70% and lending to investors more than double between 2008 and 2017.

    Educated property investors now enjoy almost utopian conditions where after tax out-of-pocket expenses can be as low as $50 per week on a $500,000 property. More on that later. First, what does the typical investor look like?

    The Typical Property Investor

    • 32 – The average age an Australian first invests in property
    • Nearly half of Australian investors have taxable incomes below $80,000
    • 48% of Australian investors own a unit
    • 53.4% of investor owned dwellings have an estimated market value of less than $500,000
    • Australians typically invest as stepping stone to owning a home, to pay off their home sooner or to create wealth in retirement

    Identify Your Investment Goals

    Australians invest in property for several reasons; some to create a passive income stream, others to put their tax dollars to use, while some are driven more by tradition, be it family or societal. An increasing number of Australians, however, invest in property to grow their retirement nest egg. Regardless of why you’re investing, knowing your end game – what you’re trying to achieve – enables you to act strategically rather than emotionally.

Figure 11 charts the expected income (in 2015 dollars) to life expectancy for a 30-year couple with household wealth at the 50th and 95th percentiles of the population. The income is broken down into the element that will be derived from superannuation and the Age Pension. These incomes are compared to the Association of Super Funds Australia (ASFA) comfortable household income standard.

Figure 11: Expected income (in 2015 dollars) to life expectancy: 30-year old cohort with household wealth at the 50th and 95th percentiles

Source: The Actuaries Institute: For Richer, For Poorer – Retirement Incomes, 2015

According to the Actuaries Institute, a couple aged 30 in 2015 earning the median income (50th percentile) and retiring at 65 would have an annual income to life expectancy below what the ASFA deems comfortable. Only with the help of the aged pension would that couple be able to retire comfortably.

Think about that for a moment.

This typical couple works all their life, contributes a sizeable portion of their income to superannuation and still falls short of achieving a comfortable retirement. Combined, their superannuation provides about $48,000 each year to life expectancy – considerably less than the comfortable benchmark set by the ASFA.

If that wasn’t alarming enough, in determining what constitutes a comfortable lifestyle, the ASFA does not account for any overseas holidays and assumes retirees own their home outright and are relatively healthy (source: ASFA Research and Resource Centre 2016).

Younger and middle-aged Australians are particularly exposed to the public policy risk of social security benefits being cut, and that they may need to pay higher taxes through their working life to support the growing benefits paid to older cohorts. By mid-century one in four Australians will be aged over 65 compared to one in seven in 2016 and about one in 14 people will be aged over 85, up from one in 50 in 2016.

If you’re aged in your thirties, there are 35 years’ worth of potential policy change you need to contend with between now and when you retire. Given the speed at which the political landscape has changed since the relative stability of the Howard years, the prudent way forward for young Australians would be to prepare for a retirement without the Age Pension. If you’re in your mid-thirties and in a relationship, would you be happy to retire on $48,000 per year after close to fifty years as a taxpayer?

The amount of money you need in retirement will vary depending on the lifestyle you want to lead. The first step? Determine the income you envision retiring on per year and work backward to determine the required size of your retirement nest egg. If anything less than a comfortable lifestyle doesn’t sound fair to you then we can work with you to develop a strategy to help achieve your goals.

5 Tips to Help You Buy Your First Investment Property Sooner

We understand that getting into the property market, particularly if you’re a young Sydneysider, can seem daunting; prices have increased significantly in the last few years, you’re bombarded by a growing chorus of naysayers, then there’s all that contradictory information and need to contend with. So why then do Generation Y invest at higher rates than Australians on average?

We’d argue that this disruptive generation better leverages off the skills and resources of those around them. If you’re a young Australian looking to invest, here are 5 things that can help you finance your dreams:

1. Establish a professional support network

When it comes to property investment, there’s more information to navigate now than there ever has been. Countless apps, endless research and numerous stakeholders. Your first step is to get educated. That means knowing how much you can invest while building in financial buffers, knowing where to invest and what to invest in. These important questions are best answered by professionals. Your team should include:

  • A Mortgage Broker – a finance professional can maximise your opportunities and educate you on the risks you need to be aware of.
  • Property Advisory professional – where and what should you invest in?
  • Financial Planner – develop a plan to reach your goals.
  • If you’re not able to immediately finance a property investment or your first home, then develop a plan that sets out clear and achievable goals that get you there.

2. Develop a plan

Setting goals is easy, it’s achieving them that can be difficult. Often, our goals are relegated to the too hard basket because they appear out of reach. What you need to understand is that property investment isn’t a sprint, it’s a marathon. Setting smaller goals goes a long way to achieving those big ones. Ask yourself these questions:

  • How much do I need to save before I invest?

    Be sure to account for government charges and subsidies in addition to a deposit, solicitor’s fees and the potential of mortgage insurance – these can add $20,000 to your upfront costs

  • Break that into smaller goals: How much do I need to save per week to achieve my goal?

    Cashflow management is key. Understand what you spend your money on and if you can potentially cut costs.

3. Buy with a partner or friend

Investing with a partner or friend can save you time and money. Investing with a partner does, however, affect your ability to secure another home in the future. If one co-owner wants to buy a second property, the bank will assess the whole first loan as that borrower’s responsibility. The other risk is that your co-owner wants to sell the property sooner than you do.

4. Get a loan from parents or family

If your parents have owned their home for an extended period, they would likely have accumulated equity that you can use to finance your first investment. It works like this: assume you want to purchase a property for $450,000. You’ve saved $20,000 – enough money to cover the stamp duty and legal costs. You need to borrow $450,000. Your parents (or another generous homeowner) can lend you equity of $90,000 which then acts as a 20% deposit. The loan of the full $450,000 is in your name only and you won’t need to pay mortgage insurance, saving you around $9,000.

5. Consider investing off the plan

Investing off the plan is the layby option for property investment; pay a 10% deposit to secure a property at today’s price and pay the balance in the future. The time between when you pay a deposit and completion can be used to save a larger deposit, or contribute to the costs of purchase such as stamp duty. The risks of investing off the plan include:

  • Finance risk – the lending landscape, and your circumstances, can change before completion. You’ll need to stress test your ability to repay for off the plan more than you would for investing in complete property.
  • Development risk: the risk that the project delivery team doesn’t deliver fully on their obligations, or to the standard outlined at purchase. Development risk can be mitigated through stringent due diligence pre-purchase.
  • Value: the risk of a mismatch between the price you pay and the value of the property. This risk can be mitigated by ensuring the purchase price is in line with comparable recent sales.

Being Strategic

Too often, Australians invest in property without taking a long-term view of how the acquisition will help them achieve their goals. Position yourself well with your first investment by considering the following:

1. Rental Yield – the higher the rental yield on your property, the lower the cost of ownership. The table below shows the after tax holding costs on a $500,000 investment in an apartment in Brisbane, Sydney and Melbourne. Figures are based on an income of $80,000, an interest rate of 5% and an investment of 10% plus costs (stamp duty and conveyancing fees).

Table 3:After – Tax Holding Costs on a $500,000 apartment in Brisbane, Sydney and Melbourne: August 2017

  Total Investment Rental Yield Weekly Cost After Tax
Brisbane $69,694 5% $1
Sydney $70,629 3.8% $67
Melbourne $78,826 4% $56

The total investment differs on account of higher rates of stamp duty in Victoria and New South Wales than in Queensland. When it comes to building a portfolio, holding costs on your existing investments matter. Under the scenario described, an investment in Brisbane is close to cash flow neutral, while an investment in Melbourne or Sydney costs around $3,000 per year after tax.

2. Capital Growth potential – gains on your first investment can be used to finance the acquisition of a second. The growth potential of your investment therefore has a significant bearing on your potential to build your portfolio. While there’s a degree of long term performance consistency across Australian capital cities, there are shorter term price growth disparities. This means an investment in one city could yield a higher short to medium term capital gain than the national average.

Knowing the cycle, dollar value:

  • Had you invested in a $500,000 property in Brisbane in 2003, you’d have had more than $333,000 in equity by 2007 to help build your portfolio compared to $242,000 in Melbourne and negative $94,000 in Sydney
  • Invest in a $500,000 property in Melbourne in 2008 and you’d have $175,000 in equity by 2010 compared to $126,000 in Sydney and $75,000 in Brisbane
  • Invest $500,000 in Sydney in 2010 and you’d have $282,000 in equity by the end of 2016, compared to $149,000 in Melbourne and $ $60,000 in Brisbane.

Being strategic with your cashflow and knowing where to invest are the keys to successful investment.

Locating the Right Property

On an individual property level, demand is a function of:

  • Value – How is the property priced relative to comparable assets. This minimises the risk of a price/value mismatch particularly when it comes to off-plan investment
  • Design – Our research indicates that larger, well designed properties have higher rates of capital growth than properties without those attributes
  • Cashflow – Rent less holding costs
  • Build quality
  • Developer/builder reputation and experience
  • Amenity – In a competitive market place residential amenity adds another dimension to demand

Tax Deductions

Tax deductions can reduce the cost of owning a property by 80%

A common misconception when it comes to property investment is that because you own a large asset it must cost you a lot to hold. The reality is owning an investment property can cost you less than $100 a week after tax. Little wonder why nearly half of Australian investors have taxable incomes below $80,000. Before we get into it, here are some common terms you need to know:

  • Rental Yield: The rental return on an investment, calculated as the total rent per year divided by the value of the property.
  • Depreciation: For tax purposes, the decline in value of the building component (structure and fittings) of a property can be offset against your income (though it’s not an out of pocket cost).
  • Rental Expenses: The cost of owning and maintaining a property, including: property management fees, council rates, insurance and body-corporate fees.

Tax Deductions: Out of pocket costs (interest and rental expenses) and value adjustments (depreciation) that can be claimed against total income and minimise tax paid.

Case Study

You earn $80,000 per year and buy a $500,000 property under the following assumptions:

  1. You invest $70,000 for a 10% deposit, stamp duty and solicitor’s fees
  2. You borrow $450,000
  3. Loan is on interest only terms

Table 4 breaks down the income and tax deductions applicable under the scenario described:

Table 4: Income and Deductions for a $500,000 Property investment

Source: Property Investment Analysis Software

Pre-Tax out of pocket costs = Rent – Interest – Rental Expenses = $10,000

Your total income, which combines your wage and rent, increases to $102,500 against deductions totalling $42,500. The result is you pay less tax, as shown in table 5:

Table 5: Tax Obligation Pre and Post Investment

Source: Property Investment Analysis Software

Post-Tax out of pocket costs = Pre-tax costs – tax credit = $10,000 – $7,000

$3,000 per year/$57 Per Week

For $57 per week after tax you can increase the size of your asset base by $500,000! The more you earn, the more deductions you can claim, and the lower your post-tax holding costs. Figure 12 shows the proportion of total costs accounted for by you, your tenant and the tax credit in the first year of ownership. You pay only 6% of the after-tax costs of owning an investment property.

Figure 12: Who Pays What – New Property?

Source: Property Investment Analysis Software

New vs Old Property

The cost of owning an investment property will vary for many reasons, the most significant of which is its age. The figures on the previous page are based on a brand new property. Here’s why that matters:

  1. The 2017/18 budget removed an investors ability to depreciate fittings and fixtures on a second-hand property. That means investors of new property have a $6,000 tax advantage in the first year of ownership compared to investors of existing property.
  2. You can depreciate the structure of a new property for longer than an older property.
  3. Rental expenses on new property are lower than they are for old property.
  4. Rental yields for new property tend to be higher than they are for old property.

Figure 13 shows the proportion of total costs accounted for by you, your tenant and the tax credit for an old property. The following assumptions were made:

  • Rental yield declines from 4.5% to 4%
  • Depreciation of fittings and fixtures has been removed
  • Rental expenses (maintenance costs) increase by $2,000 per annum

Based on these assumptions, weekly holding costs increase to $136 after tax, so that an old property costs an additional $4,108 to hold per year compared to a new one of the same value. An investor who purchases an old property contributes 21% to the cost of ownership compared to 6% for an investor of a new property.

Figure 13: Who Pays What – Old Property?

Source: Property Investment Analysis Software

This may still be affordable if you only want to invest in one property but can be a roadblock when it comes to building a portfolio. The Australian taxation office indicates that only around 5% of Australians own two or more investment properties. There’s little doubt the proportion would be higher had these investors been in a stronger cash flow position with their first investment. When it comes to building a portfolio, holding costs on your existing investments matter. New property can give you the competitive edge you need to grow your asset base sooner.

Build Your Investment Team

Property investment is not a get rich quick scheme; success takes time, research and ongoing management. It’s also an asset that’s familiar to Australians. It’s that familiarity that has arguably lead the Australian Securities and Investments Commission (ASIC) to note that one of the benefits of investing in property is that:
Unlike some complex investments you don’t need any specialised knowledge to invest in property.

Now, it’s true that anyone can invest in property. Their success, however, will depend on their ability to assess, and draw insights from, a large amount of both quantitative and qualitative information. An additional 1% capital growth per annum (from 5% to 6%) on a $500,000 property over ten years would generate an additional $80,000 capital gain. Knowing when, where and what to invest in has a significant impact on your investment success.

ASIC also recommends investors buy in markets they’re familiar with:

Consider buying an investment property in an area you are familiar with as it will take you less time to research. Check recent sale prices in the area to give you an idea of what you can expect to pay for local properties.

Given property is one of the most significant investments you’ll likely make, decisions shouldn’t be based on what takes ‘less time to research’. It’s an argument better left for buying a car or investing a small amount of money in shares – not for a long-term commitment like property.

Why it Makes Sense Getting Professional Support

  1. There’s more to successful investing than investing where you’re ‘familiar’. Given the diversity of the Australian property market, the rules that apply to one city or suburb might not apply to another. By limiting your opportunities to areas you’re ‘familiar with’, you potentially limit the performance of your property portfolio.
  2. Diversity of information. Navigating and drawing insights from available data can be a full-time job. That plan of investing is often be placed in the too hard basket or delayed resulting in opportunities lost.
  3. Holding a property requires you to be more proactive than holding a basket of shares. Maintenance, depreciation, tenancy, property management: with so many moving parts, having support can minimise the stresses of ownership.
  4. Access leading market research. We assess short and long-term trends and present them in jargon-free, easy to understand reports. Our independent and sourced capital city reports will give you the confidence you need to start or expand your portfolio.
  5. Access developments in multiple growth markets, leading developers, multiple asset types as well as development opportunities.

Conclusion

‘The best time to plant a tree was 20 years ago. The second-best time is now.’ (Chinese proverb)

Too often fear acts as a roadblock to action. We procrastinate, we get bogged in the ‘what ifs’ and we fear exposing ourselves to vulnerability if things don’t work out. When it comes to property investment that procrastination can be costly. In the decade ending December 2016, house prices in our capital cities increased on average $25,000 per year. That’s more than double what the typical household saves.

Get educated, build a support team and take action.

YOU HAVE A VISION, WE HAVE A WAY TO GET YOU THERE.

Reach out to schedule time with the Full Financial team.

YOUR SCROLLING WILL NOT GO UNREWARDED

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