Now, if you just tuned out because you think you’re not in business and you are an ‘investor’ wait until you own more than a dozen properties – you will figure out it’s a business.

One of the secrets to making more is to discover which kind of ‘time’ you are living in. There are only two kinds of time that you have. Busy time is the time you spend that does not make you money. Whereas income time is doing a particular group of activities that make you money.

Let’s delve deeper to discover what kinds of activities are in each kinds of time. Going to seminars is really valuable. It’s important to get an education; in fact I believe it is vital. But that is busy time. Chatting on forums can be a good idea, but that is busy time.

When you are out looking for deals – that is income time. When you are negotiating deals – that is income time. Those are the times when the potential of making money arises.

Let’s look at how this relates to business. For example, when I had a real estate company, what was actually income time? Yes, sales, when I was actually selling something, or advertising something to be sold, or making sure that the sale went through. All of that was income time.  But was shuffling paperwork or talking to people in the office, running meetings, or photocopying, is that income time or is that busy time? It’s busy time.

Now do NOT misunderstand me.  I am NOT saying you should only do income time, of course you have to create systems and do all the little details etc.  However, you need to understand that this alone will not produce income.

I think for most people the reason they don’t do more income time is because this is where the ‘Fear Zone’ is. The Fear Zone, in relation to income time consists of two things. The first is, “what if I make a mistake? What if I screw it up and lose?” The second reason is that it is confronting. In the beginning, it is confronting to put yourself out there, talk to agents and be proactive.

So people avoid the Fear Zone. They stay stuck in the Safe Zone. The Safe Zone is sitting on the sidelines; but no one ever played a game of football, tennis or hockey sitting on the sidelines.

You have to cross that thin white stripe, that separates the sideline from the playing field. And that is what terrifies people. It’s the thought of just putting one foot over the line.

Richard Branson said once that journalists write countless words about how Virgin has succeeded, but he added, “at Virgin we just pick up the phone.” It was his way of saying they just take action – they step across the line.

Once you take that first step it is usually so much easier. It’s that first step, having to make that call, or going to see that property, or if you are in business doing the thing that will propel you into income time that is scary. But the funny thing is that once you take the first step, there is often a wave of relief and an incredible feeling that you are accomplishing something.

As Lao Tzu said, “the journey of a thousand miles begins with a single step.”

The post The Phenomenal Power Of Income Time vs Busy Time appeared first on PropertyInvesting.com.

Since their respective market peaks, Sydney dwelling values are down 13.9% while Melbourne is down 10.7%. Worse still is Perth, down 18.1%, and taking the booby prize is Darwin – down 27.5%. The only capital city that defied the downturn was Hobart (up 0.6% for the month, and a very healthy 35.7% over the past five years).

Against the backdrop of falling values, I thought it timely to first review several elementary investing principles, and then consider four ways that property investors might choose to apply them to the current down-trending property market.

A Little Investing Theory

When you boil all the hype and hoopla down, there are only two ways to make a profit from property: cashflow and capital gains.

Very simply, cashflow refers to your bank account increasing when you receive more cash in (i.e .from rent and other receipts) than expenses paid out (i.e. cash payments). Capital gains occur if your property’s value (net of sale costs) appreciates above its carrying cost, over time.

Either profit type can be made generically (i.e. by the market), or it can be manufactured if the investor can apply their skill and expertise to find and solve one or more problems in a way that adds more perceived value than actual cost.

For example, a negatively geared rental property is, by its nature, negative cashflow, so it must be a growth strategy – either generic or manufactured. Furthermore, a property that you plan to buy, reno and then rent for positive cashflow would be a combination of two profits – generic cashflow and capital growth (initially manufactured via the reno, where more perceived value is added than its cost, and thereafter generic growth from general market appreciation).

Current market conditions indicate headwinds, meaning there is a generally downwards pressure on property prices. Therefore, we currently need to take generic growth off the table in most scenarios as a realistic profit option, but that still leaves us with: positive cashflow – generic and manufactured, and manufactured capital growth strategies.

Strategy #1: Focus On Cashflow

The first approach is to focus on cashflow as the lifeblood of your investing success, in which case, so long as the property is cash-flowing and sustainable, any downtrend can be considered survivable – i.e. a temporary and transitory incident. 

As I’ve said for many years, unless you’re a speculator, cashflow should be the meat and potatoes of any long-term investing strategy, with capital appreciation being the gravy on top. If so, then it doesn’t really matter if prices are falling so long as your assets remain cash-flowing, in which case your investing is sustainable and you won’t be a forced seller in a down market.

The unfortunate problem is, many investors don’t know how to accurately calculate the likely cashflow outcome of owning the property, and they can also overlook other critical aspects of due diligence, thus they purchase somewhat blindly and then have to suffer the unpleasant consequences. 

This saying is true: all ships float on a rising tide. When the market is booming it doesn’t really matter what you buy. Yet when conditions are tough, due diligence is what divides the speculators from the savvy and sophisticated investors.

I’m actively looking for good quality cashflow properties right now, and have made multiple offers in the past few weeks.

Strategy #2: Manufactured Growth

The second strategy is to buy and manufacture your profit. As mentioned, the not-so-secret formula for doing this successfully is to add more perceived value than actual cost. Of course, the usual strategies apply: sub-division, renovation, and development – but really any problem you can fix for a profit will deliver a manufactured growth outcome.

A down-trending market produces some extra heartache, and risk, when manufacturing your property profits since your gain is predicated on perceived value, and if values are falling, then your profit margin might be shrinking during the time it takes to finish the project.  

Consider a property that is bought for $350,000 with an ‘all in’ reno budget of $100,000 and an expected resale price of $500,000. Such a project is expected to make a profit of $50,000, and so this is your ‘margin of error’. That is, the project’s perceived value can fall by up to $50,000 and you’ll still be okay – any more than that and you will not recoup all of your actual cost and you’ll be in the red on the project.

Low profit margin properties could be acceptable in an up-trending market where the time period will tend to inflate your profit, but they should be avoided during other times in the market cycle.

Premium properties tend to be the best performers in an upturn, and the worst performers in a downturn. Why? Because property prices tend to be more volatile the more expensive they become – rising sharply in up markets, and falling faster and harder in soft markets. The smarter, safer, and more sensible risk-averse approach when in a downturn, is to target properties at the more affordable end of the price spectrum, and ideally where there hasn’t been a sudden spike in supply.

If you are manufacturing growth then be sure to calculate your Plan B Cashflow outcome, which is “how well would you cope if you couldn’t sell the property and instead had to rent it out?”

Strategy #3: Straw Hats In Winter

I’m extremely confident on this point – sooner or later, property prices will recover and several years after they do, today’s property prices will look cheap. The questions I can’t answer are when the bottom of the market will occur, and how quickly will property values recover.

That said, compared to the peak of the market, many properties in high-quality areas are looking cheap and possibly good value. Beware! Value should be based on strategic value now (i.e. scarcity) and the growth narrative into the near future, as opposed to what the property may have been worth on a good day in a property market boom that has long since ended.

I’ll be talking about this topic in a lot more detail at my upcoming 1-day Millionaire Mastermind Workshop. If you haven’t got your ticket(s) I suggest you do so now.

Strategy #4: Ignorance Is Bliss

The final strategy is to forget all the strategy and investing science, and just buy something you like and hope it will be a good asset tomorrow.

This is a strategy I strongly suggest against pursuing, because it involves accepting high levels of risk without being adequately compensated for it. That is, the market could continue to fall for many months, even years, and you’ll suffer for it.

A smarter approach is to simply wait until the market has bottomed, then buy on the bounce when there is more upside for less risk.

Final Words

When it rains, everyone out in the open without an umbrella will get wet.

As simple as it sounds, for some investors the best advice right now is to simply stay indoors – meaning, don’t venture outside for the moment and instead concentrate on indoor activities.

For other investors who are appropriately educated, equipped and empowered to venture outside in the wet, now is an opportune time to make great progress while there are few people cluttering up the investing streets. Certainly, the groundwork you accomplish now will prepare you for handsome profits when the rain stops and the sun comes out again.

Finally, if you find yourself caught in the storm without an umbrella then don’t just stand their getting soaked to the point of catching investing pneumonia. Seek shelter – somewhere safe to ride out the storm. It too will pass, eventually.

The post Ideas About Investing In A Down Market appeared first on PropertyInvesting.com.

Interpretation of data can be much the same game. On the ABC’s Insiders program on the weekend, the host and his guest (a politician) each argued that the summation of the facts they were quoting, which was at complete odds with the other, was right, and that the other person was completely and factually incorrect. An independent review of the facts later on proved they were both right, and both wrong! It was a duck, and a dinosaur!

The same mixed reading is also present in the latest real estate and housing data. Now that the Autumn sales period is underway, there is certainly more transaction volume, and this ought to mean that the trend should be easier to identify. However the number of properties actually being listed for auction is well down on the same period last year (with major auction markets Sydney down 27% and Melbourne 31% lower).

Fewer properties being put up for sale is also confirmed with RealEstate.com.au noting that its listings dropped 3%, and they flagged possible further declines as buyers hold off until after the election. If Labor win, as seems likely, there will be a period of substantial uncertainty as lobbyists jockey to be heard while new policies are formed. Typically, when people don’t know what to do, they do nothing.

CoreLogic’s read of the property market for February revealed a decline of 0.7% in national dwelling values, with all capital cities falling except Adelaide (no change) and Hobart (up). Sydney is now down more than 10% for the year to February – the first time that has happened in 30 years. Melbourne is not far behind.

It’s not all doom and gloom though. Initial auction clearance data from last weekend showed ‘green shoots of growth’ in Sydney’s property market with a preliminary auction clearance rate of 61.3%. Melbourne was still soft at 54.9%, but recovering from being stuck in the 40%’s. Add to that strong jobs growth, projections of population growth, along with a natural ‘correction’ to housing supply causing approvals number to throttle back, and perhaps the claims of a pending crash is nothing more than alarmist rubbish.

Still, how do we invest with confidence and clarity in times when there is such uncertainty?

I think the story of how pilots fly at night or through fog, when visibility is low, provides a great illustration. At such times pilots have to rely on their instruments rather than their intuition.

In other words, investors would be wise to lean on the investing ‘optics’ – the financial parameters – of the investment rather than second-guessing their intuition about timing. If it’s a good deal because the income stacks up, or you feel the growth story over the medium to long term makes the risk worthwhile, then go ahead and buy with conviction. Why? Because eventually this current market malaise will pass, and if I know anything about real estate it’s this: when the market does turn, tomorrow’s investors will wish they had bought more at today’s prices, and at today’s low interest rates.

A Steveism to remember is the antidote to risk is skill. Risk has surely risen with all of the conflicting data and current market uncertainty, so to offset this heightened risk, the amount of skill you need to succeed must also increase.

In summary, now is not the time to close your eyes and guess that we’re at or near the bottom, and thus go buying in hope the prices will recover. However, it is the time to invest in being able to read and interpret what your investing instruments are telling you about the deals and opportunities you ought to be enquiring about. After all, you can’t buy a great deal you’re not looking for, and, as my property mentor, Stu Silver says, if you’re not making offers, you’re not making money.

The post Dinosaur or Duck? appeared first on PropertyInvesting.com.

Not long ago, when the Great Australian Dream was to own a house, units were sometimes considered as second-class accommodation options; the preferred domain of the ‘downsizer’, or for those who could only afford a watered-down version of the ‘full’ dream.

Times have well and truly changed though, as evidenced by Tim Lawless from CoreLogic noting in their March Hedonic Home Value Index that “The unit sector across Sydney and Melbourne has shown stronger conditions relative to detached housing.”

When I asked my Property Protégé Group why units might be performing better than houses, even despite a pending potential glut of new units that are forecast to hit the market over the next year or so, they correctly identified these realities:

1. Affordability 

If you don’t want to rent, but you can’t afford a house in the area you want to live in, what do you do?

You compromise by resetting your expectations. Sure, while it would be nice to own a home, if it is simply not financially feasible (i.e. insufficient deposit and or borrowing ability), or the debt obligation not wanted (i.e. preference for less debt but more life), then the compromise is no longer seen as an unpleasant ‘second choice’, but rather a prudent decision.

2. Convenience

The classic home on a quarter acre block of land used to be the goal. Not any longer. That slab of land requires too much maintenance and upkeep – weeding the garden, mowing, and if you are unlucky enough to have a pool (once something that made you the coolest kid in primary school), then you are accursed in having to not only regularly scoop out the leaves and clean it, but to also pay a small fortune in keeping it clear and blue, when nature wants it to turn murky and green.

A unit, on the other hand, is compact and convenient meaning the private open space is easier to maintain. If more space is needed, then there are many local parks to choose from – all of which are well looked after (and paid for) by the local council.

With the tendency for units to be built in large numbers in those suburbs close to CBD’s, choosing to buy a unit there can save some serious coin in travel costs going to work.  If one didn’t want to drive the now much shorter distance to work, the infrastructure is often already in place to use heavy rail on a daily basis, saving lots in running costs and the parking of a vehicle near your workplace.

3. Space

Less is the new more. It was previously mandatory to have a ‘spare bedroom’ on the off-chance someone came to stay, but more often these spaces became a sort of ‘urban self-storage’ and a place to dump stuff. Not anymore.

A vacant room adds a lot of mortgage cost for not much living benefit. Unexpected visitors can now find a friendly patch of carpet to unfurl their blow-up mattress, or even better, stay at the local Quest apartments (or AirBnB, or even couch surf).

4. Expectation

In addition to their skill and money, the recent influx of overseas immigrants and overseas investors have brought with them new ways of thinking too. One such idea is that living in an apartment is not second class at all, but rather mainstream and normal. While it might take a generation or two for the idea to embed into the community as a whole, there are nonetheless many active buyers whose Great Australian Dream was just to live here, and anything they can call their own is a real blessing.

5. Concept Gentrification

The inability to own a home and having to settle for a unit is no longer just for a few hapless unmarried or elderly folk. Nowadays, the inability to afford a home is a mainstream issue affecting many (particularly those under 30), and this has had the effect of legitimising units as the new normal, and reclassifying home ownership as something that only the elite can afford. This could lead to some interesting ‘tax targeting’ in the future as the voting block of those owning homes dwindles.

The Future Of Houses

What are the consequences for houses that are becoming less attractive and affordable? Specifically, as baby boomers retire and downsize (to units) in increasing numbers, with the decline of international buyers, what new demographic can afford (or will want) to pay top dollar for what is becoming an obsolete form of accommodation?

Investor Response

It is indisputable that the unit (more accurately described as “dwellings other than detached houses”) sector is increasing in numbers and popularity. While I’d continue recommending shying away from new units sold off the plan (owing to a potential lack of scarcity and because much like a new car, new units tend to fall in value immediately after first use), there is definitely opportunity for those who want to buy (for scarcity) and hold, renovate, or even possibly creatively subdivide (i.e. buy the block and sell the unit, or some kind of strata subdivision).

Conclusion

As demographics change over time, this leads to a re-framing of so-called ‘normal’ desires and expectations. Consider the needs and tastes of one hundred years ago (when horses and carts were phasing out) to today (when owning any kind of car is becoming normal). Naturally, society’s changing tastes will shape what’s hot (and cold) in the property market. Our job as investors is not to pass judgement on their legitimacy, but rather to supply what is in demand, because so long as people live in houses (or units) you can make money by buying problems and selling solutions.

How have your investing attitudes changed with the times? What ‘old style’ philosophies and prejudices might be a disguise for investing dogmas that are causing you to overlook profitable opportunities?

Have your say on this topic by leaving a comment below.

The post Are Units As Safe As Houses? appeared first on PropertyInvesting.com.

Here’s an illustrative case study to help flesh out the theory…

Ben and Brittany are hard workers and look forward to their annual two week Christmas / New Year holiday at their favourite beachside destination – a three hour drive from the property they are currently renting as their principal place of residence. They love it there, and are always commenting about how nice it would be to have a holiday home for their (planned) kids and (hoped for) grandkids. They see a ‘shack’ for sale for $500,000 (which is about half of the value of the place they’re renting) and, although it’s a stretch, if they rented it out when they weren’t using it to help pay the mortgage, they might be able to afford it. Besides, they’re sure it will make a good investment because it will appreciate in value over time.

What should they do?

Around this time every year a question may pop into your head… is it a good idea to buy a holiday home? After all, it’s summer holidays and the weather is warm, so the idea of having a holiday retreat to escape to is very appealing – so the romance of the proposition may have you reaching for the computer to see what’s available, and for how much.

However, before making an emotionally charged purchase, here are six ‘reality reminders’ to consider:

1. Pleasure Or Profit?

Robert Kiyosaki, author of ‘Rich Dad Poor Dad’, says that your home isn’t an asset but rather a liability.

I disagree. A home, or a holiday home, meets the accounting definition of an asset since it holds future value. However, a choice needs to be made about whether the property is a lifestyle, or financial, asset. 

Lifestyle assets are purchased for pleasure. The returns are enjoyment and happy memories.

Financial assets are purchased for profit. The returns are (net) rent and/or capital appreciation.

A distinction between these two purposes is needed because the motivation and psychology for purchasing, holding, and eventually selling real estate differs depending on whether you’re holding it for pleasure or profit.

For instance, if you own a financial asset that consistently loses money, then it should be sold and the money redeployed. On the other hand, a lifestyle asset that loses money might still be kept, provided the perceived enjoyment exceeds the actual cost.

Just be careful where and when you have mixed motives. That is, buying a lifestyle asset for perceived financial benefits, or purchasing a financial asset for perceived lifestyle benefits. The lack of clarity might mean you end up with a conflicted asset that doesn’t perform to its maximum potential in either a lifestyle or a financial capability.

For Ben & Brittany, they seem to be unsure about whether the investment is being purchased for lifestyle (i.e. enjoyment), or financial (i.e. monetary) purposes. The holiday home seems to be a lifestyle asset with financial upside, yet enjoyment compromises will need to be made in order to afford it, and the added financial pressure may offset any enjoyment.

If they are buying for enjoyment there shouldn’t be any added financial pressure, and if they are purchasing for profit, the question needs to be asked “is this the best capital growth property we can find?” Another consideration is how will this purchase affect their ability to purchase a home or other investment property.

2. Use

How often do you think you’ll use the holiday home? The risk is that you overstate your use based on how you feel when you purchase it – i.e. it’s fine when you’re on holiday and the location is in peak season, but, once you own it, you may find it harder to consistently get away. Work commitments, birthday parties, school sports, etc. have a habit of invading the time you otherwise hoped to get away.

Consider this: if you planned to visit the property every other weekend then you’ll be occupying it 52 days a year. That might sound like a lot, but what you’re also saying is that the property will be unoccupied 85% of the time (i.e. 313 days).

If you decide to rent the property first and then backfill the empty periods by using it yourself then, as mentioned above, you’re choosing to compromise your enjoyment because it will be in more demand during the choicest times – usually school holidays. You may also find it hard to plan a family vacation, as you’ll want to keep it available for rent until the last minute.

Remember too that shoulder and off-peak seasons will see an increase in the available properties for rent at a time when demand drops off, so rental income will decrease. Furthermore, that peak rental time will be when the property is at its best. Using it yourself at that time will really hurt your potential return.

Finally, sometimes people purchase a holiday home with a view of renting it out, but, after a couple of bad experiences, they become reluctant to continue – either because the property is soiled or damaged, or because the idea of having strangers sleeping in your bed and/or using your household items is a turn-off. For this reason there is a tendency to furnish holiday homes rather sparsely and, while practical, the lack of ‘home touches’ makes it less of a holiday home and more of a holiday rental. 

While Ben & Brittany will hope to use it more, at the moment they’re both hard workers and so are unlikely to have a lot of discretionary time to drive three hours each way to their holiday home. Furthermore, to maximise their return, they’ll want to rent it out during peak-season, which coincides with the times when they presently visit that location and want to use it themselves.

3. Management

Unless the holiday home is nearby, you’re going to need some sort of local management oversight to advertise rental availability*, and to arrange for rental, access, post-use inspection, cleaning, replacement of consumables, etc.

* For sure, the internet has made it easier for tenants to book direct with the owner, but this self-management option does not solve the other problems of managing access, checking the property is left in good condition, cleaning, etc.

Good management doesn’t come cheap, and holiday rental management is usually charged at a premium for the extra services provided. If the plan is to self-manage, then this will require time and expertise.

Ben & Brittany are three hours away, and so any need to ‘pop down’ and do something to the property will be six hours of driving, plus the cost of petrol, wear and tear on the car, etc. Given they’re busy people, they’d be sensible to use a local property manager, but this will eat up a fair chunk of their peak-season rental profits. 

4. Ownership Onus

Being the owner of a holiday home carries with it extra fiscal responsibilities – like being charged council rates and land tax, paying usage costs such as cleaning, maintenance, utilities, etc. and, of course, sourcing and paying insurance – which can be difficult to obtain in areas prone to flood, bushfire, or if the property will be vacant for substantial periods of time. 

Given they currently rent their principal place of residence, and also their holiday accommodation, Ben & Brittany may be unaware of the potential type and cost of likely ownership expenses. As such, it will be important for them to do a thorough due diligence in order to complete an accurate financial analysis. The risk is that they’ll over-estimate the income, and under-estimate the expenses.

5. Resale

Holiday homes can be easy to buy, but harder to sell. This is because the available pool of buyers is often limited to fellow holiday home owners, and those looking to downsize and permanently move to that location.

Holiday homes are a discretionary purchase. When interest rates rise and/or economic conditions decline, the justification for owning one diminishes. Hence, during such occasions, housing supply of holiday homes tends to increase as the number of interested buyers diminish, and this will put downwards pressure on prices and increase the time it will take to sell. 

Ben & Brittany have a multi-generational timeline for ownership, so they’d be smart to consider purchasing it in a structure (i.e. company or trust) that would allow for continued family use without passing on ownership to any particular sibling.

6. Flexibility

Once you own a holiday home you become committed to using it to get ‘value for money’. One downside to this is that you may not be able to afford, or want, to go elsewhere for future holidays.

Going to a destination because you want to is different from going to a destination because you have to. The former is a choice. The latter is an obligation. Being obliged to do something detracts from its enjoyment.

 Ben & Brittany only have four weeks vacation a year, and to get value for money they’ll want to spend as much time as possible at the holiday house. One opportunity cost would be in missing out on the vacations they might have had elsewhere.

Conclusion

If you’re considering buying a holiday house for profit, then you need to ask whether it’s the best rental and/or capital appreciation opportunity you can find. A good question to consider is whether you would buy the property even if you assumed you couldn’t use it.

Alternatively, if you’re thinking of buying the property as a lifestyle asset, then assuming you can afford it, you need to realistically evaluate whether the actual and opportunity cost and commitment of ownership will outweigh the enjoyment you’ll gain from using it. Now the question to consider is – would you buy it if you found you couldn’t easily rent it?

The worst place to be is conflicted – stuck in the middle between purchasing for pleasure and purchasing for profit. Instead of getting the absolute best of either, you risk having the worst of both.

While it may seem like an attractive proposition, I believe Ben & Brittany would be better advised to continue renting their holiday accommodation and looking to either invest elsewhere for profit, or, if they want to purchase a lifestyle asset, buy a home where they’d spend more time living. Later in life, once they’re more financially secure, and, assuming they still have the desire, they can then purchase a better holiday home with more fiscal and family certainty.

That’s my say, but what do you think – do holiday homes make good investments?

The post Do Holiday Homes Make Good Investments? appeared first on PropertyInvesting.com.

Have you ever wondered whether units or houses make better investments? In this article, I’ll explore the pros and cons for both and provide you with a definitive conclusion.

Units

Compared to houses, units tend to be smaller abodes, with smaller rooms and less private open space. They may be stand alone (i.e. detached), or they may have common walls with abutting dwellings (i.e. semi-detached), and may also have shared space for driveways and parking.

Once the domain of the pensioner or downsizer, units (aka apartments, condos, and plexes) are now popular to the point of becoming mainstream for these three reasons:

1. Affordability

In general, in any given suburb, a unit will be cheaper than a house. This will be because it is a smaller sized building with more compact bedrooms and living areas, but more importantly, because it has less land.

As mentioned, having to put up with small used to be seen as a compromise. Not so much anymore. Smaller now means less cost (i.e. rates, utilities, etc.) and less effort to maintain (i.e. cleaning, garden, repairs, etc.).

2. Convenience

While apartment living has always been a necessity in population dense cities like London and New York, and in places like Europe, Australia was urbanised on the back of a “house in the suburbs on a quarter acre”, and a commute (usually via public transport) to the city for work.

Yet, as travel times increased, and as the amenities in city areas improved, the CBD area has morphed from a place to work and be entertained, to a place to live and work and be entertained. For some, the convenience of walking to the office and access to superior amenities such as restaurants, entertainment, transport, etc. have outstripped the benefits of a traditional house in the ‘burbs and a long commute on a congested freeway to work.

Furthermore, as mentioned, while seen as odd by past generations of Australians, unit living is the norm in many Asian and European countries where space is in short supply. Without any prejudice, immigrants see nothing unusual about living in the same type of (compact) accommodation as is the norm in their country of origin.

3. Yield

For investors, compared to houses, units generally provide a better income return. That is, despite needing to accept a lower rent compared to what could be achieved owning a house, investors are more than compensated with a cheaper purchase price so that when the numbers are crunched, it is usual for a unit to have a higher percentage gross return (i.e. annual rent divided by purchase price) than a nearby house.

Houses

To qualify as a house, the dwelling normally has to be on its own title and have no shared or common area, including walls, driveways, etc. Houses are usually larger than units – both in respect to room size and the amount of private open space.

As mentioned, for many generations past and present, the Great Aussie Dream was to own your own house, which was typically on a substantial parcel of land (such as the classic quarter acre which is a little over 1,000 square metres). While land sizes have diminished (most new houses today come on land parcels of 500 square metres, or less), houses remain the pinnacle of home ownership for those who like their space, are raising a family, and/or who prefer not to be living a wall away (i.e. a few metres) from their neighbours.

Which Is The Better Investment?

Consider this conundrum: you can either buy an older 2-bedroom house for $500,000 in suburb Y, or a new 3-bedroom unit in the same suburb. Which should you choose?

As we flesh out an answer, here’s a general investing principle to remember:

You are better off purchasing the worst house
in the best suburb you can afford,
than the best house in the worst suburb
you can bear living in.

Have you heard the saying “Land appreciates while houses depreciate”? It’s true. What makes a dwelling more valuable is not the bricks and sticks it is made from, which will deteriorate over time and require maintenance, but rather its land size and proximity to appealing amenities. This is sometimes paraphrased as “location, location, location”, but that is only partly true. For land to be valuable it must be usable and it must be scarce; land that is not usable or scarce is unlikely to be a good investment.

The principle mentioned above captures the reality that a bad house on good land will be a better investment than a good house on bad land.

Another general principle to remember is:

Buy the best-worst house you can afford
rather than the worst-best unit.

In other words, dollar-for-dollar you are better off buying a run down house in your chosen location than a spruced up unit. Why? Because over time the land will become more valuable (as it comes more scarce) whereas the unit will depreciate in appeal as it suffers wear and tear from use.

It is true that your rental yield will probably be lower for the house, but whatever you miss out on in income should be well and truly made up for in extra capital appreciation over time.

These two points made, you may be faced with limited deposit capital and/or borrowing ability. If so, then a unit can still be a smart investment if it helps you get in the property market, rather than having to watch on the sidelines as property prices increase faster than your ability to save.

If you are considering purchasing a unit, then here are four recommendations to remember:

1. Buy old, not new. Older units are usually bigger, and you won’t pay a premium for shiny and new which is only temporary anyway.
   
   
2. Don’t get attached. The less attached a unit is, the better. If possible, avoid common walls abutting living areas.
   
   
3. Less is better. The fewer units on (or in) the block, the better. The more dwellings there are, the less scarcity there is, and the more cramped the living conditions, and the less land that would be “yours”.
   
   
4. Aim high, or low, not middle. You are better off with a ground floor unit (for convenience), or a high floor unit (for the view), rather than being in the middle with the masses.
   
   

To conclude, data that tracks rental yields and movements in median dwelling prices over time indicates that while units deliver a better rental yield than houses, houses outperform in terms of capital appreciation. Given Australia is largely a growth (rather than income) property market, you’re better off with a house than a unit, and better off with a unit than nothing at all.

The post Units or Houses – Which Make Better Investments? appeared first on PropertyInvesting.com.

Key Highlights:

• We saw a boost in auction volume this week, which meant more choice for buyers.
• Auction clearance rates spiked, showing demand is solid and vendors are realistic.
• Home prices have been growing four to five times faster than wages.
• • Swiss Bank UBS is warning of a property crash if the RBA hikes rates.

This Week’s Preliminary Auction Activity (Week Ending 23 July)

Demand appears to have spiked this week, evidenced by both auction volume and the preliminary clearance rate increasing across the combined capital cities. As usual of late, Melbourne pulled the majority of that weight, while Sydney and Perth didn’t look too shabby either. Though it’s not listed in the graph, Canberra also posted a preliminary clearance rate in the 70s.

Keep in mind, both Sydney and Melbourne’s final clearance rate results will likely be adjusted down once all the auction stats flow through from agents. Sydney may end up below 70 percent, while Melbourne is more likely to come in around 76 or 77 percent.

Source: CoreLogic

Auction volumes are expected to increase again next week in all capital cities. This will provide another test of demand, as buyers will have more to choose from, possibly leading to greater competition amongst sellers unless demand falls.

Last Week’s Final Auction Results (Week Ending 16 July)

While Sydney’s clearance rate has remained below 70 percent for the past six weeks, Melbourne hasn’t seen a clearance rate in the 60s since this time last year.

Here are all the final capital city results for last week:

Source: CoreLogic

The North West and Eastern suburbs were most in demand in Sydney last week, while the North East, Outer East and South East took out the top spots around Melbourne. Wollongong, south of Sydney, was the best performing regional area.

Source: CoreLogic

For the historical data of weekly auction clearance rates, click here.

Recent Home Price Movements

Home prices were climbing dramatically week-on-week in Sydney and Melbourne over the previous five weeks, but this week marked a shift in that trend. Home prices remained essentially the same as they were last week, which could indicate this recent mini-boom may be topping out or rolling over for the winter.

Source: CoreLogic

That said, based on today’s daily index, Sydney and Melbourne are up 2 percent and 4 percent respectively, for the rolling quarter. Brisbane and Adelaide both dipped, putting each of them negative for the quarter. Only Perth remains in the red for the year.

Source: CoreLogic

Property Market Analysis

Melbourne’s preliminary result was red-hot this week, nearly hitting 80 percent. Sydney also saw a boost from previous weeks. While these results are sure to fall with the final reporting, we will most likely see a combined capital city clearance rate this week above 70 percent for the first time in months. 

The higher clearance rates and steady price action this week could be due in part to vendors setting more realistic reserves. In light of auction volumes beginning to trend back up, agents knowing competition would be stiffer surely played a part in conditioning down seller expectations.

As I look at the bigger picture and what seems to be impacting price movements the most, auction volume (supply) stands out. As we all know from the laws of economics, falling supply equates to rising prices, while rising supply leads to falling prices.

For this week at least, prices have leveled off. With supply increasing again next week, it will be interesting to see if prices slip a little further as well.

What It Means For Investors

If you see the trend as your friend, then you may find reasons to expect home prices in Sydney and Melbourne to continue rising. Both the long and short-term trends continue to be up. Melbourne is up over 16 percent for the year and Sydney nearly 13 percent.

With growth like that on the heels of the last five years, it’s hard to see the property market grinding to an immediate halt. Unless the RBA does the unexpected and lifts interest rates, it would be reasonable to expect a moderate amount of growth in 2018 as home prices flatten out in the second half of next year or in 2019.

If you instead take a more contrarian approach to the market, you may be quick to point out that home prices have been increasing four to five times faster than wages since 2012. It would also be reasonable to expect that growth like that can only go on for so long until demand falls, supply rises, and prices correct.  

Speaking of a correction, an economist at Swiss bank UBS has warned that the Australian property market has peaked and that any interest rate hikes from the RBA could trigger not just a correction, but a crash in home prices.

But assuming rates remain on hold, he said, “Looking ahead, we still see price growth slowing to 7 percent year-on-year in 2017 and 0 to 3 percent in 2018, amid record supply and poor affordability.”

As I’ve said before, I can’t see the RBA raising rates. The Board knows what that would mean, not only for home prices but for our entire economy. But that doesn’t mean we should necessarily expect prices everywhere to continue rising.

Smart investors will learn how to buy properties that give them multiple ways of winning – not just generic capital growth, but through positive cash flow and manufactured growth. Deals like that are not just found, they are created.

That means your most important key to success in the current market is growing your level of property investing sophistication beyond that of the common person. Rather than focusing on trying to predict market movements, focus instead on educating yourself and growing in confidence.

With help from Steve McKnight’s Property Apprenticeship course and my mentoring program, you can lay the right strategic foundation and learn a proven system for finding winning deals, all while having someone guide you every step of the way.

If you’d like some no obligation help working out your best property investing strategy in the current market, take a moment now to set up a complimentary Strategy Jumpstart mentoring session with me through my online scheduling system.

The post Supply is Rising as Home Price Growth Takes a Breather appeared first on PropertyInvesting.com.

A common question I’m asked is, “What makes a better investment – city, regional or rural real estate?” As you’ll see, there is an answer, but before I reveal it, let’s cover some investing theory.

Opportunities Are Not Location Specific

To begin with, an important point needs to be made –”Opportunity is not location specific” – good (and bad) deals are found everywhere. 

Indeed, a saying of mine to remember is this: “As long as people live in houses you can make money out of real estate,” and this means that if you can find a problem, whether a people or a housing problem, and solve it cost-effectively, then you should be able to create wealth.

This might be finding a tenant, or allowing someone to buy a house they otherwise couldn’t buy – such as offering carry-back financing, or adding more perceived value than actual cost by doing a cosmetic renovation. The point is that problems are really just opportunities in dress-up, and problems exist everywhere. 

Investor Constraints

We all have a different amount of time, money, investing skill and risk tolerance, and this means an investment that is right for one person may not be right for another.

Time 

If you already have a 9-to-5 job, then trying to be a professional property investor in your spare time, like at 9pm after a hectic day at work, is going to be very difficult to sustain. Such investors are probably better off with a set and forget strategy, such as a low-maintenance blue chip growth rental property.

Other investors choose to accelerate their wealth creation by being more hands-on, and this will require more time to find value-add opportunities and solve them. To do this successfully, such investors may need to take extended leave, or reduce their permanent work hours, in order to ‘free up’ the time needed.

Money

As a rule, a city property will be more expensive than the equivalent home in a regional or rural area. Therefore, if you want to invest in the city, you will need more capital for deposits, and the wherewithal to qualify for a larger loan.

You probably know that I started off buying regional properties – in Ballarat to be exact. The main reason for that was two-fold: first, it’s where I could find positive cash flow properties; and second, it’s an area I could afford to purchase in.

Investing Skill

Great investors are made, not born. You become a great investor by first investing in yourself (i.e. in education), and then using your skill and expertise to find, manage and sell real estate. In the absence of skill, an investor must speculate, and the more things you leave to chance, the more chance there is that things will go wrong.

Risk Tolerance

Some people find the idea of bungy jumping appealing. I don’t. It’s too risky. Same with sky-diving, alligator wrestling, snake charming and the like. On the other hand, I’m right at home buying $100m worth of US commercial property, negotiating a tricky real estate deal, and standing in front of hundreds of people at a property seminar. This just serves to prove that we all have a different risk threshold, and one person’s risk is another person’s opportunity. 

For instance, you might think that regional property is risky because the market is smaller. Someone else might feel that city properties are risky because they are more expensive. The truth is that risk is inverse to skill; the higher your skill at a particular endeavour, the lower the risk will be in doing it.

Consider open heart surgery. If I had to perform an operation on you this afternoon, then the risk that the operation would fail and you’d die is very, very high. But for a skilled heart surgeon, who does this operation many times a week, it’s just another day at the office (or, in this case, hospital).

Investor Goal

Different investors have different goals. Some investors want growth. Other investors want income. Some investors want to negatively gear. Other investors want to positively gear.  The diversity in desired outcomes allows for one person to be selling a house (because they feel the property market has peaked) and another person to be buying that same house (to create an income loss and allowing him to negatively gear with the hope of long term capital gains) to both be right.

Investment Outcome

Different properties offer different profit outcomes. By their nature, city properties have very low rent returns, but tend to appreciate faster in value (at least in dollar terms). Regional properties usually offer higher rent returns but may not appreciate in value as fast as city properties. 

Steve’s Six Principles For Deciding Where To Buy

Here are six principles to consider when deciding where to buy:

1. Invest where you can afford to buy.

There’s no point looking to buy property in an area that you can’t afford. If you want to buy a city house as an investment property but can’t afford Sydney then try Melbourne, or Brisbane, or Adelaide, or Hobart. Alternatively, if you must buy in a certain suburb in Sydney, swap an unaffordable house for a cheaper unit, and see if that helps. If it doesn’t then change the suburb until it does.

2. Invest where the return makes sense.

If the city, regional or rural area you want to invest in doesn’t have real estate you can purchase that will deliver your required return within your required timeframe, then look elsewhere.

3. Invest where, and how, you feel comfortable.

You should invest in locations you know something about and feel confident investing in, and your chosen investment strategy should be one that you have been educated in implementing.

4. Invest where the majority of people own.

Investing always carries risk, but if you invest in an area where the majority of people own, rather than rent, then you are somewhat insulated against a sudden price decline like investor-dominated towns like Moranbah and Gladstone experienced.

5. Invest where a ‘pathway of progress’ is emerging.

Another Steve saying: You buy in an area as it is today, but you’ll sell in an area as it will be tomorrow. It makes sense to buy in an area that people will want to live in more and more as time goes on. The perfect situation is an area that is in what I call a “pathway of progress”. That is, better job opportunities, improving infrastructure, amenities, transport, etc. that will make the location more desirable.

6. Invest where the trend is your friend.

I often say the fastest and easiest way to make money is to find a fast moving trend and jump on it. That way – just like paddling downstream – the market momentum will carry you, and your profits, along with little effort. The alternative is to invest where the trend is not your friend. This too can be lucrative in time, but you may need to wait a while for the trend to reverse, and in the meantime, you risk losing money.

So, Where Should You Invest – City, Regional Or Rural?

The answer – any, and all!

For some it will be a regional area because they know it well, it’s affordable, and because it provides the return they want, when they want, and how they want. For another investor it will be a city property, or rural property, for exactly the same reasons.

In my case, I started off investing in regional areas, but nowadays I buy commercial property in city locations.

So, you see, it doesn’t matter where you start. Just pick somewhere that works for you.

The post What’s Best – City, Regional or Rural Property? appeared first on PropertyInvesting.com.

Who knew? Tom Hanks – one of my favourite actors is also a property investor; and a serious one at that. He and his wife Rita Wilson were reported to have recently sold two of their residential investment properties in LA for a total of A$23.5m. He obviously knows a thing or two about property investing because his combined purchase price was only A$13.1m. He had owned one property for 16 years and the other for 10 years.

Hanks isn’t the only movie star who invests in real estate. The Terminator, Arnold Schwarzenegger, is on the record saying “I made my first million in real estate, not in movies.” His first property, a 6-plex he bought for $27,000, was later sold for a profit of $169,000 that he rolled over into another apartment building.

Here are four observations, together with some discussion starter questions to reflect upon:

1. Real estate is a wealth creation, and wealth preservation, vehicle.

Hanks earns his money in movies but invests it in real estate. Another way of saying this is that Hanks makes his money from trading his time and skill, and he preserves his capital by investing it in real estate. All going well, not only will the value of his real estate be maintained, it will also appreciate.

Questions for further thought…

How do you make your money? How do you preserve your wealth? How well is that strategy working for you? What needs to change?

2. It’s okay to sell.

One of the popular mantras in real estate investing is that ‘you should never ever sell’. That is certainly a proven way of deferring tax, but as you can see, both Hanks and Schwarzenegger are content to sell when the time is right. So, when exactly is that? When you can make more money, sooner, with less risk and/or lower aggravation.

Questions for further thought…

What assets do you own that could be sold to allow you to achieve better investing results? What will you do with the proceeds?

3. We all start somewhere.

A$23.5m is a lot of money for a couple of properties, but this is unlikely to be Hanks’ first property investment. Indeed, Schwarzenegger testifies that his first purchase was only $27,000. What we learn is that your first deal is unlikely to be your best deal, and that it is a starting point, not an ending point.

Questions for further thought…

What’s holding you back from making your first, or next, property purchase? How can you overcome analysis paralysis?

4. Big numbers don’t necessarily equate to big risk.

Martin Ayles, and investing veteran and friend, once asked me “What’s the difference between $100,000 and $1,000,000?” Being a bean counter, I replied “900,000?”.

“No”, Marty said, “it’s one zero, and zero is nothing”.

What Marty was trying to say is that the investing methodology that makes an entry level property investment feasible is the same methodology that makes a much more expensive property investment viable. For instance, I’ve seen $100,000 property deals with more risk than $1,000,000 property deals. That is, risk is not in the size of the deal per se, but rather in the investor’s skill and expertise to be able to turn a profit.

Questions for further thought…

How are you under or over investing according to your investing skill? Are you an investing thoroughbred doing pony rides or an investing junior out of your depth?

Final Comments

Luckily you don’t need to be a movie star to invest in real estate. Whether you’re just starting, or you have a mega-portfolio, the challenge remains the same – what should you buy, how should you hold, and what should you sell, to make the most money, in the quickest time, for the least risk and the lowest aggravation.

If you need help and guidance with what to buy or how to invest then make sure you are at my upcoming 3-Day Millionaire Mega Conference. Details of how to save 50% on one of the last 25 discounted seats can be found here: http://www3.propertyinvesting.com/mega-conference-discount

Until next time remember that success comes from doing things differently.

– Steve

Do you have any questions, thoughts or comments about this article? Post them below and Steve will reply in person. 

The post What Tom Hanks & The Terminator Can Teach Us About Property Investing appeared first on PropertyInvesting.com.

While a big price reduction is sure to tickle your greed gland, the discount may not really be genuine. It could be ‘deal bait’ – something savvy sellers use to attract buyers.  

For instance, one of the deals I’m weighing up purchasing at the moment is a 500 square metre office and warehouse commercial property. It was originally listed for $600k+, but the agent let me know on the sly that his seller is becoming more and more motivated and that $425k would probably buy it now. Oh! Oh! Oh! A $175,000 discount! That’s got my attention.

Loading up my due diligence number-crunching spreadsheet (find out how you can get a copy here) I quickly inserted the variables. I was a little crushed when the ‘bottom line’ revealed the most I should pay and still expect my desired profit is $400,000. So I wrote back to the real estate agent saying that I was close, but that the best I could do was still $25,000 less than what his seller might accept. He said that that was too low for his seller to consider favourably.

This short case study reveals the following six learning points:

1. A discount does not guarantee a great deal.

Property sharks love to smell blood in the water, but a discount in and of itself doesn’t guarantee a good deal. In most cases, a big discount simply reflects that the seller started at an unrealistically high list price and the subsequent adjustment is the equivalent of the market saying, “Tell him he’s dreaming.”

2. A discount should not stop further negotiation.

Just because a property has already fallen in value shouldn’t stop you trying to negotiate an even bigger price reduction. Yes, you may hear the agent say “But they’ve already dropped their price by <insert amount>!” However, the price you pay should be what you need in order to make your desired profit, not what the seller needs to feel good about their sale.

When I make an offer that is less than the asking price I often say, “Don’t make it personal and don’t take it personally.”

3. A discount does not subvert the need for due diligence.

If you think you’re getting a great deal, you may be tempted to fast-track or hijack your pre-purchase due diligence in your haste to stitch up the sale. Don’t! You may think you’re buying cheap, but if you rush and miss something important, then once you’ve paid to fix it the deal might not be nearly as good as first thought. As the old adage says: Hasten slowly!

4. A discount does not mean you’re buying under market value.

Sometimes a buyer will mistakenly think a big discount means they are buying below market value. Oh please! Think about that for a minute… you are the market, so what you pay will be the market price. While you can purchase below replacement cost, or below the independently appraised price, you cannot ever buy below market price.

5. A discount does not mean you’ve made money from day one.

A discount is not the same as a cash profit. Think of buying as opening the investment position and selling as closing the investment position. It’s what you do after you’ve bought and before you on-sell that unlocks the profit. In order to convert your discount to cash, you will need to find someone willing to pay more for it than you did. Being able to do that requires that you know a thing or two about the art of investing.

6. A discount does not mean the deal is problem free.

On the contrary – a property that must be discounted tends to have one or more problems that need to be fixed before the property will be profitable. A good example that comes to mind is a large discount I negotiated (equivalent to one year’s rent) on a two-tenant commercial property. When I purchased the property, it was 50% occupied. A year later and, despite my best efforts, it is still 50% vacant. It seems I overestimated how easy it would be to fix the problem.

Don’t misunderstand me… getting a discount is usually better than having to pay a premium. Just be careful that you aren’t being distracted by pretty plumage on what is otherwise an ugly property duck.

Have you ever received or negotiated a big discount on a property that you thought was great, only to later discover it wasn’t as good as you hoped?

Be brave and share your story by posting a comment.

Steve McKnight will soon be releasing a brand new product he has been working on for the past two years – something so valuable that it will be a total game changer for every property investor. <Find out more here>.

The post Why Big Price Discounts Don’t Always Make Great Deals appeared first on PropertyInvesting.com.