Investment Advice For Residential Property In Melbourne
Off the plan
You will notice off the plan property seems to always be priced a little lower than the established market. There is also a great tax incentive for investors to reduce stamp duty depending on what stage the property is completed to, at the point of purchase.
The risk involved in this type of investment is the possibility of negative equity at the time of project completion. Negative equity is when the purchase value is higher than market value at the point of property settlement. For example, you purchase off-the-plan, the developer might not have a completion date set into the contract, hence it could take 12 months or longer to complete. In that time, the real estate market could move 10% up or down.
This can cause banks to reduce your borrowing capacity or lose any paid deposits if you are unable to settle on the property.
If you’re interested in this type of investment it’s important to know whom you’re dealing with when it comes to these type of purchases. Has the developer got a long history of delivering finished products? Have they been in business long etc. Make sure there is completion dates specified in the contact with penalty charges built in if completion dates are not satisfied.
For more info on off the plan purchases, read ‘The Dos and Don’ts to off the plan purchase.‘
Pros
- Stamp duty savings.
- Cheaper purchase price.
- Low maintenance property (brand new).
- 7 Years building warranty, 12 month warranty on electrical goods.
Cons
- Potential of negative equity.
- Subject to a builder being able to deliver a finished project (and not go bankrupt).
- Financially committing to a purchase and not knowing what the finished product will look like.
- Longer than expected settlement, exposing your financial commitment to a longer term.
Mass scale apartment developments
Melbourne’s real estate market might have the allure of gold to some investors. Currently, this type of property and sector of the market is what no one wants to talk about.
I view this type of property purchase as high risk with little payoff or reward. Why? It’s a simple matter of supply and demand, the state government in 2016 approved over 70,000 apartments dwellings, and the normal amount is approximately 25,000. As a result, this has created problems with negative equity, high vacancy rates and time on market, banks not offering finance for particular types of developments and flat or negative capital growth.
However, every down turned market creates a wonderful buying opportunity. To the speculative investor it could be time to spot the diamond in the rough but for this type of purchase it’s wise to gain some advice on the better options out there.
Pros:
- Close access to local ammenities.
- High availability of tenants.
- Low maintenance.
- Affordable living in premium locations.
Cons:
- Can be difficult to find tenants when many appartments are available to let at the same time.
- Developers can use sunset clauses.
- Longer than expected settlement, exposing your financial commitment to a longer term.
- High annual body corporate fees.
- Difficulty to differentiate your property from the many on the market (for lease or sale).
Properties in major cities, Melbourne & Sydney.
The big cities are great places for investment security. Wise real estate advice promotes buying property that attracts tenants, which ensures strong capital growth, high rental yields, low vacancy rates and low time on market when selling. These cities offer tenants a great affordable lifestyle and most importantly, employment.
Major cities like Melbourne are less susceptible to economic change, for instance a town that is based on mining jobs or large manufacturing plants could halve real estate values if the employers leave.
Pros:
Consistent capital growth
High availability of tenants due to
New / improving infrastructure funded by state and federal government.
Low vacancy rates.
Cons:
- High prices / difficult entry to market.
- High cost of maintenance.
Common property’s, dime a dozen
This type of property is commonly found in the outer suburbs of a major city. When I was a young investor, I built a large part of my folio on this type of property and experienced reasonable capital growth with low vacancy rates.
The setback to this type of purchase is the difficulty of differentiating your property from everything else on the market at the time of selling. If market prices are moving downwards the only option the seller has is the dreaded price reduction.
To reduce risk on this type of purchase the seller must buy a property with tangible value ie: close to train station, shops, within a great school zone, access to freeways or a large block of land with subdivision potential.
Pros
Affordable housing.
Larger land allotments than inner city.
Low rental vacancy rates.
Cons
- Lower rental yield.
- Less infrastructure.
- Difficulty to differentiate your property from the many on the market (for lease or sale).
- Lower capital growth than inner city.
Long term fixed lease residential property.
Usually this type of property is offered by government or corporate entities. Even though it offers long term rental security, the lease terms can be very long, eg: 5 x 5 x 5 years, with the potential for extended lease after the fix term.
The down side to this is at the point of selling, the property might still have a long lease term and therefore, this can:
– reduce the number of buyer’s that would compete to purchase your investment
– not allow the owner an opportunity to ‘style’ the property for sale.
– Can’t be sold with vacant possession, hence the next buyer would have to honor the inherited lease contract regardless of how good or bad the current tenant is.
– Restriction on the normal landlord freedom of rights particularily around evicting a problem tenant.
Commercial Property
Commercial property is usually a high yielding property from the prospective of cash flow, it’s common for rental income to be doubled compared to residential property. However, commercial property has low capital growth and higher vacancy rates between tenants.
This type of property is susceptible to economic change and could potentially be a risky investment if the economic climate changes. This is why it’s safe to not have all your ‘eggs in one basket’ – so to speak and not own too much of one thing within your portfolio.
I once heard a wise property investor say, ‘..even if property prices sank to $1, eventually it would have to recover because the people of a city always needs somewhere to live’.
Pros:
- High rental returns.
- Low maintenance property.
- Potential of long term leases.
Cons:
- High vacancy rates.
- Low capital growth.
