How to pick a high-yielding/high growth investment property
After a significant downturn, the Sydney property market has again become fertile ground for investors.
Record low interest rates and the easing of lending restrictions, coupled with a market rebound that is gaining momentum means now is a great time to buy.
These conditions, and the slowdown in new builds, have led to a unique market environment for the savvy investor to take advantage of.
We discuss these below, and what you, as an investor, should be looking for.
1. Market rebound gathers pace
The rapid turnaround of the housing market has surprised many. October was the fourth successive month that enjoyed a rise in national dwelling values, realestate.com.au reported.
The momentum is such that respected industry voice Tim Lawless, head of research at property analysts CoreLogic, says the market losses of the past two and a half years could be erased by the middle of next year.
“Sydney’s housing market is on track to post a recovery within six months,” Mr Lawless commented in a new report.
“Housing values are trending higher rapidly, up five per cent over the past three months.”
There is plenty of opportunity in Sydney’s property market for savvy investors.
Some industry insiders have argued such a prediction is overly optimistic. Across the board, housing values are 5.7 per cent below their peak of mid 2017. Regardless, there is growing positive sentiment in regards to housing prices.
“We expect the recent recovery in house prices, particularly in Sydney and Melbourne, to extend into 2020,” Westpac said in a recent report..
2. Investor activity is growing
Investor activity has fallen 40 per cent since the market peak. But that reluctance to enter the market is beginning to take a back seat.
“Investors are coming back to the market,” says Leon Jacques of buyer’s agent Cohen Handler.
“I am getting a number of calls each week from investors wanting to know what is out there.
“The market is coming back and they are seeing a lot of opportunity.”
Westpac is one lender also seeing opportunity for investors. The Big Four bank has moved to allow property investors to take out interest-only loans with smaller deposits than previously, as it looks to increase its mortgage growth.
3. Positive gearing
Record low interest rates mean that the three-year fixed rate for investor mortgages is now lower than the average capital city gross rental yields, according to The Daily Telegraph.
This means investors taking advantage of this, will enjoy positive cash flows as income is greater than costs.
Mortgage broker Lincoln Eastment from East Financial Services said this can offer investors great financial advantages.
“This type of environment is likely to exist for some time,” he said.
“There are tax breaks for negative gearing but with positive gearing you are paying tax on profits. With that profit you can pay off more of your investor loan now or even put it in your owner-occupier mortgage (if you have one) and pay that down.”
Market conditions are making positive gearing possible.
4. Lack of new apartment builds
New apartment starts have plummeted 41 percent this year, according to the Australian Construction Industry Forum.
That is much more than the predicted 10-15 per cent fall and has largely been attributed to the falling property market. However as the market picks up, new builds are slow to react. This means it will be unlikely there will be a large surplus of apartments on the market, which would push prices down.
Instead as the market improvement gains steam, there is likely to be increased competition for less stock, due to factors including population growth and pent-up demand, leading to price increases,
So what should your approach be, in this market?
Target the right area
You’re targeting an income stream, capital growth, or both. So you need to know the areas that are going to give you that. Key factors you need to consider include:
• Is it likely to be a sought-after area now and in the future.
• Is it close to transport, shopping and other amenities?
• How are similar suburbs in the area performing?
• Is it below the market price of surrounding suburbs?
Look beyond your own backyard
When searching for the right investment property, it’s important to cast the net wider than suburbs close to where you live.
Investors need to look beyond their own backyards.
A recent University of Sydney study found that two-thirds of Australians bought an investment property close to their home, not in another location that could have outperformed their own location in the long run.
The study blamed familiarity bias, a lack of sophistication, knowledge or education and momentum behaviour – the persistence of the same behaviours – for this trend.
Put emotion to the side
Your investment property is simply that, you’re not planning to live in it. And your emotions won’t help you to choose the property with the best potential for yield or capital growth. You want to build another income stream, grow your wealth, or both. Look at the property objectively, will it bring you the returns you are seeking? If not look elsewhere.
Once a property has ticked all those boxes, then make your move.
A Toplace apartment could be ideal for your investment property. To view our latest projects click here or contact us today.
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