Investing in Australian property has been a very lucrative business over the last 50 years. For example, the average price for a house in Melbourne would have cost you $19,800 back in 1973. When adjusting for inflation, that’s just over $208,000 in today’s dollars.
Compare that to the average house price in the Victorian capital today – currently over $911,000 based on figures in May this year – and the investment proposition is compelling. In effect, we have seen price growth of 438% in Melbourne over the last 50 years, and that’s after taking inflation into account! Other capital cities have seen similar returns.
Not all property areas have grown at the same rate of course, and picking the right area, property or time to invest is a complicated process. Often the best way is to take advice from someone who has been there and done it, then try to learn the lessons that have worked for them.
One such example is Mike – not his real name as he prefers to keep his anonymity – who has been investing in Australian property for well over 20 years and has been a customer of Loanscope Director Emmanuel Guignard for the last fifteen of those.
His insights into how he built a property portfolio are a useful guide on how to navigate the tricky world of property investment. Here are his five tips for success:
- Stick to capital cities for long-term growth
Despite short term price spikes in regional areas (particularly those in mining areas) can be tempting, our experienced property investor suggests Australian big cities are best for long-term growth. He points out that “residential properties in capital cities have approximately doubled in value every ten years” in recent times, which is a very healthy return for any asset class.
Mike also highlights that Melbourne & Sydney have experienced the biggest increases in value, and interstate property can have its advantages if you don’t live in those locations. Having a diversified property portfolio is one of them, although researching local conditions such as higher insurance or maintenance costs is essential.
- Invest in houses rather than units where possible
Despite all the fixtures and fittings, most of the value in Australian property is in the land that your home or investment sits on. For this reason, Mike suggests that houses rather than units are the best long-term investment, as the land value will likely appreciate over time, given Australia’s net migration.
However, the Aussie dream of a picket fence and a backyard for the kids to play is becoming out of reach for many, particularly first home buyers. If a house is not an option for you at this point, Mike’s preference “would be villa units, or an apartment in ‘period’ block with a small number of total apartments.” Worth bearing in mind if the dream home is currently out of reach.
- Buy convenience
We live in an increasingly frantic world, where the boundaries of work and home are blurring, especially since the pandemic. So, buying a property that is close to amenities that you (or a potential tenant) would need on a daily basis is becoming even more important.
Our seasoned property investor believes you should consider how close a property is to “public transport, strip shopping, supermarkets, cafes etc” to maximise capital growth. He also suggests focusing on properties within 10k’s of the CBD (the inner or middle ring), which are a safer bet.
- Consider commercial property
Although most property investors start with residential housing, it’s worth considering commercial real estate, particularly if you own your own business. This was the case with Mike, who’s first investment property was “the commercial premises we ran the business out of.”
There are several benefits to investing in commercial as opposed to residential real estate. These including having higher yields and longer leases, with annual rent increases often built into the lease.
However, Mike cautions that vacancy periods can be longer, and tenants may also request fit-outs, which can be expensive. More generally, he notes that “a deeper knowledge of the property type and economic conditions is required” when investing in commercial property and seeking professional advice on this is a good idea.
- A Self-Managed Super Fund (SMSF) is a useful investment vehicle
One final thing to consider is set up a self-managed super fund to manage your property investments tax effectively. As Mike points out, “if you run an SMSF and can purchase the property through that vehicle, it is a good was of increasing the SMSF balance and possible Capital Gains Tax (CGT) exemption/discount.”
This is something that Mike undertook in his property investment journey, although he qualifies that the CGT benefits depend on the time of sale and need to be managed carefully. A financial advisor can assist with this if it all sounds too hard!
As with all investors, we make mistakes along the way, and the key is to learn from them where possible. So, what would our property investor do differently if he had the chance?
“I could have looked into local conditions more when buying interstate,” is his response, and he recommends using a buyer advocate, who provides independent advice to buyers and are often specialist in a certain area. He also cautions to “choose carefully” if going down this route.
As with most things in life, it pays to do your research and seek professional help in areas where you have a knowledge gap. However, the returns that Australian property has realised for investors in the last few decades make this time a worthy investment in itself.
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