A quick glance at the numbers makes for exciting reading for Queensland investors. Since 2009, dwelling values in Brisbane have only risen by 7.7%, compared to the massive 59.1% increase in Sydney and 52% increase in Melbourne.
And the growth potential is not the only thing that’s attracting investors and first home buyers.
“Yields are substantially higher than what can be found in Sydney and Melbourne, and affordability constraints are much less severe,” says Cameron Kusher of CoreLogic RP Data.
According to recent CoreLogic RP Data Home Value Index results, Brisbane’s gross rental yield for houses currently sits at 4.5% (third highest capital city in Australia) and 5.5% for units (second highest capital city in Australia). And with a median dwelling price of $452,200, this is cheaper than Sydney, Melbourne, Perth, Darwin and Canberra.
“Of all the major capitals, Brisbane appears to be showing the best fundamentals,” says Kusher.
Where to invest in the regions
If you’re looking to invest in regional Queensland, you can start by crossing some areas off your list. And mining towns are a good place to start, says Todd Hunter, founder and director of wHeregroup Property.
“Regionally, anything through the Surat Basin is suffering majorly at the moment. So there will be negative growth through there,” says Hunter.
In February, another 26 Surat Basin jobs were lost in Dalby at mining business Ostwald Bros. This added to roughly 100 jobs lost at the company near Christmas, as projects are coming to an end.
Hunter believes it should be an especially interesting year for Toowoomba, which has a mining focus but does not just rely on mining, due to its diversified economy.
“Toowoomba is a sort of a hub to that Surat Basin, and so it will be interesting. There are also a lot of townhouse developments going on through that area, and there is just too much oversupply,” he says. “But your mining towns, your Mackays and Gladstones, they won’t perform.”
Hunter is more optimistic about certain regional areas that have more of a tourist focus. “Cairns will go through quite well. We have a bit of a falling dollar and that will certainly help places like Cairns,” he says.
For Ryder, the Sunshine Coast is one of the key standouts outside of Brisbane. “It’s a tourist economy, but that economy now is broadening and strengthening,” Ryder says. “Townsville is also starting to swing. So you will probably see some growth in the next 12 months. It’s one of Australia’s strongest regional economies.”
First home buyer activity rising
For people looking to buy their first home, Queensland seems to be the destination of choice. First home buyers purchasing property in Queensland are more active than in any other state in the country, besides WA.
In Mortgage Choice’s recent new home approval data, first home buyers in Queensland accounted for almost one in five loans written in February.
Mortgage Choice spokesperson Jessica Darnbrough says Queensland has a much lower median dwelling price than a number of other states, in addition to stamp duty concessions for first home buyers purchasing established properties.
“Our research shows more than 70% of first home buyers who purchased their property within the last two years bought an established dwelling. As such, it isn’t surprising to see first home buyer participation strong in the states that not only offer concessions or grants to those looking to purchase an established dwelling, but those states boasting a lower median dwelling price,” says
Investors often have to choose between cash flow-positive properties and those that will deliver market-leading capital growth – but if you want to build up substantial wealth, there’s one thing you need to know.
When it comes to investment strategies, there are those who use a cash ﬂow strategy and those who understand that real wealth is only achieved by using a capital growth property strategy. The aim of a cash flow strategy is to supplement your income and retire at the end point. But that doesn’t mean you will retire earlier than you would using a growth strategy. That will depend on your initial available capital and the timing of the next market growth cycle.
A cash flow strategy is very simple. Identify properties with a rental yield higher than the total amount of your expenses, interest repayments and holding costs. Once your desired level of passive cash flow has been reached, you have a choice about whether or not you want to remain in the workforce.
There are a number of problems with a cash flow strategy. The first is the amount of capital required in today’s Australian markets to establish a sufficient cash flow positive portfolio. This aside, the main issue when considering a strategy to build wealth is that real wealth comes from doubling your asset holdings every seven to 10 years. You will never achieve real wealth by trying to supplement your income. I’m sure you’ve realised by now that I’m a capital growth property strategist.
The properties required to build a cash flow portfolio are usually located regionally or on the outskirts of major cities. With regional properties you’re lucky if they double in value every 15 years, so we don’t consider them as part of a capital growth strategy.
Here’s an example of how a growth strategy outperforms a cash flow strategy.
If you were to invest $400,000 into a cash flow property portfolio and assume that it would double every 15 years, then your initial investment will double twice in value over 30 years. Its value at this time would be $1,600,000. This may seem like a large amount in today’s money, but in 30 years it won’t buy you much.
If you made the same $400,000 investment in a growth property portfolio and assume your investment will double every seven to 10 years, then you can assume your initial investment will double three to four times in 30 years, which means if doubled every 10 years it will be worth $3,200,000. If it doubles every seven years, the end value will be about $6,400,000.
Be very clear on your desired end position when comparing and considering these two strategies. You can’t save your way to wealth with rental income or earned income.
I also want to make it clear that you should never combine these two strategies when building your portfolio. Decide on your preferred strategy and stick with it. If you’ve already started on a cash flow strategy path and you want to switch to a growth plan, I recommend you sell up and realign your portfolio to your plan.
• You can’t achieve real wealth by trying to supplement your income
• Regional properties generally double every 15 years and are not suitable for a capital growth strategy.
• Growth properties historically double every seven to 10 years
• Never combine these two strategies when building your portfolio
Land appreciates: goes up in value; meaning it’s an appreciating asset.
Buildings depreciate: goes down in value, meaning buildings are depreciating assets.
The taxation ruling on this is that the building itself has a deemed lifespan of 40 years and theoretically at that point needs to be replaced.
Let that sink in and never forget it. Wealth comes from land only. The building’s only purpose is to gather rental income and assist to cover the land holding costs.
Ask yourself, what is long term growth?
People’s definition of long term is often different to mine. The reason for this is that my portfolio is not really for me. It’s for my kids and their kids and so on. My definition of a long term investment, is an investment that will continue to grow in value for 100 years plus.
This is why apartments are bad investments. Yeah, that’s right, bad.
Like the wicked-witch-type bad.
Apartments are a flashy investment option. There is something cool about the thought of owning an apartment. But the fact is they don’t meet my long term criteria. Even if apartments were to grow in value at a faster rate than medium density housing, I still wouldn’t buy apartments to add to my portfolios. The fact is that if I purchased an apartment I know that in 60 or 70 years’ time it’s going to start to look run down, it will end up a slum. An apartment will age and then need replacing. I can’t imagine at that point in time all the apartment owners banding together to chip in to build a new building on the land. Instead the apartment will have to be sold for below value, at a price that’s cheap enough for a developer to make profit by knocking it down and building again.
Smart investors don’t try to pick winners, they instead avoid picking losers.
When we think of land content, why are apartments in most cases far from worthy investments? Ask yourself this question. If you buy an apartment, how much land do you get with your purchase? Well you do get some land, but to really understand how much land you’ve purchased, you have to divide the size of the block the building is sitting on between all the apartments. Yeah, that’s right; essentially you don’t end up owning much land at all, which means there’s not much to appreciate in value.
Therefore, my choice is to purchase medium-density housing that will continue to grow in value, even if in 60 years I have to replace the house that sits on top of the appreciating asset, being the land, I will still have a very solid portfolio.
Remember the golden rule: land goes up in value and the building goes down in value.
People talk about land value content as a rule. Don’t worry yourself too much about this calculation. If you’re buying houses or even units or town houses with reasonable size land for that particular suburb, they can be worthy investments. I do, however, strongly advise staying away from small units; you can classify one or even very small two bed units with low land content as an apartment.
Here’s a basic rule I use when considering an investment.
The total floor area of all buildings needs to be less than the total area of the site. It’s fairly simple when you think about it. Read it again if needed.
Meaning the land content ratio (LCR) must be > 1:1 or 100%
Example 1: LCR of the standard home.
House = 200 m2
Land = 400m2
LCR = 2:1 or a LCR of 200% (this is good as the land is double the size of the building).
Example 2: LCR of the standard apartment.
Apartment building = 10,000m2
Land = 1,000m2
LCR = 1:10 or a LCR of 10% (very bad as the land content is only a fraction of the building size)
An old run-down house that needs knocking over may sell with 80, 90 or even 100% of the sale price being land content (like the block our home is now built on, when we first purchased it).
Let’s think for a moment about supply and demand.
When demand becomes greater than supply, it means there are more buyers than suitable property at that point in time. Pressure on supply means prices go up.
When supply becomes greater than demand, it means there is more property than buyers in the market, meaning prices stagnate or drop until they reach a price point that encourages more buyers to enter the market.
When it comes to apartments, developers can just keep stacking more and more apartments on top of each other, so it’s hard in some places to get real pressure on supply. This is why I also recommend that you do not invest in or around CBDs. Over the long term, the land component is what will increase in value. As a general rule, medium-density housing with good land content will continually outperform apartments. Stick to a safe, proven strategy.
Remember the Golden Rule:- Land appreciates. Buildings depreciate.
If you like apartments, rent one.
- Never forget the golden rule: land appreciates, buildings depreciate.
- Remember, the total floor area of all buildings needs to be less than the total area of the site.
- Wealth comes from land only. The building’s only purpose is to gather rental income.
- Don’t buy apartments or small units with minimal land content.
- Say it again: land goes up in value, buildings go down in value.
According to YIP mag article SUBURB TO WATCH
Boondall: Northern Brisbane suburb with lots of potential
The northern suburb of Boondall is one that simply has an excellent reputation. Located only 10km from Brisbane’s CBD, this suburb has so much to offer it is literally bursting at the seams. Affordability, proximity and leisure are just some of the words that describe the diversity of the area.
Boondall appeals to a wide demographic. Couples, families, young professionals and retirees are all drawn to this suburb, but for different reasons. First of all, the facilities in the area are excellent. Boondall State School has received numerous awards for educational programs, and the internationally acclaimed St Joseph’s College sits in the south. The suburb is also home to the Brisbane Entertainment Centre, an ice-skating complex, an aquarium and a recreation centre.
The Boondall Wetlands are also a major drawcard. Over 1,000 hectares of protected land provide rich birdlife in the area, making it quite unique. Bikeways and bus routes criss-cross the suburb. Two train stations service the area, and with the Gateway Motorway to the east, travel is hassle-free. The main shopping centre sits along Sandgate Road, and the Toombul Shopping Centre is a five-minute drive away. Surrounding suburbs provide other amenities, such as hospitals, restaurants, cinemas, banks and sports grounds.
While the median unit price is $394,000, many properties are well under this price. Two-bedroom units perfect for couples or young professionals can be found on College Way and Groth Road for under $300,000.
Example of Groth Road Development:-
There is lot of misconception out there about what rental yields really tell us when selecting a property as a suitable investment.
Calculating the Yield
To work out a rental yield, the weekly rent X 52 weeks, is divided by the purchase price. A quick way to work out a yield in your head is that 5.2% yield is approximately $1 of rent per $1000 of price. Example 5.2% rental yield on a property at $400,000 purchase price would be $400 a week rent. ($400 X 52 = $20,800 divided by $400,000 = 5.2%). In my experience a yield of 5% can give a positive cashflow outcome and a yield of 8% can give you a negative cashflow outcome. Surprising isn’t it? This is because there are many other factors that affect a property’s cashflow. There is more to the story than just gross rental yield.
The higher the rental yield the better the investment opportunity?
Logic would tell us that the above statement should be true. A property purchase price of $400,000 with $620 a week rent has a rental yield of 8% .In this instance you have more income from rent to service the expenses of the property. Sounds great, should I rush out and buy it? It sounds like a positively geared property.
As a property advisor I know there are many other boxes that need to be ticked before rushing into a purchase.
Capital growth vs cashflow vs risk
The above 8% yield sounds ideal. If it was that easy we would all be happy. However there is more to the story. Selecting a property for high yield alone can have some consequences. Many investors have found that high yielding properties can come at a cost of little capital growth, negative cashflow or increased risk.
I have spoken to many investors who bought a property based on the yield alone only to find that the area they selected stayed stagnant for years, with no capital growth achieved. Without capital growth their ability to grow their portfolio came to a crashing halt. So assessing a property for potential drivers of capital growth as well as yield becomes critical for your portfolio growth.
Other investors decided to buy a cheaper property, based on affordability and the promise from the agent that it would be positively geared. They then found that the costs of holding the property were much higher than first thought due to continual repair and maintenance costs of the property, eroding their anticipated cashflow. So assessing a property for potential cashflow as well as yield becomes of prime importance.
The promise of high yields from 8% – 15% can be found in many mining areas in Australia, particularly in Qld and WA. Reading the advertisements for properties in these areas and the high rents being achieved makes them appealing to investors. However with high returns comes high risk. Volatility in the market is to be expected .A new investor wanting to start their portfolio may find the risks too high until they have more experience.
Assessing Cashflow for a property
The assessment criteria when selecting a property should be based on more than just rental yield alone. Gross rental yield is not a reliable indicator of whether a property will have a positive or negative cash flow, will have future capital growth or will be a high risk investment. As well as the due diligence and research required to assess the potential for growth and the level of risk