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The property fundamentals investors can’t afford to ignore
With investors facing uncertainty, jumping the gun without much forethought could be costly, while delaying decisions may mean missing out on good deals. Here’s what they should do instead.
With investors facing uncertainty, jumping the gun without much forethought could be costly, while delaying decisions may mean missing out on good deals. Here’s what they should do instead.
As investors adapt to a reshaped market, revisiting the fundamentals could be the difference between taking on thousands of dollars in debt and building a resilient portfolio that delivers strong returns.
According to Right Property Group’s Victor Kumar, current uncertainty and various market headlines following the tax changes were weighing on investors’ psyches and impacting their property decisions.
“Consider it a long, leisurely drive, and all of a sudden you hit a stretch of road where it’s full of potholes – you don’t know which to avoid if you’re not used to driving on roads with potholes,” he said.
To navigate the uncertainty, Kumar said investors should focus on what makes sense for their portfolio rather than waiting for the “right” opportunity.
He also urged them to weigh lower purchase prices against tighter cash flow while assessing outcomes for the best returns and least risk.
Here’s what to do:
Tax changes don’t offset good opportunities
Kumar said investors needed to build solid foundations to set themselves up for the future, rather than waiting for the right opportunity and missing out.
“The reality is that most people are sitting on the sidelines waiting for certainty to appear before they jump in,” he said.
He said that while changes around tax deductions were likely to create cash flow challenges, the current decline in property prices could present an opportunity for investors who can afford to buy.
“Let’s say a tax deduction is going to be $10,000 – you can choose to save that $10,000, or you can choose to jump into a property where you know you can buy it $50,000, $100,000 below what they were a couple of months ago,” he said.
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Kumar said that through the lower price, the investor would be able to substitute 10 years’ worth of tax deductions, which they would receive later down the track.
“The only thing is that it impedes your cash flow, so you’re not getting the $10,000 relief that you got normally from a tax deduction from your negative gearing,” he said.
“So you have to factor that bit in, and that could be as simple as restructuring all of your loans.”
Consider low-risk, high-return income streams
According to Kumar, investors should also avoid buying multiple properties without a well-thought-through plan and instead consider what kinds of income streams could add value to existing properties.
One investor he knew had to decide whether to knock down one of his properties in Logan Shire, in Brisbane, to replace it with six townhouses, or keep the current house and build a three-bedroom granny flat.
“When we look at the whole scenario, we put everything down on the table to say, okay, if we built our six townhouses, you’re getting six rental income streams.
“But our return on investment was sitting at 6.5 per cent, and the risk factor was quite elevated because now you’ve got six constructions and you’ve got rid of an income-producing asset while you’re building, so there’s no cash flow.”
After some further thought, the Brisbane investor decided to build the granny flat, which was not only substantially cheaper but also delivered bigger returns.
“The return on investment on that was 16.5 per cent, in comparison to the 6.5 per cent, so he was getting 10 per cent more return on investment,” Kumar said.
“The risk factor was substantially lower and the time frame was substantially lower as well. So if we’re building in a slowing market, speed is of the essence.”
Think about risks of new builds
With investors steered towards new builds and house and land packages due to the negative gearing exemptions, Kumar warned there were construction risks to consider.
He said rising construction costs could cause builders to ask for extra payments for the property, but investors may be unable to pay because of current affordability pressures.
“That’s the biggest risk we have in terms of investors that are chasing the tax dollars today,” he said.
“There’s a series of interest rate rises which will then cause a decline in affordability, but at the same time, the build cost, because of the Middle Eastern war and, just simply, inflation is going up.
He said that in 12 to 18 months, there could be numerous half-developed properties for sale, presenting opportunities for other investors to buy them.
“Chances are likely that will happen, but then you’ll be waiting for properties that are largely going to be Mickey Mouse houses that don’t really have the character, don’t really have the infrastructure,” he said.
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