According to a recent RP Data report, in hundreds of locations across Australia - especially those in the wider regions of Brisbane and Sydney – it’s cheaper to buy a property than to rent. Woe is me; what does this mean for investors? Absolutely nothing.
Blogger: Kevin Lee, founder, Smart Property Adviser
This report may scare investors into thinking that tenants will stop renting and buy their own properties. But this will not happen. People rent for many different reasons.
If a tenant purchased a property based purely on this report and the hype surrounding it, they would soon realise that the results extracted from the analysis did not include the additional costs of acquiring a property such as council rates, insurance, stamp duty or legal and conveyancing fees. And then there’s the ongoing property maintenance.
RP Data’s report alarmingly states that in 388 suburbs it is cheaper to buy property than rent, but in reality that only represents approximately 7% of suburbs nationwide. The pure facts are that most people find it cheaper to rent than buy, especially those who desire to reside in prestige locations.
When you buy a property in a prestige area [although you may own a lovely house] you will have to pay more for most things, including strata levies, council rates and property maintenance. Many people rent where they want to live because they know that renting is cheaper than if they were to buy the property; paying a mortgage repayment and all the associated fees & charges that come with the ‘Great Australian Dream’.
Every tenant knows that if any maintenance issues arise – it’s the landlord’s problem, not theirs. What they don’t know however is that mostly its’ a tax deductible expense for the landlord, just like just about everything else!
So where should you buy property?
Although there seems to be as many ‘investment strategies’ as there are ‘property gurus’ … I stand by my well-worn strategy of buying investment properties where 80% of the market can afford to rent them. And that’s why I encourage my clients to invest in residential property in the middle to lower end of the property market – that’s the 80%.
Why? Simple really - you have less chance of your property being vacant for long periods of time. And an empty investment property is pretty much like an empty promise – heartbreaking.
Now, we all know there are thousands of investors who prefer to ‘gamble’ by investing in mining towns - but in my opinion these people are naive if they believe it will last forever. As an example, a few days ago I saw a brand new 4 b/r house and land package in a WA mining town. It was a smallish square box and looked like the exterior walls were constructed from pre-cast concrete.
WOW – it was already pre-leased for 3 years to a mining company for $3000 per week. How much were they asking for this average sized home in a ‘one horse’ town? $1.15m
Do the math for yourself – a small parcel of land in a remote area of the WA coastline could maybe have a ‘real’ worth of say $250k. And construction of a 160m2 house @ $2000 per m2 is $320k. Total = $570k.
So the investor has scored an amazing $468k in rent over three years, for a property that could be worth only $250k when the mining boom fades, and which may struggle to get $300 a week rent – but the worst is yet to come.
If that investor put down 20% deposit and paid the stamp duty and other purchase costs from their savings or equity estimated at $283.7k [$230k + $50.7k + $3k] and borrowed the $920k to finance this great investment – who do you think will be the loser when the mining boom fades?
Things get very ordinary for overexposed investors; very quickly.
There are plenty of long forgotten towns littering Australia - and across the globe - whose claim to fame in their heyday was a population explosion due to a mining boom, timber milling, pearling, or even shipping ports that were established on the back of the mining boom.
As an investor, your number one job is to keep your property tenanted - so that you keep your income flowing. Buy your investment properties where most people can afford to pay the rent.
As a professional investor, you need to be sensible and know that:
A) tenants are humans - so provide them with a good living standard and they’ll usually look after the property
B) always have landlords insurance; always have landlords insurance, always have landlords insurance.
C) always ensure sure your rents match the market.
Think of it this way:
If you own a 2 bedroom ‘hovel’ that looks & smells like a pig-sty, where the cockroaches have to be removed from the front door to get in when the tenant inspects it … But you want $300 a week rent and I own the unit next door that has been freshly painted, has new carpet, new light fittings and blinds - and I want $320, which one do you think the tenant will choose?
And, if it’s a little quiet on the “tenant front” I can drop my rent to $300 and still beat you.
It’s about keeping your tenants to keep your income. The aim of the investing game is to generate surplus income every day.
The RP Data report and resulting debate about the pro’s and cons of renting vs buying has caused a stir …. but primarily amongst journalists.
Smart property investors should be able to:
a) peruse the report and identify the hidden facts the media hype failed to mention
b) review their own property portfolio and ensure that they’ve “trained” all their property managers … that their investment properties are never empty.
About the Blogger
Kevin Lee of Smart Property Adviser is regarded by many as Australia's most trusted property investment adviser. Since 1999, Kevin's been the go-to-guy for people when they need honest finance and property investment advice and guidance.