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16 Sep 2020

Building a property portfolio in any market

By Damon Frith, content editor for Citi Australia The nation's wealth is entrenched in property but the pandemic has created uncertainty

According to the Financial Review’s 2019 Rich List, more than a quarter of the country's 200 richest people made most of their money in the property sector.

While the tech sector is generating the quickest rise of new millionaires and billionaires, property remains the source of wealth for 63 of the 200 richest, states the Rich List.

It will perhaps come as no great surprise to Australian’s, as the nation has a long history of property creating the backbone of many people’s wealth.

In the first half the previous decade, property prices boomed after finally responding to the recovery post the Global Financial Crisis. There was a blip as significant property price falls were recorded in 2018 and early 2019 on the back of a global economic slowdown. But as we entered 2020, prices were again pointing north.

But the global pandemic has thrown the property market into confusion. While an initial market response to COVID-19 was slow, in the second half of the year prices did start edging downwards.

June quarterly data from the Australian Bureau of Statistics showed average property prices fell in all states and territories with the exception of Canberra. The biggest falls of more than 2 per cent were recorded in Sydney and Melbourne.

However, despite the falls national average house prices remained 6.1 per cent higher in the year to June, according to the ABS.

Where prices are headed is debatable. It will depend on the success and time to roll-out a COVID-19 vaccine, resulting speed of an economic recovery and importantly, the speed at which the unemployment rate can be lowered.

Despite the uncertainty, there are pockets across Australia were property prices are still on the rise, particularly outside the inner areas of the capital cities.

Property investors also need to consider the rental market. And it’s certainly been impacted by the virus.

In the September monetary policy minutes of the Reserve Bank of Australia, it was noted that rental markets remain weak.

“Rental supply had been boosted by short-term and holiday rentals being brought onto the long-term rental market, while demand had been depressed by the reduced flow of new migrants and a decline in the rate of household formation. Rental vacancy rates had risen recently, and members noted that downward pressure on rents was unlikely to dissipate in the near term in either Sydney or Melbourne,” the Reserve Bank minutes said.

Certainly there are pressures on the property market, and for some that will be an incentive to take advantage of ‘a buyers' market’.

No matter your reasons, if you are preparing to add housing to your investment portfolio here are three tips that make sense not matter where we sit in the property cycle.

1. Stick to your budget

How much can you afford to spend on your investment property? As well as the purchase price, there's the cost of maintenance, property management fees, strata levies and landlord insurance. You may also have to renovate to attract a tenant.

Before you buy, make sure you're comfortable with your current debt levels, and have a buffer to allow for any periods where your property may be untenanted. Unexpected costs can also arise, such as a sinking fund plan for a strata building.

If you already have a mortgage on your own home, you can use your equity to fund the deposit for your investment property – typically up to 80 per cent of your home valuation minus your debt.

2. Negative gearing comes with a cost

Property can be a good long-term investment option as part of building your retirement nest egg – and it also comes with an attractive tax advantage if your rent doesn't cover all the costs of your investment (including your interest repayments). This is called negative gearing.

However, negative gearing basically means your investment is impacting your cash flow every month – and this could lead to financial stress if you don't have a comfortable buffer.

3. Finding opportunities for growth

You're not buying somewhere to live, you're buying an investment – so take any emotion out of the decision. First, work out the expected returns – income plus capital gain – as this must exceed your borrowing costs over the long term.

Then look for the features that will appeal to renters, such as close proximity to transport, schools and shops. Areas with universities or hospitals will always have strong demand. Find out what other developments are in the pipeline, as they could impact future demand and amenities – and if you're not familiar with the area, it's worth getting advice from a buyer's agent.

Finally, make sure you ask your bank to pre-approve your investment loan before you start hunting.

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