Interesting Article

Timing is everything: now is the time to review your property
interests. Today I want to deal with the idea of the perfect property
portfolio.

Diversity is about being selective and discerning within the context
of spreading risk. Prudent diversification occurs over time, and aims
to fill gaps in a portfolio with each subsequent purchase according to
a set of ideal outcomes and selection criteria. These cover optimising
growth and income potential in the choice of location, architecture,
property type and cash flow over the life of the investment cycle.

Each time you have the opportunity to invest, ask yourself: what is
the balance of localities, houses versus apartments and architectural
styles in my portfolio? Where are the gaps, and which of these gaps
does my present financial capacity allow me to fill without
overcommitting?

Every investor is different and people may wish to buy commercial
properties or farms or whatever. Personally, I like to recommend that
your first stage of diversifcation might be to have a house and an
apartment or vice versa. They should both be in inner-city locations
although not necessarily in the same city. After that? Read on.


Location

Diversify within the most sought-after, high land value locations.

You don't always have to invest in your home city or region,
especially if you live in a smaller capital. Plenty of investors
choose to have one property in their home locality and then diversify
into Melbourne, Brisbane or Sydney as their equity builds to achieve
higher and more consistent returns.

Ideally, an investment property should be located two to 12 kilometres
from the CBD of a major capital city such as Melbourne or Sydney.
Melbourne and Sydney are the ideal choice because both have big
populations, well diversified economies, intense infrastructure, a
diverse demographic profile, world-class educational facilities and
appealing cultural aspects. Brisbane is also an option within closer
proximity to its CBD.

These parameters offer the highest underlying demand, land values and,
therefore, the highest growth. The outlay for a single asset should be
ideally between $350 000 and $1 million. It's that demand, scarcity
and the finite supply of land in these areas that drive the growth.

Perth has undergone stellar capital growth, but within the ideal
context it's too geographically isolated, and its economy is overly
dependent on mining. Similarly, mining towns, retirement and holiday
resort regions have similar limitations. It's not only important that
physical characteristics and infrastructure are plentiful; demographic
composition is key. Prices and demand only rise consistently when the
bulk of the population is permanent and actively contributing to
economic output.

Remember Far North Queensland in the late1980s? All it took was the
pilots strike to kill tourism – the predominant industry – and
inevitably, the economy, which hurt the property market. Now it's
mining towns where fibro shacks are selling for $400,000, but what
would happen to mining if the economy was hit by stagflation or
China's growth slowed significantly?

Even within the top cities and areas, selectivity is still critical.
There has been a trend for investors to speculate on potential growth
of a suburb while there are many who buy close to where they live
because they "know and love the area". This is emotionally driven
reasoning and bears no resemblance to an optimally diversified
investment model.


Architectural style

Victorian, Federation, Edwardian and Art Deco styles are timeless, in
limited supply and have demonstrated consistent capital growth over
many property cycles. Houses built between the 1880s and the 1940s and
apartments built between the 1930s through the mid-1970s will offer
the best growth. It's perfectly appropriate to diversify within these
parameters.

Houses built later than the 1960s and most established mid-priced
apartments built after the mid-1970s are unlikely to have the scarcity
value or timeless appeal of their older counterparts and are therefore
less likely to deliver the requisite growth and ongoing demand, at
least for the foreseeable future

Tax savings and depreciation benefits should only be viewed as the
icing on the cake, never as the primary investment driver. As a point
of diversification, and only if all the other fundamentals are right,
combining these with depreciation benefits is fine.


Property types

When diversifying a portfolio, investors can choose between houses,
apartments, town houses and villa units. The best choices are
established apartments and houses because these types attract the vast
majority of the population the vast majority of the time. Apartments
with one bedroom (occasionally up to three) and two or three-bedroom
houses work best. Never buy an apartment without off-street parking
entitlements.

Townhouses may be the new trend for owner-occupiers, but as
investments they may not perform as consistently because they tend to
appeal to a limited pool of buyers and tenants. Similarly, the villa
unit had its day in the 1950s and 1960s but they too usually have
limited appeal. They seem to attract a narrower demographic from both
a rental and re-sale point of view because of the "community" style of
these developments.

It will be no surprise that I also steer investors away from
run-of-the–mill apartments in high-rise towers, again because they
lack scarcity value in spite of perceived tax or rent-related
incentives. Certainly, some more exclusive towers aimed squarely at
owner-occupiers have experienced strong growth but in the main, had
investors who bought these gone for established dwellings in coveted
locations instead, their assets would have appreciated far more.


The gearing/cash flow myth

Gearing is often touted as the "bees knees" of successful property
investment. In fact, the only justification for high levels of gearing
– that is more than 75% – is strong capital growth. This is why the
highly geared, "positive cash flow" (PCF) investment property is
nothing more than a red herring when it comes to creating an optimal
diversification platform.

PCFs provide an immediate positive cash flow in spite of high gearing.
Values and growth patterns lag seriously behind much of the market,
making the percentage return high. It's only the percentage that looks
good in relation to the asset value. The dollar value of the rent is
actually quite low compared to an equivalent property in a prime area,
where growth drives both the asset and rental value. The problem is
that the low value creates the illusion that they are great
investments because they can be bought at bargain prices and as a
proportion of the low value, the rent appears fabulous!

Many investors reason that it's a good diversification strategy to
include one or two PCFs in their portfolio to balance the outlay
required by the negatively geared ones. In fact, the cost of low or
absent capital growth over time is far greater than the short-term
perceived benefit of the balancing effect. I know of one investor who
bought high yielding, low-growth properties and dropped about $300,000
in capital growth over a period of six years. This severely hampered
their ability to build a solid diversification platform.

There is really only one legitimate way to get a positive cash flow
from an investment property: to have more equity than borrowings.

Rising interest rates are another reason to avoid this category of
investment because over the long term, you will end up paying far more
for the privilege of borrowing than will ever be justified by the low
rate of appreciation.


Finally …

It's far sounder to understand the correct meaning and application of
diversification. Acquire fewer top-notch properties rather than
numerous lemons, and pay down some debt on a regular basis. No matter
what the text books say, ideally, the more equity you control, the
more financially independent and economically insulated you become.
 
a mate sent it to me .... its from the Eureka Report. While they are more focussed on equities as an investment vehicle they also dont mind property and write some articles from time to time.

Not trying to espouse any views - just for information only.
 
Ideally, an investment property should be located two to 12 kilometres from the CBD of a major capital city such as Melbourne or Sydney.
Melbourne and Sydney are the ideal choice

I'm presuming the author of this article resides and invests in Melb. or Sydney. :rolleyes:



Perth has undergone stellar capital growth, but within the ideal
context it's too geographically isolated

that's a rather large but to just dismiss glibly like that...and...isolated from what ?? Sydney and Melbourne....that's a good thing isn't it ??


It's ideally suited for servicing the big Indian / Chinese and Japanese markets for which it has many synergies.


What exactly is the "ideal context" ??


Piffle from experts.
 
There is really only one legitimate way to get a positive cash flow
from an investment property: to have more equity than borrowings.

Rising interest rates are another reason to avoid this category of
investment because over the long term, you will end up paying far more
for the privilege of borrowing than will ever be justified by the low
rate of appreciation.

What the hell? Has the author thought this through?

If the only way a property is going to get CFP is by using your own money, rather than borrowed money, then it stands to reason, then the yield is less than the interest rates. And if the yield is less than the interest rate, why aren't you holding cash? 6% from a house, or 8% from cash... I know which one I'd rather.

No, the only way to legitimately get a CFP property, is buy it so cheap it's CFP even at above long term average interest rates. The mania of the last 20 odd years makes that pretty rare.
 
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