Some Tips of Where to Buy from the SMH,

Found this article which may be on interest to those searching for positive gearing.

Peter 147

Don't write off property, there are still hot spots out of town, writes Jane-Anne Lee.
If you're shy of shares but have an enduring love affair with bricks, there are still places to invest that are defying the downturn in the property market in spectacular fashion.

Semi-rural Marlow Lagoon, about 20 kilometres from Darwin; Bluff Point, the premier suburb of Geraldton in Western Australia; and Red Hill on Victoria's Mornington Peninsula, with most properties on acreages, have been the big movers in the past 12 months with a median price change of 127.8 per cent, 121.4 per cent and 93.9 per cent respectively.

Ceduna in South Australia, the last major town before the Nullarbor, and Midge Point, 40 kilometres south of Proserpine, Queensland, are nudging their heels, recording 88.9 per cent and 85.4 per cent.

On the capital city front, Darwin with 24.2 per cent growth, Hobart with 18.25 and Perth with 11.5 have been the stand-out performers. Darwin and Perth owe their growth to the raging resources sector and demand from China, while Hobart prices were in catch-up mode.

But rather than join the rush to snap up properties in these booming areas, it may be wiser to look elsewhere. That's because you will have already missed out on their intense growth, says Margaret Lomas, author, property investor and founder of Destiny Financial Solutions.

"In my own property investment strategy there is no room for historical reporting of figures from last year," she says. "That is only going to tell me where I shouldn't be investing because I have missed out. What I do is look for properties [in areas] that haven't reported high growth rates, but still have economic vibrancy."

Draw a wider circle

Increasing populations, diversity of industry, low vacancy on commercial premises, good shopping centres opening rather than closing and low unemployment come under her definition of economic vibrancy. She also takes note of the scarcity of available land for new buildings.

"The way to do it is to look at features they need to grow and stay away from those ones being reported for good growth. Maybe draw a circle around those areas and look at them. For example, it's too late for Dubbo in NSW, so look at nearby Narromine."

Kim Hamilton, a director at Raine & Horne Dubbo, says cheaper houses in Narromine, a 25-minute drive from Dubbo, selling for about $100,000 and fetching $150 a week in rent, are attracting investors.

Lomas's other hot tips for property investors are the outer suburbs of Adelaide, such as Elizabeth and Davron Park, lower socioeconomic areas at which "people turn their noses up", Logan in the corridor between Brisbane and the Gold Coast, Redbank on the road from Brisbane to Toowoomba and Mildura in Victoria.

"You don't necessarily invest where you live," she says. "People in Sydney or Melbourne think because they live there they have to invest there. Imagine if all you have done is invest in Sydney in the past 12 months. You would be losing your shirt.

"Australia is a big country. Once you understand that you can continue to invest in growth areas when other areas are in their loss cycle. I have done that over the past nine years. Some of them have experienced short-term losses but overall they all experienced good growth at some time because I have ensured they have economic vibrancy."

Lomas has invested in Mildura because it has economic vibrancy: a growing population, reasonable prices, diverse industry such as wine, timber and tourism, and a population big enough to inspire lively commerce and large franchises.

Growth in regional centres
Antonio Roccisano, director of Roccisano Real Estate, agrees, saying the Mildura economy is thriving thanks to mineral sands mining, wine and plans for an $80 million marina, plus a solar tower that will be the tallest building in the world. He says that for $188,000 investors can buy a three-bedroom home that rents for $220 a week.

Shane Oliver, chief economist at AMP Capital Investors, says much of the recent growth in prices has been in regional centres because capital cities are overvalued by about 25 per cent. As a result, there could be a long period where house prices head sideways, particularly in Sydney, Melbourne and Canberra. You will need to see big gains in rents to make investment properties in capital cities stack up.

"More investors are saying they have had enough of capital cities, they are overpriced, let's look elsewhere," he says. "It's almost the way the property boom started. It began in Melbourne, spread to Sydney then Canberra as we came into the early part of this decade, then Brisbane, Adelaide, Perth and Hobart, and now what we are seeing is the next logical extension to parts of regional Australia.

"But I think we have seen the bulk of the run. No doubt there are parts of regional Australia still offering good value, but ones with gains in excess of 100 per cent have largely seen the best of it.

"Five years ago it was quite easy for investors to find something attractive in a capital city. Now you have got to be prepared to get in your car, wear the petrol costs and find something out there in regional centres, particularly those centres where mining is nearby, because the mining boom is expected to continue for a while yet.

"The key is to find towns with good rental yield and good economic underpinnings. You don't want to go to a town where the locals are moving out.

"Western Australia ranks highly on that front. It has got the mining sector taking off and yields are higher than in Sydney. Hop on a plane, turn it into a holiday while you are looking around for an investment property."

Robert Mellor, director of building services at BIS Shrapnel, is also upbeat about Western Australia, but less so about the Northern Territory. He says Darwin and Perth's median prices have leaped because they are in catch-up mode, having missed out on the boom in the late 1990s and early part of this decade. They have also been riding the resources boom.

Perth has the fundamentals
While Perth and Darwin may add a further 5 per cent growth, Mellor is wary about the shallowness of the Darwin market. "Darwin and Perth have been the only two markets in the last year that have shown substantial growth," he says. "So those comfortable with residential rather than the sharemarket will start looking at these markets. Perth has got more underlying fundamentals. Even if the price starts to slow, you will do reasonably well out of Perth.

"The WA market is looking very promising, running on the back of the resources boom and the fact that there is no end in sight. I think you can get bullish about China for a while to come. Over the next few years I can see strong growth in demand but some of that growth that they have had will ease back because you get into the operational phase of those mines rather than the high demand for personnel that is required in the development of those new mines."

Mellor believes there are opportunities for investors in the south-west of Western Australia, but cautions that people need to do their homework as some areas have achieved faster growth than Perth, so run the risk of a slowdown. That's why it's vital to look at all the fundamentals to ensure the location is sustainable long-term.

Lomas also likes Western Australia, especially Bunbury, two hours south of Perth, which has a thriving community and a diverse range of industry, making it a great place to invest.

About 18 months ago she invested in Darwin, enjoying 30 per cent growth in six months. However, like Mellor, she believes it's too late for investors to reap similar gains. She also thinks Tasmania has limited opportunities.

Mellor adds that Adelaide is starting to slow, and Melbourne and Sydney will remain flat until prices ease under higher interest rates, which are expected to rise by 0.5 of a percentage point in the first half of next year.

"We see a bit of a setback for Sydney and Melbourne and they do run the risk of a further drop of up to 5 per cent in prices into 2007 and the early part of 2008 until rates drop back down during 2008. Data also shows a stabilisation in prices in Tasmania over the past 12 months."

It works in cycles

Lomas says property does behave in cycles, but it doesn't behave in the same cycles all over the country. "So many people were told 12 months ago that now is not the right time to invest in property. What they should have been told is now is not the right time to invest in Sydney. When you invest in property it's not meant to be speculative or short-term. It means you are going to invest through a cycle and if you hold through a cycle there will be a loss and a gain and it will even itself out."

Sometimes property just clicks

Marie Spencer has been busily investing in property this year while the pundits continue to talk of a property slump.

In February, after a six-month search, she bought her first investment property, a two-bedroom townhouse in the Brisbane suburb of Woodridge. It is positively geared that is, its rent covers all her costs and is returning an attractive 9 per cent.

In July she settled on a two-bedroom unit in Kalgoorlie. It's rented for $220 a week to a mining company employee, again delivering her a return of 9 per cent.

"Now I have been looking around Wagga Wagga, Albury and Dubbo for a third property," says Marie, 39. "I did look at Mildura where I used to live but I haven't found anything. I also intend to look in Adelaide.

"I do all my research on the internet and have yet to see the two places I have bought. Instead, I rely on my financial adviser to do the number-crunching then I get a building inspection report done and I proceed from there.

"My aim is to build a big portfolio and retire off the income from that. I really enjoy doing it, but it is time-consuming. For me, it's all about the numbers. I am not swayed by negative talk about the property market. If the figures add up, then I will buy it."
 
Peter 147 said:
Found this article which may be on interest to those searching for positive gearing.
Semi-rural Marlow Lagoon, about 20 kilometres from Darwin; Bluff Point, the premier suburb of Geraldton in Western Australia; and Red Hill on Victoria's Mornington Peninsula, with most properties on acreages, have been the big movers in the past 12 months with a median price change of 127.8 per cent, 121.4 per cent and 93.9 per cent respectively.

Even 2 years ago the yields in Bluff Pt were poor for a +ve CF investor (6 - 7% from advertised prices). CF investors in Geraldton would have gone for bottom-end Rangeway & Spalding. But my portfolio needed a growth component, so I was willing to tolerate -ve CF 8% in Bluff Pt.

The article stretches it by labelling Bluff Point as THE premier suburb; Bluff Pt is good, but Mt Tarcoola/Tarcoola Beach are slightly higher regarded according to my research.

Bluff Pt has had some new beachfront houses built in the last couple of years, so this will have accounted for some (but certainly not all) the high growth experienced. Being older than the Tarcoolas with some non-brick houses, and on the marina side of the city, the attractiveness for redevelopment is high, and others have seen this given the building activity.

Rgds, Peter
 
Thanks Spiderman.

I certainly would take any paper recomendation with a grain of salt.

Interesting article in its broad comment ;) .

Any other comments out there?

peter 147
 
"Lomas also likes Western Australia, especially Bunbury, two hours south of Perth, which has a thriving community and a diverse range of industry, making it a great place to invest."

Well its great to hear when people agree with what you have been saying for the last six months. :D
I cant comment on the other areas but they have the Southwest summed up very well.



Cheers

Madmurf
 
madmurf said:
"Lomas also likes Western Australia, especially Bunbury, two hours south of Perth, which has a thriving community and a diverse range of industry, making it a great place to invest."

It sounds like Lomas is basing her predictions on capital growth rather than places that meet her criteria re cashflow (as recommended in her book). I can't help thinking that if Geraldton and Bunbury only grew by 2% and not 40% in the last year or so, such suggestions might not necessarily have been made ;)

Unless there's been a big rent spiral, in Bunbury you'd be doing well to get much over 5% yield. With a yield not much different from capital city levels, and Bunbury mean prices not that much less than Perth's one would wonder why bother.

The only thing I can think of is that being smaller, places like Bunbury and Geraldton might have most suburbs within 2-3km of the beach, whereas that's true for only a minority of Perth suburbs. So you could get a well-positioned regional city IP for about the same as a mediocre position capital city IP.

Even 2 years ago, only a minority of Bunbury properties would have had >6% yields from advertised prices, and most of those that did would have been pre-85 (which breaks Lomas' rules re after tax +CF). If anything Bunbury yields would have been between Perth's and Geraldton's and much lower than Kalgoorlie's.

Both McKnight and Lomas strongly recommend against purchasing properties that don't meet their critieria of CF+ (whether before or after tax). However the boom in any of the WA coastal cities seemed to indicate that anyone who bought anything fairly standard (ie 2-4 br and not in a complex) returning at least 7% gross did well.

A big lesson from all this is that the investor hung up about rigidly following various cashflow guru buying criteria to the extent that they didn't buy missed out majorly because of the stage of the cycle we've just gone through. In one year they might have $30k appreciation but only a $3k CF loss. Only if there is a completely flat market for the next 9 years (less if falling) would they be in the red.

Around 7% is still unsuitable for areas with limited capital growth prospects.

But for other areas around 7% has the following things going for it: (i) is unlikely to be much different to Navra's Rental Reality in the areas under discussion, (ii) is the same as interest rates, so the rent covers interest, (iii) at current interest rates means that renting is still cheaper than buying, but the difference is only about 30-50% making it more an emotional/lifestyle than an economic choice, (iv) probably represents a fair premium over capital city yields, and (v) FWIW is a minimum return recommended by Neil Jenman (who in an investing context is very conservative).

Tough McKnight and Lomas-style cashflow criteria are possibly best followed immediately after a boom, but significantly relaxed if growth prospects were seen to be good. This could be either due to cyclical forces as in Perth, or genuine long-term undervaluation as in Geraldton (compared to any other Australian coastal city of a similar size), Rockingham (compared to Perth metro) and Bunbury (compared to Busselton).

This of course introduces issues to do with timing markets (or, more simply avoiding purchasing around the peaks), but this is a discussion we have seen here before.

Rgds, Peter
 
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