Top 5 areas to buy for capital growth

[Wilson!]

Greetings all
This is my first post on the forum.

Just after thoughts from members, on where the top 5 locations to buy now are.
Factors to consider:

1. Prices on the rise now, but not overdone and about to flatten out
2. Good rental yields to minimise out of pocket expenses

After reading Aust Propert Investor, Beenleigh seems like a good location, it is grown from median house prices of $94,250 in 2002 to $280,000 today
It continued last year at 14.74% increase

The trick of course, is to identify areas which have just started to rise, or are continuing to rise, not those who have boomed and will now flatten out

I'd be grateful to get opinions from others on locations.


PS - Anyone in a similar situation...below...

We have a 6 month old son, are paying off an apartment in Sydney, and are looking to buy a house in 3 years so he can run around. Buying an investment property in a fast growing area now seems better than saving in an ing account for nominal interest

Holding for three years to realise capital growth will allow us to sell it then, or use the equity as a deposit for a house in Sydney


Cheers,
Wilson!

 

[DavidMc]

Hi Wilson,

It's very hard to pick the best areas for capital growth. You should probably steer clear from most people who say they can. In my view 3 years is too short a timeframe in property. It's quite possible to be in negative equity after only 3 years. Make sure you are happy with that risk before you continue. A longer timeframe (7+) is more suitable for this asset class.

Reports from Residex will provide you with the information you are after. www.residex.com.au.


Regards,

David.

 

[alexlee]

Also it's limited by your borrowing capacity. Knowing (not that anyone can predict property prices in the short term) that a $1m property will have good growth doesn't help you if you can only borrow $300k.

As David said, 3 years is a pretty short time for property. Just the buying and selling costs would be close to 10%. It might be better to lay down a long term plan instead? You're going to need more money than just for the deposit on a house later on.
Alex

 

[Omega Investmen]

Fundamental drivers of demand

Hi Wilson,

I believe it is possible to find areas that are going to experience higher than average capital growth areas, while providing good high yields to minimise your holding costs. These areas could be considered to fall into two broad group.

Safer city growth areas
Firstly areas within major cities, such as inner city (eg, 2-7km) Melbourne, Brisbane or Adelaide. Areas that in my research, reading of the available property investor magazines (eg, Your Property Investment, Australian Property Investors, Your Mortgage) and attendance of investment seminars (eg, www.mcorp.com.au has a fantastic three day free seminar) are on the rise and in the case of Adelaide potentially the next Perth.

These areas have fundamental reasons for their rise and indeed have experienced strong growth in the last year (15%+ in some suburbs in the last quarter in Melbourne). By purchasing data from the relevant state Real Estate Institute (www.reiv.com.au ; www.reiq.com.au ; www.reisa.com.au) you can get the quarterly and annual trends of top performing suburbs and start your short list from there.

I don't have the information handly to outline the reasons for each city - this is information you can and, more importantly, should source and read yourself. I agree in part with DavidMc's advice - be wary of those who claim to be able to tell you where to buy. However, the property market is not the stock market. It is NOT totally efficient. There are not hundreds of stock analysts watching the 500 or so main companies in the market when it comes to the property market. Most people don't invest more than 20km from where they live - so the market will be inefficient and you can get good buys by doing the research.

As you are pretty new and have a shorter time frame, I would recommend you use a buyers advocate - someone who will do all the work for you and recommend properties for you to buy. They are much more likely than you to pick a property that will experience above average growth.

You'll need to meet with a few of them and read their testimonials and preferrably talk to some of their clients. Once they recommend properties, do you research on the suburbs to see if you agree with their recommendations. They charge about $7k or 2% of the property's value. However, if a property goes up by say 10% a year this is money well spent.

Also, a buyers advocate will find you a property fast - probably four weeks. You could spend six months research suburbs and the market may have risen 10% - 10% you would have missed out on. A buyers advocate will save a lot of time for you and get you in the market sooner.

More speculative regional areas
Secondly, you can get good growth and high yields by investing in boom towns. Bernard Salt (demographer and partner of KPMG and regular columnist in The Australia - www.bernardsalt.com.au) has identified the top boom towns in Australia based on population growth. Now is the best time to use this data for investing - given the last census was only last year.

Other towns are booming because of the 'once-in-a-life-time' commodities boom. These towns include Roxby Downs (SA), Gladstone (QLD), and Port Hedland (WA but very, very expensive). Global demand for coal, uranium, copper, aluminum, iron ore and other metals from China, India and other developing nations has created a sustained commodities cycle that has never been seen before (see www.bhpbilliton.com/bb/investorsMedia/investmentPresentations.jsp and www.riotinto.com/investors/219_publications_and_speeches.asp for presentations outlining this).

The growth in these towns over the last five years has been phenomenal and I believe will continue for the medium term. Roxby has a $5bn expansion, Gladstone a $2.2bn expansion and more than $10bn in other potential expansions plus is one of the top 10 population growth regions in Australia, Port Hedland is out to experience the Fortescue Metals Group expansion. Rents are c6% in Roxby, c5% and increasing in Gladstone, and c10% in Port Hedland.

While these are regional areas, there are fundamentally sound reasons why these areas have and will continue to boom. Again, you need to do your own research into it but I believe the evidence is clear and pursuasive. Indeed, I have myself personally flown to Roxby Downs and Gladstone, and have purchased in Roxby and signed a contract for a property in Gladstone. However, do your research and make sure I am not just 'talking my book'


Residex (www.residex.com.au) also has a 'Best Rent' report that details the top 100 rental suburbs - this could also be a good starting point for you.

All the best!

Flynn

[email protected]

 

[Peter Parker]

Hi Wilson,

I believe it is possible to find areas that are going to experience higher than average capital growth areas, while providing good high yields to minimise your holding costs. These areas could be considered to fall into two broad group.

Safer city growth areas

Firstly areas within major cities, such as inner city (eg, 2-7km) Melbourne, Brisbane or Adelaide.

It is true that established homes in many of these areas have experienced high recent growth. However contrary to the assertion above, the best quality houses in these areas are sold on low yields (3% approx).

Their period architecture contributes towards their scarcity value but means limited building depreciation tax benefits. While such places may deliver excellent capital growth, their holding costs are very high. This means that unless you're on a very high income it will be a long time before you can afford to buy your second IP due to serviceability issues.

The other class of property common in inner areas are newer units and townhouses. These offer higher yields. But in general with units the higher the yield, the smaller the unit, the larger the complex, the less scope for value adding, the less control you have, etc. And their capital growth performance might not be great.

More speculative regional areas
Secondly, you can get good growth and high yields by investing in boom towns. Bernard Salt (demographer and partner of KPMG and regular columnist in The Australia - www.bernardsalt.com.au) has identified the top boom towns in Australia based on population growth. Now is the best time to use this data for investing - given the last census was only last year.

As you say high risk. Unless you've done all your research probably not ideal for a first investor unless the yield is exceptional and it's in a large town with several industries and a long-term future. Banks may be reluctant to lend.

Some mining and regional towns have appreciated so much that yields are down to 6%, ie hardly better than you can get in a capital city.

It may well be that the best property is neither of the above. Maybe a tired but sound house, duplex or villa in a well-serviced middle or outer suburb might be better due to reasonable holding costs and improvement potential?

As you are pretty new and have a shorter time frame, I would recommend you use a buyers advocate - someone who will do all the work for you and recommend properties for you to buy. They are much more likely than you to pick a property that will experience above average growth.

Is there any documented evidence for this?

If you intend to buy more than one property (and a proper portfolio that guarantees a modest degree of financial independence requires about 6 properties minimum) it might be better to research stuff yourself and not use a BA. BAs tend to concentrate on certain areas and the area they specialise in may not be the best for your investment capabilities. Some BAs are even known to spruik business by slagging good value areas they know nothing about, even though they may have a lot going for them.

Investing is a long-term process, and works best if assets are held for much more than 3 years. Betting that property A will appreciate by $B in such a time is speculation and unless you elect for a more active style of investing (eg renovating, but this is not sure-fire either) passive buy and hold won't guarantee growth.

 

[DavidMc]

Also, a buyers advocate will find you a property fast - probably four weeks. You could spend six months research suburbs and the market may have risen 10% - 10% you would have missed out on. A buyers advocate will save a lot of time for you and get you in the market sooner.

I used one of Melbourne top and most respected buyers advocates and they took 6 months (to be fair this included Xmas and my assigned BA left their organisation). Engaged 16 Oct 2006, purchased 21 April 2007. In the end I found something myself and overpaid to get it (perhaps I was sick of waiting). They verified it was an amazing place, now I'm going to the Department of Justice to mediate on a car parking issue in the block. The market also moved a huge amount in this time. A few other forum members had a similar experience and with other big BA's. Their wait times are simply too long in a hot market. Everyone wants in. Maybe a smaller BA would be quicker, but one of the things I wanted was the 'off market network' of a large respected BA.

In hindsight it was a bad time to use a buyers agent in inner Melbourne, although I was just too lazy in 'getting around to it' myself. I underestimated my own skills (but to be fair I simply didn't have the time). Nobody will do a better job than yourself and I agree with Spidermans comments if you're to purchase 6+ you might as well bite the bullet and learn the process yourself.

 

[jingo]

Also, a buyers advocate will find you a property fast - probably four weeks. You could spend six months research suburbs and the market may have risen 10% - 10% you would have missed out on. A buyers advocate will save a lot of time for you and get you in the market sooner.

]

Interestingly there was a post on the forum earlier this year from an investor who had engaged a BA. He was becoming very frustrated as the market in Melbourne was moving very quickly, and the BA certainly didn't find him a property in anywhere near the time you quoted above. He ended up purchasing on his own in the end, and believe he ditched the BA.

I have attached the relevant thread below for your reference, and the relevant post is No 13. (But you need to read on to see how frustrated Emu became!)

http://www.somersoft.com/forums/showthread.php?t=32049



Regards Jason.

PS: I hadn't read David's post above before writing this. But if you go to the link attached you will also be able to read of David's experience in buying earlier this year through the Wakelin Group.

 

[Wilson!]

Thanks guys, you are all brilliant!!
We have a 6 month old son who has just discovered all the interesting things around him, so I have just started reading into your suggestions.

I’m sending it to my blackberry to read on the train to the office in the morning!!!
I love this forum, so much knowledge to share and build on.

One thing I wanted to ask, if you were in the same situation, would you go down the IP path, or put regular monthly savings into a managed fun, or onto your current mortgage... I have ruled out the ING account, as 6% is not very high, and then also it is taxed...but then you do get compounding interest benefits but over 3 years, that wouldn't be all that much

• Managed funds can return up to 20% (I am pretty good with the share market, so can pick a good one) but then you lose 42% in tax
• An IP should go up in three years, but then also it may not.
• Paying off the current mortgage builds equity, but you are only making a return of the current interest rate % aren't you?

Thanks everyone...

Cheers,
Wilson!

 

[Peter Parker]

[*]Paying off the current mortgage builds equity, but you are only making a return of the current interest rate % aren't you?

After tax it's a little bit better.

Paying down a mortgage at 8% is equivalent to a savings account returning 10-11% before tax since interest on the latter would be taxed.

Getting the equivalent of 10-11% before tax, though it falls well below the growth that entrepenurial (ie risk taking) investors expect and get is still respectable though hardly a fast route to wealth.

 

[alexlee]

• Managed funds can return up to 20% (I am pretty good with the share market, so can pick a good one) but then you lose 42% in tax
• An IP should go up in three years, but then also it may not.
• Paying off the current mortgage builds equity, but you are only making a return of the current interest rate % aren't you?

How long have you been investing in shares, and have you only ever invested in a bull market?
Alex

 

[willair]

• Managed funds can return up to 20% (I am pretty good with the share market, so can pick a good one) but then you lose 42% in tax
• An IP should go up in three years, but then also it may not.

Wilson,The 42% tax is only a problem when you sell while the money is
invested is just an interest free loan from the ATO,all you have to do is
ask yourself can any investment stand up over the next three years the
way they have over the past three, do your own research and take the
initiative yourself,but if you are as good as you say at the ASX,then stick
to what you know,anyone can make money in a Bull Market,or any market
if you have a plan and and exit plan in place..
Just look a few weeks back MBL was around the $64/65 dollar mark ,when i had a look just then they are above the $87 dollar mark,just think if you bought 5000 at that price,that's what i call fast bucks....willair..IMHO..

 

[Wilson!]

Yeah good point guys.

A bull market is good to everyone.
I have been investing only the last three years. Hardly a guru, but have done ok so far.

A bear market would be doifferent, but then the strategy changes to shorting and other options

I think I'll take a mix of paying off he mprtgage now, plus investing in high risk stocks, on a 80/20 ratio...
At least that is a balanced rosk/reward ratio, and it may decrease my 3 year period too.

You just never know ...