What I learnt from property investment

[FelixL]

I have been on a roller coaster ride in the property markets for the a while now and would like to share my experiences

Cash really is the king - I leverage to the max and now pains me to see all these wonderful opportunities available but no cash to invest

Rental yield - average rental yield in the capital cities seem to be neutral at 5%, 3% suggest house prices is too high and should sell, 7% above should buy

Key indicators of growth/crash - population, employment, building approvals, those factors affect the supply/demand equation the most

Don't believe government promises - I live in NSW so may be this is on the extreme end of the scale

Media reports - if they are very negative, usually good time to buy, if they are very positive, time to pack up and go

Fix interest rate - with the RBA now independent, the rate seem to revolve around 7.25%, below that can consider fix rates

 

[Nathan]

Good observation felix. Kudos to you.

 

[Deltaberry]

1-yr fixed are all at around 7% now.

 

[FelixL]

1-yr fixed are all at around 7% now.

sorry i didn't clarify properly in the original post, I was talking about 3-5 yr fix rates, 1 yr is fix is too short for the benefit of a piece of mind.

About 1-2 year ago they were 5 yr fix rate at below 6%! I kick myself for not jumping on board at the time

 

[Peter_Tersteeg]

Kudos on their way, good post.

If you don't have cash, you can't pay the bills, let alone invest more. Get it when you don't need it becuase when you do, no-one will give you any.

I'd be interested to see your thoughts on the rental yield. 5% isn't anywhere near cashflow neutral (more like 10% yield on purchase price), but that may not be your criteria. In capital cities, 5% is quite a good yield. Could you expand on this?

I believe most governments do more harm than good when manipulating the markets, but pure capitalisim is a pretty bleak picture too.

Population and demand always push prices up in a limited supply market.

Media is out to sell advertising space, genuine reporting is rare.

Right now I'd agree with the fixed rate assessment. The RBA doesn't have as much influence on fixed as much as it used to, but the global market seems more volatile these days. It might actually be trending downwards if you look at a 30 year timeframe. I'm not sure.

 

[FormerLurker]

Kudos on their way, good post.


I'd be interested to see your thoughts on the rental yield. 5% isn't anywhere near cashflow neutral (more like 10% yield on purchase price), but that may not be your criteria. In capital cities, 5% is quite a good yield. Could you expand on this?

I think he meant more as a price guide - i.e. a property yielding 3% is over priced 5% neutral 7% underpriced.

I don't agree with this assessment though it's to generic - "Rich" suburbs tend to always have relatively crap yields as they target capital gains and "poor" suburbs conversely have better yields as they target cash flow over CG his formula may work for "middle-class" suburbs though (but if I found 7% yields in a middle-class suburb I'd be thanking my lucky stars or wondering what’s wrong with it (probably both).

 

[long88]

good time to buy now.

http://www.theage.com.au/business/home-loans-sink-to-decade-low-20110406-1d3n2.html


on the look for 7% return.. where people ?

 

[Peter_Tersteeg]

I think he meant more as a price guide - i.e. a property yielding 3% is over priced 5% neutral 7% underpriced.

I don't agree with this assessment though it's to generic - "Rich" suburbs tend to always have relatively crap yields as they target capital gains and "poor" suburbs conversely have better yields as they target cash flow over CG his formula may work for "middle-class" suburbs though (but if I found 7% yields in a middle-class suburb I'd be thanking my lucky stars or wondering what’s wrong with it (probably both).

It's probably a good guide within a certain price range. I think the rule of thumb on price vs yield changes with the price range. A client recently purchase a property with a 7% yield, the property value is below $150k. Other clients are buying in the $800k+ range are getting 3% yields. If you know the area and know what the right yield for the area tends to be, this can be an easy way to quickly make a short list.

 

[Token Funder]

*snip*
Key indicators of growth/crash - population, employment, building approvals, those factors affect the supply/demand equation the most
*snip*

You missed a/the biggy - growth or contraction of credit.

 

[FelixL]

yeah the rental yield = 5% is just a guide I used for neutral point in respect to supply/demand. Assuming mortgage rate at around 7.25%, I feel (and this is just my gut feeling) 2% is a fair price to pay for home owner and the chance of getting capital gain. At 3% most rational people will remain renting therefore drive the price down and ratio up, at 7% its almost same as mortgage then most rational people will buy instead of rent, pushing price up and ratio back towards 5%

More over, I only apply this guide on suburbs with ~20% rental stock, for suburbs with primary owner occupiers (eg. north shore sydney) I can accept 4-4.5%, for west sydney need to see 5.5-6% to get start looking

One thing I still can't figure out is how regional/rural market work, any one with better insight?

 

[FelixL]

You missed a/the biggy - growth or contraction of credit.

yup, watching the change of credit provision is much better indicator of affordability than the oft quoted rent-to-median-price or income-to-median-price

for some reason this statistic is not often reported in the media

 

[Token Funder]

yup, watching the change of credit provision is much better indicator of affordability than the oft quoted rent-to-median-price or income-to-median-price

for some reason this statistic is not often reported in the media

..and the following would imply what, do you think?

Latest ABS Stats

 

[FelixL]

Thanks Token, just the stat report I've been looking for a long time

I will read it in detail, but on a glance seem to point to a downward pressure on house price on its own. However we still have healthy population increase, almost full employment, and reduced building approvals (-supply)

my take is the house prices will be flat for the next few years with some areas seeing -10%

sydney though I think might increase slightly since it has been sideways since 2003 and only recently recorded some gain recently

there will be markets within markets and thats what I will be focus on