Four experts advise wanna be home owners on how and where to get a toe in the water, writes Mary Costello.

No-one really knows whether Australia’s property bubble will burst or just slowly deflate but with potentially better times ahead for buyers, maybe you’re considering investing in property. So where do you start?

We asked four experts for advice for a hypothetical novice investor who wants to get into residential property with a modest $70,000 in savings. What should our investor be aiming for and where and what should they buy?

We received a range of responses and whether you’re risk-averse, adventurous or patient, you should find an approach that suits you.

Michael Yardney of strategist Metropole has written several books on the subject, including How to Grow a Multi-Million Dollar Property Portfolio—in Your Spare Time. He says our investor has to get his foot into the market.

‘‘If you want to grow your portfolio, you must grow your asset base through capital growth or cash flow,’’ Mr Yardney says. ‘‘My strategy is high capital growth. For the past 18 months, we’ve had higher than average capital growth. That will now slow and interest rates will increase.”

Our investor should buy in the best location money will allow, which means they must compromise on something. I suggest they compromise on land size, not location.

Some areas always outperform others. It’s the law of supply and demand. It’s true that houses appreciate but not all land is the same. There’s no shortage of land in the outer suburbs.

‘‘I’d look for a high land-to-asset ratio—not new high-rise blocks but older properties where you can renovate and value add”

‘‘You can get a one-bedroom apartment in the low-$400,000s in Melbourne’s bayside area or the inner east, or a two-bedroom apartment a little further out”

‘‘In the past three years, apartments in these areas have had as much capital growth as houses because of the way we live now. People are giving up land size for amenity. There are more one and two-person households, so apartments still make great investments.”

‘‘I suggest our investor use $40,000 to $45,000 of their money to put down as a deposit and borrow the balance of their investment purchase, using a loan-to-value ratio [LVR] of 90 per cent.”

“They can do this by using lenders mortgage insurance [LMI] —a one-off premium that allows you to leverage money better. This would leave them with funds for the acquisition costs [usually 5.5 per cent of the property price], the cost of the LMI and a small financial buffer for contingencies like vacant periods and repairs.’’

Karin Mackay of Australian Property Buyers advises our investor to buy into suburbs with an average of 10 per cent capital growth over the past 10 years.

‘‘When we look at the growth Melbourne has experienced, the suburbs that haven’t [achieved] an average of 10 per cent per year for the past 10 years will probably never achieve an average of 10 per cent,’’ she says. ‘‘Capital growth grows the wealth, not the rental income”

‘‘An investor with a $70,000 deposit and an income of $60,000 with no debt, including rent, could possibly borrow up to $500,000. The type of properties I would buy would be apartments that you can add value to, or those close to the CBD, good public transport, lifestyle, shops and restaurants.”

‘‘Don’t eliminate apartments that are already renovated or properties that are only a few years old.”

‘‘Two years ago, we bought a new property for a client for $358,000. The developer had used the cheapest white paint—one bucket of paint to 10 buckets of water—and the cheapest carpet.”

“It also had a study that was larger than the bedroom; however, it was open-plan and flowed into the dining/ living area. It was rented until last month for $400 per week. We’ve had it repainted, laid bamboo floors and installed shoji Japanese screens —two fixed and two sliding—and we now have a second bedroom.”

‘‘We rented it in less than a day for $500 per week and we’re expecting the bank valuation to come in at $535,000 to $550,000. The total expenditure for the cosmetic makeover was $12,000. Not a bad investment.’’

Ms Mackay tips a number of areas for strong future growth, including Port Melbourne, Elwood, Yarraville, Seddon, Brunswick, Northcote, Thornbury, Fairfield, Alphington and  North “Melbourne.

‘‘I’d also look in Altona between the railway line and the water and in Mornington between the Nepean Highway and the water, where you may get a smallish house”

‘‘Some people like to buy houses for the land value. The old saying ‘land appreciates and buildings depreciate’ is quite true. However, in the inner suburbs, the land is so very scarce, they can’t construct many more apartments, so avoid areas where there’s still a lot of land left for development.

‘‘I completed a scenario for a prospective client. He wanted to buy two blocks of land and build two houses in Tarneit.”

‘‘The cost for both was $550,000. I suggested an apartment in Port Melbourne, as there was very little land to develop into apartments.”

‘‘If he went ahead with Tarneit, he would have gained approximately $251,339 in equity in 10 years. If in PortMelbourne and [in] an apartment, he would have gained $413,006 in equity in 10 years. Both scenarios would have the same rental return. Which one would you prefer?’’

Portfolio Management Services acquisitions manager Phillip Almeida recommends our investor consider properties in the $200,000 to $300,000 range.

‘‘Focus on established property with a land component rather than off-the-plan,’’ he says. ‘‘A mixture of capital growth and solid income is recommended. You need to have both.”

‘‘Always consider where the tenant demand is going to come from and what . . . will drive value over the long term.”

‘‘Look at properties that you can potentially add value to by conducting a minor cosmetic renovation but stay away from properties that require major structural renovations.”

‘‘A minimum capital amount of 20 per cent should be invested to minimise your mortgage insurance costs and have a slush fund of roughly $5000 on call for any unforeseen items.”

“An excellent relationship with an experienced property manager is essential. Don’t necessarily focus on the cheapest fee out there.’’

Mr Almeida says certain regional areas in Victoria offer good value. ‘‘Frankston has performed well for our client base and Geelong is the area we’re focusing on at present,’’ he says. ‘‘You need to be diligent in stock selection, though, and building and pest reports are essential.’’

David Morrell of Morrell and Koren Buyers Advocates takes a cautious approach, advising our investor to be patient. ‘‘Don’t spend your $70,000 initially because by the time you get your loan ratio happening, you won’t have enough to get something decent,’’ he says.

‘‘They might lend you 70 per cent, which means you’d only have about $350,000 to spend, so it’s better to keep saving. You’d be very limited in what you can buy—a one-bedroom apartment in the inner suburbs. It will go up a bit in value but it won’t go up as much as a house”

‘‘I suggest saving more money because the market’s not going to change fundamentally. There’s really no clear indication of the way the market’s going, except [buyer sentiment] is running out of steam.”

‘‘With $350,000, there’s not a lot of choice out there at the moment and the caution lights are flashing. If I had $70,000, I’d sit back and wait like a tiger in long grass . . . Buy now and it could be a case of ‘March remorse’. That advice might cost me clients but I can’t tell them to do it; it’s not a smart play.’’