A Proactive Approach to Greater Profits in Property Investment

In order to clarify the benefits of the proactive approach, first we need to glance back a little and lay a foundation.

Since 1991 investors flocked to invest into the new accommodation wave of city apartments. The attraction was very compelling at the time for a number of reasons. The market place for accommodation requirements was showing signs of change, there were new markets emerging that had never existed to any degree before, such as the female market, the short term business accommodation market which became the serviced apartment industry and also the Asian education student accommodation market.

Also downsizing middle aged couples along with an increasing percentage of single occupancy dwelling requirements played its part. Also contributing were more families with two homes, as with wealth came the opportunity to own maybe a beach house or acreage property plus the inner city apartment. Further to this an eager state Government keen to keep jobs happening in a very fragile economy, ensured a planning system that produced permits quickly, all of these factors added weight to the attraction of apartment investment.

As prompt planning approvals improved affordability as it reduced holding costs for the developers, whereas today this adds thousands of dollars for no benefit to the cost of a dwelling. Adding further weight to this move was improved taxation benefits due to significant depreciation allowances and the growing awareness of the cash flow advantages of taxation variations, plus stamp duty savings for buying off the plan, and the opportunities to buy property in ones super fund whilst achieving negative gearing status for funds borrowed.

However it is significantly different today in 2011 than it was in 1990, for example in Melbourne CBD and the city fringe there were less than 3000 apartments, compared to over 45,000 today. City land was at historic lows and building costs were highly competitive due to the crash of the commercial property boom. Docklands and South Bank didn’t exist.

All this has changed, today you have land values at high levels, and building costs at historic highs.

So with such significant change and such different conditions, what is the answer to maximise your property investments returns over the next two decades.

In the first place we know there is a shortage of housing in fact to the tune of approaching 300,000 houses Australia wide. This is caused by a number of factors, one which is often over looked is our rapidly slowing death count. This results in less deceased estates and therefore less property sales from this sector. Another reason is the government’s taxation loadings which reduce viability of many otherwise viable sites. A major culprit in reducing housing is our expensive and inefficient planning and permit approval system.

This is further compounded by long term population growth which has slowed but is still growing at around 1.7% per annum and on all accounts is sustainable well into the future. The rest of Asia has decided they want to live in Australia and Australians have willing handed over the ownership of the lucky country. One day soon they will wake up and discover they are living in someone else’s culture.

However with a weak government and a she’ll be right attitude of the citizens, be sure nothing will change, in fact watch the immigration rates further spiral to a day when we have a Melbourne population in excess of 7 million people and a new culture along with it. If you consider this forecast has potential then also consider what this will do to property values in well located areas with good access to work, transportation, quality education and entertainment.

STEP ONE

Step one in our proactive approach to greater profits in property investment discussion is to plan your investment strategy to benefit from this event as it will happen. The key here is not to get side tracked by market swings or media hype proclaiming the next so called hot spot, which seems to appear at least once a month in yet again a new location, simply stay focused on the big picture.

STEP TWO

The next step for safe and sure profit in property investment in the long haul is simply to hold on to your well chosen assets.

STEP THREE

The third step and a most important step is to set yourself up so you can hold on to your property assets.

Time honoured but has the time run out

The two most considered options are to buy something in a great location sit on it and wait for the market over time to produce a profit. However whilst this strategy has a good past history the environment has changed considerably as demonstrated above, not suggesting over time this strategy won’t deliver as with population growth and continued supply and demand issues it will. But this strategy is costly in regards to your holding costs than if you were to buy something in a great location of the future, as you will get a higher rental percentage to investment along the journey and potentially a similar capital growth rate.

Time to dig a little Deeper

However both of these strategies are in some ways flawed, the first one requires a substantial investment with a low return; this strains cash flow and therefore reduces other investment opportunity. The second system can be a long time in the making and you need to be assured the area is heading in the direction you intended for capital growth. Don’t be fooled just because an area is growing this does not mean more capital growth in the short term in fact it can be quite the opposite.

There is a better way

There is a better solution to both of these options and this is the property development and hold option. This option provides the opportunity not only for capital growth but greater leverage on capital growth. Also a far better cash flow position due to higher depreciation taxation allowances plus the big one, GST, as you don’t pay GST on the sales price if you hold the asset for five years.

You will benefit from higher rental incomes from the investment you have made, as your return comes from the value of the asset not the cost to develop the asset. For example you buy the land and build two townhouses with combined total cost of $1,000,000 to complete the project; however the market value for these completed townhouses comes in at $625,000 each, therefore the gross asset value is $1,250,000.

So if we assumed you borrowed 80% of the total land acquisition and development cost which totaled one million dollars you would borrow eight hundred thousand dollars. If we assume a rental income return of 4.5% on the $1,250,000 this would produce a gross income of $56,250 per year. On the $800,000 borrowings at say a 7.5% interest rate, the annual interest bill would be $60,000 per year.

After deducting taxation allowances via deprecation and negative gearing and adding the costs of rental management your new townhouse investment is in fact cash flow positive. In this example if you were on the top marginal tax rate one could be cash flow positive to the tune of between eight and ten thousand dollars per annum after rental management and maintenance costs depending on the quality of fit out, as this generates the level of claimable depreciation allowances.

This is a much safer way to hold quality income producing property, as not only do you build equity immediately, you also save on stamp duty and GST which combined amounts to around 14% of a new property acquisition. For example had you bought a newly completed townhouse from a developer, you would pay 14% in taxes let alone his profit margin so you are well behind the eight ball before you even start.

There are a lot of better ways to structure your property investment arrangements, which need to be properly explored. Yes there is potentially more work if you undertake this development and hold option on your own, but you will be well rewarded for your effort, and if you buy a property well that has such value adding potential then you reduce risk should there be an untimely property down turn.

Obviously property development is not for everyone as it takes considerable time and knowledge, but the figures and the benefits as indicated above are attractive and achievable. If this strategy is of interest, this is what Mollard Property Investment consultants provide to their clients, a better way to buy, invest and develop sound property portfolios.

This article is aimed at providing a more proactive option in property investment. It considers where we are at today in the market and how to progress in different market conditions than what inspired the last twenty years of capital growth.

This article was written by Phillip Mollard Director of Mollard Property investment Consultants P/L http://www.mollard.com.au Phillip is also author of God Man and Money.