Taking the interstate route

PORTFOLIO POINT: The varied property growth rates across the major capital cities can present good buying opportunities. But there’s a lot of ground to cover before leaping in.

Sydney or Melbourne? Brisbane or Perth? Adelaide or Canberra? Increasingly, my Eureka Report mailbag includes these sorts of questions. Property investors appear to have a growing appetite for investing in a city other than their own.

Property investment used to be a parochial business. Investors tended to buy property in the city where they lived, often on the same side of town as their home. It was only the truly adventurous who ventured further afield.

The trend to look interstate is a few years in the making, and has been driven by factors such as falling aviation costs and greater access to information via the internet making Australia a smaller place. But I suspect it has received a kick-on in recent times for two reasons.

First, and most significantly, is the multi-speed economy and its prominent place in the national conversation since the GFC arrived in 2008. Australian states and regions have never had uniform economic growth rates, but the persistent divergence in GDP numbers that we’re seeing between the likes of Western Australia on the one hand and Tasmania at the other extreme has investors looking beyond their backyards.

The other main factor at play, to my mind, is the aggressive competition between property data providers for ascendency. It has resulted in a blizzard of reports on property market performance. Inevitably, the media frames many of these stories in terms of the relative performance of cities.

Not that interstate investment is a bad thing, per se. For example, for those who have two or three investment properties in a capital city, there may be some value from a diversity perspective by looking beyond familiar environs. This is certainly the case if you’re currently only invested in a smaller capital or regional city that traditionally have a lower capital growth profile. In this instance, investors should seriously consider Sydney, Melbourne and Brisbane, our major capitals.

However, to be confident of success, investors need to develop a deep knowledge base and understanding of their target property market.

To begin with, tenancy rules and tax structures differ between states. Prospective investors will want to visit the relevant state revenue office’s website to understand the entry, holding and exits costs involved in property investment. You’ll also want to check out the local rules regarding tenants’ rights and obligations.

That, alas, is the easy part. The real challenge is having sufficient granular knowledge of a city’s dynamics to ensure that your asset selection is spot on. Now, it’s possible nowadays to absorb some of the need-to-know local information by trawling the web, especially the property sections of metropolitan newspapers, the real estate portals and by studying online maps to identify which suburbs have the most intensive infrastructure.

But to truly obtain a genuine feel for a city, you’ll need to visit, ideally stay a while, and devote yourself to intelligence gathering. Before you step on a plane however, you’ll want to have done some serious homework first. Speak to a number of estate agents in areas you think may be worthy of consideration. For balance, also contact some independent property advisers. Look to set up meetings with those parties whose advice you found most valuable.

Once you’re in the new city, try to attend as many open-for-inspections and auctions as you can. Share your investment criteria with the real estate agents and property advisers, and ask them probing questions about the sorts of properties they recommend.

It’s generally best not to rush straight into buying a property. Go back to your home town, reflect on what you’ve learnt, and talk to your favoured property adviser, with a view to honing your criteria and appointing them to assist you. Over the next month, do further desk research about the target market, with a plan to revisit the interstate city thereafter to buy an investment property that fulfils your rational objective criteria.

Assuming all goes well with buying the property, the most vital step in the process after asset selection is choice of property manager – and by this I mean not just the agency, but the particular person who would be managing your property. With you living interstate, you’ll be heavily dependent on that individual, so it will need to be someone you feel you can trust. 

Your property adviser should be able to recommend someone reputable. Also take soundings from the estate agents you meet. Once again, be proactive. Try to meet your prospective manager in person or failing that, arrange a telephone meeting where you will ask the manager about their experience and how they will manage the property (see Property investment's vital ingredient for further advice on choosing a property manager).

Successful investing interstate isn’t insurmountable. But you do need to be diligent, organised and persistent, and have an appetite to ask lots of questions and hold people to account. Get this right and you’ll have enhanced and diversified your property portfolio.

Property Q&A

This week:

• Buying on the Harbour, and is car parking a must?
• Parking funds in UK car parks
• Buying the property next door
• Is now a good time to fix?

Buying on the Harbour, and is car parking a must?

My wife and I live in Melbourne where we own several residential and commercial properties. We are looking at the possibility of investing in one, two or three apartments in Sydney through our SMSF in areas like Potts Point, Elizabeth Bay, Darling Point, Double Bay, Point Piper, McMahon's Point or Kirribilli. I know you strongly advise not to buy an apartment without car parking in Melbourne. Does this advice also hold for suburbs like these in Sydney? You are correct in identifying key harbour side areas in Sydney with high land values and solid investment targets. Whilst there may be other nuanced differences between what is acceptable in Sydney as opposed to Melbourne, the key driver in Sydney demand and future capital growth is defined by proximity and access to Sydney Harbour.

Car parking for apartments is essential, even in Sydney where it is not as common as Melbourne. Given the choice of parking versus no parking, a tenant and/or a future buyer will often dismiss a property with no car parking and pay a premium for the property with car parking.

Parking funds in UK car parks

I’ve read about several car parking-only investment opportunities in London with 9% plus guaranteed net. How safe are these investments? They look airtight, but are there any traps?

I’m not fundamentally opposed to investing in car parking-only opportunities. When the circumstances are right they can deliver strong capital growth. You want a situation where there is a scarcity of car park places relative to demand in the vicinity and where geography or planning restrictions are sufficient to give you confidence that future additional supply will be limited. Further, the prospective parking space should have a price history and a track record of good capital growth.

Unfortunately, many car parking spaces on offer are new. Just like off-the-plan apartments, the price is set by a developer rather than the market and they are usually overpriced for what they represent. And just like off-the-plan apartments, there is usually a well-stocked production line of these car parking spaces on the way, which virtually ensures little or no future capital growth.

Rent guarantees are an old trick developers play to entice unwary investors to buy their overpriced property. But there is no such thing as a free lunch. Effectively, they recoup any above-market rent payments they might have to fork out by overcharging for the asset in the first place. Further, once the rent guarantee period lapses, investors often discover that the true market rent is much lower.

Add in the exchange-rate risk, uncertainties with the British economy and the inevitable challenge of being able to realistically evaluate an investment on the other side of the world, and I would suggest this is a high-risk strategy.

Buying the property next door

My neighbour has told me he’s thinking of selling and I indicated I might be a potential buyer – it would be a good investment property. He’s asked me to make an offer with a view to closing the deal without him appointing an estate agent. How might I proceed?

Before considering how to negotiate let’s take a step back. Are you sure you want to buy this property? Does it really meet objective investment criteria, or is the convenience of buying next door skewing your decision-making?

Bear in mind the potential downsides of having your tenants live next door. What happens if something goes wrong? Even if the agent collects the rent, you will be front and centre if the hot water service breaks down or the toilet won’t flush!

On occasion, a property is worth more to an adjacent owner than others because it opens the opportunity to develop both parcels of land – the sum of the parts is greater than the whole.  But that doesn’t necessarily appear to be your motivation. You may, however, be putting too many eggs in the one basket by having a home and investment property in the same area.

If you do want to proceed, do not make an immediate offer. Ask the owner what he thinks it is worth. If he agrees, that immediately puts a ceiling on the price for you to work down from, and may well be less than the maximum you would be willing to pay. You, of course, should never disclose your maximum price!

Of course, he may also refuse to volunteer a price. In that instance, propose that two valuers are engaged to formally value the property. Meanwhile, you should also be doing your own research to unearth comparable recent sales and, ideally, its sales history to determine whether the property has a history of strong capital growth.

Armed with this information, you’ll be in a position to make a strong case to strike a price that is fair and reasonable.

Is now a good time to fix?

I sense that we might be near or close to the bottom of the interest rate cycle. Is this a good time to fix my mortgage?

Data from broker Mortgage Choice indicates that the proportion of new mortgages that are variable currently stands at 85%, which is the highest it’s been for nearly a year. So at the moment, most new borrowers think there are further cuts on the way. Of course, no one really knows and the tone of the recent Reserve Bank correspondence suggests it wants to sit on its hands for a while and see how the earlier rate cuts impact the economy. Nevertheless, many market analysts are tipping one or two more rate cuts by the end of the year.

Fixing your rate is akin to betting against the banks. Essentially you’re waging that you can predict the turning points in the interest rate cycle better than they can. Unfortunately, those who fix their rates usually end up doing it too soon or too late and pay higher interest costs over the cycle than those who remain variable the whole time.

For the risk adverse, fixing your rates does provide certainty and the removal of worry may be worth paying for. A compromise is to fix a proportion of your loan. Keep an eye on the cash rate, and if there is a further cut, fixing for a year or two may be advantageous, subject to independent advice specific to your situation.

If you do fix, be very sure that you will not be selling during the fixed term as the break costs can be very high. And make sure you have the option to reduce debt whenever you want to without penalty.

Monique Sasson Wakelin is a co-founder and director of Wakelin Property Advisory, an independent firm specialising in acquiring residential property for investors. Monique can be found on Twitter: @WakelinProperty.

Note: We make every attempt to provide answers to readers’ questions, however, answers are of a general nature only. Subscribers should seek independent professional advice for more in-depth information that is specific to their situation.

Do you have a question for Monique? Send an email to monique@eurekareport.com.au