The interstate property buyer's checklist

PORTFOLIO POINT: Diversifying into other states can be rewarding, but means treading carefully. Our checklist will help.

It was just a short advertisement spied by an associate of mine, relaxing on a well-deserved Queensland holiday. “Come to Perth,” it said, “and invest in the fastest-growing real estate market in the country.”

What a difference a year makes! Twelve months ago, anyone plunking serious money into Perth property would have attracted concern from friends and family. But at the start of 2010, it seems the fly-in fly-out property investment phenomenon is about to return: another sign of a healthy property market marching forward with confidence and the genuine short supply of good opportunities.

If you’re flying interstate to attend a “property investment seminar” run by spruikers and salespeople, it’s likely you’re walking straight into an investment disaster. But buying outside of your home town makes sense for some investors. Different markets show different propensities for growth. Diversification can help manage the risks associated with varying economic and market factors at different points of the cycle, provided the process is undertaken correctly and cautiously.

For interstate investing, here’s my list of do’s and don’ts.

Monique’s Fly-in Property Investor’s Checklist

Take the test: Are you a fly-in investor? Buying interstate makes sense for investors who:

Live in a low growth area or city
Want to diversify their portfolio of multiple properties in their home market.
Want to acquire assets in a larger city with a broader economic base.

Your reasons for investing interstate must have a solid, long term foundation. Trying to catch a price-growth burst is likely to end in tears as many east coast and Perth investors in small mining towns have found in the past two years.

Diversify while you identify. Check the five major markets in Australia and identify the cities most likely to grow over the next five years, particularly if they’re growing for reasons different to your home market. Pick a city with the best drivers and broadest growth prospects.

Get online before you get onboard. Research, research, research. You will need to understand as much about your investment destination as possible. Start with geography and then determine which suburbs have the most comprehensive infrastructure and services.

Read like a local. Start reading the newspaper of your destination city. You’ll find within a couple of weeks you’ll get a sense of the city, how sales results are progressing, which areas are vibrant, which are falling out of favour and which perform consistently because they are in perennial demand. Local journalists reflect local perceptions and you’ll uncover the “lay of the land” by “reading local”.

Determine your entry point. By this stage, your research will have found the same names popping up as proven investment locations. Pick three prominent and consistently performing suburbs and track sales in these areas for at least two months. Whatever you do, don’t try to outsmart a market you’re not familiar with. Only opt for the seasoned, proven investment localities.

Key players. Identify two or three prominent local real estate agents in each of your locations and talk to them by phone. Then call two or three independent, experienced and qualified property advisers in that city. Talk to them about the types of property and locations you’re looking at. Listen carefully to their feedback and observations and be willing to modify your views if necessary.

Now it’s time to see your investment destination for yourself, armed with detailed market information, market intelligence and valuable local contacts. Just like George Clooney, Brad Pitt and Matt Damon in Ocean's Eleven (why do I like that movie so much?) you’ve picked a target, assembled a team and devised a plan '¦ only yours is above-board. Time to fly in and make the kill.

Before you leave home, leave your ego in your wardrobe. Just because you’ve made millions in Sydney doesn’t mean Perth can’t humble you. Your instinct in Adelaide may be uncanny yet Brisbane could confound everything you thought you knew. Buying investment-grade property is both a systemic process and a nuanced business, and no matter how good you think your instincts are, never approach a new city impulsively. Investing in property is not like buying lipstick or a tennis racquet. If you buy impulsively, you’re asking for trouble.

Fly in, touch down, stick around. Plan to fly in on a Thursday and stay for four or five days so you can observe market dynamics over the weekend. Hire a car and drive around the areas you’ve identified, as well as neighbouring locations. Go to as many relevant open-for-inspections as you can. Go to auctions, talk to agents and keep your ears and eyes wide open.

Meet and greet. Make appointments to see the real estate agents and the independent property advisers you’ve spoken to. Get them to show you properties that meet your criteria and have some detailed, serious discussions about what you’ve looked at.

Stop! Of course, at this point, it’s tempting to make an offer on a property you’ve seen and settle the whole deal. After all, isn’t this why you spent money on your ticket and hotel room? No, it isn’t. Now is the time to ensure you don’t jump the gun and make a mistake.

Get your property adviser to assess your selections. How highly do they rate your selections? If they fail, it’s time to go back and revisit your observations and calculations. Listen to the reasoning and advice your adviser is giving and correct your thinking. If your adviser rates your selections highly, move forward and keep your adviser as part of your “team”.

Go back within a month. If your selections rated well the first time, take a few weeks to think things over and then make a return visit. This time the plan is in full operation; if you find the right property, check with your adviser and if they approve, buy it.

Buying an investment property is a meticulous business at the best of times; buying without a plan in an unfamiliar city is tantamount to gambling. Take your time, do plenty of research and get advice and you’re likely to add a great property to your investment portfolio.

Property Q&A

This week:

Investing on the Sunshine Coast.
Perth or Sri Lanka?
Melbourne’s inner-west.
Do I need landlord’s insurance?

Sunshine Coast

I have been looking into buying an investment property on the Sunshine Coast, just five kilometres north of Caloundra and a couple of hundred metres from the water. What advice do you have for Sunshine Coast investors?

Can I ask why you are looking at this property in particular? If it’s for investment, your focus should be on maximising capital growth with a property with all the right attributes for growth. And while the Sunshine Coast is one of Australia’s more picturesque coastlines, recent history demonstrates that when the property market confidence tide goes out, it recedes a long way in coastal destinations like five kilometres north of Caloundra

If you’re determined to buy a property in this neck of the woods, then I would concentrate on a two- or three-bedroom home as close to the traditional Queensland style as possible. Look for a house in good structural condition, well positioned in a quiet street, close to bus services and within walking distance of a good high school, and no more than a five-minute drive to a major shopping centre that includes a business hub.

As an investor, I would be inclined to suggest a residential property in an inner or middle-ring suburb of Brisbane is more likely to benefit from an upturn in the Queensland economy than the Sunshine Coast. I would start by looking at period two- or three-bedroom period-style houses in inner-Brisbane, in quiet residential streets no more than 10 minutes walk from a major transport route. These property types will have a more consistent growth profile than tourist-dominated coastal regions, which tend to suffer sudden reversals of fortune if the economy falters or if a sudden burst of development ensues.

Perth or Sri Lanka?

I have $600,000 to $700,000 to spend on a Perth investment property and am finding a well located, low maintenance, green title three- or four-bedroom house within 10 kilometres of the CBD is a bit difficult. I have started looking at southern Sri Lanka for portfolio diversity and long-term profits. With the civil war over, the area looks promising for tourism and economic growth, especially with growth engine – India – only 20 kilometres away. I am looking at short-term, semi-luxury accommodation. Any tips or thoughts are welcome.

Yes, the war in Sri Lanka is over, thank goodness for that. Often after such events a small stream of Western investors flocks in, looking to capitalise on a depleted market. Although some do manage to buy properties that turn out to be a great investments, they generally have to wait 10–20 years for above-average returns. Societies recovering from wars tend to have two or three episodes of fighting breaking out in the years following the cessation of war, driven by unresolved tension between former combatants. On top of this, wars are so destructive to economies that unemployment and inflation remain stubborn problems for up to a decade. And while India may only be 20 kilometres away from Sri Lanka’s northern tip, it’s much further from the southern economic heart of the country. In short, I would advise you not to invest in Sri Lankan property unless you know the country really well and have a decade’s worth of patience and financial resources.

I also don’t understand why you think you’re priced out of the Perth market. With your budget, you should be able to find a well-positioned investment property in many inner suburbs and some middle-ring beachside suburbs. You could start by looking at two-bedroom strata properties in areas with high rental demand that are close to but not in the city centre of Perth – areas such as Subiaco, Booragoon, South Perth or Ardross. In terms of medium and long-term investment potential, I would rate these property types in the right location as a better investment than a four-bedroom house further out. Just concentrate on finding a property in an architecturally consistent and appealing area with great access to transport, education and employment and with this budget you should secure an excellent investment.

Melbourne’s inner-west

I am currently looking for my first investment property and considering a unit in the Footscray area of Melbourne’s inner-west. There are a number of multi-storey developments with units selling in the $400,000–500,000 range. I am getting a lot of mixed signals about the future capital growth of this area and would value your comments.

For investors, mixed signals are the first and often reliable sign that the investment you are contemplating incorporates more risk than you should be taking on.

Melbourne’s inner-west is a demanding place for property investors, as they need to be both highly selective and very skilled in selecting or rejecting specific precincts. There are outstanding properties located in this area and over the long term we should see improvements to transport and other infrastructure. But there are problems with investing here. First, the de-industrialisation process is not complete and there are still many factories, chemical storage sites and a refinery in adjacent areas. Second, although access to the CBD has improved in the past 10 years, access to the rest of the metropolitan area by public transport or road is still problematic.

With your budget, I would suggest that you stay away from these new developments and look towards the inner-northwestern suburbs instead. With your budget, you should be able to find a two-bedroom apartment in a low-rise complex. If you can find a unit in one of these complexes located in a quiet residential street within walking distance of shops, public transport, parks and recreation facilities then you should gain better capital growth.

Landlord’s insurance

The local real estate agent told me I need to take out landlord’s insurance for a rental property I have bought. If the building and public liability is covered by the body corporate, is this insurance necessary?

Yes, it’s actually a cover all investors should have. The cost of this protection is very little compared with the potential losses.

Landlord’s insurance will cover eventualities not insured by the body corporate’s insurance or a standard home and contents policy. This includes rental default, accidental or malicious damage by tenants, damage to properties through natural disasters and legal claims by tenants against you. Landlord’s contents insurance should also cover the internal fixtures and fittings, which may need replacing such as carpets, curtains, kitchens, appliances and cupboards.

Investors in a freestanding house need to insure their building, while the owners of a strata title unit should have structural damage covered by the body corporate’s policy; in fact, it’s required by legislation in most states.

Monique Wakelin is co-founder of Wakelin Property Advisory, a Melbourne-based independent property acquisition and advisory company, and co-author of Streets Ahead: How to Make Money from Residential Property.

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 Wakelin? Send an email to monique@eurekareport.com.au.