Tuesday, December 12, 2017

Take the time to buy your perfect property

Some find the process of buying the perfect property laborious and somewhat tedious, while others find the process exciting and a total challenge.

One thing is certain: no matter what your feelings toward the outcome, finding the perfect property requires time and effort and rushing this process will ultimately mean that you can end up purchasing a poorly performing property. woman property deal

Or worse, you could end up with a disastrous ‘money-pit’ on your hands.

Rushing into any purchase is generally due to placing pressure on ourselves because of impending market conditions or our own financial position, when we are driven by emotion rather than a rational thought process.

Whether it is an addition to your portfolio, or the ultimate family ‘dream home’, placing strict time deadlines on the process is a dangerous and stressful way to purchase property.

Taking the time needed can sometimes be difficult as there are a number of situations that drive us to make a quick decision.

Here are four circumstances that can place pressure on your buying decision:

  • The market is exploding and prices are rising every day 
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It is difficult not to panic when you are watching prices rise literally around you, but you need to be mindful that rushing your purchase can be fraught with danger.

There are essential processes such as, research on the suburb and history of the area, carefully checking comparable sales and of course, the time needed to enter into a price negotiation, which all takes time.

Rushing, or skipping these altogether may ultimately end up costing you far more than the week or so it would have taken to go through these crucial steps.

  • Your life situation is about to change

There are so many circumstances that cause financial strain such as the impending arrival of a baby, a divorce, a relocation to a new city, or even a change in your employment status.

In these situations, it is sensible to take the time to understand your future borrowing power and seek advice from a finance strategist to avoid entering into a financial situation that is unserviceable.

  • Time is running out with your current lease landlord rights and responsibilities

Taking the leap from the renting pool to owning your own home is the ‘great Australian dream’.

Unfortunately, when the end of a lease is looming, there is unwarranted pressure to make a quick decision rather than risk being ‘homeless’ within weeks, or signing a new expensive leasing contract.

In this situation, it is often healthier to find short-term accommodation and take more time to find the perfect buy.

The cost of short-term accommodation will be less than the costly buying fees involved in buying a property that isn’t right.

  • There are changes to Government incentives

Government incentives are designed to stimulate the real estate industry, and are often reviewed when market forces dictate the need to influence a fluctuating market. 48797404_l-300x270-300x215

Often impending changes to a grant – such as the First Home Buyer’s Grant – forces buyers into think they must rush to take advantage of the entitlement.

The risk here is that you could actually spend more money in the long run.

An example is, if you are buying at the peak of a market to get the $7000 grant, you may spend more than if you had just waited a few months, when competition from other first homebuyers has all but disappeared.

Making a swift decision may lead to a poor outcome, however there is also the flip side where it can be equally detrimental to wait far too long – and the perfect property slips through your fingers.

It is important not let too much time lapse or you might make the mistake of:

  • Spending so long in decision-making that you miss out on properties,
  • Having so many options in the pipeline that you become completely confused and lose track of your original strategy,
  • Not being ready and becoming fearful of actually signing on the dotted line, or
  • Your thoughts are conflicted and you don’t trust your decisions so simply just ‘keep looking’.

Uncovering the perfect investment should start with a solid long-term strategy and understanding precisely what kind of property you need to buy, and what growth rate and return you’re looking for.

Once you clearly understand your financial standing, the suburbs you are targeting and the property type you are seeking, you are in the best position to maximise your negotiation.

SO WHAT WILL BE YOUR NEXT STEP?

Are you going to take advantage of the property markets in 2017 or are you going to get caught by the traps ahead? 

1-percent

If so and you’re looking for independent advice, no one can help you quite like the independent property investment strategists at Metropole.

Remember the multi award winning team of property investment strategists at Metropole have no properties to sell, so their advice is unbiased.

Whether you are a beginner or a seasoned property investor, we would love to help you formulate an investment strategy or do a review of your existing portfolio, and help you take your property investment to the next level.

Please click here to organise a time for a chat. Or call us on 1300 20 30 30.

When you attend our offices you will receive a free copy of my latest 2 x DVD program Building Wealth through Property Investment in the new Economy valued at $49.



from Property UpdateProperty Update https://propertyupdate.com.au/take-the-time-to-buy-your-perfect-property/

4 steps to getting out of debt

Debt sounds like such a bad word, doesn’t it?

The thing is there is good debt and bad debt25961181_s-1

Good debt makes you money – such as a mortgage on an investment property.

You’re technically using other people’s money to create wealth through capital growth.

On the other hand, bad debt costs you money – such as a personal loan for a new car or, worse still, using your credit card to pay for an overseas holiday that you can’t really afford in the first place.

One of the hurdles that many would-be property owners face is reducing their existing debt so they become more attractive to lenders.

It might seem easier said than done, but there are some simple strategies to get out of debt.

1. Track your spending

It’s a sad reality that many people have no idea how much they spend every month. 

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In fact, many Australians live from one pay period to the next with not much left over before they eventually get paid again.

One of the first steps to getting out of debt is to simply track your spending.

A good way to do this is to create a spreadsheet or similar where you can input all of your spending in a month.

If you do this for a month or two, you will soon start to see where all of your money is going.

You see, buying your lunch and two coffees every day for $30 soon becomes $150 per week – and $600 a month!

2. Have a budget – and stick to it! bank-savings-house-couple-save-property-meeting-budget-300×199

Using the above example, then, another strategy would be create a budget and stick to it.

So, instead of buying lunch every day, you could only do that on Friday’s as a treat.

That way, you’ll save nearly $500 a month, without missing out entirely.

No one wants to live on baked beans to reduce their debt so it’s important to create a realistic budget.

In my experience, an unnecessarily strict budget is doomed to fail from the start.

3. Create some extra income

In today’s world of the sharing economy there are a number of ways that you can boost your income. recession-australia-note-money-economy-squeeze-tighten-save-saving-budget-cut

However you choose to create extra income, it’s a sound strategy to increase what’s coming in so you can reduce your debt more quickly.

By earning at extra $500 a month, perhaps you can pay down that personal loan faster, which will allow you to save a deposit for your first home.

Again, be realistic about the time that you have available to take on extra work.

Reducing debt shouldn’t turn you into a slave to the red numbers while you’re trying to them into black ones instead.

4. Say no to credit cards

There is nothing fundamentally wrong with credit cards – as long as you can pay back the balance in full every month. credit card

That way you’re not getting stung with sky-high interest rates for the privilege of using someone else’s money, which is the bank’s.

If you can’t afford to pay off your credit card balance every month, then you can’t afford a credit card.

It really is that simple.

Too many Australians get caught in the debt-trap of paying the minimum off their credit card every month, which means they’ll likely never pay it off.

The thing is you can reduce your debt by preventing it from building it up in the first place.

Choose a debit card instead so you’re spending money that you do have, rather than money that you don’t.

Here’s the thing… 12426376 L

Getting out debt involves planning and it involves dedication.

By getting professional advice you can create a debt reduction strategy that will enable you to get out of the quagmire of owing much more than you should.

But that plan must be realistic so you’ve got every chance of replacing bad debt with debt of the good kind.



from Property UpdateProperty Update https://propertyupdate.com.au/4-steps-to-getting-out-of-debt/

Here’s what property investors plan to do in 2018

Are you planning to buy an investment property in 2018?

Or maybe you’re planning to buy a new home?  Color Question Mark In Drawing House

Well you’ll be in good company because around half the respondents of a recent survey plan to buy another investment property in the next 12 months, and 23% are planning to buy a new home.

This is despite the fact that 64% of respondents believe that property prices will remain flat, or increase by less than 5% over the next year.

What’s all this about?

In November Michael Yardney’s Property Update and Your Investment Property Magazine polled their readers and 2,250 property investors and  would be investors gave their input to the 2017 Property Investor Sentiment Survey, the largest and longest running survey of its type in Australia

Running since 2011, it offers rich and vibrant insights into how property consumer trends and sentiments have changed over time.

You can download the full survey finding and our analysis by clicking here, but for the moment let’s look at some of the highlights.

Who took part in the survey? 

investor-enquiry-form

A wide range of Australians – 2,250 ordinary mums and dads responded.

The fact that they already subscribed to Property Update or Your Investment Property Magazine meant we had a captive audience of people already interested in property.

When asked for their combined family income 3% earned less than $50,000 while 2% earned more than $250,000 but the bulk earned a combined family income between $100,000 and $200,000.

90% owned at least one investment property, but a wide spectrum of investors partook in the survey:

  • 10% owned no investments
  • 19% owned one investment property
  • 20% owned two investment properties
  • 15% owned three investment properties, and it went all the way up to
  • 7% owned 10 or more properties

Some surprising results:

  • 24% of respondents plan buy a new home in 2018. This is up considerably from 14% 12 months ago. This is probably because some will take advantage of the First Home Owner’s Grants currently available

Survey Results 1

  • Despite our property markets moving to the next phase of the cycle and property price growth slowing down, 61% believe now is a good time to buy property and 1 in 2 (51%) respondents plan to buy another investment property in the next 12 months. Interestingly this is much the same as 12 months ago (52%.)

Survey Results 2

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  • While 26% of respondents plan to seek advice from a property strategist or an advisor, we find it surprising that 25% will seek no advice on their next property purchase. This is a concern because, despite the significant amount of research material and information available for free, there’s one thing you can’t get over the internet – and that’s the perspective that only comes after years of on the ground experience.
  • While our readership is reasonably evenly split amongst males and females we found it interesting that of the 2,250 people who responded 73% were male. Now that’s interesting and you can read whatever you want into that statistic. Pam, my wife, said that it’s because males have been trained to do what they’re told – but I’m not sure about that.

Some not so surprising results:

  • Melbourne was seen as the most likely capital city to deliver strong capital growth over the next 5 years (52%), closely followed by Brisbane (45%). These are the same to growth capitals that readers suggested 12 months ago and in virtually the same proportions (50% Melbourne and 45% Brisbane)

Survey Results 3

  • More than three quarters would buy a property with land – a house, townhouse or villa unit. Apartments (9%) are out of favour at present – and not surprisingly so – as house price growth is significantly outperforming apartments in most capital cities
  • 42% of these investors saw an opportunity to “manufacture” capital growth by purchasing property with renovation or development potential Melbourne property skyline
  • Around half of the respondents reported that the recent changes to lending policy have impacted their ability to purchase another property, while 36% say that meeting the banks stricter serviceability criteria will be their biggest stumbling block to purchasing a property.
  • However, they are realistic that they won’t enjoy quick and massive capital growth in the near future, but they still intend to buy more property in the next year.
  • 64% believe that property prices will remain flat, or increase by less than 5%, over the next year. Clearly those planning to invest are taking a long term view.
  • More than three quarters would buy a property with land – a house, townhouse or villa unit. Apartments (9%) are out of favour at present – and not surprisingly so – as house price growth is significantly outperforming apartments in most capital cities

The bottom line:

It’s clear that property investor confidence is still strong and those who can afford to are planning to remain as active as ever, buying another investment property or new home if finances allow, despite the fact that the boom is now well and truly over and strong capital growth isn’t widely anticipated in 2018.

This shows that Australians property investors focus is on long-term capital growth, rather than an immediate equity boost, while many are looking for a property that has potential to add value, rather than waiting for the market to do the heavy lifting.

WHAT CAN YOU DO in 2018?

As signs point to softer growth conditions for Australian property over the coming months, independent professional advice and careful consideration will be as important as ever in navigating Australia’s varied market conditions. 

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If you’re looking for independent advice, no one can help you quite like the independent property investment strategists at Metropole.

Remember the multi award winning team of property investment strategists at Metropole have no properties to sell, so their advice is unbiased.Whether you are a beginner or a seasoned property investor, we would love to help you formulate an investment strategy or do a review of your existing portfolio, and help you take your property investment to the next level.

Please click here to organise a time for a chat. Or call us on 1300 20 30 30.

When you attend our offices in Melbourne, Sydney or Brisbane you will receive a free copy of my latest 2 x DVD program Building Wealth through Property Investment in the new Economy valued at $49.

 



from Property UpdateProperty Update https://propertyupdate.com.au/heres-what-property-investors-plan-to-do-in-2018/

Vacancy Rates Increase Marginally in Most Cities in November

Data released by SQM Research this week has revealed the national residential vacancy rate was 2.2% in November 2017, with the number of vacancies Australia-wide increasing to 70,795 – a slight increase on the month of October. National Residential Vacancy Rate

Hobart’s vacancy rate continues to remain at a record low of 0.3%.

Adelaide and Brisbane’s vacancy rates also remain unchanged from October at 1.4% and 3.4% respectively.

Canberra’s vacancy rate has increased marginally to 1.0% from 0.8% in October.

In the bigger cities, vacancies increased markedly in Sydney to 14,362 in November, up from 12,435 in October, giving a vacancy rate of 2.1%, up from 1.8% the previous month.

Melbourne recorded marginal increases with the vacancy rate now at 1.8% with 9,872 rental properties available.

Rates Chart01

Key Points:

  • Nationally, vacancies rose marginally in November to 70,795, recording a vacancy rate of 2.2%, up from 2.1% in October.
  • Hobart continues to record the lowest vacancy rate of 0.3%, a record low and down from 0.6% a year earlier.
  • Perth recorded the highest vacancy rate of the capital cities at 4.5% in November, down from 5.2% a year ago.
  • Adelaide and Brisbane’s vacancy rate remain unchanged at 1.4% and 3.4% respectively.

Darwin’s vacancy rose from 2.6% to 2.8% over the month. 

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Even in Perth, vacancies rose to 4.5% from 4.4% in October, and remains the highest of any capital city.

The small rises in vacancies are expected in November and December due to seasonality, and offer some relief to home seekers although those in Hobart and Canberra faced ongoing tight rental conditions and higher rents.

Sydney has recorded a larger rise.

Rising from 1.8% to 2.2% is material.

Rises occurred across all regions in Sydney however, some of the larger month on month vacancy rises came from the Northern Beaches, Parramatta the Upper North Shore and especially the Hills District where vacancy rates rose sharply to 3.7%.

Asking Rents

Capital City asking rents over the month to 12 December rose 0.4% to $550 a week for houses.

Unit asking rents fell 0.5% to $437 a week.

The highest increase for houses was recorded in Canberra at 1.9% over the month, while asking rents for units jumped the most in Darwin by 2.8%. rent property

Hobart’s asking rents for Units had the largest drop at 3.6% in the month, followed by Sydney’s unit prices dropping by 0.7%.

For houses, Canberra recorded the largest increase at 1.9% over the month.

Sydney continues to record the highest asking rent in the nation for a three-bedroom house at $728 a week and also for units at $519.20.

Canberra follows at $606 a week for houses and $433.80 for units.

Asking rents for houses rose in Melbourne, up 1.0% over the month to $515.10 while unit asking rents also rose 0.7% over the month to $395.80 a week.

Vacancy Rates

Source: www.sqmresearch.com.au

 



from Property UpdateProperty Update https://propertyupdate.com.au/vacancy-rates-increase-marginally-in-most-cities-in-november/

Lessons on responsibility from previous economic cycles

Today I’d like to share a little of what I’ve learned from investing through a number of economic cycles.

Lets start back in 1991

What a year that was!property time market clock house cycle investment timing watch growth

“It’s lucky for Spurs when the year ends in one” sang Chas and Dave, and true to form in May of that year my beloved Super Spurs won the FA Cup led by England soccer heroes Gary Lineker and Paul “Gazza” Gascoigne.

The summer festivals later that year were even better.

In an exciting prelude to Blair’s ‘Cool Britannia’ era, legendary folk band The Levellers played to huge crowds with their hit songs:

The year is 1991, it seems that freedom’s dead and gone, the power of the rich is held by few”.

Those of us who weren’t high on the traditional festival fumes noted perhaps just a hint of wry irony in 80,000 youths with identikit floppy hair singing along to “there’s only one way of life…and that’s your own“.

But we were young and carefree, and every second person claimed to be an anarchist, all set to “smash the state by ’98” as the slogan of the day went.

1991 – recession

That summer, you see, Britain’s “loadsamoney” excesses of the 1980s had come back to bite with a vengeance and the UK was in the midst of a deep recession which had lasted a gruesome five quarters.

Elsewhere in 1991, the Soviet Union collapsed and spiralling interest rates in Australia had seen the “recession we had to have” and real estate woes here too. recession

The greedy bankers and capitalist fools who owned houses and had speculated in shares would be ruined.

Thankfully, we were young and we’d never go down that route, though.

If only we’d studied our mod music history a bit harder, we’d have known that only a decade earlier another generation of idealist kids had thought exactly the same thing: “No corporations for the new-age sons!” mimicked The Jam song When You’re Young.

But Paul Weller went on in the same verse to explain:

“But you’ll find out life isn’t like that. It’s so hard to understand, why the world’s your oyster but the future’s your clam”.

And Weller was spot on because roll forward ten years to the next year ending in one (2001), we’d all moved on and I saw a lot of those young rebel friends strutting around the City of London, minus the long hair and anarchist tendencies, working as brokers, traders, bankers and bean-counters.

We’d grown up.

2001 – yet more gloom

In 2001, Spurs didn’t win the FA Cup, I didn’t go to any festivals and was working for a corporation in London.

Madonna and Guy Ritchie had yet to move into the area at that stage, but an average terraced house where I worked in Marylebone cost £632,900, which was a shade over 35 times my salary (ouch).

I lived 105km away from the office and commuted in daily (another ouch).

Worse, although the predicted Millennium Bug had not ended the world as feared, Millennium exuberance was now threatening to.

The FTSE approached the wildly irrational level of 7,000 as the tech stock bubble helped to drive stocks to dizzying valuations before the inevitable reversal.

By 2001, the world was indeed now seemingly ending as the FTSE collapsed to well below 4,000.

The capitalist fools who had bought shares and houses would all be ruined (again).

2011 – world sure to end this time

When they say that history repeats, they aren’t kidding.

Roll forward to the next year ending in one (2011), and we were in the aftermath of the great Global Financial Crisis. 

four-green-houses

The US and UK had experienced deep recessions.

Australian dwelling prices had fallen by around 6 percent or so leading to an unprecedented bout of online hysteria Down Under.

Meanwhile, the US government had by now stumbled into its debt ceiling crisis spooking share markets into wild intraday swings (ditto).

And ever onwards the cycle of doom and gloom goes.

The one thing you can be assured of as an investor is that it won’t be a smooth ride.

As the old saying goes:

“We’ll have seven to ten recessions over the next 50 years – don’t act surprised when they come.”

More than that, we’re human.

There will be bad relationships, worse investments, accidents, illness or other derailments along the way.

But usually in life, it’s more important how we react to what happens to us than what actually happens to us, and what determines the end result is likely to be persistence – the determination to continue regardless of what occurs.

Paying yourself first

For all the recurring crises across the world, long-term investors with a sensible investment plan have continued thrive.paying yourselfSource: stockcharts.com/freecharts

Robert Kiyosaki, once said that the governments are smart because they pay themselves first by deducting their share of your salary at source.

If they didn’t, he said, people would spend the money and not pay their tax.

Based upon how a lot of people run their personal finances, he was probably right.

Kiyosaki took the point further, stating that the main difference between “wealthy people and poor people” was that the wealthy paid themselves first to invest in assets, while the middle classes and less well off spent their money on living costs, liabilities and luxuries, trying and ultimately failing each month to save some money.

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Concept: Rich Dad Poor Dad

It’s essentially correct and a key reason why most people have a ‘portfolio’ of investments which comprise their house and some superannuation (and sometimes investment properties), and nothing else.

Why is that?

Largely because we make these super contributions and mortgage repayments compulsory and resolve to honour them come hell or high water.

Therefore if you are going to build a share or investment portfolio, you must have the discipline not to cash in the shares or investments for a holiday or a new car.

This is one reason that some people have done well in property, since they buy in popular locations and resolve to never sell.

2021 – the rules will have changed

Between now and the next year ending in one (2021) compulsory superannuation contributions will have been ratcheted up from 9% to 12%, and whether it is confirmed this year or some time in the future, the pension age will eventually be increased to 70. recession australia note money economy squeeze tighten save saving budget cut

People are likely to get very angry about this.

But the powers that be have very little or perhaps no choice.

They are forced to make these changes because the average superannuation balance is woefully – and I mean woefully – inadequate, by a factor of many.

Australians are well-paid in global terms and tend to earn a surprisingly high number of dollars in their lifetimes, but rather than saving and investing them, the majority elect to spend pretty hard too.

For this reason, most Australians of retirement age end up drawing some or all of the Age Pension, which is presently set at under $400 per week for a single person and under $300 per week for each member of a couple.

Growing up

It’s little use complaining to the government about all this, for it has its own books to balance.

At some point we all need to grow up and take responsibility for ourselves which means saving hard and investing for our own retirement.

In another decade’s time, we’ll likely have had another stock market crash.

We can complain all we like but in 2021, 2031 and 2041 suburbs like Woollahra, West End, West Perth and West Melbourne will all still be expensive for housing because they are minutes from their respective capital cities near to which most people want or would choose to live.

We might even had had a recession, finally. recession

Sure, there will be always contrarian analysis, commentary and websites which practically implore you not to invest, because there is sure to be a recession, stock markets are bound to crash and property markets will inevitably recede.

Each of these observations is unquestionably true, since all economies cycle, every stock market crashes and no real estate market on the planet is exempt from periodic corrections.

After a century of data, though, Australian capital city real estate markets have not once receded below the troughs of a preceding cycle, and in an inflationary economic environment our stock markets will always eventually return to new peaks (while dividend income increases).

The long term trends in inflationary economies and markets are up and anyone who has employed a sensible and disciplined long-term approach will have done well enough over time to fund a healthy enough retirement and not add to the government’s ever-growing pension burden.

The rules of financial responsibility

Recall my thoughts on what is a reasonable time horizon for investing and building wealth.

1 year? 2 years? 5 years? I don’t reckon so.

How about thinking beyond your own lifetime?

Worryingly, there are plenty who see things differently, electing to spend their savings in order to fall below the assets tests and become eligible to collect the Age Pension:

You can’t take it with you. You only live once. I plan to spend the last dollar on the day I die. I’ll take the lump sum on a SKI holiday and then live off the state pension!”.

If you are fortunate enough to be employed, then being a grown-up and taking responsibility for your finances means:

  • eliminating credit card debt; 21743109_l
  • eliminating bad debt;
  • budgeting;
  • knowing the difference between needs and wants;
  • not spending every cent you earn (and more);
  • saving and retaining an emergency cash buffer;
  • paying yourself first;
  • investing the difference wisely for the future in a portfolio of assets;
  • not trying to “keep up with the Joneses”; and
  • protecting your wealth.

If you can stick to these basic rules of financial responsibility, then your retirement should be a comfortable and secure one.



from Property UpdateProperty Update https://propertyupdate.com.au/lessons-responsibility-previous-economic-cycles-pete-wargent/

Success and Wealth is Not an Accident

Why are some people so much more successful? 44375941_l

What can we learn from them?

How can we become more like them?

And I’m not only talking about money or property – I’m talking about all facets of life.

Well, a whole lot of people persist in thinking success is an accident.

An accident of birth or genetics or freak encounter or luck.

Now please don’t be offended when I say…

Most who think like this must do so in order to live with their own lack of achievement.

To admit that success and wealth is both a methodical process and the outcome of a process virtually anyone can use would be to admit they failed themselves.

It is more palatable to say life failed me than to say I failed me, to say I’m unlucky rather than to say I’m lazy.

While it’s more comforting, this way of thinking is obviously not helpful. 

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I’ve been studying the psychology of success for over 25 years and have mentored over 2,000 successful (and some not so successful) investor business people and entrepreneurs over the last decade.

And I’ve found that success and wealth is very, very rarely accident.

Even the incredibly annoying, apparently vacuous Kym Kardashian is not a success by accident.

People often complain about her fame and financial gains, noting she has no talent.

But there’s a terrific object lesson there…you don’t need talent.

Personally, I think I have very little if any talent

But I do have some very finely honed skills.

Many years ago I noticed that the Rich and successful people share similar habits 45437255_l

I’ve written abut them here:

I’ve also learned the Success Habits of the Rich and over the last 15 years these have now become my habits.

In fact I’ve written them down and documented how you can also become Rich and Successful (and of course the two are not the same) in my best selling book – Michael Yardney’s Guide to Getting Rich.

Click here now find out more and get your copy.

These days I mostly see, work with and hang out with very successful people.

But I also come across potential clients, and even a few existing clients, who struggle.

As an observer, it’s not hard to see why they struggle…

Success and Wealth is attracted by practicing certain behaviours.

These people do not practice those behaviours.

So success shuns them. You see, failure’s no accident either.

If you’d like to learn more about why the rich keep getting richer click here now and get your copy of Michael Yardney’s Guide to Getting Rich.



from Property UpdateProperty Update https://propertyupdate.com.au/success-and-wealth-is-not-an-accident/

Monday, December 11, 2017

The 10 major risks faced by Australian property investors

We all understand that all types of investment including property investment comes with a risk.

So let’s discuss the 10 pre-eminent guises of investment risk, as they apply to Australian property investors.

1. Market risk (or systematic risk)

Market risk may affect all investments in an asset class in a similar manner, such as in the event of a market-wide price crash.Dice_800x600

As such, market risk that cannot easily be mitigated through diversification.

While buying properties in different states might diversify market risk to a partial extent, if the wider property market crashes, diversification is unlikely to assuage the systematic risk successfully.

Property investors should additionally invest in other asset classes that tend to move in a non-correlated manner to real estate.

Property investors can also focus upon a longer investment time horizon which allows correcting markets greater opportunity to recover.

2. Liquidity risk

Equates to the possibility that an investor may be unable to buy or sell an investment when desired (or in sufficient quantities) due to limited opportunities.

Illiquidity is a salient risk in real estate.

It is difficult to sell a property quickly should the need arise, which is not the case for large-cap stocks or government bonds.

Liquidity risk in Australian property is best mitigated through investing in landlocked capital city suburbs with eminent demand and constrained supply.

3. Specific risk (or unsystematic/business risk) 

four-green-houses

Equities investors and fund managers talk much of specific or business risk, being the measure of risk associated with a particular stock or security.

Also known as unsystematic risk, this typically refers to the risk associated with a specific issuer of a security.

Businesses in the same industry may have similar types of business risk, and issuers of stocks or bonds may become insolvent or lack ability to pay the interest and principal in the case of bonds.

Specific risk in property investment is somewhat different, and rather relates to the risk of acquiring a loss-making property or one which delivers sub-optimal returns giving rise to opportunity cost.

Specific risk can be mitigated through diversification, although this can represent a challenging proposition in property as dwellings tend to be expensive.

One frequently invoked strategy of property investors is to acquire different types of property in different states.

Careful, detailed due diligence and research of any property purchase also tends to reduce (if not eliminate) specific risk.

4. Interest rate risk 

Normally refers to the possibility that a fixed-rate debt instrument will decline in value as a result of a rise in interest rates.

Where an investor buys a security offering a fixed rate of return, he introduces an exposure to interest rate risk.

Examples thereof including bonds and preference shares (preferred stocks).

In Australian investment property, the interest rate risk instead lies in variable rate mortgages as the cost of debt capital can materially increase when the Reserve Bank ratchets up the cash rate.

The risk can be mitigated through the use of fixed-rate mortgages and prudent cashflow management.

5. Foreign exchange risk (or currency risk) risk

Arises from a movement in the price of one currency against another.

When the Australian dollar appreciates, the value of foreign investments declines.

Conversely, if the dollar weakens the value of foreign investments effectively increase.

Currency risk tends to be greater for shorter-term overseas investments, which have insufficient time to revert to a mean valuation in the same manner as longer-term equivalent ventures.

6. Sovereign risk (or social/political/legislative risk)

Sovereign risk is associated with the possibility of unfavourable government action or social upheaval resulting in investment losses.

Governments retain the power to amend laws affecting investments, and rulings which result in an adverse investment outcome are representative of legislative risk.

One frequently highlighted legislation risk in Australian property investment is the possible phasing out of the negative gearing tax rules.

Investing in developing or unstable countries variously offers opportunities for substantial returns but, reflecting the principles of the risk-return trade-off (of the CAPM model) may bring a heightened associated sovereign risk.

7. Credit risk

house mortgageCredit risk normally refers to the possibility that a bond issuer becomes unable to service expected interest rate payments or a principal repayment.

Typically, the higher the credit risk is, the higher the interest rate on the bond.

In property investment, credit risk often lies in the investor rather than the lender, although there is of course a possibility that lending institutions can become insolvent as was seen in the US as the subprime crisis played out.

Property investors should retain a liquid buffer in order to mitigate the risk of mortgage default.

8. Call risk

Also usually refers to bond issues and the possibility that a debt security will be ‘called’ prior to maturity.

In bonds, call risk prevails when interest rates fall, as companies redeem bond issues with higher coupons and replace them on the bond market with lower interest rate issues to save cash.

Can call risk impact Australian property investors?

Indeed, but conversely when interest rates run higher.

Investors with high exposure to adverse interest rate movements may be considered risky by mortgage providers cyclically.

Investors in Australian commercial property have periodically been subjected to the real estate equivalent of a margin call, being forced to reduce debt exposure through the redemption of assets.

9. Reinvestment risk

Usually refers to the risk that future coupons from a fixed-interest investment will not be reinvested at the interest rate prevailing when it was initially purchased, a risk that increases in likelihood when interest rates decline.

Zero coupon bonds are the only fixed-income instrument to eliminate reinvestment risk due to having no interim coupon payments.

The most straightforward strategy for property investors to avert reinvestment risk is simple: never sell.

10. Inflation riskaustralian-mortgage-finance

Also known as purchasing power risk, the possibility that the value of an asset or income stream will be eroded as inflation diminishes the value of a currency.

The risk is the potential for future inflation to cause the purchasing power of cash inflows from an investment to decline.

Inflation risk is best countered through investing in appreciating assets such as real estate, dividend-paying stocks or convertible bonds, each of which has a growth component allowing them to outperform inflation over the long term.

The uplifting news for property investors is that favourably located Australian real estate is well recognised as a tremendously effective inflation hedge over time.



from Property UpdateProperty Update https://propertyupdate.com.au/the-10-major-risks-faced-by-australian-property-investors2014/