Benefits of buying property counter cyclically

Given the cyclical nature of property markets what are the benefits of buying an investment property in a downturn?

While property markets are cyclical and experience ebbs and flows, many investors will only buy when the market is running hot and retreat or delay an acquisition during a slowdown.

However, is that the best strategy that property investors should utilise?

Although sentiment suffers during a property market slowdown, there are advantages to building your property portfolio when everyone else wants to sit on their hands and take an ‘I’ll-wait-and-see-what-happens’ approach.

So what are the benefits of buying an investment property in a market slowdown?

1. Fewer buyers. During a downturn many buyers, including property investors and owner occupiers, retreat from the market and wait for a recovery. Those left in the market wanting to make an acquisition will therefore encounter fewer buyers and less competition.
2. More choice. When property markets cool, the amount of housing stock available typically increases meaning buyers have more options to choose from and are more likely to find a property better suited to their needs.
3. Better bang for buck. With fewer buyers in the market and more stock available for sale, sellers have to price their properties more competitively and are more likely to discount their asking price. Buyers have a better chance of securing a property for less or can even purchase a superior property that they otherwise couldn’t have been able to afford in a normal market.
4. More control over contract negotiations. Given the market is weighed in buyer’s favour, buyers have more control over contract negotiations, whether that be for negotiating more favourable settlement periods, rent-back periods with owner-occupiers or early-entry clauses, among others.
5. While it’s easy to become disheartened when residential property markets slow, there are definite advantages to buying property in a downturn.
6. Regardless of market conditions, though, investors need to take a long-term view with their investment decisions, keep property investment fundamentals at the fore and buy when they are ready, rather than trying to time the market.

WA strata reforms back on the agenda

After being put on the back burner for more than a year, reforms to Western Australia’s strata titling system are again in the spotlight with the newly-elected state government supporting an overhaul of the existing arrangements.

One of the biggest changes will be the introduction of community titles, which will allow multiple strata schemes to be managed individually under one umbrella management structure.

This is particularly beneficial for mixed-used precincts and buildings that feature a combination residential and commercial space, whether that be office, retail or other, as it allows more efficient management of the area

For example, the community title will enable schemes to cover specific areas of a building or precinct. So one scheme can exist for the common areas that are used by all individuals, such as driveways and foyers, while a separate scheme can exist for an individual building, which may have a pool that not everyone can use.

Another major benefit is the ability to terminate old strata schemes. Currently, it requires 100% of landlords to agree to terminate a strata scheme but this will be dropped to 75%, which will allow for greater utilisation of sites through development.

Property buyers will also benefit from a more transparent system as sellers of strata-titled property will have to provide specific strata information prior to purchase.

There are more than 300,000 strata lots in Western Australia valued at more than $170 billion.

The strata reforms were first announced in January 2016 after a 2-year consultation period.

However the changes were put on the back burner in the lead up to the WA state election in early 2017 when the Labor party rose to power.

The reforms will be the first major shakeup of the strata legislation in 20 years and comes after significant growth in strata living with strata development making up 40-50% of current development.

Why every property investor needs a cash buffer

Cash buffers are essential when building a large property portfolio as they provide a safety net for investors. So how much money should you set aside for a cash buffer and when should it be used?

When building a large property portfolio, it’s important to set aside a sum of money that can be used for contingency situations.

Without an adequate cash buffer, you may find yourself in a financial bind if you suddenly need to pay some unexpected bills.

Typically, there are two income buffers that you should keep – a personal income buffer and an investment property buffer.

A personal income buffer is important in the event that you lose your job or need to take an extended period of time off work because of illness or another reason.

The aim of this buffer is to allow you to maintain loan repayments on your home loan and investment loans during the period that your salary is reduced or cut off.

The size of your personal income buffer should depend on your risk profile, stage in life and job security, among other factors, but it’s typically recommended to hold 2-4 months of your current income on hand.

The second type of buffer, the investment property buffer, is useful for repairs and vacancy periods.

The aim of this buffer is to ensure you have enough cash on hand should you need to complete maintenance works on an investment property, such a replacing a hot water system or fixing a leaking roof, or to maintain loan repayments during vacancy periods.

The size of the investment property buffer should vary on the age of the property (the older the property the more maintenance that is generally required), the vacancy rate in the area and likelihood of changes in the market. Typically, it’s best to hold 2-4 months of rental income on hand as an investment property buffer.

By failing to hold adequate cash buffers, investors can easily find themselves under financial pressure should they need to address urgent maintenance works or if their salary is suddenly reduced or cut off.

This can have significant consequences on investors’ property investment plans and goals and could even lead to forced sales.

However, by planning ahead and putting these cash buffers in place, investors can have peace of mind that they can continue to meet their financial obligations should repairs be required or there are disruptions to their income.

Retail and rail to benefit this suburb

This suburb is poised to benefit from a new train station under the state government’s Metronet plan in addition to a major redevelopment of a local shopping centre.

Embleton is located within the City of Bayswater about 7 kilometres north east of the Perth CBD.

The suburb is bound by Broun Avenue, which runs into Beaufort Street, in the north and west and Beechboro Road in the east. As well as these roads, it is also highly accessible via Tonkin Highway, Embleton Avenue and Collier Road.

Its neighbouring suburbs include Morley to the north, Bedford to the west and Bayswater to the east and south.

While Embleton doesn’t offer a train station, residents in the south of the suburb are in close proximity to the Bayswater train station. There are also bus services that run down Broun Avenue into the Perth CBD.

Development of the area dates primarily to the late 1950s when much of the land was resumed by the State Housing Commission, which subdivided and developed the residential lots still present today.

Embleton is predominantly low-density residential stock, with practically the entire suburb zoned R25. The suburb’s median house price stands at $502,500.

Of the existing stock, 85.4% are houses, 10.4% are semi-detached, row or terrace houses and townhouses and 4.2% are flats, units or apartments.

About 61% of properties are either owned outright or being purchased, while 35.4% of properties are being rented.

The suburb’s 2,737 residents have a median age of 38 years.

Of Embleton’s population, 20.3% identify as technician and trades workers, 13.7% as clerical and administration workers and 17.7% as professionals (WA average is 19.9%)

Features of the suburb include the Embleton Public Golf Course, Embleton Primary School, Bayswater Waves, Broun Park and McKenzie Reserve.

Nearby amenities include Morley Galleria (1km), Bayswater Train Station (1.5km) and the Beaufort Street Café Strip (3km).

The City of Bayswater has recently recommended planning approval for a proposed $350 million redevelopment of Morley Galleria, which would increase the size of the centre from 78,000sqm to 128,000sqm, including the establishment of a town square and an urban plaza.

This is set to add a significant amount of amenity to nearby Embleton, with works expected to commence in 2018.

Furthermore, the recently-elected Labor government’s Metronet public transport plan is set to greatly benefit Embleton with a station planned for Walter Road that would service the area.

The Walter Road station is expected to form part of the Ellenbrook train line, the North Circle line and the Wanneroo line.

The Ellenbrook train line is the first stage of Metronet with construction expected to start in 2019 before opening in 2022. This would include the Walter Road station that would service Embleton.

Deals and Don’ts – Wanneroo, Heathridge, Yokine Deals

Wanneroo

Purchase price: $375,000 Purchase date: April 2017 Block size: 792sqm Specification: 3 bedroom, 1 bathroom, house with double garage built in 1971 zoned R20/40

Deal: This property is a great buy because it’s located on a corner block with zoning of R20/40 meaning it has good development potential. Its location is also excellent being within 350m of Lake Joondalup and within 800m of the Wanneroo town centre. The streetscape is also highly desirable and it’s a short walk to Taywood Park.

Heathridge

Purchase price: $445,000 Purchase date: April 2017 Block size: 723sqm Specification: 3 bedroom, 1 bathroom house with double garage built in 1977 zoned R20/40

Deal: The main feature of this property is its subdivision potential and the fact that it is opposite a neighbourhood park. It’s also close to amenity with Belridge City Shopping Centre just 300m away.

Yokine

Purchase price: $486,000 Purchase date: March 2017 Block size 353sqm Specification: 3 bedroom, 2 bathroom house with enclosed double carport, built in 2002

Deal: The main features of this property are its proximity to the CBD, being just 7km away, and its relative affordability. It is in excellent condition making it easy to lease, and the fact that it is situated on a green title block means it has no common property with neighbours.

Don’ts

Spearwood

For sale price: $425,000 Block size: 721sqm Specification: 3 bedroom, 1 bathroom, house

Don’t: This doesn’t represent a good investment because it backs onto the freight railway line and it is located in close proximity to the busy Rockingham Road. The condition of the house would also make it difficult to lease and the irregular block shape will put constraints on any future development potential.