5 Signs that a Suburb is Hot

Everyone wants to know which suburbs will be the next hotspots. But would you be able to recognise one if you saw it? How can you tell when a suburb is booming or, more importantly, ready to boom? Here are 5 signs to look out for.

Wise property investors know that regardless of how the overall capital city market is performing at any given time, there will always be some suburbs that will be performing better than others.

When deciding to make an investment purchase, it’s important to have an understanding of what is happening at a suburb level. It’s especially important to be able to identify which suburbs are booming or ready to boom – those with a high level of sales activity, strong competition amongst buyers, and a high likelihood of price increases.

Here are 5 signs that could indicate a suburb is red hot.

1. Days on market (DOM)

The average time it takes to sell a property in a suburb will tell you a lot about the state of the market in that suburb. When the figure is smaller than the overall city average it means that demand for property is relatively strong in that area and properties are selling quickly.

The lower the number, the hotter the market is. For instance, if the overall city has an average of, say, 80 days, then a suburb with a 30 day average is clearly in high demand from buyers. Bear in mind however that a short average days on market doesn’t necessarily make a suburb a good area to invest in as the market may have already peaked. Similarly, a suburb with long average days on market could still offer great options for long term investment. 

Investors should note that average days on market figures can be misleading as some suburbs contain sub-markets in them that may be performing quite differently.

2. Vendor discounting

Knowing how much vendors are discounting their properties can be very revealing and indicate whether a suburb is booming. This discount refers to the difference between the asking price and the final sale price and it is typically provided as an average across all sales in a given time-frame.  

If the discount is quite large, say above 8%, than it’s safe to assume that buyers hold the majority of power, given that sellers are willing to accept a lower price in order to secure a sale. This might sound like a positive situation for buyers but it could indicate that the market is falling.

A small discount, say less than 4%, indicates that there could be strong demand for properties and that it’s essentially a seller’s market, which could indicate that prices could be on the way up.

3. Percentage of stock on the market

Looking at the number of properties currently for sale in a suburb as a percentage of the total number can offer some important clues as to the state of the market. A low figure, say less than 2%, could indicate that property is tightly held in that suburb and that supply is generally low, which can easily lead to price increases if demand outweighs supply. A high figure of more than 3% could indicate that supply is plentiful in the suburb and price rises are unlikely in the immediate future. 

4. Tightening rental market

Investigating the rental market of a particular suburb can offer some important insights into determining what’s happening in the market.

As renters are often more mobile than buyers they tend to respond more quickly to changes in the dynamics of the market. As an area becomes more desirable, renters will move into the area before buyers catch on and start pushing up prices.

A low rental vacancy rate means that there is high demand for rental properties relative to supply and is a sign the suburb may be hot or heating up. Bear in mind though that a low vacancy rate could mean that people would rather rent than buy in a suburb as is the case with some mining towns.

5. Expert opinion

The people working in the industry every day, such as buyers agents and sales agents, can provide great information about what’s happening in specific suburbs and identifying hotspots. So, it’s worthwhile listening to what they have to say.

These industry professionals often have access to more up-to-date information than what is published in the media and will often have first hand evidence that a market is hot before others find out.

When talking to experts however, it’s important to consider any potential bias with the opinions you receive. For instance, it is in a sales agent’s best interest to tell buyers that the market is hot and prices look set to rise.

Conclusion

While it’s important to be able to evaluate the current state of a market within a particular suburb, you should remember that investing for capital growth is about identifying future prospects. If a suburb is already red hot it may be too late to invest. On the other hand, a hot market may indicate that a suburb has fundamental advantages and is ripe for consistent price growth.

Before investing in any suburb you need to understand what that suburb has to offer compared to others, and what’s likely to change in the market to make it more desirable in the future. It’s also important to know exactly where within a particular suburb you should invest as this can make an enormous difference to your capital growth.  

How to Calculate Your Break-Even Point

Some people, can be hesitant to invest in property as they often perceive the risk to be high. Whilst every investment carries an element of risk, investors can calculate the property’s break-even point of capital growth to assess the risk of a potential property investment before making the purchase. This is the point at which the capital gains equal the cash shortfall of holding the property (assuming that the property is negatively geared).

Let’s look at a simple example. Assume you purchase a $400,000 property (worth $400,000). When you subtract all the expenses (including interest on the loan, management fees etc) from the rent and take into account depreciation and tax benefits, this property has a negative cash flow of $10,000 pa, which is fairly typical. So, in other words it costs you $10,000 out of your pocket to hold this property. In this example, what is the break-even point? It’s easy to calculate. By simply dividing 10,000 (the cash shortfall) by 400,000 (the value of the property) and multiplying the figure by 100 (to make it a percentage) we obtain an answer of 2.5%. Therefore, if the property grows 2.5% in that year, your investment has broken even. 

Obviously you would want more than 2.5% growth to justify the risk, especially when long term growth rates are generally much higher than that. But it shows nonetheless how little capital growth you actually need on an investment to break even.

For the sake of this example let’s assume that the property does grow by only 2.5% in the first year you own the property. What happens to the break-even point in the second year when you take into account that rent on this property has now increased. Let’s say that your out of pocket expenses are now $8000 pa rather than $10,000. With a quick calculation you can work out that your break even point is now only 1.95%. Anything above that figure and you’re ahead.

Here’s an interesting question, what happens to the break even point when you buy a property below market value? It involves the same calculation but brings up a strange result. Let’s go back to the earlier example where you bought the $400,000 property but let’s say the property is actually worth $450,000 when you buy it. All of your costs are the same and so is the rent, which means your out-of-pocket costs are still $10,000 pa. So what’s the break-even point? You might be thinking to yourself that you’re already $50,000 ahead so isn’t the break even point negative? You would be right. It is now -8.9%. This means that even if through some shock and highly unlikely occurrence, the property value falls by 8.9% you would have still broken even. Clearly, if you manage to buy a property below market value you give yourself a great head-start.

While I would always recommend hunting for the best capital growth opportunities, it’s still important to consider your out of pocket expenses so that you can work out your break even rate of capital growth. If you’re unsure how to work out your out-of-pocket expenses, your Momentum Wealth consultant will be able to assist you. It’s important to remember that property is a medium to long term investment. Focus on choosing the property that will generate the best returns over time and try not to focus on the short term fluctuations.

Home Buyers and Investors Causing a Flurry of Activity in Perth

First-home buyers and investors are driving a recovery in the Perth housing market, with latest figures from REIWA showing the volume of Perth property sales in the March quarter reached its highest level in two years.

First-home buyers are driving a recovery in the Perth housing market, with latest figures from REIWA showing the volume of Perth property sales in the March quarter reached its highest level in two years.

The data shows there has been a surge in the number of first home buyers, with 8 out of 10 buying established houses rather than building.

REIWA’s president David Airey says first home buyers are choosing to buy near established infrastructure such as shopping facilities and good transport links rather than in newer areas, which is good news for the overall market.

“The strong activity from first- homebuyers has been a tonic to the market and we can see from current figures that as a result of this activity, trade-up purchases also improved during the March quarter for many properties above the current median of $465,000,” he said.

REIWA has also seen a rush of investors, attracted by recent rental growth. Preliminary data for the March quarter show that rents have increased by around 10% since the same time last year. The overall median rent for Perth is now $420 per week.

The influx of investors is a trend that should grow as the end of the financial year approaches.

Insurance – Can You Afford Not To?

I remember reading an article which had some worrying facts and figures regarding Life Insurance. One of these was a report from the Australian Bureau of Statistics which revealed that, on average, 12 parents of dependent children die each day in Australia. And of these, only 4% will have sufficient life insurance to assist their families. This means that, each year in Australia, roughly 4,200 parents leave their families exposed to financial hardship or even ruin.

One of the reasons behind the low uptake of life insurance protection in Australia is thought to be the confidence that employees place in the life insurance component of their superannuation fund. However, the same article points out that estimates show that the average worker would not have much more than $70,000 life insurance cover via their superannuation fund – a figure which represents only about 20% of estimated average needs.

The article also indicates that another apparent reason for the low uptake in term life insurance is the general perception that it’s just too hard to obtain protection. And even if it’s not too hard, it’s just too much work, not just to apply, but to try to understand the subtle differences between the various life insurance products.

The good news is that an increasing number of Life Insurance Companies are developing simpler products which are not just easier to understand, but which also require less ‘hoops’ to be jumped by the applicant.

These life insurance products are also available through Momentum Wealth Risk Services, so now there’s no excuse: will you fall into the 4% that have sufficient life insurance cover, or will you be one of the remaining 96% that leaves their dependents to cope with the situation?

Justin McManus is a Corporate Authorised Representative of Marsh Pty Ltd Australian Financial Services Licensee No. 238983. This information has been prepared without taking account of your objectives, financial situation or needs. Before acting on this information you should consider its appropriateness, having regard to your objectives, financial situation and needs.

Cross-Collateralisation

Cross-collateralisation can greatly jeopardise investors’ property plans. But what exactly does it mean and how can it affect your investing potential?

Lenders generally want to get their hands on everything you have.  You will find out that they will want security not only on the property you are purchasing, but also on your own home, your car, your first born child and your dog.  Well, they won’t really ask for your first born child and dog, but they might take them if you offered.

Cross-collateralisation is where more than one property is used as security for a loan.  Cross-collateralisation should be avoided as much as possible as it will limit your ability to borrow further funds if another financial institution has some type of security over the property you are trying to borrow against.  Unfortunately most novice investors do not understand the restrictions cross-collateralisation puts on your wealth creation strategy.

For example, let’s assume you own your own home worth $600,000 and you have a $200,000 mortgage.  You have no free cash available.  You decide to purchase an investment property for $400,000.  You would go to your current lender and say, “please lend me the entire $400,000”.  Given the amount of equity you have in your home, they should loan you the entire amount, and they will take first mortgage security against both properties.  You have purchased an investment property.  You now have both your properties tied up to the one financial institution.  You also have $1,000,000 worth of property and $600,000 worth of debt.  You have at least another $200,000 of equity in those properties you could obtain for further use (based on an 80% loan to value ratio LVR).

If you were to ask for a loan for the additional $200,000, who do you think will lend you the money?  Probably you’re current lender, but perhaps not many other financial institutions.  Financial institutions hate second mortgages.  They aren’t in control and don’t get to keep the property title as security. This is held by the first mortgage holder.  Therefore in this scenario your best chance to get another loan is with your current lender.  The trouble is that they now have already lent you $600,000.  If they say “no more money” you have to accept that or refinance that financial institution out of all the property you hold with them and start the search for finance from scratch.

Successful investors know that it is wise to spread your borrowings around amongst different lenders.  In this example we just reviewed there would have been a better way to get all the finance you needed.  Firstly you should go to your current lender (or find another) and say “Mr Lender I have a property worth $600,000, my mortgage is $200,000, I want a home equity loan with redraw for another $280,000”.  If you have good credit there is no reason why you should not get this money.  Suddenly you have a $280,000 facility available.  You purchase the $400,000 property.  You come up with a $80,000 deposit from your redraw account and go to another financial institution.  You say “Mr Lender, I have purchased a property for $400,000.  I want a loan for $320,000.  Please give it to me now”.  Assuming your credit is fine there should be no reason why you wouldn’t get this loan.  You now have $1,000,000 worth of property.  You have two lenders who both only control one of your properties.  You also still have $200,000 left in your redraw account with which you can purchase more properties or other investments.  You could buy another $800,000 worth of properties with that $200,000 redraw account, or you could invest it into the share market or any other investment you decide.

Having different mortgages and different lenders on each individual property also gives you many more options should you choose to refinance.  For example, if you have all your loans with one institution and they reject a new loan application, you are going to have to refinance all your properties with someone else.  If it relates to one property only, you can just refinance the one property and keep all your other loans in place.

Each property you purchase should be assessed on a stand-alone basis only.  You should only offer as security the property you are purchasing.  If another property is cross collateralised it will limit your borrowing ability. 

The Lowdown on Tenant Databases

Most landlords would have heard of a tenant database. But how much do they actually know about them? What information do they store? Who can access them? When can a tenant be listed?

A tenant database is typically run by a private company and contains details about the problems landlords and property managers have had with tenants. This information is made available to property managers, and licensed agents for a fee, who use the information to assess risk by checking whether an applicant has an unfavourable rental history. 

A tenant can only be listed on a database under certain circumstances. Normally it is for a serious breach that has resulted in a lease being terminated, such as unpaid rent, intentional damage or a failure to make payments directed by a court. Generally, the amount of money owed to the landlord has to be greater than than the bond amount recouped. 

There are strict rules with regard to submitting any person’s name to a tenant database, mostly around providing full disclosure.

It is also important that, before even signing a lease, applicants are informed that a breach of the lease agreement may result in a listing on a tenant database, normally done on the application form. Please note that the legislation surrounding tenancy databases varies from state to state. Therefore the terms of their use and how informationis recorded needs to be within the guidelines and legislation of that state.     

As property managers, we use these databases as part of the process in screening prospective tenants. Whist a very useful source of information, tenancy databases contain limited data and therefore do not replace vigilant reference checking and other criteria in reviewing a tenant’s application.  

Hot Property

In this month’s Hot Property section, we take a look at a purchase made recently in Victoria Park by one of our buyers’ agents, Yanti Sujatna. This one ticked all the boxes with strong growth potential and high rental yields.

Victoria Park is one of the few suburbs that meets Momentum Wealth’s strict investment criteria. With its proximity to the CBD, access to key transport nodes and burgeoning café/shopping strip, the suburb offers both strong growth potential and high rental demand.

After a thorough search and selection process, a double storey 3 bedroom 2 bathroom terrace-style townhouse was purchased. The property is positioned at the end of a small row of four and located very close to the desirable ‘Raphael Park’ precinct of Victoria Park.  

A townhouse was selected as this style of housing is popular with the key demographic of Victoria Park, namely young professionals. Townhouses offer a low maintenance lifestyle but with most of the benefits of a free standing house.

The property features off street parking for two cars and a good sized outdoor entertaining area, making it very appealing to prospective tenants. An added benefit is that the property has a bathroom on each floor which allows someone to live upstairs and another to live downstairs quite independently. At the time of purchase, it was already rented to 3 young adults so rental income was already guaranteed.

The internal condition of the property was quite run down, which provided the clients with the opportunity to consider cosmetic renovations to add value and help maximise tax deductions. With the clients eager to leverage this opportunity, Momentum Wealth introduced a suitable company to help plan and manage the $15k worth of renovations.

The property was purchased for $490,000 even though there is strong evidence to suggest that the market value is around $520,000, giving the clients equity from day one. The financing was structured in such a way that the client could capitalise most of the renovation costs and therefore minimise the cash outlay.

At the time of purchase, the property was rented at $435/pk but Momentum Wealth’s property management team successfully increased the rent to $525/wk. This represents an impressive gross yield of 5.6% even before any renovations, which will likely increase the rent even further and also boost the capital value (without overcapitalising).

After purchasing an excellent property at below market value and with extraordinary rental yields and enormous potential for growth, the clients are justifiably excited with the outcome.