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News Bulletin : ADA News Bulletin December 2010
28 DECEMBER 2010 Compiled by Stuart Wemyss According to ATO data, over 27% of property investors own more than one investment property which equates to over 470,000 property investors. The vast majority of established dentists own more than one investment property. The interesting (or perhaps disappointing) thing is that the vast majority of dentists hold all their investment properties within close distance of each other. There are many reasons for this, with 'comfort' probably being at the top of the list. An experienced property investor friend of mine (who owns quite a number of properties in Melbourne) said to me "I'd like to own a property in Sydney but I don't know the area well enough. I like to invest in Melbourne because I know the good and bad areas." That's an interesting comment because share market investors don't take the same approach. Have you heard a share market investor suggesting they only buy stocks in companies that have a head office in their domicile State? Maybe property investors are too hands-on for their own good. Throughout this article, I will try to demonstrate that astute property portfolio construction can make a material impact on your overall wealth. That is, you can significantly increase your chances of achieving financial freedom if you develop a deliberate and well thought-out investment property strategy, even if it means stepping out of your comfort zone. The two most common mistakes made by property investors include not getting advice in regards to which property to buy and not planning out their portfolio. THE VARIABLES One of the good things about investing in property is that there are arguably fewer variables to consider than in the share market. However, it is absolutely critical to get them right. They include: • Location -- different locations will perform differently from an investment perspective. This performance might vary over the long and short-term. For example, South Yarra in Melbourne and Bondi in Sydney might both be blue-chip suburbs and have very similar expected long-term returns (in terms of capital growth and rental income). However, over the short-term, i.e., year to year the returns might be very different. • Property type -- there are many options: house, apartment, high-rise, low-rise, units, attached, semi-attached, detached, single-fronted, double-fronted, dual-occupancy and the list goes on. Probably the major impact of these options is the actual or attributable land value component the property has. A house sits on its own land and the 'land value' portion is more easily identified. A high-rise apartment also has an 'attributable' land value. However, given the number of individual apartments that sit on the block of land, the land value component is much smaller and is 'indirect'. The proportion of land value will often drive capital growth and the amount and quality of accommodation will drive income -- renters will pay for accommodation and owners/ investors will pay for land. • Bedrooms -- the number of bedrooms will appeal to different types of renters. A three bedroom home will appeal to a family. A one bedroom apartment will most likely appeal to an older (established) person rather than someone who has just moved out of home (due to earning capacity). Different tenant types will have different levels of risk and longevity. • Tenant -- the age, occupation, earning capacity, marital status and renting history will all impact on a tenant's risk profile. Some types of tenants are better in some locations. For example, a one bedroom apartment in a trendy area will most likely attract a high income earning professional. Whilst most professionals will pay rent on time and take good care of the property, they tend to be a little more transient and possibly less likely to occupy the property for many years. • Architectural style -- different architectural styles will enjoy different levels of demand from various renters and potential purchasers, and these 'trends' can change over time. • Investment return characteristics -- different properties will have different rental yields and different capital growth prospects. For example, a high land value house might have a rental yield of 2% whereas a brand new apartment might yield more than 5%. TAXING CONSIDERATIONS There are two State-based taxes property investors need to be aware of -- stamp duty and land tax. Whilst stamp duty isn't a reoccurring tax, i.e., only payable once it can still make a difference. The higher the stamp duty cost, the less residual money you have to use as a deposit thereby reducing your purchasing power. Transfer stamp duty, i.e., what you pay when you buy it on a $350,000 investment property can range from $11,075 to $17,177 depending on the State the property is located in -- a massive difference of 55%. If an investor had a $50,000 deposit, they would be able to afford to spend up to $380,000 in one State versus only $335,000 in another -- due to the higher stamp duty. If both these properties increase in value at 8% per annum, the difference in value in 15 years will be $140,000. As you can see, the repercussions from higher stamp duty extend beyond the initial cost. This might be important to be aware of when developing an investment property portfolio business perspectives HOW TO STRUCTURE YOUR PROPERTY PORTFOLIO What property types, when and where
ADA News Bulletin November 2010
ADA News Bulletin February 2011