10 investment myths
By Heidi Davoren
Everyone has an investment strategy they swear by, but even the most frequently-touted investment catchcries don’t ring true all of the time. In this article we look at when there are exceptions to the rules.
Myth 1: Property always goes up
The property market is cyclical. There are periods of decline and periods of increase. This is what we refer to as the property clock.
For example, it’s better to buy when the market is sitting at the bottom of the cycle – say six o’clock – rather than 12 o’clock, when the prices are at their peak.
So while property experts are quick to point out that over the long term property prices do in fact go up, it’s important to remember prices also go down.
Adam Nobel, a sales agent with Remax Profile, says mining areas are a clear example of a boom and bust market where prices can drop significantly.
“There are a lot of speculators in these locations and you run into problems when projects that are supposed to last 20 years only last two years causing property prices to drop dramatically,” he says.
“The market goes in cycles obviously and property prices can go up and down quite substantially through different parts of the cycle.
“The only area I can think of that hasn’t gone down to my knowledge is Toowoomba. This is an area where prices go up and not down. There hasn’t been a bust here that I can recall,” he says.
Myth 2: You make more money with houses than units
Buying a house has long been the preferred choice over buying a unit when it comes to improving your chances of equity gain or profit.
However, this notion is worth challenging and units should not be written off as a poor investment choice, especially for those first-time buyers who are looking to get into the market. Units can be a good way to find your feet as an investor.
Property strategist with Metropole Shannon Davis says units in lifestyle precincts are far more valuable than buying a house in an estate located away from services or transport.
“What’s more important is market depth,” Davis says.
“Demand drives capital growth and this is what investors need to look at, over and above whether the dwelling is a house or unit.”
Davis also suggests investors look at the demographics of an area as investors could secure higher sales prices on units in areas preferred by empty nesters or professionals.
“Demographics are important. Childless couples pay more i.e. SINKS (single income, no kids), DINKs (double income, no kids), empty nesters or young people seeking share accommodation.”
Davis also reminds investors not to forget that some units can have a land component as well and shouldn’t be written off as a lesser alternative to a home.
It’s also important to remember when purchasing a property that if you intend on knocking down the existing dwelling and rebuilding, the value of the home is irrelevant. However, knocking down a home and replacing it with a block of units would certainly result in a higher anticipated return on resale.
Myth 3: Only buy within five kilometres of the CBD
Location, location, location. Inner city is where it’s at, according to the large majority of property experts. If you’re going to buy a property, the closer you are to the CBD the better your chances of fast capital growth – but this may not necessarily be so all of the time.
Increasingly, studies are finding people are choosing lifestyle factors over and above higher density living.
As technology improves, work-from-home jobs increase, and work-life balance becomes more important, our population is looking outside of the city centre for their residential escape as well as their investment opportunities.
This has made coastal properties or ‘tree-change’ options more sought after and meant property investors are looking outside the inner city suburbs and the CBD.
In fact, Davis says there are times when buying within five kilometres of the CBD is not a good idea.
“I would suggest not buying inner city if there’s too much industry nearby or if there are too many high-rises, which will increase supply and therefore decrease the value of your property.
“I would also avoid areas where there are too many investors and therefore a lack of owner-occupier appeal.
“Inner city locations that are close to heavy transport routes such as central station or red light districts should also be avoided.”
Nobel says investors can buy outside of five kilometres from the CBD and do very well.
“As long as the infrastructure is there. Substantial changes in infrastructure can make a massive difference in a property’s value,” he says.
“An example of this is the Sunshine Coast in Queensland, which has always been a bit of a donkey market, but with the new hospital going in it has made a big difference.”
Nobel says investors should also look in areas or suburbs where there are strong communities. He notes some suburbs which have a high Chinese population and the strong sense of community within these groups to buy in close proximity to each other.
“Those little pockets and enclaves from a commercial point of view – there’s not one property, retail or commercial left because they all want to set up businesses together within an ethnic pocket and yet if you go closer into the city there are plenty that they can’t sell,” he explains.
“It’s the same in Parramatta in Sydney. There’s very strong demand for people in those areas to have their own community in these locations and they can feel at home. They buck the trend of the inner city location always being the spot that’s more in demand.”
Myth 4: You’ll always benefit from kitchen or bathroom renovations
Touted as the common area or communal meeting place of the house, a kitchen has long been regarded as fundamental to a property’s worth.
Consequently, a costly kitchen renovation might be expected to significantly increase a home’s value. And in a lot of cases this may be so. However, a fresh paint job or inexpensive cosmetic improvement might add just as much value to a home at a reduced cost.
Reno King Paul Eslick says kitchen and bathroom renovations are always going to be the most expensive due to the “prime costs involved”.
“Kitchens and bathrooms have prime cost items like stoves, hotplates, sinks, baths, showers and all the associated trades required to install them like plumbers, electricians, water proofers, tilers etc,” Eslick says.
“One must carefully consider if major replacing or refurbishing of these areas is always required. What an investor might be better off considering is a mini makeover.
“For example, if the kitchen carcass or structure is good, the drawers slide and the cupboard doors are in good condition why replace them when a simple cosmetic makeover would give an excellent result?
“I would recommend polishing the kitchen sink with marine grade stainless steel polisher, replace the tapware, paint the splash back tiles and change all the handle ware.”
Eslick says these simple and cost-effective steps will offer an improvement to the value of the property without the need for spending large sums of money.
He also suggests investors might benefit more from unconventional renovations such as setting up an outdoor kitchen to add value, rather than renovating the existing one.
“Here’s the big whammy – move the kitchen outside via converting a window to a door way and installing a deck or paved courtyard.
“By supplying a good quality stainless steel barbecue, the kitchen cooking is transferred outdoors which is always a positive for the investor who also gets to claim depreciation on the barbecue.
“This may increase the rent and it’s a real win-win for the investor. You save yourself a bundle by not going overboard on an expensive kitchen but complement the existing one with an outdoor area.
“The average investor should be able to build or supervise the building of a deck and paving. I’d suggest doing a free course making it well within the grasp of the average handyman.
“A dingy dark kitchen doesn’t need to be replaced if you install a circular fluoro light or sky light to increase the light density or install blinds that allow light penetration,” Eslick says.
“Depending on the location sometimes a kitchen wouldn’t be high priority if in close range to good quality food outlets. A friend of mine has a couple of homes in New Farm just a few kilometres from the CBD where off-street car parking is restricted and near impossible to obtain.
“The kitchens in his rental properties have aged but are still useable and when he enquired with the tenant whether a kitchen makeover would be appreciated, the tenants agreed but what they really wanted was easy off-street parking. This was the beginning of a brilliant idea.
“A permit was filed with council for three off-street parking spaces at a cost of $79. The permits were approved.
“The owner will spend another $5000 on the crossover and concrete stand and when revalued with the additional parking spaces it equated to $120,000 gain in property value!
“Yes the kitchens are dated, but the tenants eat out a lot and the car parking is the rich dessert in this deal. Again the tenant and investor are both happy, making it a win-win situation.”
Eslick says it’s important to consult the tenants when it comes to deciding what renovations are preferred, rather than going with the standard kitchen or bathroom improvements.
“Ask a family of renters with a pet whether they would prefer a kitchen makeover or a pet, or a security front fence installed if they have children and you’d be surprised what they would choose,” he says.
“If you factor in family, pets and security you may get better rents and happier tenants, making everyone a winner.”
Further, Nobel says investors should consider avoiding renovations altogether in some cases.
“If you want to hit the renovators’ market and let people design the kitchen and bathroom according to their own taste you wouldn’t waste your money on a renovation,” he says.
“Let them do it their way, especially if it’s an old house. There are a lot of buyers out there who want to do it completely from scratch.”
Myth 5: North facing properties are the best
A northerly aspect can improve your property’s re-sale value and make living conditions in the home more comfortable, but not everyone is precious about the aspect of a home especially if there are other factors, which make the property more desirable.
Nobel says the aspect of a house is important but a buyer will overlook this point if they’ve fallen in love with the house for other reasons.
“It’s all about location, lifestyle and view, and people will buy a west facing property if they love it. Many people never ask or even think to check the aspect,” he says.
“For example, Bulimba riverfront properties in Brisbane sell from $2 million and upwards and these are all west-facing. I guess you could say it’s not as important to most people as we might think.”
In addition, buyers or investors in the Darwin market in the Northern Territory don’t usually want a north facing property either.
Residents here want to avoid the sun’s burning rays and turn away from the glaring heat.
Myth 6: Never buy a ground floor unit
Ground floor units have long been regarded as the ‘poor stepsister’ to the superior upper level units boasting grand views and elevated above the other subordinates in the unit complex.
High foot traffic, lack of security, increased road and traffic noise and poor views are some of the negative aspects of owning a ground floor apartment.
However, Phil Hassid of Hassid Flat Sales says in his experience ground floor units are in fact highly prized by particular buyers due to the potential for courtyard space and ease of access.
“People who find those aspects attractive are less concerned with views and security can always be augmented,” he says.
“So to a degree the markets for ground floor units and upper floor units are separate and the question becomes more one of the respective relative sizes of those two submarkets compared to the respective levels of stock.”
Nobel agrees, saying ground floor units are sometimes the most sought after, particularly by elderly people who are moving from houses to a lower maintenance, lower cost unit.
“They love the low floor units because there’s no steps. The second thing is that I’ve been in many buildings, mainly six and eight packs, where the lower level has a courtyard and has a nice green area and allows the owners or tenants access to a river or a park.
“In terms of security that might be something that needs attention, but the tenants have a genuine outdoor space that makes them feel like they’re living in a townhouse or a house rather than a unit.
“They have much more space compared to being up higher and having just a balcony. The lower floor units often sell for a lot more. I’m currently looking at an apartment where one upstairs just sold for $330,000 and the one downstairs that’s been slightly renovated and has a nice courtyard just sold for $440,000.
“I see it all the time. They’re more sought after than a walk up the stairs. Only in river view apartments is this different, where the higher you go up the better the view, but if you have no view the lower levels sell better.”
Myth 7: Adding pools doesn’t add value
Adding a pool to your property can be a messy, time consuming and reasonably costly exercise.
There has long been a school of thought among homeowners and valuers that adding a pool to a property was more hassle than it was worth and added little to a property’s overall value.
However, in tropical locations where having a backyard pool is vital in order to survive the summer, the inclusion may make the difference between a sale or no sale.
Eslick says a pool can definitely add value but more commonly when it’s added to a principal place of residence rather than an investment property and warns investors to be familiar with pool legislation.
Nobel says he’s found that 50 per cent of the marketplace prefer a pool and 50 per cent don’t.
“I think what’s more important is having enough space for a pool if buyers do want one. What investors should remember is that 90 per cent of buyers just want space around the house – whether it’s for a pool or a yard – the important thing is that there’s an outdoor area of some sort. Houses with no yard whatsoever are a concern.
“I just sold a house that had a stunning garden and was landscaped but the new owners smashed it to pieces to put a lawn in.
“Big houses with not much yard aren’t highly sought after. Only older people don’t want a yard, but they still want some kind of outdoor area. That’s probably more important than a pool.”
However, he says the further investors go outside of the CBD into suburban areas that are family-friendly, the more buyers are looking for a pool and the higher the demand for a pool.
“The professionals or those with small children don’t want a pool for safety reasons, but I had a property on the outskirts of the city recently where 45 of the 50 people who looked at it were specifically looking for a home with a pool.”
Myth 8: Property doubles every seven to 10 years
As we mentioned earlier, property prices are cyclical, so while some locations may well double in a seven to 10-year period, this might not be the case for every location, nor is it the case for every 10-year period.
A range of factors will determine exactly how much an area increases in value such as population growth, rezoning issues and infrastructure.
Long-time property commentator and director of Metropole Property Strategists Michael Yardney says investors should be aware that the property market will experience downturns just as it does capital growth.
“Capital growth is one of the main reasons people invest in residential real estate and it’s often said that over the long-term the average annual growth rate for well-located capital city properties is about eight per cent which would mean properties should double in value every nine years,” Yardney explains.
“Other commentators are a little more conservative and suggest properties double in value every seven to 10 years. And while this is generally true, it also means that 50 per cent of properties will not double in value over the next decade and 50 per cent will grow in value more quickly.
“We recognise that property markets move in cycles, which means each state has its own property cycle and there are cycles within each cycle. Different areas, different price points and different types of property have their own cycle.
“Looking into these further, you’ll find that in each 10-year period there seems to be three or four years when the market is flat and in some cases the property values fall. Then there are three or four years of low capital growth followed by a few years of strong price growth during the boom stage of the cycle.
“Clearly property investors must be aware of, and prepared for, these cycles and your best chance of achieving above average capital growth is buying the right property at the right price and most importantly in the right location.
“A recent study by the Australian Housing and Urban Research Institute found that both in percentage terms and in absolute terms over the long haul, suburbs located reasonably close to the CBD where demand is high, close to employment and where the most people want to live and where there is no land available for release, outperformed the outer suburbs with regard to capital growth.
“And in a recent issue of Australian Property Investor magazine research by John Lindeman on understanding property confirmed that, in general, capital growth is greater in our capital cities than in regional centres.”
The lesson investors should learn from this is that the myth of promised returns over a set number of years isn’t always the case.
“During a boom everyone is an optimist and expects the good times to last forever, just as we lose our confidence during a downturn,” Yardney says.
“Our property market behaves cyclically and each boom sets us up for the next downturn, just as each downturn paved the way for the next boom, as it has over the last year.”
Myth 9: More floor area equals more value
The bigger the house the bigger the asking price, right? Maybe not.
A giant house with rundown fixtures and fittings in a poorly performing market isn’t going to be as highly sought after as a well set out studio apartment in a high-demand area.
A good example of this is inner city Sydney and the prices buyers are prepared to pay for a small townhouse compared to a larger home further out.
Davis says buying a large home in a bad area with less services will mean less demand and therefore more vacancy for investors, regardless of whether the property itself boasts a large square meterage.
“When you buy in an area with too many investors and little established community, having a bigger dwelling isn’t going to improve your return.”
Myth 10: Buying new is better than buying old
The idea of buying a shiny new home sounds very appealing – like driving out of the showroom in a new car – there’s no threat of hidden defects, broken parts, used or worn features.
However, there are times when the appeal of buying an untouched, unlived in property isn’t the most sensible option.
Nobel says he doesn’t agree with this concept at all.
“When it comes to promoting and selling new stock, especially units, I think the industry is full of unethical peddlers who prey on people who don’t know any better.
“There’s plenty of companies who do developments and have marketing companies or real estates who sell a two-bedroom, two-bathroom house to a bloke in South East Asia for $470,000 when the average price might be $330,000.
“There might be 200 similar properties on the market which means there’s no demand, they won’t be able to sell down the track and the body corporate fees are usually higher.
“I agree that new units are usually easier to rent out, I don’t deny that, but I prefer the older product because you can add value quickly and easily.
“I think they’re much better investments. If you talk to a smart property investor they go with older properties with low body corporate and a good location.
“A lot of the older units are much bigger. There are less of them and therefore higher demand with lower body corporate fees.”
Source: API magazine