What Or Where?

I am repeatedly asked: “Am I Better Off Investing In Houses Or Units? “Personally, I tend to invest in units (apartments), rather than houses because I am more interested in where I invest rather than what I invest in.

Did you just pick up that the real question is “where” not “what”?

Readers of Nick’s weekly newsletter would know that we place huge importance on the laws of supply and demand. Whether oil, bananas (remember Cyclone Larry in 2007 and what that did to the price of bananas?), property or anything else, supply and demand will ultimately determine all long term pricing (NB: There may be short term “blips” along the way).

I’m 100% Convinced

I am totally convinced that the areas most likely to deliver the better ongoing capital gain are those locations close to infrastructure and services; such as shops, hospitals, employment, transport and so on. An exception to this “rule” is where a property is located in an area with a WOW factor; like near the ocean or overlooking a golf course.

Infrastructure Rules

It was Michael Matusik who recently said that “infrastructure rules“; that’s where the best capital growth is to be found.

Land in areas that I like to target is simply too valuable to use to construct houses. You will not find a new housing estate opening up anywhere close to an infrastructure hub.

As a “set ‘n’ forget” investor, I find apartments and townhouses to be a lot easier to look after; but that’s another story.

What, Where OR WHY?

By extrapolating this logic out further; we can argue that it is not a question of what should I be buying, or where should I buy; but rather WHY!

You see, it’s the outcome (a favourable result) that I am really chasing. The “what” and/or the “where” merely form part of my strategy to achieve the desired outcome.

What Is Your WHY?

In my case, I bought 13 properties to create an equity base sufficient to support my family, without the need for me to continue working. Capital growth is where my focus firmly remained and three years ago, my dream became my reality and I retired.

Billabong & Rip Curl Open Shops In Alice Springs

… and If you believe that, I have a bridge for sale in Sydney!

Please understand that when you become a property investor, you become a business owner.

Would living in Alice Springs be justification enough for opening a surf shop there?

No, of course not; that would be a very stupid business decision!

To knowingly open a business in one location when another would have resulted in more profits defies all reason. Surely you would want your business operating in the locality that gave you the best chance of success.

I was living in Adelaide when I secured my first investment property. It was in Brisbane.

Why? Because the Australian Bureau of Statistics had population projections at the time showing a 1.6% growth for Adelaide and 78% for Brisbane!

Where was my new “business” venture likely to enjoy the greater success?

To achieve my capital growth goals sooner, I wanted property in areas of limited supply (little available land) with increasing long term demand (population growth).

Why Queensland?

The National Housing Supply Council has just released a report, from which I have included the following exerpts.

By 2028, the number of households in Australia is projected to be 11.4 million – an increase of 3.1 million in the underlying demand for dwellings over the 20-year period from 2008

National Housing Supply Council State of Supply Report – Additional households by region for low, medium and high household growth scenarios, 2008–28 as at 30 June

Low growth scenario (The low household growth scenario assumes that age and sex-specific net migration rates (overseas and interstate) for each region as observed in the period 2001–06 are maintained, with total net overseas migration increasing from around 120,000 a year in 2008 to around 160,000 a year in 2028)

• NSW total – 500,000
• Victoria total – 722,000
• Queensland total – 1,090,000 (of which 825,000 are in SE Qld)
• WA total – 357,000
• SA total – 134,000
• Tasmania total – 45,000
• NT – 22,000
• ACT – 31,000

So, based on the above, where will the greatest “demand” for my business be?

Under the low growth scenario, the greatest numbers of additional dwellings would be required in south-east Queensland; 41,000 per year compared to just 15,000 per year in Sydney or 14,000 per year in Perth.

It was important for me to leave my emotions out of my decision making. I simply could not argue with the figures. Yes, people who invest in property in Adelaide, Perth and Hobart and so on are likely to make money. Based on these figures, however, it is clear that to have invested in my own hometown would have been a higher risk strategy.

I freely admit to being a lazy investor. I want the best outcomes with the least input and the least risk! I assume that you feel the same way!

This same report reveals that average rental yields are also on the way up. They are higher for units/apartments than they are for houses.

Over the past six years, rental vacancy rates have fallen. This suggests that total returns on rental housing investment have not been sufficient to ensure supply keeps pace with demand; despite significant capital gains over the same period.

Very low vacancy rates have caused rental growth to accelerate over the past two years.

The dwelling rent component of the Consumer Price Index (CPI) measures average growth across all rental housing; which was 8% over the year to June 2008

Rents on new leases have been growing even faster, suggesting that overall rental growth is set to continue.

That deals with increasing demand but what about supply? Will there be a shortage or glut?

We have previously shown the graph below, but it’s worth revisiting it.

WOW! This shows a SHORTAGE of around 100,000 dwellings this year, climbing to almost 120,000 in 2010. Significant dwelling stock shortages are anticipated to prevail until at least 2018!

Jack Of All Trades But Master Of None

None of us can be an expert in all areas. I have been an investor for more than 10 years. I have assisted numerous others with their investment needs for much of this time; still:

• I do not deal with banks; I have an expert broker to do that
• I do not prepare my own tax return; I have a great accountant for that
• I do not research my own property; I leverage off the efforts of experts (such as mrd) for that too
• I do not have the time or inclination to travel around looking for the best place to operate my “business”. I chose to surround myself with a competent, trustworthy team of professionals to work with me. It wasn’t always as easy (in my early days) as Nick & Katrina have made it today.

Bobcat Operator Or Train Driver

Maybe your property investing experience has been as challenging as it would be to operate a bobcat on the side of a steep, rocky hill. I liken the mrd Customer Care Program to a railway line on flat ground. One is difficult, challenging and risky – the other is pretty much a ‘no-brainer’; you just have to decide to get started and complete your journey.

So, whether you are yet to get started on your investment journey or you have become derailed somewhere along the way; mrd is here to help. Your best starting point is to have us prepare a complimentary, no obligation Finance Structure & Cash Flow Health Check. more…

Happy Investing,

Martin Bell
mrd Customer Care Program… because investing is personal

STOP PRESS! See also: Investing: Units vs Houses – Depreciation Differences

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