In the current round of Web Seminars we are offering, I highlight four key factors that are a MUST… if you expect to draw any credible conclusions.

1.    Record Population Growth
2.    Investors Have Fled The Market
3.    Home Ownership Unattractive
4.    New Construction Has Stalled Badly

1. RECORD POPULATION GROWTH

Australia is currently experiencing the fastest population growth in 200 years. Our population is predicted to grow by 350,000 this year for the first time in over 200 years. That represents approximately the combined total population of Geelong, Cairns & Bunbury; or the whole of Canberra.

The 1850’s Gold Rush years, Post World War 1 (1919 onwards) and post World War 2 (1946 onwards) saw our 3 previous population explosions. Today we see a similar pattern emerging; i.e. rapid and prolonged growth, too few workers and pro-immigration government policies.

Record population growth means a significantly stronger demand for new housing! Given our record numbers of new migrants will generally rent for a season, demand for rental properties will continue to strengthen.

2. INVESTORS HAVE FLED THE MARKET

Rising interest rates in recent years have squeezed rental yields making property look unaffordable. Add to the mix a booming stock market (averaged over 20% per year between 2004 and 2007) and one can see why property has not been the preferred investment vehicle of recent years.

Since becoming familiar with the term “subprime”, seeing the global credit crisis unfold… and hearing of property values in the US & UK falling by 30 & 40%, many would-be-investors have opted to stay on “strike”. It’s fair to say that since the highs of mid 2004 only the ‘brave’ have continued to invest in property.

Investor demand accounts for about 50% of all new housing starts and about 70% of unit starts. Therefore, that investors have fled the market means significant negative impact on the supply of new housing and increased demand on existing rental accommodation.

3. HOME OWNERSHIP HAS BEEN UNATTRACTIVE

As with investors. the housing affordability barrier, rising interest rates (& general living costs) and of course the US initiated subprime crisis has left many would-be home owners lacking the confidence to purchase.

Scared, priced out of the market, unable to secure funding or unable to service a loan? regardless of the reason why new home ownership has been unattractive; the result has been that many renters in recent years have simply continued to rent. This has placed further pressure on existing rental housing stock

4. NEW CONSTRUCTION HAS STALLED BADLY

Since 2005 the absolute number of completed residential properties has fallen and they are forecast to continue falling in 2009. The US subprime crisis cemented this downward trend in demand for new properties. Add to that, in recent years we have seen the high profile bankruptcy of some large developers along with massive financial pressure on many smaller developers. The cost of finance has skyrocketed for developers… i.e. if they can find a lender who will back them. Understandably, developers are very nervous… many have simply shelved their new projects until such time as they see clear evidence that investors have returned to the market.

Developers going broke, developers shelving projects and/or developers unable to secure funding means new construction has stalled badly and as a result greatly reduced the supply of new property further adding to pressures on existing housing stocks.

DISSECTING THE EVIDENCE

• FACT: We are experiencing the greatest housing shortage in 200 years
• FACT: Because of the new Federal Government’s immigration policy, we are experiencing the strongest population growth in 200 years
• FACT: Since about mid 2004, broadly speaking investors have fled the market
• FACT: Since about mid 2004, broadly speaking home ownership has remained unattractive and renters have continued renting
• FACT: Since about mid 2004 the construction of new dwellings has stalled badly
• FACT: In mid 2004, national rental vacancy levels were about 3.5%. This level is considered a balanced market. Rental vacancy levels have dropped to below 1.5% now and are expected to continue to drop to historical lows of between 0.5% and 1% in 2009. These levels represent a stressed market
• FACT: When the demand for rental housing grows at a faster pace than supply, increased demand can be offset by diminishing vacancy levels
• FACT: When vacancy levels reach just 1% it is said that we have NO VACANCY, as the 1% represents the few days between tenants moving and carpets being cleaned etc… prior to a new tenant moving in
• FACT: Therefore, once vacancy levels fall to 1%… there is no room left to offset increasing demand by diminishing vacancy levels
• FACT: When demand increases and supply decreases and vacancy levels are already stressed; i.e. no vacancy… market forces mean rents have to go up… and significantly where population growth is significant
• FACT: Interest rates are the lowest they have been in years and are expected to reach (near) record lows by mid 2009

Now you have the FACTS, rather than simply “opinions”; may I suggest you draw your own conclusions as to what might happen with Australian property in mid to late 2009?

• With the cost of renting about to soar and the cost of ownership dropping significantly (i.e. rental incomes up and interest charges down), what do you expect the market will do?
• With stock market volatility and uncertainty and interest earned on cash deposited dropping away, what do you expect the market will do?
• With serious increases to the first home owners grant, what do you expect this group to do?
• Given rental properties vacated by first home owners will not produce a glut… because vacancy levels are at an all time low (stressed market) and the population is growing by the size of Canberra each year, what do you think the market will do?

Can I go out on a limb and tell you what I think; I may be wrong, but I don’t think I am?

1. I expect rents to soar in 2009
2. I expect interest rates to continue to drop next month and in 2009
3. I expect confidence to come back to the market, drawing back owners and renters alike
4. Given there is a lag of a few years from when developers decide to build again and new stock being ready to live in… I see no relief for the poor tenant for at least a few years
5. I also believe that the combination of all that I have just outlined will result in the next property price surge

So, in summary…

Those who have been building a property portfolio as their preferred vehicle for funding their retirements (NB: assuming they bought the right residential property in the right areas) are soon going to experience the property investors trifecta:

1. Rising incomes (rents)
2. Falling costs (interest)
3. Increasing equity (values)

I would love to address the subject “We are not the USA” and compare the FACTS relating to how we are different and why what happened there will not happen here; but I will save that for another day.

May I invite you to register your interest for either our next FREE Web Seminar this Wednesday evening… or if you let us know what other time(s) best work for you, we will run them according to demand CLICK HERE.

Happy Investing,

Nick Lockhart
mrd customer care program… because investing is personal

As an ‘aggressive’ property investor and someone leading others, I am very mindful of my responsibility to be sober and considered in my views.

Successful people swim against the tide of popular opinion. They carefully consider facts before making decisions of far reaching consequence. As the events in America bring on a feeding frenzy for those with an opinion (and often an agenda); the need for sobriety is needed now more than ever.

My Considered Opinion:

Recent global events in the credit market haven’t altered my long standing confidence in selective residential real estate. I expect my investment strategy will ultimately defy some of the broad-brushed statements being tossed about by a few pessimistic economists; who ironically have had most of the recent television and radio airplay.

Many hours have gone into penning this article… I trust the few minutes it’ll take you to read will deliver real benefit.

Let me start with some background to put into context my thoughts…

I don’t like exaggeration, manipulation or dealing with people in business who lack a conscience. If I really thought the sky was going to fall in… I would close my business and go and do something else; but I am incredibly optimistic about the future. Katrina and I are looking forward to the settlement of our next investment property; about April next year, after the three we have settled since November ‘07.

I listen, read and engage. Some follow cricket; I closely follow politics & economics with focussed attention on monetary and fiscal policy. I consider the opinions of political leaders, economists, analysts, journalists, commentators and so on. I like to get inside their headspace in an attempt to understand the “why” behind their logic. It’s fair to say I am influenced by the many voices… but my conclusions will come back to basic fundamentals; and so should yours.

Over supply and lack of demand undid the property market in the USA… and the lack of investor confidence has undone many other investment markets. My investment exposure is limited to a market dominated by owner occupiers (i.e. the housing market). It will continue to perform on the basis that everybody needs a roof over their head (and I am really selective in where I buy).

Those who cannot afford to buy… rent. Australia has an existing housing shortage, a growing population and increasing (record) immigration numbers. The supply side of the equation has been hit hard by interest rates in recent years, so unlike America where homes were built to satisfy greed rather than need; my attitude is “DON’T PANIC” (as famously quoted in “The Hitchhiker’s Guide to the Galaxy”).

BEWARE of irresponsible borrowings! There are three types of debt and it’s vitally important to understand their differences:

First there is what can only be described as HORRIBLE DEBT

Horrible debt refers to debt used to purchase consumables, or things that depreciate… bought with after tax dollars (that is no tax deductions). Cars, furniture, televisions and all general credit card debt best describe this category. Clear what horrible debt you have as soon as you can and quit taking on any more. The interest free deals at Harvey Norman are not a good idea; unless you have the cash and temporarily park it in an offset account against your home loan until the interest free period expires.

Then there is TOLERABLE DEBT

Tolerable debt refers to the type of debt we incur when purchasing an item (such as the family home or a valuable piece of art) that appreciates in value, but offers no tax relief.

The “Great Australian Dream” ought not to be mortgaged and in debt struggling for 30 years, just so you can say “we have a home”. In my opinion, the great Australian dream is being a self funded retiree, while you are still young enough to enjoy it. To this end it may make more financial sense to accumulate property that others rent from you… while you go and rent something to live in. It’s horses for courses and no, one size does not fit all. That’s why our decisions need to be sober and considered, but only after we have defined our desired outcomes and we have the knowledge necessary to make such decisions.

Finally there is the good kind of debt that I like to call PRODUCTIVE DEBT

Because productive debt works for me, it’s the type that I want as much of as I can responsibly get my hands on! Productive debt is used to buy items that appreciate in value… And it also ATTRACTS TAX RELIEF. Borrowing to invest into property falls into this category and, done responsibly, is still the gateway to your financial freedom!

The danger we face is that we throw the baby out with the bath water, stick our heads in the sand and see opportunity pass us by again… for another season of our lives.

DEBT & RESPONSIBILITY

Sadly, I see too much evidence of people embracing one of two extremities with the following results:

1. Financially destitute people; due to their investments going bad
2. Financially destitute people; due to them failing to plan and take action for their “financial tomorrow”

Please don’t wake up one morning and find yourself in either camp; it’s completely avoidable. I believe that these difficult times serve to reaffirm the urgency of:

• Taking responsibility
• Being rational and considered in making financial decisions
• Blocking out the noise, hype and sensationalising of current events
• Not being dictated to by fear; which is generally ill-founded anyway
• Accumulate assets (albeit with conservative discrimination)

It’s always been provocative, however, my opinion is that safety comes by discriminating against those asset classes that investors predominately drive; anything other than residential real estate.

I “preach” fiscal responsibility. That does not necessarily mean do nothing so as to protect what you have; but subject to your debt levels and ability to service that debt… it may! We need to also consider opportunity cost, because time and inflation ensures standing still is really a backward step.

We need some sober balance to counter all the misguided, broad-brush, simplistic hysteria being screamed at us. Yes, some pretty scary stuff has been going down lately. Yes, many people will sadly see their nest eggs disappearing. Personally I am not convinced that the stock market will recover in a hurry and I think there is a justifiable reason for some concern surrounding the property market. However, those with well located, residential real estate… in areas of growing demand and limited supply; closely positioned to infrastructure and essential services… that offers lifestyle and employment options AND priced in the median bracket for such an area… should dig out an old copy of “The Hitchhikers Guide to the Galaxy” and take advice from the front cover “DON’T PANIC”!

You would be so forgiven for tuning out right now and saying “you’re only saying that because mrd deals in just residential real estate”… EXCEPT that I am on record everywhere for over 6 years as saying the opposite! Namely, mrd only deals in residential real estate because what I have outlined above is what I have believed and promoted; even when stocks were flying high!

We live in a society (world) that is debt propelled… so I am going to continue this theme of debt for at least a few more weeks. Please click the link above the top of this newsletter to pass this article/blog onto others who you believe would benefit from a sober & considered voice on the topic of responsible debt. I have attached a couple of relevant PDF articles that I encourage you to download and read… as well as some commentary snippets from others that I believe have a more considered view on the future of residential real estate, than some commentators getting much of the current airplay.

Happy Investing,

Nick Lockhart

No Rent Relief in Sight as Demand Remains High; say experts:

RP Data state research director Tim Lawless said demand for rental properties – far outstripping vacancies – had driven rents up sharply. He said while the Federal Government’s boost to the first homeowner’s grant would probably deliver a “minimal” increase in rental vacancies, in the long term it would not be enough to match demand. “We have such a dramatic undersupply (of properties) I really can’t see rents falling,” he said.

Download “This is Australia – Not the USA” – RP DATA Property Pulse

ANZ Property Outlook September 2008:

With evidence of a slowing economy, a series of interest rates rises to digest and falling house prices in overseas markets, the question needs to be asked: are house prices going to fall in Australia? We think not. Australian established house prices rose almost 8% in the year to June 2008 and are up nearly 10% per annum over the past decade. Following a brief respite in 2004, triggered by two interest rate rises in late 2003, house prices re-accelerated for a few years before softening into 2008, again in response to interest rate rises.

Download “ANZ Property Outlook September 2008“

Boost to the First Home Owners Grant:

In response to the Rudd Government’s announcement this week to boost the First Home Owners Grant, Opposition Finance Spokesman Joe Hockey warned the housing package could backfire. “There is a danger that this initiative could push up house prices,” he said. “It might be another way to help out the banks because it pushes up the value of bank securities against existing mortgages”.

Link To: Property Market Results Defy Doom & Gloom Merchants

“Nothing travels faster than the speed of light with the possible exception of bad news; which obeys its own special laws.”
Douglas Adams, “The Hitchhiker’s Guide to the Galaxy”

Bad news surrounding the two largest U.S. mortgage companies has been circulating in recent weeks. Suddenly, Fannie May and Freddie Mac, have bust onto the global stage ‘branding’ themselves in places (such as Australia) where they were previously unheard of. Together these two companies own or guarantee about half of the U.S. $12 trillion mortgage market.

When you first heard the names Fannie May and Freddie Mac did you chuckle and think “who thought to call those companies such silly names?” They are types of acronyms:

• Fannie May: Federal National Mortgage Association (FNMA)
• Freddie Mac: Federal Home Loan Mortgage Corporation

The U.S. Government has recently announced plans to “prop up” these companies.

Most people are aware of the down turn in the U.S. housing market and the huge “sub-prime” mortgage crisis that has worked its way through the world’s financial systems. There is little argument that the U.S. economy is in some serious trouble right now… but (the $64,000 question is) does that translate into trouble for Australia?

We have heard it said that “America sneezes and the world catches a cold”. In this instance and in my opinion I see fundamental differences that will insulate us from an experience like that of the U.S.A.

America’s sub-prime woes are a consequence of negligent lending policies. They had what was known as a NINJA loan. No Income, No Job, No Assets. Many of these loans were “non-recourse”; meaning that if times got tough borrowers could simply walk away from both their house and their mortgage and nobody would chase them (i.e. no recourse). This led to the term “Jingle mail” as people posted the keys back to the bank and moved on.

NB: These types of loans are not available in Australia; and with good reason!

While no economy can remain completely unaffected by the U.S. sub-prime mortgage crisis; along with various economists, analysts and media commentators I don’t see this situation as having much effect on Australian housing prices.

The West Australian Newspaper on April 7^th 2008 quoted CommSec chief equities economist, Craig James, as saying the fundamental difference between the US and Australia is that the US was suffering a major glut of housing whereas Australia continues to have a significant shortage. “With official net migration hitting almost 180,000 and continuing strong population growth, the prices of Australian homes had a solid base”.

The difference between current demand of 180,000 dwellings per annum and current construction (150,000) is 30,000 dwellings every year!

He says “Australia has a massive deficit of housing and demand continues to be driven by the fastest population growth in more than 20 years. It’s all about supply and demand” he says!

A floundering U.S. economy has no affect on people living in Queensland (or wherever) needing a roof over their head. Everybody needs somewhere to live. They will either rent or buy and given fewer and fewer people can afford to buy… more and more rent.

Economics 101: As was the reason for the woes in the U.S. housing market; the simple law of Supply & Demand is the main reason why the market in Australia will be protected.

AUSTRALIA

One million new homes need to be built over the next five years to cope with Australia’s booming population; according to recent figures from the Housing Association. See the following link for details:

• http://investmentmentor.com.au/2008/07/05/a-million-houses-needed-to-avoid-shortfall-newscom/

United States of America

In the U.S. many areas are experiencing an oversupply of housing. January 2008 figures from the U.S. show a record of nearly four million unsold existing homes were for sale, including nearly 2.9 million that were vacant! Compare this with Australia where there is a significant housing undersupply (underpinned by the fastest population growth seen in many years; as mentioned above)

Certainly interest rates have slowed the market somewhat, however, with the population increasing, many people believe that when interest rates start to drop again the pent up demand will see rapid price increases. See the following links:

• http://investmentmentor.com.au/2008/07/17/rba-at-end-of-rate-hikes-9-news/
• http://investmentmentor.com.au/2008/07/17/property-hot-spots/

On top of that WA and Queensland are in the throes of a resources boom, largely fuelled by the emerging middle classes in China and in future, India which should continue for many years. See the following link for details:

• http://investmentmentor.com.au/2008/05/30/the-impact-the-resources-boom-is-about-to-unleash-on-us/

The impact of China was highlighted recently when it was pointed out that if you added Australia’s entire population to that of China, the Chinese population would move from 1.3 billion to err… 1.3 billion! China + India + Urbanisation x 2.5 billion people = 1 Great Big Resources Boom.

Market forces will always prevail. In my opinion, even considering current economic circumstances, well located property will continue to appreciate. I can be that confident because this is the only possible logical conclusion when demand for housing so markedly exceeds supply.

As long as the sun rises in the morning; interest rates, inflation, employment levels, the U.S. and Australian economies will continue to rise and fall… and may have some short term impact. Over the medium to longer term, however, our property market must move up! To change this outcome we would need to see a fundamental shift – either to more supply or to a drop off in demand (i.e. diminishing population growth); and there is little chance of either in the foreseeable future.

As Eynas Brodie; editor of Australian Property Investor magazine recently said “If you’re among the Australians who’ve had their finger on the panic button as the sub-prime mortgage market in the United States has come undone, you can let go now.”

Happy Investing,

Martin Bell

martin@investmentmentor.com.au

From the same newspaper on the same day… but do the following two articles sound like a contradiction to you?

City To Boom Again
Townsville Bulletin 08/07/08

TOWNSVILLE could be on the cusp of another housing market boom. Property experts predict the current softening of the market is about to turn, despite a slowing national economy and rising interest rates. A BIS Shrapnel Residential Property Prospects report forecasts a 22 per cent increase in median house prices from 2008 to 2011.

REMAX Excellence sales agents Lyn Griffiths and Rohan Banning are predicting that will have a significant effect in Townsville. Ms Griffiths said Townsville’s real estate market generally lagged behind Brisbane trends by around 12 months. “Townsville’s property market has softened after more than six years of growth but we believe this is the calm before the next boom”, he said. “We firmly believe the next 12 to 18 months will provide a real window of opportunity for buyers to get in on the ground floor before the next wave of price rises. “It is fairly safe to say Townsville property won’t be getting much cheaper in the future”.

Townsville Housing Sales Drop
Townsville Bulletin 08/07/08

TOWNSVILLE’S residential property market is declining and its industrial sector is at its peak, new research has confirmed. The Herron Todd White property market indicators last month show what many in the industry had thought – rising interest rates and inflation have taken hold.

So… is it just me, or do these two articles seem at odds to you too?

Although most property investors say they understand that real estate is a “long term” investment, it is surprising how many will be overly influenced by the short term changes to the market.

The housing markets in most Australian cities have gone pretty quite recently with interest rates mostly to blame, in my opinion. However, in those areas of limited supply with a growing population; such as Townsville as quoted in the article above, I take great comfort! Why? Because when all the ‘dust settles’ market forces ultimately prevail.

When interest rates start to ease (and some, such as the chief economist at the NAB are saying rates should fall to around 6% by the end of 2009) the pent up demand should result in a rapid increase in prices again.

As you have no doubt heard us say over and over:

“It is not timing the market, rather it is time in the market”

We do not follow or promote a speculative approach to real estate; nor do we “trade” property. Personally, I am simply not interested in risk taking; i.e. beyond what I consider to be very small and very measurable risk. Therefore, I do not speculate as to the “best time” to buy the “best time” to sell (actually I don’t believe in selling either). If you intend to buy and hold property long term, you are going to experience several cycles in the normal scheme of things. Market timing is not critical but the length of time we are in the market is! Unlike the share market, some would say that with property it is better to enter the market early, rather than late.

In my 8 years of property investing experience; both purchasing 13 with my wife and assisting hundreds of others to do likewise, I have heard it said many times “We are waiting for the prices to start to move again before we make our next purchase”. In most cases when the prices do start moving these same people are “caught napping” and miss that “right moment”. Well the good news is; there is always a “right moment”…

I am from Adelaide and have friends back there who secured their first investment property about 6 months after Marion and I bought our first. That was 1999 and since that time they have often thought about their 2nd purchase but “timing wasn’t right” or they “were moving house” or “changing jobs”. The last reason/excuse they told themselves was that they had a wedding to pay for. Please don’t think that I am being harsh, that’s not my point. None of us have to look far to find an excuse for why “NOW” is not the right time to quit smoking, start exercising or get control of our future financial responsibilities.

Just like our friends, over the past 8 years Marion and I have had numerous reasons why not to invest. Some we were tricked by and some we ignored. Consequently we now have 13 investment properties valued around $4.5mil and our friends still hold just the one. We could have done more or we could have done less. I am happy to chat with anyone who wants to do more sooner but just can’t see a way possible. Post me a reply and I’ll get back to you.

Martin Bell
PS: Within 6 hours of writing this blog we received the following price rise notification from the developer of the Townsville Waters properties on our website:

From the Developer:

Just a note to let you all know that next Wednesday the 16th July 2008 there will be a price increase in our Townsville Waters development, affecting all our unsold apartments. We believe this will be in the range of 4%, and unfortunately is due to the ever increasing prices of steel, concrete and fuel. We will be signing new concrete and steel agreements on Friday and this will affect our pricing for any of those units without a current LOI.

(Ralph Waldo Emerson – philosopher: 1803 to 1882)

Yes; the “game” requires coolness and right reasoning. Several months ago I had someone tell me that they would not consider an investment property in the Cairns or Townsville area, “because it was too hot and sticky”. Understandably, my response was “but you are not going to live in it, and there are thousands of people moving into the area who will want to live there!”

It is too easy for investors to allow their emotions, likes and dislikes to affect an investment decision. My opinion, however, is that I’m looking for the best opportunity for capital growth. With this focus in mind, I concentrate on those areas showing fundamental reasons for increasing, ongoing demand (population growth); yet with a limited supply of available land.

Properties I choose must be livable! Somewhere that most people will want to live. Offering tenants a clean, modern, well appointed and conveniently located environment will give me the greatest chance to attract and keep tenants – prepared to pay a fair market rent! All of this ultimately flows through to capital growth; my real goal!

Personally you may love living out in the suburbs and that’s fine. However, as Nick has been teaching for years (those of you who have been fortunate to attend one of his Information Sessions would concur), understanding the impact of changing demographics is vital to your research! Based on recent reporting in the media and a number of well regarded property analysts, it is clear that renters are willing to pay “exorbitant” rents to be nearer “the action” (to quote one newspaper). That means restaurants, cafes, clubs, transportation hubs, schools & hospitals, beaches and so on. I am not suggesting the actual city centres of Sydney, Brisbane, Perth, Melbourne, Adelaide etc; but I am suggesting central business areas.

Surprisingly to some maybe, this same demographic group are happy living in apartments and townhouses (areas of higher density) to achieve this. Besides, they love the idea of someone else looking after the grounds and the pool etc.

A recent news article from www.news.com.au; looking at record high rents across the country, quoted APM’s general manager Michael McNamara as saying rents would continue to rise. He believed ‘Generation Y’ tenants would rather “pay exorbitant rent in inner city locations than live in what they see as the cultural wasteland of suburbia.” Remember, it’s not where you or I would prefer to live; it’s an investment. Other recent reports have confirmed this trend, showing the capital growth of apartments and townhouses to have exceeded those of house and land, in many areas. This all shows why research is so important.

The Ralph Waldo Emerson quote above refers to the “game” and I suppose that really depicts what it is! To succeed at any game first requires we know the rules. I will often say to people “you have to know the system to work the system; if you don’t then the system will work you.”

The banks have their system, as do the valuers and the tax office. We need to know the rules and tactics of their games; and use the system to our advantage. Please don’t think I am suggesting, for instance, that you push the envelope with the tax office, I am not! Put simply, we have to understand what our entitlements are and how to play to win – within those rules.

In the case of my property portfolio, there have been times when one bank valuer will give me a much better valuation than another. I understand their “game” (i.e. a valuation is not necessarily a valuation), so this forms part of my decision process – as to which lender to choose use. I “employ my own team” to help me play my game (to win). I only use an experienced finance broker; who knows how each lender works and how to play each lenders set of rules – to my advantage. My wife and I now have 13 investment properties, however, we still rely on experienced researchers to help us find the right properties. We don’t have to know it all ourselves, we just need the support of a good team.

It is all too easy to look in the general real estate agents listings and see something you “personally like”; however:

• Has it been researched as an investment? Is it in an area of limited supply with on-going increasing demand?
• What infrastructure spending is planned for the area?
• Is it close to ‘essential’ facilities: shops, hospitals, public transport etc?
• Is it somewhere people really want to live?
• Do you understand exactly what your holding costs will be?
• Do you have a plan to fund these?
• Will your finances be structured in such a way, as Nick would say, “to make bookkeeping “set ‘n’ forget”?
• What sort of rent returns are being achieved and what is the local vacancy rate like?

Market forces rule and nobody can ‘micro guarantee’ the health of any particular market all the time. That is, from time to time any area can demonstrate “signs of weakness” in the short term. Nevertheless, on numerous recent occasions, mrd clients have actually had a tenant in their brand new property, paying above expected rents before their property had even settled!

To finish off with, here is a real estate listing from Toronto Canada!

• Just $179,900
• Completely re-done top-to-bottom, front-to-back
• Tumbled stone entrance walk
• Renovated Bath
• Renovated Kitchen with newer stove, new cabinets and new stacked washer/dryer
• Bedroom with ‘Built-Ins’… (doubles as a den)
• Walk-out to fenced patio
• 100 Amp service
• 2 Satellite Dishes and Receiver

Sounds great? Shame the block is only 2.2mt wide; perhaps not such a great investment

Wishing you every investment success,

Martin Bell

The first Tenant Is Usually The Hardest To Find!

When a new development is completed and numerous similar properties come onto the market at the same time, someone will get the first tenant and someone else the last.

While there may be a general shortage of that type of property in the area the sudden increase of availability (in a similar demographic), may temporarily “swamp” a tenant pool. These will be absorbed by the market, however, there may be some initial vacancy for a few weeks. In my experience this only occurs at the release of a new development as the leases then become staggered and the development moves into a more normal tenanting cycle and vacancies are few and short.

Katrina and I bought our very first investment property in a complex of 42. Some vendors had tenants immediately… but we were literally the very last. From memory it took about 7 weeks. The market was considered tight, there was just not that many people ready to move in a hurry.

Of course we wondered if we had done the right thing… but this vacancy was soon forgotten once it was tenanted. Since that time (almost 7 years ago) we could count our vacant days on one hand (across all our investment properties). I suppose it was Murphy’s Law that the only vacancy that concerned me was the very first.

Assuming you invest in property in areas close to infrastructure; transport, shopping, schools, hospitals etc, there should be a constant and growing demand for your property. Although the initial vacancy issues hurt at the time they are quickly forgotten, especially when the capital growth kicks in. A few hundred in lost rent is dwarfed by the thousands in capital growth.

How Much Rent Should I Be Asking For?

The best way to determine what a property will rent for is to pretend you are a tenant and go looking for a similar property to rent. The first port of call would be the Internet. Have a look for similar properties and see what they are renting for. Remember that tenants will pay a premium for a brand new property. This is the process your tenants will go through to assess how much rent they should be paying.

Don’t fall into the trap of trying to get a rent that equates to the value of the property. The tenants don’t care what your property is worth, they only care what other similar properties are renting for and that will all depend on the supply/ demand situation in that specific location at that point in time. If there is a short term glut of a particular type of property on the market then it would be foolish to continue to ask top rent and be the last unit to get a tenant. It might be costing $300 a week for example waiting for an extra $10 or $20. It would take too long to recoup the money. You are always financially better off to meet the market and secure a tenant quickly; wherever that is at the time (Remembering that with a new development, all the units come onto the market at about the same time). Once you have your first tenant the leases get more staggered and the development moves into the normal rental cycles.

Don’t sweat the small stuff. While it seems a big deal at the time, as with our initial 7 week vacancy, it really isn’t. Successful investors have a long term view recognising these as just “bumps in the road”… not the end of the road.

NB: While we will always assess market rents as being what they are at the time a development is first released (and generally speaking they will actually be higher at the time of settlement), the market forces that prevail when a tenant is required ultimately dictate what rent can be realised. This will be determined by the universal laws of Supply & Demand. Our job as investors is to meet the market and secure a tenant!

These extremities are caused largely by “the herd mentality”. Let me explain…

• People, inspired by others making money from rising property prices, decide to do likewise
• Demand increases, thus pushing prices higher
• Higher prices mean reduced rental returns (rental yields are determined as a percentage of the purchase price)
• This downward influence on rental returns decreases demand (the number of able and/or willing buyers diminishes)
• The decreasing demand takes the heat out of the market
• As supply slows, demand for existing rental property steadily increases
• Rental returns improve, buyers are attracted back to the market (and the cycle continues)

Those who ignorantly rush into an overheated market, without much planning or assistance, may find themselves overextended.  These ‘sensational’ stories sell… and so are quickly taken up by our media.

The one overriding factor that makes residential real estate such a great investment class (stable and predictable) is this:

No matter what the state of the economy… (rent or buy) everybody has to live somewhere! They cannot leave the market, as with the stock market or even the commercial property market.  This rock that residential property investing is built upon provides a level of certainty that other asset classes do not (in my opinion).

Market forces will always prevail. Economic conditions may alter… but that will either result in an increase in values or rents. Either way, things always return to the centre point or Market Equilibrium… and we win!

Property investing ought to be seen as a long term strategy. It’s important to keep your eyes on the end result and not be spooked by events that happen along the way (anything that does happen between now and then is just “market noise”). Keep your support team close, continue to educate yourself and be sure to have your finances structured correctly. With a long term mind set, doing these things will act like suspension against any bumps in the road… and you will come to agree that the destination is well worth the journey.

Happy Investing,

Nick Lockhart

There are laws of chemistry and physics, laws of nature and there are also financial laws.

If you fight the laws of physics you will lose every time. Have you ever tried to fight the law of gravity? It’s painful when you land with a thud! Gravity wins every time. NB: While the law of aerodynamics supersedes the law of gravity… it does not do away with it!

Did you ever try to grow a plant that was totally unsuited to the local climate? No doubt, you didn’t have much success! How silly would it be to mix two explosive chemicals together… and no reaction?

People drown fighting rips… but anyone can swim with the tide.

LAWS GOVERNING THE FINANCIAL WORLD:

As there are laws governing most things about us… so too it is with the financial world. Two obvious laws that I want to consider here are (1) Time and (2) Inflation. In my experience, most people fight these financial laws like the swimmer in the rip. They drown financially… but it does not have to be that way!

Once we accept that there are laws governing time & inflation, we can learn how to harness them to our advantage; it’s that simple! It can be like having the wind at your back, rather than running into a headwind.

Therefore, my strong suggestion is: “Quit fighting natural laws; rather learn how they work… and how to use them to your advantage”.

TWO SIDES TO THE LEDGER:

There are two positions we can take:

1. The CREDIT side of the ledger – where your net cash position is positive; this is where you are investing your own cash.

1. The DEBIT side of the ledger – where your net cash position is negative; this is where you invest using other people’s money.

The CREDIT side of the ledger

While it is not commonly understood; using your own cash to invest will leave you fighting against the natural laws of time and inflation. Each year your nest egg will be eroded at the rate of inflation. Although the actual face value may not change the true value of your money has reduced. If you had $100 last year and the inflation rate was 3% you would still have $100 today but that $100 would buy you 3% less than it did last year. I am not talking about the face value or the actual dollar figure; rather the real value of what you have.

With this in mind when investing your cash you have to earn at least the rate of inflation just to stay in the same position. Using an inflation rate of 3% as an example you would have to earn 3% per year after tax just to break even.

When struggling against the “tide of time & inflation”… our forward steps are unlikely to result in any (real) forward movement.

So, Is There A Better Way?

The DEBIT side of the ledger

Personally, I have chosen to be on the debit side of the ledger. On this side, time and inflation work in your favour… because you are working in harmony with the natural forces. For every two steps forward you take, they will push you another step(s) forward. You are now running with the wind at your back!

Here’s how it works.

By using the bank’s money to finance your investments you are in a net debt position; i.e. you owe more than you have in cash. Obviously you don’t owe more than you own, that wouldn’t be good but you do owe more than the cash you have to hand.

Like most investors I use interest only loans for my investment purchases; I purposefully do not pay down the debt; but nevertheless, my debt does actually reduce! By not repaying any of the principal component of my investment loan the actual loan amount (i.e. the dollar figure) will remain the same. A $400,000 interest only loan today will still represent a $400,000 loan (productive debt) in a years’ time.

That part is pretty straight forward… but now let’s consider how time & inflation (my new found friends) can help…

Assuming an inflation rate of 3%… and looking forward 12 months; in real dollar value terms (or spending power), I now owe the lender $12,000 less! Talk about a “set ‘n’ forget” system to create wealth as you sleep.

What these new found friends of yours do is actually reduce the real value of your debt. STOP! That point needs to be absorbed… I am suggesting that the effect of inflation (over time) can increase your net worth, reduce the real value of your debt and work passively for you 24/7!

Wow, we have just seen how it is possible to finally appreciate inflation… instead of cursing it; bring it on!

For the person with a million dollars worth of borrowings (I am only referring to productive debt here), their wealth is increasing by (at least) the value of inflation… or $30,000 a year (assuming 3% inflation). Given that real estate values generally increase at a rate well above the rate of inflation (i.e. well researched residential real estate, where the supply is limited and the demand increasing) the real gain is probably going to be significantly more!!!

To further illustrate my point, let’s take a longer term example… using a story told to me by a friend recently.

In 1974 his parents sold their family home in Adelaide for $25,000. It was a fairly typical 3 bedroom home in the suburbs. $25,000 was a lot of money back then; given his dad was only earning $50 a week at work.

Now, if a smart investor had purchased that home and used an interest only loan… the (productive) debt owed would still be $25,000. We all know that while $25,000 was a fortune back in 1974… it is worth significantly less now. I know people with credit card limits bigger than that today.

The (productive) debt an incoming investor would have gone into to purchase this property would have represented possibly 105% of what the property was worth at the time (i.e. assuming they borrowed the stamp duty and the purchase costs); however, today it would represent just over 7% of the current value of the property (assuming the median price of a home in Adelaide is $350,000 as per REISA President, Robin Turner).

Another way of looking at your gain is to recognise that not only have time and inflation “paid down” your (real) debt, passively while you sleep, work & play… they have also pushed up the replacement cost of your asset(s). There’s no way you can build a house for $25,000 these days.

IN CONCLUSION:

• Not only has the real value of your (productive) debt been reduced, but the replacement value of your asset(s) have increased.
• The value of your asset and the value of the debt to purchase that asset start at about the same level… but then, thanks to time and inflation, they move further and further apart.
• Debt is reduced and replacement cost increases,
• The “gap” created between these two amounts is your profit; from inflation
• Add that to the natural capital gains from supply and demand and you are really getting somewhere fast.
• All the planets are aligned, and the universe is in harmony and, assuming you use the knowledge provided… there will be an inheritance for you to leave to your children’s children (after a comfortable retirement yourself)!

Don’t fight these natural laws; rather learn how they work and harness their power as fuel for your financial future!

Coupled with housing affordability, low to middle income earners are being warned that prices are likely to spike again within four years with “steep price increases”.

What have bananas got to do with the property market?

They are a simple example of the effect of market forces, supply and demand. Bananas became extremely expensive after a cyclone wiped out crops. The supply was dramatically effected and the demand pushed up the prices.

Do people have to have a banana? No – they can eat other fruit!

Do people have to have a roof over their head? Yes- without exception!

They either buy or they rent, one of the two (not counting “freeloading” teenagers), and housing affordability is worse now than it has been for many years.

Many people cannot afford to buy so they have to rent, an ever increasing number. In areas of increasing population growth there is strong demand, match this with limited supply and prices increase. It is the same in the rental market and that is why we see the current issues in Sydney with people forecasting massive 40% rent increases!. Sydney’s vacancy rate has fallen to 1.5% and it takes an average of 6 weeks to secure a lease. In some parts of Queensland vacancy rates are below 1%! (3% is considered “normal”)

An ANZ senior economist has been quoted as saying “Housing market tightness is expected to intensify over 2007 as the supply of homes continues to run well below demand,” . He said this would generate higher house prices and rental levels, while vacancy rates would remain very low.

In my opinion no matter what the authorities do, change interest rates, change tax laws etc , in time, market forces will prevail. Recent interest rate rises and low returns have meant that many investors abandoned markets like Sydney. As a result fewer rental properties were built but the demand did not diminish so now we see escalating prices and enormous increases in rents. This will eventually make property more attractive and bring the investors back into the market.

To quote a friend this is a “swinging pendulum”. It is a never ending cycle with prices historically doubling every 7 years or so and when you invest (buy and hold) rather than trade (buy and sell) you will ride though several cycles. In my opinion it is not “timing” the market (when to buy and sell”) it is the “time in” the market that matters. “Trading”, picking the right time to buy and to sell is , to me , fraught with danger (let alone capital Gains Tax) but “investing” in property , when you buy and hold ,is a long term business. You can still take your “profit” without selling and paying capital gains tax by drawing down on the equity. It works – I do it!

Many of us see what is happening now, the “rental crisis” in Sydney and Brisbane particularly as no surprise at all.

The Australian Bureau of Statistics define wealthy people as those with over $1,000,000 in net assets and only 1% of Australians fit that definition. You need to challenge old concepts and change your mindset as the first step to join that 1% or you will be in the 96% that at age 65 will be either dead or “dead broke”

Source: The Daily Telegraph