Now is a great time to be picky about where you buy, and picky you should be. During 2007, it really made no difference in Brisbane (and many other capital cities) where you purchased... you got capital gains and got them quickly! Obviously that is not the case now. What we are seeing as a result are people who are being cut throat with their offers and who are buying for rental returns. Just make sure you don’t forget about position when doing this!
Position is one of the keys to a good real estate venture as we all know, but we tend to forget this all too easily when the capital growth isn’t apparent. What we can tell you is that property will follow its long term trend, so if the long term per annum growth is high, then it will be high again.
Here is an example of what some people are looking at now:
Property A is a house in an average suburb, is affordable, and shows a rental return of 5.5%. Current capital growth is 0 to 1% pa for the next year. Pretty good rental returns for a straight house, but obviously not good capital growth, but then again, not much has good capital growth now.
Property B is a house, in an inner city suburb, is more expensive than property A, shows a 4% rental return and the current capital growth is 0 to 1%pa over the next year. Sounds a little average doesn’t it?
Most people would go for Property A, but what we haven’t told you is that the long term growth for property A is 8% pa and for Property B it is 12% pa.
Now what do you think? We are guessing that the immediate reaction of some is ‘but you didn’t tell us the long term growth up front!’. No we didn’t, but who does? And would you listen? We know a lot wouldn’t because we are seeing it with our own eyes. People are buying houses in middle suburbs with average amenities and access to services simply because the price suits them and the rental return is higher compared with a more expensive suburb that has lower rental returns and no immediate capital growth advantage.
But how many of these people are buying property with only a one or two year timeframe in mind? Most have a longer term view than this and even those with a short term view end up with long term investments in a lot of cases, but if you don’t then Property A probably was the right choice. But if you are in it for the long haul, wouldn’t you rather have good prospects for much higher capital gain?
One other thing you need to consider in all this: What is the current rental return compared with the historical rental return within that suburb? In both examples above you will probably find they are both higher than normal because of a slowdown in growth and a rise in rents.
Lastly, are there suburbs out there that you have ever wanted to own property in but couldn’t afford? Either because the rent return was too low or the prices too high? Now is the time to look into these suburbs. You just might be surprised to find the rent returns are no longer as low as you recall and you don’t have to rage war with other buyers to get the property.
Tip of the day: Long term investors need to ensure they buy for long term!
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