Investors chase profit in three ways: Capital growth, Rental yield and Tax deductions. There was an old adage I once heard many, many years ago: Never buy an asset where the sole purpose is to lose money and get tax deductions!
In other words, long-term capital growth should always be your focus when buying property but short-term yield helps to pay the mortgage. The best way to do this is to choose properties that have potential for long-term growth, but immediately offer a rental return or taxable deductions that will allow you to meet mortgage repayments.
If we look at off-the-plan investments. These make sense for foreign nationals that have difficulty in complying with Foreign investment review board requirements as there can be up to a 50% exemption for the review board in certain developments. They also make sense for owner-occupiers who have always wanted to own something new. Similar to the person who buys a new car once in their life, then goes for the demo model every time after that. However, for an investor they may end up losing opportunity.
According to The Age reporter, Marika Dobbin, there were 23,325 new apartment approvals granted in the 12 months up to February this year. This is up substantially on last year and well up over the number approved through 2008. Many of these developers are starting the “give-aways”. Marina berths with docklands apartments, rental guarantees in Inner suburban developments, and furniture packages with the smaller townhouses. Anyone that was around the property market in 2000 – 2003 when Docklands and Southbank were gaining momentum will be reading this with trepidation.
If you need a rental guarantee, you should not be buying the property as an investment. These guarantees were thrown around with Docklands apartments and many investors were severely burnt when, after the twelve-month guarantee expired, after having the property vacant, the actual market rental return was in some cases less than half of what the rental guarantee had been.
Capital growth in the Docklands apartments has also been horrendously slow. In some instances, not even maintaining pace with CPI. This, during the 2000 – 2010 decade, where the majority of suburbs in Melbourne saw capital growth rates upwards of 9% p.a.
Newer style apartments, townhouses and houses will give good depreciation benefits, better rental returns and less maintenance costs than older style properties. However, this needs to be balanced with the higher initial capital cost. As interest rates continue to fall, (if the banks happen to pass on any rate cuts the Reserve Bank offer over the next couple of months,) then buying properties that are between 2 and 15 years old will be achievable with smaller on-going costs. Add this to good tax benefits and higher rents and you will improve your yield dramatically. If you have bought well and not pay the 20% builders’ premium that you usually have to pay for new and off the plan purchasers, you also give yourself a much better chance of capital growth.
If you are considering the purchase of an investment property, give our office a call and we can organise a no obligation meeting to discuss the pros and cons of property investing in Melbourne.
Ian James
Director JPP Buyer Advocates
