Unlocking the Property Market - Lindeman John

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have heard that a new mine is opening and prices are about to shoot skywards. Maybe their friend bought a property somewhere and tells them that prices have doubled in recent years, or a brochure they receive informs them that properties in a certain new development are selling like hot cakes and if they're not quick, they'll miss out. These are all very good reasons to conduct further research, but they should never form the basis of a decision to purchase. If you are a property investor, you need to have a clear understanding of what results you want to achieve and how the housing market can help you to secure them.

      Property investment is unlike purchasing a home. People don't generally buy and sell dwellings to make money from capital growth or cash flow, but to make a home. They may not buy in areas that are going up in price or where rent demand is rising, but where they can afford or prefer to live in. They don't sell to realise a profit, but because it's time to move to a bigger home, in a better location, or to a retiree destination. This gives you, the investor, a huge advantage because you are competing with buyers and sellers whose motives are not profit-based. But to take advantage of this, you need to use an investment strategy that is appropriate to your personal situation.

      Housing investment can provide income from rent or capital growth from price rises – and these are fundamentally different approaches. Many investors fail to grasp this essential truth and, as a result, their investments fail to generate a profit. If there's one rule that you should never lose sight of, it is to always borrow for passive growth and never for cash flow. This is the essential difference between good and bad debt and, properly applied, it will turn property investment into a profitable lifelong journey.

      Let's assume that you, or maybe your children, are new investors who have scraped up just enough money for a deposit. Your strategy should be to buy a property that is going to rise in price as quickly as possible, turning the growth in its value into profit. This is called leveraging, because while you contribute only the deposit when you buy, you only repay the loan amount when you sell and keep the difference, less costs and taxes.

      To work for you, this strategy needs only two fundamentals. First, you must be able to make regular interest repayments on the borrowed money, and second, the property must substantially grow in price during the time that you own it. This means you should buy in a suburb where high price-growth is about to occur. Timing is everything; not just buying at the right time, but also selling just before the growth comes to an end. Some investors try to use this strategy by buying in risky areas such as mining towns and ports, but that's just speculation and not at all necessary. The idea is to buy in suburbs where the demand from prospective buyers is growing faster than the number of properties available, because that's where prices are likely to rise quickly.

      Although you may start this strategy with just enough deposit for one property, your equity grows each time you ride the wave of price-growth, enabling you to buy more properties and repeat the process. Each time this happens, you are using the borrowed money to make more money, which is why this is called good debt. This strategy puts you far ahead of an investor who holds the same property over a long period of time, hoping for growth to occur.

      At some stage, when you have amassed considerable capital by buying, selling and then buying properties again in high price-growth areas, you will want to change to a cash-flow strategy. This is when you gradually swap your portfolio of investment properties from those with growth potential to those that will assure you of a reliable income stream. In other words, you now use your equity to buy high rent-yield properties, which you own without any debt, in strong rental demand areas. There's little point to borrowing if your aim is cash flow, because the interest on the borrowed money robs you of cash flow and can even result in a negative return – this is bad debt. These two different investment strategies can only be generated by certain types of housing in specific localities. This means that where you buy, what you buy and when you sell play a crucial part towards helping you achieve your desired results.

      Unfortunately many investors rely on the ineffective and even inaccurate selection and prediction methods the property investment industry is rife with. Some commentators will tell you that the market will always perform as it has in the past and that price increases eventually and evenly flow almost anywhere, so it doesn't matter where or when you buy. Others may talk about the housing market cycle or property clock to show you that growth and decline come and go like the seasons. Some experts will claim that a lack of recent price-growth proves that growth is way overdue and the market is about to boom, while others will tell you the opposite; that recent price rises identify hot suburbs that are about to go gangbusters. There are even some who claim that the property market behaves in mysterious ways only known to a select few. If you ask them to explain, they'll tell you it's far too difficult for you to understand, but they'll give you a glimpse for a price, of course.

      Housing is the biggest investment most of us ever make. You have a right to know what to believe about these seemingly contradictory and confusing theories, but also why timing the market, rather than time in the market, is the most profitable strategy you can adopt.

      The tools revealed in this book distil nearly two decades of my personal and professional research into the nature and likely direction of the housing market. They are the essence of the more than 50 monthly articles I have written for Australian Property Investor magazine as their research columnist since 2011. They will empower you to test what you read or hear and take the best possible course of action. These seven keys will unlock the door to the property market for you, explaining:

      ► how the housing market works

      ► where to find areas with the best growth potential

      ► where and when to buy

      ► how to narrow down your search

      ► what to buy

      ► how much to pay

      ► when to sell.

      I trust that this book will help you make the best possible housing investment decisions.

      Key 1

      Understand how the housing market works

      This key unlocks the door to the secrets of the housing market, showing how to get the greatest benefits when you invest in residential property. You will:

      ► see which of the 15 000 suburbs and towns in Australia are shooting stars with high imminent price-growth potential

      ► discover where the income-generating cash cows are

      ► learn how to find long shots if you are prepared to speculate

      ► discover how these outcomes are generated by the three demand dynamics of the housing market:

      ○ people

      ○ purchasing power

      ○ properties

      ► see how these demand dynamics work together to cause price and rent changes.

      Many investors think that accurately predicting the property market is next to impossible. They believe that no-one is clever enough to pick the best time to buy or sell, because the housing market seems to behave in strange and unexpected ways. They rely instead on hearsay, gut feelings or speculation, and, while a few strike it lucky, most end up with results way below their expectations.

      Such experiences have led many investors to adopt the buy and hold method, also known as time in the market. This ‘safety first’ strategy is based on the belief that housing prices always rise over time and that this growth evens out, so it doesn't really matter where you buy an investment property or whether prices fall for a year or two, because prices will eventually go up everywhere and, over time, all areas of the market will eventually achieve the same rate of price-growth.

This idea is simple and anyone can use it. Some experts take this notion a step further, by claiming that house prices double in value every eight or so years. On what basis are such statements made? They are built on the past performance of the housing market. Experts promoting the buy and hold theory often produce charts such as Figure 1.1, showing that house prices did indeed double in price every eight years during the 1970s and 1980s.

      You can see why this theory

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