5 questions investors must know the answer to
If investors fail to ask themselves even the most basic of questions, they leave their portfolio vulnerable to poor performance.
Blogger: Peter O'Malley, author, Real Estate Uncovered
What is the net yield?
Frighteningly, many residential investors don’t know how to calculate net yield on their investment. They see that the property leases for $1,000 per week and do modeling around $52,000-a-year income.
The only figure that counts for investors is the amount left over after all costs have been covered. Strata rates, council rates, water rates, land tax, vacancy, agent fees, maintenance, are all costs that can take 20 per cent to 30 per cent off the gross yield. The $52,000 you thought you were getting just turned into $36,400.
Are you chasing yield or capital growth?
Many investors in their search for growth disregard the importance of a strong yield supporting the investment. The best investment properties provide good yields that continue to appreciate. The predictable and growing yield ensures that capital growth follows. A property with a weak return, tipping you into negative gearing, then needs to experience strong capital growth just to offset the negative gearing. Buying on the basis that a property has sound income fundamentals is investing. Buying on the basis that, hopefully, someone will pay a higher price than you just paid in the future, is speculating.
Is the investment decision tax-based or performance-based?
If you ask your accountant how to save tax through negative gearing, they can certainly help you. A good tax-saving property can be a dud investment, though. The goal, when investing, is to profit. Negative gearing is a fancy term for weekly loss. Many investors sell out of positively geared properties because the property is creating a ‘tax problem’. If you are paying tax, you are profiting. If you are negatively geared, you are losing. Even though the tax man splits the loss with you, half a loss is still a loss. Buy good real estate, and capital growth and yield growth will come.
As a wise man once quipped, “You are better off sharing a profit with the tax man than keeping a loss to yourself.”
Where do you think we are in the current cycle?
Rents are down, prices are rising, interest rates are set to go down further and Sydney has its mojo back. Credible forecasters and economists contradict and conflict daily on what will happen with the property market in 2015 and beyond. Absorb all the key messages and form your own view prior to purchasing an investment property. Take a long-term view (10-plus years) to quality property and you should do well. If you take a punt on a quick profit in the market, understand the risk you are running.
Are you Sydney-centric in your outlook?
Property investors have a tendency to invest close to home. Yet, the best investment buying in the residential sector may well be in capital cities outside of Sydney. Your investment decision should be driven by fundamentals that suggest growth, not geographical convenience.
