What is the preferred asset class, and what is the strategy we need to use?
I tended to believe that every asset class and every property is a good buy. If we look back 20-30 years, we know that it was worth to put our money into real estate, rather than store it in our saving account.
This theory is ok for some audience; buy any property and keep it for the long term.
This is also the first approach of 99.9% of the current real estate investment companies. With this scenario, they will always be the winners without any responsibility for the medium-term growth, every point in time their answer will be “wait a bit more”.
Well, I believe that real estate is a long term approach and the time will mitigate the opportunity risk, however, why to buy a property and wait more than 10 years without any returns or capital growth. In contrast, other assets accelerate every single year. On the contrary the general answer of the sales agent “I don’t have a crystal ball or a magic wand to make the short term magic, just be patient and wait a bit longer, this is of cause a good property” Safe bet, isn’t it?
A clear strategy always needs to be there, and it should be fine-tuned every 6 to 12 months.
For an instant, buying a new apartment at the 500-700k mark every few years is ok, and of course, if you can serve the loan, but what will be the price you will pay? You inevitably attract good gross rental income and a lot of tax return. However, the price you pay might be a long term growth and unfortunate cash flow sacrifice which will delay your progress in building net asset in a reasonable time and as a result to forecast your wealth creation.
The market risk should validate every week and with any property across Australia, even in the same building to let you tune your strategy, which binds you to the right way, you can improve your property portfolio.
What to buy, where to buy and from whom to take the advice should be part of the strategy. Who is going to analyse your position and make sure you not over commit, and also make sure you don’t buy a property just for the sake of buying, with the misleading long term approach or other BIAS data.
Asset classes are different from each other, this means that not every property is a good buy and not every premises will give you good returns. This eliminates the first statement I mention at the start.
First, come the land, nothing is more valuable than land, even not a well-branded shinny skyscraper building in one of the CBDs.
Lands appreciate in value, while structure depreciates.
On top of the land, we install a single structure, called a house, and this is the most fast-growing options among the rest of the classes.
Then we insert more structure on the same land size and come with small houses or townhouses or the other combinations.
At the end of the raw, we have the units/apartments; it means many units on the same land size, and also we pay a high fee for the body cooperate which eat our cash.
In a brief to grow equity faster; Land with a house on top to connect the property with income, then small houses and then apartments.
We can drill down to land size and property configuration, 700m2 block of land with 4 bed, 2 bathrooms and 2 garage spaces or 300m2 block of land with 120m2 build, 3-4 bed, 2 baths and 1 car.
Every suburb associated with different Risk, every property configuration associate as well with different Risk. In general, we have more likelihood to make good ROI with a big block of land, rather than the small block. This is again narrow to locations. New houses estate with 500m2 land size on average and about 6 stages and 200 houses in each construction stage is likely to make less than the next door established home on similar land size.
Small houses, small lands and 1 bedroom or variations are the property-developer inventions, and this mainly to cut profits, no much to help the investor though!
Unless it is in a prominent location and the estate offer only 5 or 10 houses which are rare, not enough profit for the developer or establish houses or townhouses in an in-demand area and family-oriented suburb.
In general, for the average investor, houses are likely to grow more and faster than units or similar small product. The 4-bed unit, for example, which is a rare product and not so affordable, if it locates in a good suburb it likely to push good return as well.
We saw in the past few years when all the Melbourne units market and small product reduced in value. I am talking about 1 and 2-bed units or similar concept of tiny houses, while the 4-bed units had solid growth.
The point is that families and owner-occupiers have more interest in an excellent product that can serve their family well for the long term, they not really interesting in an investment product which is small and not designs for their lifestyle.
Another example is the Brisbane market, over the past few years, we saw houses values increase while units up to 3-bed decrease. This is a lot to do with the oversupply of units and new constructions in this market. The land gets hotter and hotter, and houses as an asset class which suitable for families enjoy from substantial and healthy growth and will enjoying along the path. Units from the other side in primary location won’t see capital growth in the unfordable future.
We can drill down to asset class in good economic suburbs, good land size or good property configuration with extras, good layout and more. Those will keep growing even in smaller steps in rough times, while others that still in high oversupply such as the South West will get heat.
It’s essential to validate every asset risk & return. In this way, we will be able to understand if the suburb is better than the other.
We will be able to understand if the property has the right configuration.
The right position on the ground,
If the suburb suitable for houses or units,
If the suburb has 98% owner-occupiers that live in big houses or the suburb has 60% renters that live in units or small homes.
If 4-bed with 2 baths or the 3 bed and 1 bath is the preferred configuration in the suburb.
If your budget is suitable for a specific location or another.
Asset class or location is all about Risk!
High equity Risk of a suburb and an asset class won’t let your hard-earned money to work for you. Sometimes it will postpone your ability to generate equity for 15 years or more and will jeopardise your ability to jump to the next property if you depend on this capital.
If it’s low equity risk, it means that you are likely to have a healthy growth and year by year, and you will be able to protect your asset growth and your cash flow.
Healthy equity risk will translate into a good cash flow risk even if today cash flow is only associated with medium Risk.