As property prices move ever upward it’s not unusual to see multi-million dollar properties in areas close to the premier suburbs. If capital growth is the name of the game it’s reasonable to say having investment properties in these areas would be a good thing.
The basic problem with expensive properties is the very nature of what makes some people want them. The price. Not just the purchase price either but what the value actually means to you as an investor.
Why is property price an issue?
Remember, equity is the life blood of an investor and the ability to access that equity is paramount to the ability to move forward.
Naturally, any percentage increase in a high end property value is going to be a lot more than a less expensive property. That’s a given obviously and makes Capital Growth very attractive. However, the inherent issue with high end properties is that accessing the equity for further investment becomes more difficult the higher it goes. There are rules around property values that are linked to LVR’s for example. The higher the value of the property, the lower the LVR applies. On top of this there are limits to the size of the loan you can get.
This situation doesn’t apply to a lower value property. Most Lenders will give 80% all day long. Of course, the normal criteria surrounding income and acceptable security type apply to all properties.
Diversifying the portfolio also provides better rental returns and reduced risk. After all, it’s unlikely all of the properties will be vacant at one time.
Rent and Invest as an alternative
One constant theme I’m hearing is that many young people are purchasing their first property as an investment and renting where they want to live. The benefit of that course of action is that there is no need to max out their borrowing capacity on one owner occupied property. Another advantage is that the deposit can be lower. The investment property can be in an area they don’t want to live in because it’s not being purchased for their residential needs. It’s an investment.
This strategy can assist accumulate multiple properties rather than be burdened with a large debt for an owner occupied property.
The obvious advantage with this strategy is that they are now PART of the market rather than trying to catch up to it to buy. Increases to property values actually increase their wealth position faster than they could save.
There could be Tax advantages to be had here also though we won’t know if the election and a possible change in Government will impact the situation.
Why House and land is preferred
These properties types offer advantages for investors. A lower Stamp Duty based on just the land component is the obvious one but it isn’t the only one.
By their very nature, newer suburbs with House and land tend to be less expensive than established areas. That doesn’t mean that there is no benefit in future growth though.
Some areas have an upside that goes beyond the current monetary value which causes the purchase price to lag behind the potential value of the area. These are the areas that should be attracting the attention of astute investors.
Our methodology is to follow the Banks preferences. We look for areas where there is a disparity between the household disposable income (capacity) and the relative values of the suburbs. We call these Value Areas.
So what we want ideally is a property located in a suburb that has upside to its Value.
That is, it has a price below what someone with high borrowing capacity, based on what the disposable income of the average person living there could pay up to, with the interest rates available at that current time.
These Value Areas provide opportunities for growth using common methods of calculating borrowing capacities.
Selecting a property in those areas could boost your ability to create wealth in the future.