Strategies for Success

Types of property booms💥

There are two types of booms, and we have seen them both occur. The first is what we call a ’Hype Boom’, and the second is what we call a ‘Real Boom’ and you can make money from both. A hype boom generally comes off the back of a major infrastructure announcement. For example, in Darwin, in 2008-09, they had a hype boom when it was announced that a major Liquid Natural Gas (LNG) works was going to be built near Darwin. During that period prices in some cases literally jumped by $50,000 over a single weekend when the existing Territory Government was re-elected on the promise that they would give the LNG plant the full go-ahead if re-elected.

The combination of the ‘normal’ price cycle and the LNG announcement delivered Darwin approximately 20% per annum house price growth for a three-year period. Now that’s a boom by any description! However, something happened after that. The construction of the LNG plant was delayed by three years. The “Hype Boom” then immediately stopped and the market came to a grinding halt. The lesson to be learned here is that you can make a lot of money from Hype Booms, but beware of what can happen if the ‘hype’ doesn’t come true. Then there’s what we call a “Real Boom”. A real boom occurs when a rapid increase in population occurs, usually due to a sizeable workforce arriving with money in their pockets in an area that has a relatively limited supply of housing. That’s when you get a Real Boom and it is truly amazing to watch. Real Booms have been going on for a long time. Even the Victorian Gold Rush created a real boom in property prices.

A real boom will happen when the major infrastructure project actually begins. Another good example of when this occurs is when the Defence Force moves a large military unit from one place to another.

As Winston Churchill once said, “I can predict the future because we have studied the past”.

Smart Investments. What type of property to buy?
Now we know where to buy, the question is, “What to buy?” Our answer to that is generally this: “brand new, residential property in the middle of the market”.
Here’s why:

Why Residential?
First of all, if you’re in residential property you can achieve a higher lending ratio, thus buying more properties with the cash or equity you have. For example, if you want to buy a retail store, you’d be lucky to get a 70% loan for it as it is a commercial venture, and you’ll also pay a higher commercial interest rate.

Commercial rates were approximately 8-10%, whilst residential rates were about 6-8% per cent, depending on the lender. So with commercial properties, you are restricted to borrowing less and you pay more for it! Whilst with residential you can often borrow up to 90% depending on where you are buying and the lender’s criteria, and get a lower interest rate. The more property you have the more you make when prices move. Simple.

This is just one of the rules of the game that you either learn the hard way, by your own mistakes or the easy way by reading content like this email series. Just make sure of course you have sufficient income from your rents to pay your mortgages!

Buy property in the middle market. Here’s why!
The reason you should stay in the middle of the residential market is twofold. Firstly, it is less volatile in terms of fluctuations in property values when compared to the higher end of the market, and secondly, the quality of tenants is higher than the lower end of the market. The high end of the residential market is driven by the demands of the wealthy. Generally speaking, most wealthy people are in business of some form and as such their fortunes, and thus demand for high-end property, are directly tied to the state of the economy.

For example, we had a client who owned a $3.5M property in Western Australia, during the Global Financial Crisis that property dropped to $2.5M during the space of 12 months. Besides, why would you want a $2.5M investment property when you can have five $500,000 properties in five different locations and spread your risk?

Another point to note is that the higher end of the property market usually has a very poor rent return when compared to the value of the property. Because anyone who can afford to rent an expensive home can usually afford to buy their own! As such, there is less demand for expensive rental properties and vacancy periods are also longer. So stay away from there! Interestingly enough if you want to live at the high end of the market, you are even better off renting. Firstly, for all the reasons mentioned earlier when we talked about renting vs buying, but also because the rent is usually dirt cheap compared to what you would have to pay on a mortgage for the same house.

At the lower, or cheaper end of the market, you are more likely to find your tenants from hell. Now we say this very carefully, because in no way do we intend to say that all poor people are bad tenants. We are just saying that bad tenants are usually poor! It is also worth considering that every property you own does come with some sort of overhead on your time. Even with a real estate agent managing each of them, you will still have to give some of your time to each one. So why not buy ten $200,000 properties at the lower end of the market, and instead get four $500,000 homes in the middle of the market? You are avoiding the tenants from hell and have a lower management overhead.

Some investors like to boast about how ‘many’ properties they have, but the smart and more successful investors know it’s not ‘how many’ you have, it’s ‘how much’ they are worth! So if you stay in the middle of the residential market, you’ll be able to buy more property, and your property values will be more stable – which is very important when you are trying to build a stable portfolio. Discover a fresh perspective on property investment with us next time, offering insights that will reshape your understanding of this dynamic market!

~Integrity Team

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