Investing in property in Australia has proven to be a sound long-term investment, with prices growing steadily for many decades. However, when the time comes to choose exactly where you should be buying a property, there are a myriad of things for you to think about.
One of the very first questions you’re going to need to consider is whether to buy in a capital city or a regional area. While there is no correct answer, there are advantages and disadvantages to both.
Investing in a Capital City
For the most part, capital cities grow in value at a faster rate than their regional counterparts.
Cities like Sydney and Melbourne have traditionally been locations that have seen heavy levels of migration, both from overseas and interstate. With limited supply, in the form of land, prices have been trending higher for a long time, and the growth rates are very strong.
Your blue-chip areas of most capital cities normally see steady growth while also being less prone to falling during times of broader market weakness.
On the flip side, because these prices are higher, rental yields are a lot lower. While we are in a low interest rate environment at the moment, historically blue-chip areas will be negatively geared investments.
Another advantage of properties located in the city is that there is normally a steady stream of tenants available. That means properties will be easy to rent out and you can usually find high-quality tenants.
Investing in a Regional Area
One of the main reasons people choose to invest in regional areas is the fact that rental yields are often far higher. It’s not unusual to find rental yields of 5-6% in regional areas, which, in the current environment, normally means your investment will be positively geared and putting cash in your pocket each month.
The other side of this equation is that the growth is normally not as high as the blue-chip areas of our major cities. However, when you have a strong yield, it’s a lot easier to hold onto your investment property.
The other clear benefit to investing regionally is that the price of the properties is normally far lower.
If you have limited borrowing capacity, you might not have the option of investing in a major city to begin with. In many regional areas, you can buy properties under $300,000 which makes them affordable to new investors.
City vs Regional
While there is no best place to invest, as everyone has their own goals and circumstances, it is possible to get the best of both worlds.
There are cities in Australia that do have very high yields, and there are also regional areas that have a track record of strong capital growth.
Many property investors look for a combination of these factors as it allows them to grow their equity while also being able to service their loans and continue to borrow.
Record-low interest rates, strong buyer demand and low listings continue to fuel strong house price growth across the country.
That means that many homeowners are now sitting in an enviable position, having seen a strong uplift in equity. The equity in your home is simply the value of the property minus any outstanding loan.
The great thing about real estate is that you’re able to access that uplift in equity to put towards a deposit on another property. It’s also possible to use those funds to put towards your current property to increase its value even further through things such as a renovation or even a subdivision where possible.
Just because your property has increased in value doesn’t mean that you’ll be able to access all of it.
Most lenders will lend you up to 80% of the property’s value. While it might be possible to access more than that, you would then be required to pay Lenders Mortgage Insurance, and that would potentially limit the number of lenders.
For example, on a property worth $1 million with an 80% LVR and a $300,000 mortgage, that means your usable equity would be $800,000 (80% of $1 million) minus, your mortgage of $300,000, which would leave $500,000, of available equity.
How to Access Equity
The most common way of accessing equity is through refinancing. When you refinance, you are effectively taking out a new loan and paying out your old loan. In this process, the lender will order a bank valuation, which will ideally show that your property has increased in value.
There are other ways to access equity, such as cash-out loans, topping up your current loan or even using things like lines of credit. However, it’s important that you speak to a mortgage broker about your personal situation.
The other important consideration when accessing equity that many people overlook is that you will likely have to be able to service any additional equity that you are wanting to redraw. Even if your home has grown substantially, if you are not earning a high enough income to service any debts on a larger loan, you will not be able to access the equity.
One of the most attractive qualities of real estate, as an investment, is the fact that you can manufacture your own equity. That simply means you’re able to do something to your property to increase its value. One of the most popular ways to do this is through a renovation.
While a renovation is simple on the surface, it can quickly grow into a project that takes a lot longer and costs a lot more than you had intended. Fortunately, there are some things you can do to effectively budget and plan for a renovation to make it a worthwhile endeavour.
Start with the end in mind
The first thing you need to understand about a renovation is that just because you do it, doesn’t mean it will make you money. In fact, many people quickly discover that the renovation they have done hasn’t added anything to their equity.
When looking to see whether a renovation is worth doing, you need to see a large difference between the value of renovated and unrenovated properties. Look at recent sales data from your surrounding area or talk to agents to see what that difference in price might look like.
When you do a budget for a renovation, the numbers often look quite appealing. It’s only after you dig a little deeper that you might find your costs are a little higher than initially anticipated.
Aspects often missed by new renovators are transaction costs. Things like stamp duty, settlement fees, sales fees, and even holding costs can mount up quickly. If you already own the property and if you intend to hold it, this can reduce your costs and make the project more viable.
While it’s nice to make your home into the most impressive house on the street, you shouldn’t overshoot the mark.
Most potential buyers will be looking around the median price. Therefore, it is important to take into account, that higher priced homes are harder to sell as would-be buyers often look for a location first and home second and will eye off properties closer to the CBD.
Manage vs outsource
When it comes to executing the renovation, you can hire a company to project manage or you can do it yourself.
You can save a lot of money by doing it yourself, and your role is simply to source the materials and the trades. You will need to understand what things need to happen in what order, but you might be able to reduce your costs by 50%.
Get multiple quotes
It’s always a good idea to get three quotes for each part of the renovation. That includes materials and trades.
Don’t always go after the cheapest price as you want someone who can do a high-quality job on the project.
Look to add value
Just because you put in a new kitchen or bathroom doesn’t always mean the property will go up in value by more than the cost of the work.
A great way to spend your money is by doing things to the property that add size or space. Converting a laundry into an ensuite or second bathroom, turning a carport into another room or knocking out a wall to open up a living area are things you can do that generally add a lot of value and appeal to a property, over and above their cost.