Property remains one of the best investment vehicles, if not the best one, in Australia. The property market is teeming with investors who are taking advantage of the seemingly endless housing demand, especially in areas near central business districts and state capitals.
While the property market is easier to manoeuvre into compared to the stocks market, for instance, investors should know that it is not without risks — while they can build their wealth nest egg and achieve the highest asset value, investing in property requires adept market knowledge and financial strategy.
Why property is a viable investment
What attracts investors to the property market is its low exposure to risks. Studying the property cycle can help many investors understand how to time the market and avoid pitfalls. Property expert Bushy Martin said that a well-selected property in the right location can provide investors with a viable investment.
He believes that when aiming for a successful investment, it is crucial to look at scarcity — recent figures from the Australian Housing and Urban Research Institute said Australia has a nationwide housing shortage of 433,000 homes.
"On the demand side, average household sizes have dropped by 40% over the last few decades and we are all living an average of 20% longer, putting significant pressure on housing demand," he said.
With the current rate the population is growing, the country would have to build 1.7 million additional homes in the next 10 years to meet the increasing demand, according to a study by the Committee for Economic Development of Australia.
"When you add higher leverage, this means you can double the size of the investment you can secure using the same amount of your money," Martin said. "And correctly structured, the tenant and the tax office can carry 80% to 100% of the cost of holding the property, making it safe and affordable. Additionally, it would not restrict your lifestyle while the property grows in value."
The key to a successful and efficient financial management for investors is to employ what Martin dubbed the “four A’s” of property investing: amortise, automate, allocate, and audit.
Are you a new investor? Read this beginner’s guide to get you started.
It is crucial for property investors to keep track of their weekly cash flow. The sustainable affordability of holding a property investment in a long-term perspective depends on how investors manage their cash flow. The first step is to amortise taxes — Martin said investors can consider combining the extra tax credits achieved through a quantity surveyor-prepared depreciation schedule with an accountant-facilitated pay-as-you-go withholding tax variation.
This technique would enable investors to get extra funds with every pay packet that can amount up to hundreds of dollars weekly, instead of waiting until the end of the financial year to get a lump sum tax return.
"This can also allow you to pay more into your offset account or property loans more often which will help you pay them off years earlier and save tens of thousands in interest," he said.
Automating the 50-30-20 rule
Tech-savvy property investors can take advantage of their online banking accounts and mobile applications to automate debit and credit functions. Martin said in order to fulfil this part of the strategy, the investor has to set up and link three accounts.
The first one is what he calls the "freedom" offset savings account. Investors should channel all their incomes into this central account. Regular debits from this account should be made to settle home-loan repayments.
Know the benefits of an offset account by reading this guide.
The "essentials" account, on the other hand, is a credit account which should ideally earn high reward points. This credit card will be in charge of paying all your normal bills, which take up around 50% of the funds you have in your offset account. Payments for this credit card should be debited from the freedom offset account in full to prevent incurring of interest.
"Once card payments are set up the credit card is locked away out of reach and never finds its way into your wallet," Martin said.
Lastly, the "living" account is where 30% of the available funds go. This debit account will cover discretionary spend items.
"This is on the basis that once the money in this account is spent you have to wait until next pay for any over and above ''nice to have'' luxury items," Martin said.
This strategy, he said, instils a budgeting mindset and ensures investors do not touch the remaining 20% of their funds in the "freedom" offset account.
Keeping a sizeable amount in the offset account would, in turn, shave thousands off home-loan interest and years off the loan term.
Allocating tasks to professionals
Martin believes that for investors to save time and money, they should be able to engage a proven dedicated property management professional to assist in managing finances.
Tasks such as annual rent reviews, charging tenants for excess water use, paying bills for rates, taxes, and insurance, and preparing yearly rent history ledger could be assigned to these professionals.
"Your job then is just to manage your managers," he said.
As much as possible, investors have to conduct cost reduction reviews every 18 months to two years on their property loans, contents and landlord insurance.
When doing this, it is essential to reach out to a mortgage and insurance broker to exhaust all options available.
"It is not difficult to reduce your repayment costs by $400 and up to $1,200 a month. This equates to earning a pay rise of $7,000 to over $20,000 a year," Martin said.