I
t is great that you already own four properties at such a young age
and are keen to continue to build your portfolio. However, before you
buy your next property, let’s consider the questions you have asked, as
this will provide some critical background information.
Where will house prices be in 12 months? They will be higher than
they are today for a number of reasons. There is less uncertainty in the
economy as the federal election is over; banks have been asked to drop
their benchmark assessment rates, so it will be easier to get a loan;
interest rates have been cut for the first time in many years; and there
is a federal government first home buyer incentive due to start on
January 1, 2020. All of this will help increase demand for property,
which will in turn increase prices.
Where is the cash rate going? Down. The Reserve Bank has already
signalled that it is willing to cut interest rates further.
Where is the economy headed? It is growing too slowly and below
the rate that the RBA would like. Underemployment and the lack of
wages growth are a worry, but future cuts in interest rates, lenders
loosening their purse strings and an upswing in the property market
should all help stop Australia heading
towards a recession.
Now, for the big question: should you
keep buying property in Albury or diver-
sify? Many experts would advise you to
diversify and buy elsewhere, but as I have
an idea that one of your long-term goals
is to develop property in the future
I would encourage you to keep buying
in Albury or in nearby locations.
There are two main reasons for this.
First, I assume you have great local
knowledge and this is a key when invest-
ing in property. Knowing which suburbs
to buy into, which streets are better than
others and which types of property are
best are critical to your wealth creation
through property.
Second, it is very difficult to develop property when you are
not physically there to keep an eye on it. Even though you may not
project-manage the job, it can provide great peace of mind when you
are able to visit the site whenever you like or meet with key members
of your development team.
In line with your goal to develop property in the future, you should
start looking at houses on reasonably sized blocks with wide frontages
so that you have the potential to develop these sites in the future. You
may say that houses will cost you more than apartments, but the real-
ity is that the potential profits in property development are far greater
than the capital growth or cash flow from apartments.
Happy house hunting!Peter Koulizos is the author of Top Australian Suburbs and
Property Vs Shares. thepropertyprofessor.com.auHigher profits
in houses
PETER KOULIZOS
Use cash
flow wisely
KIRSTEN LYNN
D
ylan, you have clearly worked hard to build and improve
your property portfolio. Your questions show thoughtful
consideration of how best to use your surplus cash flow and
what the potential risks may be.
You’re right to consider diversification. Not having all your
eggs in one basket reduces the risk that a downturn in the
Albury market, an increase in new houses/units being built
or the departure of a major employer negatively impacts
your financial plan.
But buying property outside Albury does not diversify your
wealth across other asset classes, such as shares or bonds. It
also means buying into a market that you perhaps don’t know,
can’t keep an eye on and can’t add the same value to.
Also consider liquidity. Properties are big assets that take
time to sell (months generally), must be sold in their entirety
(rather than staggered over time) and can leave you with
a taxable capital gain payable in one financial year.
Before adjusting your investment plan, please put in place
a plan B, as things don’t always go as expected.
First, consider putting aside a cash reserve to cover your liv-
ing expenses for three to six months. A cash buffer held in your
home loan offset account would guard against having to sell
assets quickly in a bad market.
Next, be prepared if sickness or accident leave you unable to
earn an income for a period or incapacity leaves you unable to
make financial decisions. Income protection insurance and an
enduring power of attorney will be important protections for
you. It is worth seeking advice about personal insurances and
estate planning for peace of mind.
Take time to think about where you want to be in 10 years and
the role your investments will play. If you want flexibility to trav-
el or move, many properties requiring hands-on management
might not be for you. Also bear in mind that you need a longer-
term horizon (at least five years) for market investments like
property and shares.
Consider splitting your surplus cash flow into two buckets.
If property is your passion, have one bucket to offset your
non-deductible debt against your home and fund the purchase
of good properties as you find them. Have the other fund
for a diversified, liquid investment portfolio. There are many
exchange traded funds that offer this at low cost.
Don’t discount superannuation. Of course, retirement seems
a lifetime away, but small contributions, year by year, will
make a considerable difference in 40 years.
Continue to be thoughtful about how you build your wealth
and ask good questions. We recommend seeking personal
financial advice from a trusted adviser to work with you on clari-
fying your investment goals and building your financial plan.Kirsten is a financial planner with Stanford Brown
specialising in wealth creation and preservation, as well
as retirement planning and estate planning.Blocks of land
with wide
frontages
have great
potential