Property investor tips amid volatile rates, markets and rule changes
Property investors have been under fire but real estate remains one of the best ways to build wealth. Here’s why, and how.
It’s been a rough couple of years for property investors, who have been smacked around by rising interest rates, volatile prices, rule changes and a pandemic.
Some of the nation’s 2.2 million residential landlords have been criticised for raising rents sharply to help cover their loan repayment costs that have jumped 50 per cent, while many people who invest in real estate via the share market have seen capital losses of 20 per cent.
However, the prospect of falling interest rates in 2024 combined with rising demand for real estate suggests a brighter outlook ahead for many investors, and experts say there are plenty of ways to get into property.
AMP head of investment strategy Shane Oliver said real estate had lost some lustre but “it’s not terminal”.
“The yield on property is now well below the mortgage rate, so it’s no longer self-funding like it was,” he said.
This meant that investors were running rental properties at a loss and would have to rely on capital growth to make money, Dr Oliver said.
“And government action around investment property has muddied the waters in some states,” he said.
Recent changes in rental rules and new tax moves – particularly in Victoria and Queensland – have scared many investors.
“To some degree investors have become a bit of a scapegoat for the expensive nature of the property market,” Dr Oliver said.
PropTrack director of economic research Cameron Kusher said most people invested in residential property for its capital growth potential, and after strong growth during the pandemic the outlook had not recently been as strong.
“Higher interest rates have made it harder to service mortgage debt and changing tenancy laws and investor taxes have made investment less attractive,” he said.
There have been reports of some investors selling up and shifting their money elsewhere but interest in the sector remains solid.
“There has been a rebound in investor activity over the past year, with the value of lending to investors having increased by 23.9 per cent since its low in February 2023,” Mr Kusher said.
“With higher interest rates, tax deductibility and negative gearing benefits have improved, potentially luring some investors back to property,” he said.
Perks Private Wealth associate director Samantha Harrison said property prices were set by those looking for somewhere to live “rather than conventional investment metrics” and home buyers paid what they could afford.
“Double-income families with low interest rates have pushed up property prices,” she said.
“The increase in interest rates together with wages that are barely keeping up with CPI should indicate that property prices are close to maximum affordability.”
FOOT IN THE DOOR
Ms Harrison said new investors could consider passive property investments such as real estate investment trusts, rather than bricks and mortar, as a starting point and a way to help save for a deposit for a house or unit.
“Be clear on why you are investing in property,” she said.
“It is a long-term investment and it is expensive to change your mind in twelve months.
“It is the land that is valuable, not necessarily the building that is sitting on the land. So, focus on purchasing in areas that are sought after. The old saying ‘the worst house in the best street’ has a lot to be said for it.”
Rethink Investing founder Mina O’Neill said would-be real estate investors should educate themselves on markets, property types, strategies and trends.
“Connect with real estate professionals, attend industry events, and build a network of contacts including brokers, financiers, and experienced investors,” she said.
PROPERTY TRUSTS
Real estate investment trusts combine investors’ money to buy and operate office towers, apartment buildings, warehouses, factories and other large properties.
Overall, REITs have had a tough time on the share market in the past two years, with the benchmark ASX200 A-REIT index down almost 20 per cent since December 2021, although it has rebounded almost 15 per cent since the start of November.
Ms Harrison said REIT investors had experienced varied results depending on the sector where they invested.
“For example, global property group, Goodman Group’s investments including warehouses, large scale logistics facilities, business and office parks have returned 26 per cent including dividends over the past 12 months,” she said.
“Charter Hall Long WALE has a larger exposure to commercial office space and has had a negative return over the same period.”
Dr Oliver said REITS had been hit by “a bunch of things”, including rising bond yields that made REIT income relatively less attractive, lower asset values, and issues for some types of commercial properties.
For example, the impact on office properties from more people working from home was “a cloud hanging over the sector”, he said.
“Retail property for many years has been affected by the shift from traditional bricks and mortar retailing to online retailing.”
And more recently rising interest rates have dented consumer spending and retail foot traffic, Dr Oliver said.
Residential REITS had experienced a rocky ride, he said, but industrial and logistics-focused properties were well placed thanks to high demand.
As for the overall outlook for REITs in 2024? “I suspect they have seen the worst of it,” Dr Oliver said, adding that “there could still be a hard slog ahead as the working from home phenomenon works its way through and settles down”.
RESIDENTIAL
Buying a single rental property is still a good way for ordinary investors to get into the market, although today’s high prices and harsh lending rules make it difficult.
“But there’s still ways you can do it,” Dr Oliver said.
“The longer-term outlook for residential property is still bright.
“There could be another bout of weakness next year and that could provide opportunities for investors to get a foothold.”
Young potential investors could stay at home with mum and dad to keep their expenses down for longer, save a deposit, and perhaps buy a rental property before moving out so the tenant helps pay their mortgage.
“You can buy an investment property and use the benefits of negative gearing to pay it down as quickly as possible,” Dr Oliver said.
Initial investments could be loss-making “but it pays off once capital gains kick in”,” he said.
Family members can pool resources to jointly buy a residential property, then share in its future gains, but property specialists say these sorts of deals should have a written agreement that spells out what happens if one member wants to sell and the other does not.
For people who already have a home with enough equity in it, becoming a property investor may not take one dollar from their pocket. That’s because the purchase price and transaction costs can be folded into investment property loan that uses the existing home’s equity as security.
There are many online resources to help educate people about investing in residential property, and Moneysmart.gov.au says investors should consider ongoing costs including:
• Loan repayments.
• Council and water rates.
• Landlord insurance.
• Property management fees.
• Body corporate fees.
• Land tax.
• Repairs and maintenance.
While negative gearing delivers investors tax deductions, it means they are still losing money in a financial year.
Ms Harrison said when Reserve Bank’s official interest rate was just 0.1 per cent between November 2020 and May 2022, more landlords were positively geared – producing a profit – than negatively geared for the first time since the 1990s.
“Rising interest rates are now once again leading to more landlords being negatively geared,” she said.
“This is leading to many landlords without sufficient alternative cashflows having to either raise rents substantially or liquidate properties. Higher average prices on property and stricter banking lending criteria are leading to fewer new entrants into the home rental space for mum and dad investors.”
COMMERCIAL
People can invest directly in commercial property such as shops, warehouses and small factories, and while it often requires deep pockets some commercial opportunities are cheaper than homes. Think small factory, storage or office spaces.
Ms O’Neill said commercial sectors such as industrial and logistics had experienced surging demand and growth of more than 50 per cent in recent years.
“Elevated interest rates may considerably influence those investing in commercial real estate, particularly given the sizeable loans typically associated with such investments,” she said.
However, commercial investors typically borrowed less than 65 per cent of their property’s value and had steadier cash inflows, “providing them greater resilience than other types of investors”.
Sales performance shows this. “The majority of commercial properties have retained nearly all their value throughout the recent surge in interest rates,” Ms O’Neill said.
“Some properties have even appreciated in value due to rental hikes and unyielding demand from investors,” she said.
Ms O’Neill said new commercial investors should “thoroughly research potential properties and markets”.
“Conduct due diligence on the financials, tenant leases, and the overall economic outlook of the area,” she said.
“Understand financing options and get pre-approved for loans. Commercial property investment often requires a significant capital commitment.”
The minimum amount needed to get started in commercial property investment was $150,000, Ms O’Neill said.
“However, it’s best to have about $200,000 so you have buffers in place,” she said.
“Surround yourself with a team of experienced professionals, including real estate agents, attorneys, and financial advisers.
“Commercial real estate is often a long-term investment. Patience is crucial, and understanding the cyclical nature of the market can help you make informed decisions. It’s true that cash flow in 2023 has weakened relative to 2022, but investors tend to take a long-term view, looking beyond temporary hiccups.”
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