Not One, But Two Pure Property Investing Strategies
In Monday’s Pursuit of Happiness I left you with a cliff-hanger:
‘…this idea is the only pure property investing strategy I’ve heard over the past five years that makes any sense.’
In hindsight, after clicking the button to send the email to you, I realised I’d misled you. There isn’t just one pure property investing strategy I’d recommend.
There’s another one. That makes two pure property investing strategies. And I’ll take you through both of them today…
First up, here’s the property investment strategy I’d forgotten about.
To be honest, forgetting this investment strategy is a bit of a howler…considering it’s probably the best performing property investment of 2012.
And based on the first two weeks of 2013, it could be the best performing property investment this year too.
But before I reveal it, let’s see how the residential housing market fared last year. Here are the numbers from housing research firm, RPData:
I’ve highlighted the year-on-year numbers. That shows you how much Australian house prices have grown (or fallen) compared to the same time the year before.
As you can see, the average growth rate for Australia’s eight capital cities wasn’t a growth rate at all…house prices fell, by an average of 0.4%.
As RPData noted, ‘Capital city home values fall over consecutive years, down -3.8% in 2011 and -0.4% in 2012.’
Remember the old yarn about house prices doubling every seven years? You don’t hear much of that rubbish these days. The bottom line on Aussie housing is that it has been a terrible investment for the past three years…and it’s still a terrible investment.
I just wouldn’t touch it as an investment proposition at all – with one exception. And if I’m honest, it’s more of a lifestyle proposition anyway. More on that in a moment. But first, back to the other pure property investment strategy I’d forgotten about…
A Pure Property Play That Pays You
I said earlier that forgetting this strategy was a bit of a howler. You’ll see why: it’s a strategy that I recommended to subscribers of my investment advisory service, Australian Small-Cap Investigator in June 2011.
I explained that investors could get capital growth and good income without going into hundreds and thousands of dollars of debt. I was right.
Look back at the table above. The best performing state capital was Darwin. House prices gained 8.9% in 2012. But most people don’t live in Darwin. Most people live in Melbourne, Sydney, and the Brisbane/Gold Coast region.
There, house prices fell 2.9%, gained 1.5%, and fell 0.8% respectively. Taking into account mortgage and other costs, most home owners saw their ‘investment’ go backwards last year.
Now compare those measly numbers to the chart below:
This chart shows the share price performance of BWP Trust [ASX: BWP].
If you’re not familiar with the company, as of June 2012 BWP Trust owned the land and buildings for 66 Bunnings Warehouses and 10 other properties.
The reason this is a pure property play is that BWP Trust charges rent based on local commercial rental rates. Unlike shopping malls, BWP Trust doesn’t charge rent based on retail turnover.
During 2013 BWP Trust gained 30.3%. That’s 20-times better than the gains made by Sydney house prices.
If you take into account the dividends paid, investors have bagged a 35.9% gain since June 2011. That includes more than 20 cents of dividends…pretty good for a share that’s still only $2.27.
BWP is currently trading above my recommended maximum buy price (that’s why I’ve taken the unusual step of revealing the name of the stock) so I’d like to see the share price settle down before I raise the buy price.
So that’s your first pure property play. Now let’s look at the second. This is the one that could surprise you…
Buying Houses is Like Buying Lollies
I know that revealing this strategy could anger more than a few hardened property bears…the folks who say you shouldn’t buy a house or any other Aussie property under any conditions.
It could even cost me my membership of the ‘Housing Bears Club’.
But I’ve never taken the view that you should never buy a house. My view has always been that housing is a bad investment if you think it’s a guaranteed goldmine or if you think the price will double every seven years.
However, I’ve always said that if you understand that and you still want to buy, and you can afford the mortgage repayments then go for it. Just understand that housing at these prices is an expensive consumption item rather than an investment.
It’s like buying Maria Sharapova’s new Sugarpova lollies for $5 a bag rather than buying a cheaper bag of lollies for $2. If you can afford the Sugarpova lollies then go for it…but there’s no guarantee they’ll taste better…and like an expensive house, it’s not a good investment.
All that said, there is one house-buying strategy I do like. It’s this…
Throughout the years I’ve railed against the housing spruikers. It has annoyed me that they’ve gotten away with making claims that have no factual basis – such as the claim that house prices always double every seven years.
It’s simply not true. Yes, there was a period from the 1970′s to the early 2000′s where that happened. But to use a 30-year period and claim that’s the same as ‘always’ is…well…let’s put it this way, stretching the truth.
Anyway, let’s get back to the one house-buying strategy that makes sense. But let me get one thing straight. I’m not about to reveal something new. This is the one strategy the housing spruikers and I can agree on.
I know that many people have an urge to buy a home. They fear missing out on getting on the property ladder. They’re worried that house prices will keep doubling and they’ll never be able to afford to buy.
The numbers from RPData prove you don’t need to worry about that anymore. House prices aren’t going anywhere. They’ve gone nowhere for two years and even the spruikers say 2013 will deliver flat house prices…at best.
Bottom line, there’s no rush to buy a house. You’ve got plenty of time to build up a deposit (say, 20%) and then dip your toe in the water.
And the best way of doing that is to buy a house (or unit or apartment) and then not live in it…
Buy and Rent?
Let me make something straight before I go on. I still believe housing is a bad investment. And I still believe house prices have further to fall.
But I believe this property investment strategy is a great way to get the best of both worlds. You fulfil the urge to own a house, and get yourself on the property ladder – on the small chance house prices do go up – plus you get the chance to cut your own living costs while someone else pays your mortgage.
The strategy in question is to buy a house and rent it out to someone else while you live in another rental property.
For example, you could buy a two-bedroom house in Frankston South for $359,000 and live in it. If you had a 20% deposit your monthly mortgage repayments would be about $1,500.
That’s OK. And for most people it’s not stretching the budget.
Or, you could buy the house for $359,000 and rent it out. You could earn rent of about $1,000 per month (which you would have to declare as income to the tax man), but you also get the benefit of claiming your $1,500 mortgage interest expense against your income.
Factor in other offsets such as depreciation and it can cut your monthly costs further. Then you just have to find somewhere to live (or stay where you’re living if you already rent).
You can rent something of similar, higher or lower quality…in the same area or in a different area.
Now, you may think, ‘Hey, that won’t make me much money.’
I know. Remember what I said. The days of housing making big gains are over. If you want big gains, look at a listed property trust – something like BWP Trust.
A Surprising Retirement Strategy
The beauty of this strategy is two-fold. First, it gives you the benefit of negative gearing and the ability to offset mortgage costs…that’s something you can do with your owner-occupied home.
Second, this strategy gives you more flexibility. It gives you the flexibility of renting while at the same time getting your foot on the property ladder.
Few people buy a home and stay in it forever. Most people buy their first home and then upgrade as their income rises. Trouble is, buying and selling houses is expensive – stamp duty, real estate agent fees, moving costs, etc.
If you buy and sell just once in your life you’re looking at $50,000-$60,000 in costs. Buy and sell twice in your life and you’re looking at double that. Buy and sell three-times and…oh boy…that’s a lot of cash to throw down the drain.
Third, if you buy in a location where you’re prepared to retire, you’ve can move into the property in your autumn years. This works perfectly. Most people upgrade as their family grows and then downsize as their kids leave home.
Using this strategy you only have to buy one house in your life, and you get to upgrade and then downsize without incurring the costs.
By buying and renting you get to benefit from higher house prices, while you also get the chance to upgrade to a better rental property if your income goes up. And I can tell you for a fact, it doesn’t cost $50,000-plus to move from one rental property to another.
I know this strategy will be controversial to some people.
Don’t get me wrong, it’s not the road to riches. But it is a road to providing you with a cost-effective way of securing a home for retirement without it costing you hundreds of thousands of dollars over your lifetime.
Think about it. And if it’s for you, you could use this strategy as part of your overall retirement plan.
Cheers,
Kris
From the Port Phillip Publishing Library
Special Report: Three Emerging Money Trends
Daily Reckoning: Banking on Stocks
Money Morning: The Talisman of Fear: Why Gold Remains the Foundation of Wealth
Pursuit of Happiness: How the State Will Die
Australian Small-Cap Investigator:
How to Make Money From Small-Cap Stocks
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Well this article has made me feel a lot better – thank you.
My wife received an inheritance in 2011. We paid off our mortgage, paid for our wedding / honeymoon and replaced the car which was written off in an accident. We used the leftover in August last year as a deposit on a house that’s a very short walk from my father’s house, and got some tennants in to pay the mortgage. We’d like to live there in a few years time to have our kids grow up near their grandpa and maybe rent our current house out instead. In the event I passed away, my life insurance would cover the new mortgage and my wife would have a passive income stream meaning she wouldn’t have to work full time and raise the kids by herself. There’s also a nice feeling about being able to leave the security of a house to each of our children through our estate. Seemed like a great idea.
I started reading Money Morning, Pursuit of Happiness and some of your subscription newsletters this month. I started to feel a bit of buyers remorse. But this article has shed another light on the second house, and it feels like a good (or at least not so bad) decision again.
James
I think this article will be my turning point. Until now, I only had one choice – how to buy my own affordable home in a good location. How much I will be able to pay every month, tax, insurance etc.
I read this article before two weeks and did extensive study and research about this strategy – rent and buy an investment property. I found this is smartest way to become rich and building portfolio. as the quote says “rent where you want to live and buy where you want to rent”. I also understand that there is a difference between a renter and a renter who is an investor. There were days where buying a house and relying on capital growth was making a sense. It’s a new trend and we need new rules. The other thing experts says, “feel greedy when others are fearful and be fearful when other are greedy.” I just read today that there were 30,000 jobs cut in Victoria alone, and the real estate market is down last 20 years. So, the property cycle is in the lowest phase and it will go to stability phase after that. So, it’s the best time to buy an investment property.