Boom towns come with risk
Home buyers must first decide what they want and where they want it
IF you’d like to be a property investor but haven’t a clue how to proceed, congratulations — you’re part of a very big club. I hear every day from people seeking advice on property investment, particularly on the topic of where to buy, but a recurring theme is this: ‘‘ Help! I don’t know how to get started.’’
They can’t determine where to buy ( and no one can advise them) because they haven’t resolved all the questions that need to come first.
The first problem is the most basic: people often don’t know their objectives. Many are confused about whether their planned purchase is going to be a residence or an investment property.
If they haven’t got that one sorted out, they can’t go anywhere, because the answer to that question changes everything.
Sometimes a person’s dilemma relates to conditions at home base. People earning big money in resources- related industries in Western Australia are ready to buy property but are aware their local market has peaked and capital growth prospects are poor.
So while they might want to buy a home in Perth, they’re distracted by reports of big capital growth in Adelaide, Brisbane and Melbourne. Should I buy a home in WA or an investment property in SA? If I buy the investment property, do I lose my chance at the first home owners’ grant?
Those who believe investment is their objective need to be clear on their criteria. There are many choices and the one that fits their circumstances will dictate where they buy as well as what they buy. Is the goal capital growth, never mind the income return?
Is it a high- income investment that pays for itself ( harder to achieve these days, but by no means impossible)? Do they want a good income return but without high risk?
The question of risk is key. Investors can buy positive cash flow property in areas showing high capital growth, but it’s at the high- risk end of the spectrum.
They’re talking boom towns, either mining towns like Dysart in Queensland or Port Hedland in Western Australia, or locations pumped by big industrial projects such as George Town in Tasmania, site of the notorious Gunns pulp mill.
The prospect of a 9 per cent income return amid rising property values may make Dysart seem appealing. But what will happen to property values when the resources boom runs out of puff; or a mine disaster shuts down the local economy ( as happened in Beaconsfield in Tasmania); or when kids start getting sick and birds die in the thousands because of lead poisoning ( as occurred recently in Esperance, Western Australia)?
Boom towns can make you wealthy but they’re risky. Investors need to know the level of risk they can live with because it dictates where they buy.
Buyers who are risk adverse don’t have to sacrifice good capital growth or good income returns. There are places that are solid, affordable, provide good income returns and have a record of steady capital growth. Places such as Mildura in Victoria or Dubbo in NSW, which have diverse economies and won’t unravel if China pauses for breath after the Beijing Olympics.
Another basic issue not well sorted in the minds of many investors is the upper limit of their financial capacity. How much buyers can afford dictates where they can buy.
Western boom towns like Broome and Port Hedland seem alluring but typical houses cost $ 650,000. The high returns of Port Hedland and the exceptional capital growth of recent times is pointless information if investors can’t afford those prices.
The big problem inherent in all this is that people don’t know where to go for information. There are plenty of companies providing services for fees, but good, independent advice is very hard to find in real estate.
This widespread desire to buy property, combined with a common lack of knowledge, and the paucity of places to go for good advice, gave birth to real estate’s bastard child, the get- rich- quick seminar, and its mutant sibling, two- tier marketing.
When belated regulatory action caused these to be aborted, others emerged from under rocks to take their place.
There are still companies out there marketing overpriced real estate for inflated fees, but presenting themselves as consumer- friendly types who live to help people.
The recent collapse of a major building company in southeast Queensland, leaving families with unfinished homes, has been linked to dodgy marketing companies paid big fees to create a pipeline of gullible buyers.
Recently a company which has been around for years peddling overpriced real estate to distant investors started promoting itself as a
buyer’s agent’’, i. e. someone acting in the best interests of the buyer.
Another marketing company, recently shamed in one of our state parliaments for failing to disclose its financial interest in the projects it markets, is still conducting business as usual — pretending that the projects it promotes are selected from the broad market because of superior qualities.
Marketers still promote the sale of hotel rooms on leaseback to hospitality companies under the guise of residential property by calling them ‘‘ serviced apartments’’.
Mum and dad investors think that they’re buying residential real estate because the word
apartment’’ appears in the title and that 7 per cent is a great return. The reality is that the product is not residential, it can’t be lived in or sold to an owner- occupier, and 7 per cent is a poor return for a hotel product that a sophisticated investor wouldn’t go near. Wannabee investors who don’t know their own objectives and lack the basic tools to get started are easy prey for this kind of ruthless marketing organisation.
A recent email came in from an investor determined to buy a townhouse in an outlying metropolitan area, at a price 35 per cent above the area median. I assumed it must be a bit special, with water views or a great location. But no, it was a generic townhouse without views and not particularly well located. For the same price that investor could buy a house on land in a good suburb within 10km of the CBD — but developers with big marketing budgets are able to exploit people who lack clear objectives and basic knowledge.
Before buyers can determine the where’’ of their investment decision, they need to understand the ‘‘ what’’ and the ‘‘ why’’. Why am I doing this? What are my objectives, my criteria and my financial capacity?
There’s no lack of desire. People know they want to be in the property investing business. But so many seem to lack a game plan. The absence of a strategy can render the hotspotting process ( the choice of where to buy) redundant.
Streets ahead: Dubbo’s diverse economy provides stability
Keep your head above water: Buying in places like the Murray River town of Mildura is safer than boom mining towns