Boom towns come with risk

Home buy­ers must first de­cide what they want and where they want it

The Weekend Australian - Review - - Primespace - TERRY RY­DER HOTSPOT­TING

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

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