Rental Property Cashflow and Risk

Our philosophy is that you need to take on a certain amount of risk when buying property. The trick is to reduce that risk by understanding the pitfalls, doing the right research, and following a logical system such as Property Ratings.

Historically, the higher the value of the property, the greater the short term fluctuations in market value. Therefore while we all buy property in the hope it will go up - often it doesn’t, especially in the short term. But it’s a proven fact that quality property will always performs very well as an investment in the long term.

The general market information available on property is not always accurate and is never fully complete, so please understand there are risks on relying on one piece of information. We use multiple research vehicles to arrive at our recommendations - many of which are not available to the general public.

Our estimates and other figures are just that - estimates. They are based on research but may differ considerably from a bank valuation, which could mean a loan may not be approved. To protect yourself against this, we can arrange an additional independent valuation (cost between $600-$2500). We also suggest you allow a significant buffer in declining markets and on certain properties, especially if another property transaction is being calculated into your figures - for example, you are also selling. If you are not sure, talk to us as well as your accountant.

Generally speaking, the harder we negotiate and the lower the offer on a good property, the greater the risk that another buyer will purchase. At all times you need to balance the price offered, against the risk of missing out.

If you are buying a vacant block of land or planning to carry out major renovations, your purchase does carry additional risk. For example, your plans may well be subject to council approval (STCA); you may experience delays and associated holding costs; not be able to do what you wanted to do without modifications; or not be able to do what you wanted to do full stop. We strongly recommend that you contact your council (we can supply numbers) to ascertain if what you want to do will be allowed. You should take notes of all your conversations and record names and dates.

We at James Buyer Advocates do not do this as we are not privy to your plans in full and even where we are privy, we are not qualified to give specific building and/or town planning advice. If you do not wish to do this yourself then we strongly recommend your architect, who should be selected and consulted prior to purchase, make the necessary enquiries on your behalf. We can provide you with names of architects or simply contact the Royal Australian Institute of Architects www.architecture.com.au.

If you feel it is more appropriate, you could engage a professional town planner for advice prior to purchase. We can supply names - for example, Peter Small at Urbis www.urbisjhd.com who is used a lot by our clients, or click on the town planners website www.planning.org.au and go to the 'contact us’ section for your nearest town planner.

It is not possible to ascertain what all your future neighbours may be planning in terms of building or developing. Your solicitor checks your Section 32’s for anything declared by the vendor and you can make your own enquiry at council. However that may not give you all the answers. When you have views that can be built out, or large parcels of vacant land, or large parcels of land owned by the one entity within your immediate amenity, you need to weigh up carefully the risks you are taking in purchasing.

In Victoria, it is a case of "buyer beware". We are buying the property as is and often there are many faults to the property. Occasionally, these problems can be major. To reduce the chances of unknown problems, we always recommend Pest and Building Inspections and prior checking of legal documents for caveats, covenants, easements, title deficiencies and more.

In property, we cannot afford to lose our asset base. While gearing, debt and rents are all wonderful things, if you lose your asset base you are in trouble. Things do not always go to plan. So put in place proper insurance from the start, like Life, Disability, Property, Business Interruption/Income and Landlords/Tenants insurance. The risk always reduces if you have adequate insurance.

Some experts say the market is going up and some say it is going down. Property does go up and down in the short term. Sometimes it’s because of artificial interference from governments via the manipulation of interest rates, or first home buyer grants, rent controls or tax concessions, but often it’s the natural market forces of supply and demand.

The bottom line for us at James Buyer Advocates is that they have stopped making land in the good suburbs. As demand exceeds supply near good schools, trains, the beach and the central business district, then so too will the price go up under competition. Good property will always continue to rise through demand linked to economic improvements, increased wealth and net migration.

Most good property investing involves borrowing money. Good returns can turn into spectacular returns by borrowing money. But debt also creates additional risks. For instance, in the early 1990’s, interest rates were over double what they are now (up to 18%). Gearing basically means the level of payment required to service your debt. If you have a heavy level of negative gearing and you do not manage it well, then your lifestyle will be affected. You need to understand and manage this to reduce the risk of poor purchases (too heavily geared) or poor sales (good property that you tire of and sell because of the payments. On the flip side, not investing will also affect your lifestyle in the future. Positive gearing is fine, provided it is associated with the prospect of growth.

It is a conflict where we have two clients who become interested in the same property. This does occasionally happen as we deal with a lot in investors and some of our owner occupier clients change their YOUR NEEDS profile. Our solution to this difficult issue is openness :

Click here to read our full conflict management process