I was at a dinner party BBQ recently.
I was just there to relax and have fun with my friends, but I couldn't help listening in to a conversation with this guy I'd never met before about his residential property portfolio.
I guess there's always one at every party right… He's had a few too many drinks, he's talking too loud, and he's bragging about how much money he makes… A self-proclaimed expert in all things government policy.
He was quoting the former treasurer who said “there is no houses bubble just a supply problem.” in references to his Sydney properties.
The trouble is that the rest of that quote was: “just a supply problem, which the market is in the process of rectifying”.
In fact Goldman Sachs economist Tim Toohey, who had previously said there was a 140,000 dwelling shortfall for Sydney, just revised his numbers to the tune of a predicted 75,000 oversupply within the next two years…
Oooops! Pop goes that bubble!
Kind of means (at least in Sydney) that the market is going to start looking pretty overpriced pretty fast.
I was lucky enough to hear this guy discount every other type of property because of the growth (this Sydney growth is what happens every year)…
This property or apartment appreciated 25% in the last 18 months… and on the surface it makes my various commercial properties with a nice steady 10% income look pretty unsexy by comparison. Even if you factor in the likelihood of capital growth averaging out my projected annual return at 13 or 14%.
The truth is though that when you're standing around listening to some guy brag at a BBQ (or even in the media for that matter) they never mention the costs involved in residential real estate.
Take a property purchase for $1 million dollars, for example. Minimum entry costs are around $44,000 (stamp duty in NSW – one of the lower rate jurisdiction is $40,811, plus legals, property reports, etc.)
Exit costs include agent fees (at two percent of say $1.3 million) at $28,600 and advertising $10,000.
Annual or recurrent costs include insurance, council and water rates and maintenance – this could easily top $4,800 per annum.
With an investment property there is also the annual land tax impost which, in the case of a free-standing house could be around $10,000 per annum.
Goldman Sachs notes that gross returns on residential investment property in Sydney and Melbourne in August were at record lows of just over 3%.
That's before any of the costs listed above!
Suddenly rocking in 10% a year is looking pretty bloody amazing.
Suddenly the added capital growth is looking not too bad at all – especially since I don't have to pay any of those expenses because my tenants do all that for me.
The other thing to consider is that when you choose a property that has good upsides, and you can suddenly supercharge your returns by adding onto your property, or revaluing the property at more because your tenant has just spent $50k on a renovation to improve their business…
That sort of thing outstrips residential capital growth every time. (of course not every property or tenant will need to want to do that… but it does happen)
Of course, I didn't point out any of those things to our inebriated friend at the BBQ… Being that loud and drunk I thought it better to leave him to his own devices…
But you… you can learn from this… not to get sucked into the hype behind fast growth residential property…
Don't get me wrong…
I'm not saying don't do it… I own some residential property as well…
But I know that from an investment point of view I'm much happier when others are paying all the expenses, and I'm collecting the passive income from them.
And I'm downright ecstatic when tenants come to me and say they want to do a new fit-out and pay for renovations on the property.
When you choose the right commercial property, it's going to put a smile on your dial as well.