Last Modified: October, 18th 2017
Sydney is the largest city in Australia, home to over 4.5 million people, and the financial and business hub of the country. It is a great place to purchase investment property at the moment, because foreign investors, especially from China, are snapping up properties and paying over the odds for them. In fact, in 2013 median house prices in Sydney rose by around 15%, and in some areas the increase was as much as 27%.
Strictly speaking, this should not be happening. Australian law prevents foreigners from buying second-hand properties in the country. They can buy new ones, but not second-hand, unless they obtain an exemption from the Foreign Investment Review Board. However, the FIRB simply rubber stamps applications. In the last year for which figures are available – 2011/2012 – it refused just 13 applications, and approved $4.2 billion of Chinese investment in real estate in the country.
Furthermore, research by PriceWaterhouseCoopers in 2012 identified Sydney as the third most favourable market for foreign investors in the whole of the Asia-Pacific area. So it looks as though Chinese spending will continue, forcing Sydney residential prices still higher.
However, before you rush out and jump on the bandwagon, it is worth asking yourself a few questions.
Where Should I Buy Investment Property In Sydney?
Location is a critical factor in any residential property investment decision. There is a definite trend towards people “swapping their backyards for balconies” as one investor put it. People want to be near the centre of things, and not have to travel too far, so the inner suburbs are the sort of places to look.
The inner west suburbs of Darlington, Camperdown, Newtown, Erskineville and Chippendale are a centre for the arts, and there are plenty of small pubs. The inner east areas of Surry Hills, Moore Park, Centennial Park, Paddington, and Darlinghurst have a lot of trendy boutiques, bars, and restaurants which make them popular.
For people looking to live near the water, popular places are just east of the CBD in Kings Cross, Rushcutters Bay, Elizabeth Bay, Potts Point and Woolloomooloo.
All of these areas are likely to become even more sought-after.
An important point to note is that, while some of these areas may offer higher rental incomes, they may not provide such long term profit opportunities – and long term profit is what property investment is about.
What Sort Of Property Should I Buy?
Property investment is a long term business, and you should be looking at holding on to it for as long as you can before cashing in. This way, you will make the greatest return on your investment. You should be looking to keep the property for at least a period of ten years. It follows that you want property that has the potential for steady growth over the longer term.
You need to do your research. Talk to locals and estate agents whenever you can. They will be able to tell you if a particular street is thought to be better than another one.
It is also worth talking to the local council to see if any major developments are planned. For instance, there might be plans to alter traffic routes in such a way that the traffic in the road in which your property is situated would increase considerably. This may well slow down the rate of growth of the value of the property.
You should also do as much research as you can on the internet. A great source of information is RP Data which has information on demographics, property values, average rents, and more.
How Should I Fund A Residential Property Investment?
If you have equity in your own home or in another property, you can most certainly make use of that. If you have had your home for several years, you most certainly have equity in it, since the value of the property will have risen over a period of time. Indeed, you will find that, on average, residential property values double every ten years. In addition, if you use the equity in your own home it will allow you to borrow more money against your investment property. This will have the effect of increasing the tax deductions that you are allowed.
There are several other options open to you. It would be as well to seek the advice of a qualified financial adviser who can point you in the right direction. You can have a fixed rate loan, or a variable rate loan. Over any reasonable length of time, variable rates generally prove to be cheaper. However, if you can get a fixed rate loan at the right time, you can score heavily.
Try to obtain an interest only loan. If you have a principal and interest loan, your negative gearing reduces as you pay off the loan. Negative gearing – when your investment property costs exceed the rental income – allows you to offset certain costs against your taxable income. This means that while you are making a loss on the property, you are reducing your tax burden at the same time.
How Do I Deal With Tenants?
The short answer is that you don’t – or at least, you should not. Get a property manager to run everything. A property manager is well worth his or her fee since they will supervise the property, arrange plumbers and electricians when needed, screen potential tenants, and generally make your life a whole lot simpler.
What Happens If I Can’t Get Tenants?
If you have the right sort of property in the right location (remember, location is vitally important) then you should have no difficulty in finding tenants. The overall vacancy rate in Sydney is around 2%, which means that 98% of residential investment property is producing rents. However, you should ensure that you have adequate landlord insurance, in addition to building insurance.
Make your property appealing to prospective tenants. If you happen to like bright red walls in your own home, that’s fine, but using neutral colours, such as white and magnolia, will appeal to most people. It is not about what you like, but about what is most popular. Remember that, although you own the property, it is not your home. It is your tenant’s home. Furthermore, when the time comes to sell, a property that is appealing to the majority will attract more buyers, and ultimately a better price.
Think about your Sydney investment property this way: many people use the term “buy to let”. You are not buying to let. You are buying to sell. You only let in the meantime.