5 Ways to Analyse Your Property Investment Risk.

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Why most Property Investors get it wrong!

What is absolutely clear is that most investors don’t have a methodology to determine their risk exposure. They leave themselves overexposed to predictable issues. We look at the 5 key risks so you can evaluate a potential purchase with an analytical framework for greater certainty.

Do you want to make sure that your investment dollars are going to work hard for you? A good risk consideration does this by taking into account the investment uncertainty vs its opportunity.

Uncertainty is a really, really good definition of risk because it incorporates your personal tolerances as well as the market risks that are involved in any purchase decision.

Have you ever made a purchase and have felt uneasy or uncomfortable, and it turned out to be a lemon? It was most likely your intuitive risk analysis telling you something was wrong. You felt it through your uncertainty or FEAR kicking in.

You may not have been able to identify exactly what was wrong but your gut was telling you that something was definitely not quite right! Take heed of this, because it only occurs when there is something wrong.

In comparison when you made a decision and it felt good then, chances were that you were comfortable with the assessment/analysis that you had undertaken. You were comfortable or happy with the amount of risk you are willing to bear.

Have you ever found yourself unsure? Then this is for you.

There are five major components we need to look at:

Acquisition risk: This determines how the purchase of a property will affect your lifestyle and circumstances. It is more than evaluating the fit for the ideal numbers. It evaluates what happens if you do or don’t make the purchase; and if your ability to hold it changes. It is essential to create a plan to model and understand these impacts.

Finance risk: What finance options are available to you? How do they impact your ability to hold the investment? Do you have contingency funding? This can impact the value of the property you can afford and its location; and hence the performance of your plan

Construction risk: This may not always apply unless you are making a purchase of a house/land package or an off-the-plan apartment or townhouse. When you are, then timing of its delivery, the quality of the builder and the appeal of the end product will have an impact. If it is an existing property a building inspection will analyse its soundness and maintenance status.

Market risk: This is an often overlooked factor. What are the market conditions for the purchase? Will the property value be affected by other properties being developed or sold in the area? What is the relative appeal of the area and the property? Are there changes in Government zoning policy, infrastructure development or local amenities that will impact it positively or negatively?

Sales risk: This is a vital aspect of your plan as it impacts your achievement through the success of your exit strategy. Timing is everything here. You need to be able to sell with a robust and preferably rising market to realise your greatest profits at the desired time. If you need to sell, because of an unforeseen event, and it is against the market there will be less profit and an impact on your goals.

Initially education can reduce uncertainty, however, there is no substitute for quality advice melded into a strong tailored plan. This is the deliverable of good advice, to super charge your results while mitigating your risks.

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Simple Insider Secret That Can Guarantee Success in Any Market

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Do you want to know an insider secret that is a tried and proven foundation for renovation profits?  Median price is the key reference point to drive your strategy for renovation and manage resales risk.

So what is it and how does it work?

What we do is take the median price which is the price of the middle property of all the properties sold in a suburb over a period of time to inform our decision.

An example

If we take Eastwood in Sydney with a median price of $1.6M and 61 houses sold in the year; it is the price of the 31st property in this group when they are arranged in order of sales price.  

The successful renovation projects use this strategy. They target median price as the resales price.  This is the value most people are willing to spend in that suburb.  If your renovated property targets this figure, you have a significant group of potential buyers already coming to the suburb looking to buy what you have created.  Simple advertising is all that is required.

By comparison, if you were to take an existing median priced property and renovate it to a value significantly above median price you have a property that fewer people looking in that suburb can afford.  You need to advertise more broadly, to attract buyers with sufficient funds, to specifically come to see your renovation project.  

This usually also means it takes longer to sell, further eroding your profits through holding costs.  This is a much higher risk renovation strategy than targeting median price.  Professional renovators target the sale price of their renovated property at, or below the median price.

If you target a resales price of below median price, your renovated property should sell very quickly.  However, you have left profit ‘on the table’ that could have been part of your success?  As a professional property renovator you want to take the best returns from the property that are possible for your budget.

Renovation is a higher risk strategy and the some of the risk can be well mitigated by buying a property with a median price resales strategy.

So how do we go about finding a property suitable for renovation? To be consistently successful we need a strategy that includes establishing ‘Where to Buy’, ‘When to Buy’ and ‘What to Buy’. 

This means most people are coming to buy free standing houses and we may have to engage in more advertising to attract the buyer we need.  This can increase the holding and selling costs leaving less money for the actual renovation.

Once we have established these parts of our strategy we can focus on a specific property.  This is where median price is vital.  We need find a property well below median price.  There needs to be enough room for us to buy, sell, hold and renovate for profit.

If we identify a property at about $200,000 in an area with a median price of $300,000 this sounds good.  Our costs are going to be about $6,000 for stamp duty, $6,000 for selling costs at 2%, about $4,000 for legal costs to buy and sell plus holding costs at about $9,000 for 9months on the $200,000 purchase price.   In total these costs add up to $25,000.

Most renovators want a 20% profit or $40,000 in this example.  That means we have $35,000 for our renovation.  Do you know how to increase the value of a home by $100,000 by spending $35,000?  There is an art to that and we will cover that in a future blog post.

“if we can deliver our project and it meets homebuyer expectations, we have a great strategy to achieve profit when we resell.”

However, if we can deliver our project and it meets homebuyer expectations, we have a great strategy to achieve profit when we resell. Home owners are already coming to the suburb to buy property at the price we are selling.  Ours has a fresh new look and that may just be the thing that lets it sell faster, saving holding costs, or maybe sell for a little more.

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Lithium to Drive the WA Economy?

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Lithium demand is set for a meteoric rise based on national and international Government Policy driving its use in batteries.  Firstly, to stablise the use of renewable sources of electricity in the grid.  South Australia and Tesla have built a stand out project to deliver this after SA disastrous power outage last year.  Secondly with their commitment to electric vehicles to reduce carbon emissions.

Meanwhile electricity and battery producers are turning themselves inside out to keep up with the expected surge in demand.  There is even talk that there is not enough lithium on the planet to meet demand.  This will drive new technologies and battery development.

Australia is currently the world’s largest exporter of lithium, however is only in third place in reserves held.  Argentina has the highest reserves, followed by China, Australia and then Chile. WA dominates this market and has several notable projects[1].

What are we mining and where is it going?

Talison Lithium is located at Greenbushes which is 250km south of Perth, and 90km south east of Bunbury Port[2].  It is currently undergoing a $340 million expansion in it’s mining operations.  This is forecast to deliver 200 construction jobs from May 2017 and then 40 to 60 operational jobs from mid 2019.

Tianqi Lithium is one of the world’s leading suppliers of lithium and based in China.  It is spending $300 million on a lithium hydroxide plant and now has the green light for a $317 million expansion at Kwinana[3], 38km south of Perth[4].  Lithium can be shipped as a metal ore, or significant value added through refinement into the chemical compounds used in batteries.

This project is forecast to have 500 construction jobs in phase one, that is forecast to finish late 2018, and phase two may be similar with its finish in late 2019.

Altura Resources at Pilgangoora, one of the largest reserves in Australia, is located 120km west from Port Hedland.  Its $139 million project is moving so fast it is reported as ‘in the early part of construction with hundreds of jobs from March 2018 and operational from early 2019’.

Pilbara Resources also has a project at Pilgangoora with an investment of $234 million they forecast they can produce 2million tonnes per annum (mtpa) with a workforce of about 400 at peak of construction with 120 operational jobs to follow[5].  The value of the mine is projected at A$9.23 billion over an estimated 36-year mine life.

In addition, there is Mt Cattlin at Ravensthorpe on Highway 1 between Albany and Esperance[6].  At full capacity they project 1mtpa.  They have commitments to ship the bulk concentrate to China.

All in all a positive sign for the WA Market.

References:
[1] https://www.miningpeople.com.au/news/lithium-boom-now-a-job-promise-for-wa-mining
[2] http://www.talisonlithium.com/projects/greenbushes
[3] https://en.wikipedia.org/wiki/City_of_Kwinana
[4] http://tianqilithium.com.au/
[5] http://www.pilbaraminerals.com.au/site/our-business/pilgangoora-lithium-tantalum-project
[6] http://www.galaxyresources.com.au/projects/mt-cattlin
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The Not So Obvious Factors Driving Housing Demand

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A sound education is a huge driver for parents and completing a tertiary level education provides children with a great advantage. The current face of that advantage is a western education.

In Australia, we want our children to be successful and support them doing well.  However, in Asia this brings out the Tiger Mums. They are fighting for the quality of their children’s education.  Is it because what their children achieve is directly linked to the quality of their retirement both in income and status?

The number of international students that came to Australia for education in the first seven months of this year was 685,000.  This was a 15% increase, or 82,000 more students than last year.  That is an extraordinary increase.   Also of interest is that over half of them headed off to university and the rest presumably to other secondary or tertiary schooling.

This sector is growing rapidly.  It has impact on the property sector through student accommodation, general rental property and the purchase of dwellings.  Is there enough accommodation in the areas that are needed?

Most of the students are attending the city campuses of the big universities and regional universities.  When we look at the surrounding suburbs there are 21 suburbs where over 35% of the residents are not Australian citizens.  The two outstanding figures are in Melbourne CBD over 65% and in Sydney’s Haymarket over 54% of residents are not Australian citizens.

What is driving the growth of this market?

The ABS calculated that international students contributed A$28B to the Australian economy in 2016-17.   This figure presumably includes fees to Universities, and living expenses while they are here.  To put this in perspective we can compare this with international in bound tourism that contributed $47.5B in 2015-16 when the number of tourists was 7.4Million people[1].

For the financial year 2016-17 our inbound tourists numbered 8.7 million[2].  This was up by 17% which, assuming the same spend basis, would make the sector contributing $55.8B to the economy.

Our international student sector is worth nearly half the value of our international inbound tourist sector and yet doesn’t seem to be getting the same attention or support.  How do we make sure these young people have a great time while they are here?  How do we manage our reputation as a great place to study and a safe place to live so they want to stay, come again or bring their families to visit?

When we examine how young people choose where to study overseas it can be confusing.  There are several websites dedicated to ranking universities.  Though others also rank countries and locations.  Students appear to be engaging in educational tourism with the Australian cities, Sydney and Melbourne high on the list.

The Chinese living essentials are for educational quality, personal safety, clean air, food safety and reasonable cost of living[3].  Compared to Beijing, Sydney and Melbourne may well be considered to have affordable living costs.

The ‘Top Universities’ website markets international cities based on their ability to “stimulate your brain cells, social sensors, taste buds, cultural connoisseurship and adventurous impulses’.  They rank them from Paris as number 1, then Melbourne, London, Sydney, Hong Kong, Boston, Tokyo, Montreal, Toronto and Seoul at number 10.

The United States is the first preference for the quality of education and life style, then the UK and then Australia.  Given we have two major cities containing 65% of our international students, by city, we may be ranked higher.

A recent Credit Suisse report found about 25 per cent of the value of new property supply in NSW, 17 per cent in Victoria and 8 per cent in Queensland, has been bought this year by foreigners, 90 per cent of whom are Chinese.  This was deduced by using stamp duty payments[4].  How many of these are for students is more difficult to follow.

There is no doubt that this will have a continuing impact on the property market in Australia as our reputation for a sound education grows.

[1] https://en.wikipedia.org/wiki/Tourism_in_Australia
[2] http://www.tourism.australia.com/en/markets-and-research/tourism-statistics/international-visitor-arrivals.html
[3] https://www.topuniversities.com/blog/15-best-places-study-abroad-2015
[4] http://www.abc.net.au/news/2017-10-11/foreign-buyers-not-deterred-by-rising-stamp-duty/9038014

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UBS: Here’s how lower interest rates in Australia have contributed to booming house prices

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Research from UBS shows how declining interest rates in Australia have contributed to the boom in house prices. UBS analysts George Tharenou, Scott Haslem and Jim Xu took a closer look at the current state of Australia’s housing market in a research report released on Friday.

Source: UBS: Here’s how lower interest rates in Australia have contributed to booming house prices

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Four capital cities’ house prices rise

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Melbourne has overtaken Sydney as the country’s hottest housing market as its cheaper house prices lure more interstate migrants.

Home prices in the Victorian capital climbed 1.4 per cent for a third consecutive week in the seven days to July 16, data from property analytics firm CoreLogic show.

Real estate data analytics firm CoreLogic says Sydney, Melbourne, Brisbane and Adelaide reported rises in property prices in the week to July 16.

Source: Four capital cities’ house prices rise

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