As many markets around the country are now entering into a buyer’s market it will be a good time to be buying property

But if you bought in the past two years, you may be worried you have paid too much for your property and concerned how you are able to grow your portfolio in a declining market.

Many investors will grow a property portfolio by using the equity gained in one property to assist in purchasing their next property.

By pulling out the equity in one property they can use this for the deposit of the next purchase and continue this process to grow a solid property portfolio.

If you are smart about your property strategy, then a declining property market doesn’t always mean the value of your property portfolio will be declining. There is still equity to be made in a property portfolio when the market is declining even if your capital gains are sluggish.

It is important to realise that organic capital growth isn’t the only way to make equity on a property and smart investors look to investment strategies that build a property portfolio that isn’t reliant only on the market conditions.

When you begin to invest in property in a way that you are not reliant on the capital growth of the market to make your returns, you will also be future-proofing your portfolio from any market declines and when the market has strong capital growth this will be a bonus.

Ways to build equity in your portfolio, without relying on capital growth:

1. Renovation
A renovation doesn’t need to be a major structural overhaul to create equity in a property.

If you do a basic cosmetic upgrade such as new window coverings, new floorings, basic kitchen or bathroom upgrade or create open plan living, you might be adding as much equity to your property as $3 for every $1 spent on the renovation.

Even getting out your green thumb and improving the landscaping could add some additional value to your property. If you complete some of the renovation yourself you can save a lot of money on labour costs.

It is, however, important to be careful when completing D.I.Y projects and know when to get the help of expert electricians, plumbers, and carpenters.

2. Subdivision

Another way to manufacture equity is if you own a large block you may be able to subdivide the block and instantly have two land titles, which is more valuable than one title, and this will increase the equity in your portfolio.

3. Development
A development project, like a duplex or townhouse development, is a tried and tested strategy to gain strong equity in your portfolio. It can help you to move forward without relying only on the capital growth of the market.

Building a duplex then subdividing the properties will ultimately give you two properties for the price of one and a whole lot of equity in your portfolio that can be used to purchase another investment property and grow your portfolio.

What is great about a duplex development is that you have a lot of choice, whether to keep both, sell both, or keep one and sell one. Some investors decide to sell one and use the money for the deposit on their next property purchase or to pay down other debt.

4. Granny Flats

Adding a granny flat to your property will provide additional rooms to a property but also serves as an additional source of income and rental yield on a property.

Be mindful that the rules around granny flats will differ from state to state. A granny flat is not all about equity but the improved cash flow will help future-proof your portfolio.

5. It’s not always about equity

Building a property portfolio isn’t always about creating ways to make equity on your properties.

Renovations and developments can be costly projects that you may not have the time or the spare cash to complete right now and if this is the case for you, there are other ways besides manufacturing equity to build your portfolio.

Another strategy is to focus on positively geared and positive cash flow properties. By holding properties that are bringing cash into your portfolio, this will not only help to mitigate the pressures of rising interest rates on your mortgage repayments, but will assist your borrowing capacity (the amount of money the banks are willing to lend you).

If you have strong borrowing capacity, you can borrow additional cash from the banks to build your property portfolio.

We often hear property described as a passive investment, which it is when compared to buying and operating a small business.

However, it’s definitely not an exercise in set and forget. While there’s a lot of work involved in saving, identifying and securing a good quality residential property asset, there remains more to do after the purchase celebrations subside.

Property investors must set the right post-purchase plans in place to ensure a trouble-free journey, which, in this day and age, can mean over many years.

My colleague, Richard Wakelin, has long advocated where possible that property (providing you select the right asset) is a ‘buy, hold, never sell and repeat the process’ proposition.

Not good news for real estate sales agents, but encouraging for property managers whose world revolves around what can be intense relationships between rental provider and renter.

Their job is about attracting good renters and keeping them – helping ensure asset protection – at which experienced property managers excel.

Asset protection doesn’t just come from basic steps like buying adequate building and rental provider insurance or the installation of smoke alarms. It’s more. It is unavoidably expensive actions like maintenance of the roof and periodic painting of the exterior.

Mutual gains

A key principle to ensuring capital and income preservation is a commitment to social responsibility from rental providers.

Now, there is nothing worse than disrespectful neighbours who are loud and noisy, have unkempt nature strips with rubbish lying around. Renters often suffer the blame, sometimes rightly, sometimes wrongly. When renters are responsible, investors are usually unaware of this neglect but, on occasion, they do know but decide to be wilfully indifferent to the problem.

This is a foolish attitude because good cohesion between renters and owner residents on a street is a win-win for all concerned and is part and parcel of asset protection for the investor.

Indeed, good behaviour begets good behaviour. Renovation by one resident often encourages neighbours to do the same and so on. Get a run of renovations and there is a noticeable improvement in the feel of the street, which lifts value for all.

It’s a phenomenon we see at a suburb level with gentrification but it can apply in smaller ways almost anywhere. And by ensuring your investment property is well-maintained, you’ll have happier neighbours who are more likely to alert you to issues or problems.

The role of the property manager is to ensure the investor is well represented throughout the course of ownership.

In this way, steady income streams and capital growth are achieved in a harmonious manner.

Successful property investment requires a methodical and long-term mindset. Vigilantly protecting established assets will ensure far greater returns than a lazy ‘set and forget’ approach.

There are more than 15,000 suburbs in Australia, and at any one time there are around 600,000 house and units for sale.

But be cautious – not every property for sale will make a good investment. Only around 1-2 per cent of properties for sale are what would reasonably be classed as an investment grade property.

What does that mean?

Experts will talk about properties that make excellent investment opportunities as investment grade, which ultimately means these properties have attributes that allow for wealth creation.

In comparison to other properties, investment grade properties will have the potential for capital growth. Investment grade properties may also have other excellent attributes compared with other properties on the market such as scarcity, desirability, location, affordability, or size/type.

What makes an investment grade property?

Approximately 20 per cent of Australian households own an investment property, but not all these properties allow for wealth creation.

An investment grade property should have the following attributes:

Potential for capital growth: The capital growth of a property will ultimately create wealth. Look for properties in areas that have the potential for capital growth, and are not at the peak of their cycle.

These areas will have multiple growth drivers (such as multiple industries for employment), as well as new schools, hospitals and shopping precincts.

Also look at Government spending on infrastructure such as new roads, highways, bridges or even sporting stadiums. All these infrastructure improvements will increase the liveability of the location and the desirability for migration into the location, which will ultimately push the demand higher than supply and create capital growth.

Scarcity: You want your property to stand out so that it is worth more when it comes time to re-value or sell.

This is because you want the demand for your property to outweigh the supply, which will result in getting the top dollar for your property. Look to buy apartments in smaller complexes and steer away from houses in new estate that often have cookie-cutter designs.

Properties located in areas where land is scarce will make a good investment and push the prices up.

Convenience: Look for properties that are in a good proximity to local amenities and transport.

Access to public transport, schools, shops, and restaurants, as well as located on a quiet leafy street away from the busy roads, will make your property more appealing to potential tenants or future buyers.

Quality: Look at a property’s individual features and ensure you are paying the right price for the quality of the asset you are purchasing.

It is OK to buy a ‘renovators dream’ but ensure you pay the right price and are not paying a similar price to a neighbouring property that already has all the top specs, as this will only limit the profit to be made on the property.

Gearing: For an investment grade property, you would need to ensure the gearing of the property is right for your strategy.

Positively geared properties will essentially pay for themselves and you shouldn’t need to be contributing your own hard- earned cash to cover the costs of holding the property. Negative gearing can be the right strategy for some investors who are targeting strong capital growth only (for example, properties in the middle of capital cities are likely to be negatively geared but will have excellent growth in the long term).

How to find an investment grade property?

Research: It is important to perform due diligence around the location and property. For location, it is important to avoid flight paths, train lines, as well as areas with high levels of government public housing. Also check what the future planned infrastructure is for the area. This can be found on the local council website.

Check whether the property is actually in an area that is planned for a new major highway, train station, or new airport, which could be detrimental to the future value of the property

Strategy: Only look for properties that fulfil your investment strategy. Create a checklist of property attributes (size, type, location, etc.) and only consider properties that have these attributes.

Capital growth: One of the most important factors for wealth creation is capital growth.

To find an area that is ripe for capital growth take a look at what is around the area, such as amenities, schools, hospitals, tourism and employment industries.

Research the development potential in the area as well as if there is any expected population growth anticipated.

One of the biggest mistakes investors commonly make is to buy into an area that has been labelled as a boom town but they are far too late and buy at the top of the market.

Rental income: The rental income of the property, or cash flow, will help to keep your property running. For an investment grade property, you will want to look for a property that has been consistently rented and located in an area that has high rental demand. It is crucial to buy the right type of property for the area and for the demographic to ensure consistent and reliable cash flow.

Type of property: Not all properties are equal. It isn’t about getting the biggest property you can afford in an area, rather you need to buy the right property for the typical person living in the area.

Do your due diligence to uncover the demographics of the location and determine if the area is popular for families, downsizers, couples with pets, or popular for singles (perhaps university students, or short-term tenants).

Buying the right sized property for the area will ensure it is consistently tenanted, as well as increase in value over time due to the demand and supply.

For first-home buyers locked out of the property market in far greater numbers than earlier generations, the possibility of property prices falling significantly is an enticing prospect.

Young buyers today are faced with property prices that soared during the Covid years when many of them were forced out of employment, lost work hours or saw their savings depreciate against rampant inflation.

Data released Thursday (20 October) by the Australian Bureau of Statistics has revealed that more than half (55 per cent) of Millennials (25–39 year olds) are homeowners compared with 62 per cent of Generation X and two thirds (66 per cent) of Baby Boomers when they were the same age.

Analysis of Census data from 1991, 2006 and 2021 showed that home ownership, including homes owned outright or with a mortgage, for those aged between 25–39 years has decreased in each successive generation.

The 25–39 year old Baby Boomers in 1991 were three times more likely than the 25–39 year old Millennials in 2021 to own their home outright. 

But with property values in decline in around four out of five Australian suburbs, young buyers who have managed to cobble together enough for a home deposit are timing their entry into the market.

Rapidly rising rents and record low vacancy rates are tempting them to buy, while falling property prices are serving as a strong deterrent.

So what will it take for the market to shed the capital gains achieved over the past few years?

Much depends on interest rates and what city or region you live in.

Source: CoreLogic.

After CoreLogic’s national Home Value Index (HVI) surged nearly 29 per cent through the recent growth phase, the full extent of how far housing values will fall remains highly uncertain and largely dependent on the moves of the Reserve Bank of Australia over the next 12 or so months.

Since the national monthly HVI peaked in April, dwelling values are down 4.8 per cent to the end of September, ranging from a 9.0 per cent fall from peak in Sydney, to Darwin, where home values remain at a cyclical high.

Source: CoreLogic.

Mainstream forecasts for a peak to trough decline also vary remarkably, but generally range from around 15 per cent to 25 per cent across the combined capital cities.

First-home buyers, and others, trying to read the tea leaves and pick the bottom of the market

A 15 per cent drop from the peak in April 2022 would take CoreLogic’s combined capital cities index back to roughly March 2021 levels. A 20 per cent drop in values would see the index 2.2 per cent lower than the onset of the pandemic in March 2020. A 25 per cent drop in capital city dwelling values would take the index 8.3 per cent below March 2020 levels; a similar reading to August 2016.

Risks and opportunities vary

CoreLogic Research Director, Tim Lawless, said across the capital cities there were varying risks, and opportunities for first-home and other buyers.

“Arguably Melbourne’s housing market is most vulnerable; a further 4.3 per cent slide in dwelling values would take Australia’s second largest city back to March 2020 levels,” Mr Lawless said.

“This vulnerability isn’t due to housing prices falling faster than other cities, in fact Melbourne’s quarterly rate of decline, at -3.7 per cent through the September quarter, was a milder rate of decline compared with Sydney (-6.7 per cent), Brisbane (-4.3 per cent), Hobart (-4.5 per cent) and Canberra (-4.4 per cent).

“Melbourne simply didn’t see as much growth in values through the upswing, with a 17.3 per cent rise from the COVID trough to peak.

“This comparatively modest rise in values means Melbourne home values don’t need to fall as far as other capitals before wiping out all of its Covid gains.”

Source: CoreLogic.

At the other end of the spectrum, Adelaide’s housing values surged through the growth phase and, since peaking in July, have held reasonably firm.

“The market would need to drop by almost 31 per cent before values in the City of Churches returned to pre-pandemic levels,” Mr Lawless said.

 Regional markets are also looking relatively secure from wiping out their Covid gains. The combined regionals index would need to see values fall a further 26.8 per cent before reaching March 2020 levels.

Comparing the generations

New analysis published by the ABS uses three Censuses to explore what was different and also what is the same for Baby Boomers, Generation X and Millennials. The ABS analysis compares the generations in terms of living arrangements, study, qualifications, participation in the labour force, working conditions, income and housing.

Duncan Young, General Manager, Census said, “Every dinner table in Australia has heard someone reflect on how things were different ‘back in my day’,” as he outlined the features of each generational grouping.

“Baby Boomers were born in the aftermath of the second World War and were young adults through Australia’s recession in the early 1990’s.   

“In contrast, Generation X were born during a time when birth rates were lower in the late sixties and seventies. They entered early adulthood as Facebook launched.

“Millennials were born in the eighties and nineties and experienced early adulthood as smartphones and tablets became household items.”

The challenge faced by Millennials trying to enter the property market is greater than that which confronted earlier generations, despite them having higher education levels and fewer with the financial burden of parenting.

Millennials are the most qualified generation at 25–39 years of age with a greater proportion of Millennials having a non-school qualification—a certificate, diploma, or degree—than earlier generations. Over three quarters of Millennials (79 per cent) have a qualification compared with under two thirds of Generation X (64 per cent) and less than half of Baby Boomers (48 per cent).

Higher education qualifications were more likely for Millennials with 40 per cent having a bachelor degree or higher, compared with almost 25 per cent of Generation X. Only 12 per cent of Baby Boomers had a degree at the same age.

The ABS reported that participation in the labour force was similar for Millennials, Generation X and Baby Boomers, with around four in five employed or looking for work when they were 25–39 years old.

Over half (53 per cent) of Millennials have never been married, compared with 26 per cent of Baby Boomers at the same age.

The most common living arrangements for Millennials is living in a couple household with no children (36 per cent), which is twice the rate of Generation X (18 per cent) when they were 25–39 years old. One in five Millennials (21 per cent) are living with a partner and children, compared to more than half of Baby Boomers (52 per cent) at the same age.