Episode 005 | Price Bands And Timing The Market
Property prices can differ quite a bit depending on location, type and age. In our fifth episode of the Property Investing Masterclass, Damian and Arin discuss the different price bands for buying residential property, and which of those investors should target for maximum returns. They will also discuss the popular question of when the right time to buy is and how investors can leverage certain market conditions to speed up building their wealth.
Welcome to episode 5 of our property investing masterclass
Last week we talked about the different demand and supply drivers that affect location, and how you can use that to find the best locations to invest in.
In today’s episode, we are looking at the various price levels in which you can buy property, and which of these price bands are most appropriate for investment. Damian and Arin also discuss the how to time the market, what market conditions are optimal for investors and how to leverage these conditions to maximise your profit.
Tune in and Learn:
- Is it better to target lower, median or higher price bands?
- When’s the best time to invest?
- Financial implications of overpaying for an investment property in a boom market
- What to do if you’ve bought a bad investment
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Further Reading: For a practical side by side comparison of investors buying under different market circumstances and how that affects them long term, download our case study here.
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Arin Di Camillo, Momentum Wealth: Welcome and thanks for tuning in for this fifth episode of the Momentum Wealth podcast series. My name’s Arin Di Camillo. I manage the property wealth consultants at Momentum Wealth and I’m joined as always by our founder and managing director, Damian Collins. Welcome, Damian.
Damian: Great to be here again, Arin.
Arin: Thanks for being with us. This is the fifth in the 10-episode series. We’re half-way through it.
Damian: It’s going well, so far. You’re doing a great job.
Arin: Covering a lot of ground. If this is the first time you’ve joined us, this is the fifth of a 10-part series. So, if you haven’t seen the first four episodes, I recommend you check them out on the website. A lot of ground has been covered already – and all about the fundamentals of property investment. Now, it’s not just about how to find a high-performing property; it’s about a whole lot more than that.
Damian: Yeah definitely, Arin. So, when you’re looking to build a large property portfolio, finding the right property, and I guess the right residential property, is really important. That’s actually crucial, but there’s so much more to it. It’s about getting the right strategy in place, developing the right plan that’s suitable for you – and that will change over time. The right properties for you and what you should be doing with your properties will be different through your life journey and where you are in that journey.
Obviously, getting the right finance in place is important. And the other thing too is that a lot of people just think that you just build a large residential property portfolio and that’s all you need to do.
But when you get towards… you know, when you want to stop working, your business or your job, you need to be focused on income stream. And so that’s where commercial property comes into play as well. They tend to produce much better rental returns. And also, for people who’ve got a bit more risk tolerance, looking at development, adding value to properties. And that might be on your own or through a syndicate. So, there’s a lot more to it than just buying your standard residential property, which is where you always want to start, but certainly, those other strategies come into place as you evolve along your property investment journey.
Arin: Sure. Now this week, we’re talking about property cycles and when is the best time to buy. We’re also going to look at the price of the investment property, whether it’s low, high or even middle-band properties. As always, we’ll offer our bonus materials, so stay tuned to the end of the episode, and I’ll fill you in on the details based on our website.
All right, Damian, let’s get stuck into it. Let’s talk about price-band first. Low-price properties, medium-price properties, high-price properties, the median prices available for every capital city in Australia. We have all the information. Which of those bands typically is going to offer investors the best return?
Damian: So, there’s really two parts to that, Arin. Firstly, there’s the part, within a city, which sort of properties do you target? And generally, we stick around the median, but we’re not wedded to just that. What we’re looking for is those suburbs and properties that have got the most likelihood of being rerated and outperforming the market. So, what we find is the higher price properties certainly tend to have been rerated by the market, so the likelihood… they’ll still do okay, but the likelihood of outperformance is less.
So, we’re looking in the middle to even lower-middle price-bands, where we know that they’ve got good fundamentals, the market hasn’t recognised it yet, and [they’re] the ones that we target. But [there are] also issues of rent and yields that also comes into play as well.
Arin: So, you’re talking about the luxury in there? Like the middle-plus type properties? Is that what you’re thinking?
Damian: Certainly, we rarely buy those in residential property. In a commercial context, actually that’s better to buy the more expensive ones, or go into a syndicate where they’re buying, you know, sort of five plus million-dollar properties. But in terms of residential, what we find is that rental yields don’t stack up as you go up the price scale.
For example, on a 500,000 dollar property, you might get $500 a week, $450 to $500. On a two-million-dollar property, you might find that you only get $1,000 a week, or let’s say $1,200. So, the rental yields don’t stack up and so we typically have stuck around that middle price-band.
Arin: Sure. What about the lower end of the spectrum? Any value to be had in that right at the bottom end of the spectrum there?
Damian: Generally not right at the bottom, because those suburbs are right at the bottom for a good reason and they may well stay there as well. They might be a long, long way out of the city, they might have socio-economic problems that aren’t… you know, we don’t see any cure for any reason. [There are] a whole raft of factors there. So, we don’t rule them out just because they’re cheap. But what we have found from our research is that generally, that sort of 10-15% under the medium price right through to maybe 15% over, that’s the band that we typically stick in. Not perfectly, exactly like that, but that’s roughly what we’ve identified as the areas most likely to outperform the market.
Arin: So, we’re looking at that middle area. What is it about the houses in that median house price range that are going to provide the best value for investors? What are some of the things that they offer investors?
Damian: Well, the main reason, Arin, is that they haven’t necessarily been rerated by the market. So property ultimately comes down to affordability and when you come from a lower price-point, you’ve obviously got more room to grow. But it’s got to have all those fundamentals, because if it’s a lower-price property, it may well stay that way for the next 20, 30 years. It still always might be the cheapest suburb in that area. So, they do have the ability to be rerated and become… certainly move from that lower-middle ring maybe to the middle-upper ring, and that’s what we’re looking for. They won’t go from Frankston in Melbourne to Toorak, or the same in Sydney, Penrith to Vaucluse.
But what we’re looking for are those suburbs and locations that might go from being underrated through to something more highly rated, and particularly, you know, when we’ve got… in Perth and Brisbane, for example, they’re going to more than double over the next three or so decades. Then something that might be a sleeper that’s 15 kilometres out of the city… we’ve seen what’s happened in Sydney and Melbourne. If they’ve got the right amenities and infrastructure, they become rerated and quite fashionable. And I’d expect we’d see the same [… in] Perth and Brisbane as well.
Arin: So, following on from that, what about the areas that already have those amenities and cafe strips and so on? Has all the growth been taken from those already?
Damian: I wouldn’t say all the growth, but a lot of the out-performance in the market. So, if the market grew, for example, 6% per annum, you know, over the next 10 years, I’d expect those suburbs would be around that sort of mark. But because everyone knows that they’re fashionable and so forth, that… you know, to get that out-performance becomes more difficult. We’re looking at the ones that are not rated like that, but they’ll get that… rather than the 6% growth, perhaps they’ll get that extra 2% per annum, which doesn’t sound like a lot. But over a 10-year period, it’s a substantial amount of money, and over 20 years, even a lot more.
So, we’re looking for that rerating, so that it becomes from that lower to middle sort or area into the middle to higher. It won’t be the Tooraks or Peppermint Groves or Vaucluses, but it’ll become more rerated by the market. And we’re seeing that. You look at Melbourne in Collingwood, a suburb…
Arin: You had to bring up Collingwood, didn’t you?
Damian: I did. Sorry! Well, in my youth, which is sadly a few years ago now, I used to go to the football at Collingwood and I grew up in Melbourne, and that was really a working-class area, and workers’ cottages, a lot of migrants there. It was their first time when they came into Australia. Now it’s a very fashionable and expensive area, same as Fitzroy. And you’re seeing the same in Sydney, Redfern, those sort of inner city areas. So, they get rerated by the market and we see that across Perth and Brisbane as well.
Arin: So, looking at the median price-band, or the… you know, 10 or 15% either side of it, what about if an investor comes to us with a couple of million dollars, and they’ve got a budget, and they want to spend that? Are we looking at… at any stage, looking at a purchase of two million dollars? Or should we be looking still around that median house price range and picking up a couple?
Damian: Look. If it’s passive investment, you would definitely not go for the two million dollar in the residential space. And the reason I alluded to before is the rental yields just don’t stack up. What you find is… look at the metro markets again… the yields come up and down and go in cycles, but let’s say on a typical $500,000 dollar property, you might get $500 a week, roughly. Or $450. When you go to a million, that doesn’t tend to translate to $1,000, it tends to translate to maybe $800, $850. When you go to two million, all of a sudden, you’re doing… often looking at maybe $1,300, $1,200 or even $1,100 a week. So more than quadrupling the price, your rental returns are only going to double and a bit.
And your negative cash-flow is very significant on an expensive property like that. You might find your land tax bill’s quite high, and it’s also a lot of eggs in one basket. So, if someone came to us with a two million dollar budget and it was a passive investment, we’d be looking more around… depending on the city, we’d be looking around that sort of 3, maybe even 4 properties to spread them into, rather than just buying one residential property at two million [dollars].
If there’s development, and they were developing on their own, maybe. But that again would come down to that individual investor, but for 95% of people, we’d definitely be spreading them across three to four investment properties.
Arin: Sure. Now, so we’ve covered off the different price bands, and we are talking around the medium price. Let’s move now to the property cycles. This topic gets a bit of airplay as well, where we talk about the time in the market versus trying to time the market. We talked about supply and demand in the last episode. We’re talking now about whether we should buy at any particular time of the market. As a general rule, what’s the best time? Should we wait for the market to bottom out? Should we look for opportunities in the top end market? When’s the best time to buy?
Damian: Well, the biggest difficulty you have, Arin, is trying to forecast when the exact top of the market, when the exact bottom of the market is. And most people get it wrong, most experts get it wrong, and… Look, no-one knows for certain exactly where we’re going to be in 10 years in any market. We can do all the research analysis and… it doesn’t go up in a straight line. Often, they go up in highs and lows. So, it’s about firstly, I guess, being in the right market. Over a 20-year periods is the right market, is the most important.
So those cities that have got all the right fundamental demand, supply factors that we spoke about in the previous episodes. That’s the most important thing. And then the second thing is then, depending on where you are in your journey, you might start to spread your investments around into the other major cities, if the timing of the cycle is right, or you’ve got a concentration in one city. But look, I’ve seen more people lose money by waiting for the bottom to come and miss out than I’ve seen people getting in too early. Particularly, again in those major cities. [It’s] different in a regional area, but in… certainly those major cities, I’ve seen far more people lose more money by sitting on the sidelines, waiting for that perfect day when someone rings the bell and says, “It’s the bottom.” [It] never happens that way, and often by the time they get into the market, they’ve missed the first 10% or thereabouts upside. So, if your time horizon is a long-term, it’s certainly about time in the market, and trying to time the exact time… if you’ve chosen your city, I would say once you’ve chosen the city, you know you’re going into that city, then buy when you’re ready. Don’t try and time the market, because you’ll more than likely get it wrong.
Arin: So, it comes back to making sure your plan’s right at the start, I guess, and then executing that plan when you can afford it, rather than waiting for dips in the market.
Damian: Yeah, exactly. Look, property prices… look, they do go down, and even in the big cities, the prices can drop by 10%. But again, who can pick that exact bottom and the exact time of it? You just can’t. You can’t generally do it. So, I would say… definitely it’s about when you’re comfortable, when you’re ready, if you’ve chosen the city, you think it’s a good long-term investment, you’ve got that long-term horizon, I don’t try and time the market. Because, as I say, I’ve seen more people lose a lot more money waiting then they… “Ah, missed it. I’ll wait until it comes back again.” And it often doesn’t. So, when you’re ready, that’s the time to get in.
Arin: We’ve seen amongst our clients and some of the people who follow us, a lot of the people have bought at the peak of the market, but not the right asset. It’s not necessarily a bad thing to buy at the peak of the market, as long as it’s the right property, and as long as it’s part of the right strategy for you.
Damian: Yeah, exactly. So again, sometimes you might buy and it ends up being the peak of the market. Again, it’s impossible to foresee everything that’s going to happen in the future when you do buy. But if you bought good quality assets, and you’ve got a long-term horizon, you will still do quite well in those particular assets. So, I wouldn’t be too concerned. The most important thing is the… you’ve got the right cities and then you’ve got the right assets, and if you have got that, if you get the timing not exactly perfect, that’s okay. Because generally you’re looking at this as a long-term investment, and you’re still going to do fairly well. Yeah, in a perfect world we buy at the bottom, sell it at a high, but that’s just not likely, and it’s very hard to predict. So, you’re better off to buy when you’re ready.
Arin: Other things come into play, you know, about markets bottoming out, or when a market’s peaking, like fear of missing out. When the market’s running hot, everyone wants to jump in, they start making irrational decisions, and potentially driving prices farther than they need to be.
Damian: Yeah, and we certainly do see that in the cycles, particularly in the up cycles and often at auctions, which are certainly more prevalent in Sydney [and] Melbourne. You read stories of prices going for 30% above reserve, and that’s where you get the… yeah, exactly… fear of missing out becomes a big driving factor for people and they end up making silly decisions. So, you don’t want to do that either. There is always going to be another good property. You know you don’t want to massively overpay. Certainly, you want to get into the market, but at the same time, you don’t want to be doing something silly.
And paying… you know, if you pay market in a… you know, maybe it’s at the peak of the market, that’s okay. You might drop down 5,10% maybe on the downside, but if you pay 20% over, you could come back [inaudible 00:13:39]. So yeah, buy at the right time, but don’t be getting caught up into the hype and the frenzy of the market, and you’ll find the right thing. It might just take you a bit longer.
Arin: So, investors can buy at any stage of the market, but they still need to maintain a bit of caution when they’re investing and stick to their basic investment principles.
Damian: Yeah, and look… certainly, you just want to be… if the market’s in a frenzy, you’d want to be more cautious and make sure you’re not overpaying, and you’ve got to buy at the time that’s right for you.
And look, ultimately as an investor, most investors will start with the first… particularly if you’re in the bigger cities that we’ve recommended for investment, most investors will start in their own home capital city. And while timing-wise, another city might be marginally better, or something better over the short term, over a 20-year horizon, most of the capital cities will do similarly.
Although we still think a couple will do a little bit better than others. So, you need to be conscious of the fact that if you’ve got a couple of properties, you might look at another capital city. If you think your market’s at a peak, but generally for most people starting out, they just seem to be a bit concerned about going interstate, and look, if you’re going to grow a decent size portfolio, you’ve got to be certainly open to looking into other cities around Australia.
Arin: If you’re an investor who has bought at the peak or overpaid at the peak of the market, what are some of the financial implications of getting that bit wrong? Of getting the wrong asset in a peaking market?
Damian: Well if you get the wrong asset and overpay, you’re in a bit of a pickle because you could be sitting under water for 5 or 10 years. So that’s not what you want to do. So, you need to be really conscious of that, not to be doing it. If you’ve overpaid and it’s a good quality asset, well there’s not much you can do. You’ve already made the mistake. But look, we all make mistakes in property investing, and so I wouldn’t say to you, “Ah, well, that’s it. You don’t ever invest again. You made that mistake.”
Because it’s a good quality asset, there’s not much point selling, because you’re going to have a transaction cost to sell, and you’re just going to get back to another good asset. So, I wouldn’t suggest generally… if it’s a good long-term asset, trying to sell for cyclical reasons, say, in residential is not good. [It’s] different in commercial, but in residential, and the recommendation would be to just hold. You’ve got the good asset. If you’ve bought a bad asset though, sometimes we do say to clients, “Look. It’s a bad asset. I know you’ve overpaid and you’re going to take a loss. Sometimes you’ve got to cut your losses and run.”
And again, no-one is immune from mistakes. And the fewer you make the better, but if you’ve made it, okay, well just recognise it and cut your losses and move on.
Arin: Yeah. And I guess you’re looking at a situation where you’ve potentially got negative equity. It then restricts what you can do with the rest of the portfolio because your whole portfolio is affected by it.
Damian: And look, we have seen that situation, particularly where people have bought properties and overpaid and bought them at overinflated prices. A lot of brokers, I’m sure, will talk about finance in this series at some stage. A lot of brokers who cross-collateralize, and banks do it, and then your whole portfolio gets revalued. And we’ve seen that hinder so many people getting into the next property. They’ve lost that equity, and when it’s cross-collateralized, it affects all their properties, and it holds them back and can put them back years. So ideally, if you buy the right asset, first the right asset in the right city is the most important. The right timing helps, but it’s not as crucial, as long as you get the right asset in the right city.
Arin: I think we’re actually going to cover off on finance and the importance of finance structures in the next episode. So, we’ll delve into that a little further then. Going back to… if you have bought a bad investment, not necessarily the end of the world, but I mean, what should you do? Should you cut it out, or should you hold and sit it out and try and get through it?
Damian: Well, again, you’ve got to get back to your property investment advisor and sit with them and say “Here’s what I’ve got. Here’s my portfolio.” And they’ll assess, “Well, what’s your objectives? Your goals? Where do you want to get to? Does that fit into the mix?” And look, if it is a bad asset, we do, and our strategists will recommend that they sell because we don’t think it’s going to get the growth.
Now, if you’re going to sell up in two years and retire, as part of that… you wouldn’t probably sell it. But if you’ve got a long-term horizon, you’ve just sometimes got to cut those properties out of your portfolio, because if they’re a bad asset, they’re a bad asset, and you’ve just got to cut them out of your portfolio and move on to something better.
Arin: Okay. We’re nearly out of time for this week already. Final question. We talked about investors getting the fear of missing out in a rising market, but it’s the opposite in a quiet market, where there’s potentially better opportunities. Everybody tends to sit on the sidelines and wait for everyone else to jump into the market.
Damian: That’s human nature, Arin. You see it in all investments. You see it in the share market, you see it in the property market, that 95% of people follow the herd. And I look at the most successful investors I know in property and even in the share market. Warren Buffet always says, “Buy when everyone else is selling and sell when everyone else is buying.” Now shares are a bit more get in and get out than property generally is, but it’s funny, isn’t it? People think, “Oh, this market’s never going to recover again,” and in some markets… and all the major cities have been through it at times across Australia.
Sydney had an eight-year flat period there where it didn’t seem to grow very much at all, and of course, we know from… that later on it had a big rise from there. So, it’s the exact opposite. There is fear of missing out, to “I don’t want to buy It’s a bad decision.” And when the herd agrees with you, it seems a rational decision, but the smart investors go early, and sometimes they go before the bottom. But that’s okay because they have to make sure they get all the upside as well. So, particularly in property where in capital cities, you’re not likely to see in good assets substantial declines. Again, it’s about getting in when you’re ready to buy.
Arin: Sure. Okay, look, that’s all we have time for this week. Damian, thanks for joining us again. Appreciate your input.
Damian: Glad to be here.
Arin: Always glad to hear you. As I said, go to www.momentumwealth.com.au/podcast and there is the usual summary of today’s discussion waiting for you as a bonus. This week, we’ve also included a case study, and it looks at two investors: one who bought when he could afford to as per his initial investment plan, the other who tried to turn the market in and out. Now the difference between the two is quite staggering, so definitely worth having a read and seeing what those case studies tell us.
Now, we hope you’ll join us next week. Next week we’re talking about finance, so we’re going to be covering off on investment finance criteria, what the lenders are looking at, and why you should avoid cross-collateralization which we touched on just a moment ago. So, thanks for tuning in. I hope you enjoyed the podcast, and we look forward to your company next week.