Mid-range rental properties and investment apartments will always be in strong demand from renters, which is why McCarthy Group recommends homes in this price segment.
When the top end of town is booming, everyone seems to be making money. Fancy cars, exotic holidays, fine dining, lavish accommodation, maybe a boat… can life get any better than this?
And then the wheels start getting a little wobbly, as we have seen over the past year or two.
The cashflow goes très ordinaire and the investors owning those top-dollar, must-be-seen-there mansions and apartments suddenly start feeling a little lonely.
No one’s home anymore…at least not in their investment apartments...
But wait a minute…they were all “outstanding prestige investments” at the time.
Sometimes when the going gets tough, the tough just take off, and investors are left with a prestige property investment that very quickly starts costing them prestige money.
Those “top end” blue chip tenants have taken off - and they’re not coming back until rents are a lot more “reasonable” (and perhaps their creditors start learning how to smile again).
And there are no prizes for guessing what that does to those prestige apartment valuations.
There are examples aplenty…
An investment apartment in Melbourne’s new harbour side Docklands development was put on the market earlier this year at $750 per week, and sat empty until let out some three months later for $625 per week.
An upmarket home in Sydney’s Bellevue Hill goes on the market in January for $2,400 per week… and now, all those months later, it is still on the market, only now it’s $2,000 per week.
According to the word in the street (and the suburbs), not to mention the NAB Business Confidence Survey, business confidence is at its lowest since 1991. A savaged stock market has pricked a lot of balloons, the easy money has gone…and the tap is being turned off at the big end of town.
Prestige property landlords are starting to find it's getting a bit lonely at the top.
Whilst the capital growth of prestige properties can at times be quite spectacular, it can be volatile compared to the middle market. In times like we are experiencing now, it can be very difficult to find tenants who will pay the rentals that will result in exceptional capital growth.
When the times are good, high end investment apartments are typically sold to 'aspirational' investors who are seduced by factors such as a trendy building name and architect, designer display unit, granite bench tops, stainless steel appliances, must-have brands everywhere and the idea of owning “prestige” property. Everyone’s ego is pumping, and group dynamics just take over. Predictably enough, people eventually start realising that sometimes common sense isn’t always that common…
A Better Strategy
Although it may sound somewhat more mundane, at McCarthy Group we have been “sticking to the message” for 10 years - because the results speak for themselves.
We have been advocating the purchase of new, single level, modern four bedroom family homes located on a good-sized block in the suburbs. Properties that middle Australia loves – and can afford.
These properties tick most of the boxes for most people – nothing too fancy, but not too shabby either. Value for money…
It's great for the kids to have a back yard to play in, Dad's got a double lock-up garage and a shed for his stuff and Mum's got a spacious kitchen and lots of storage throughout the house. It's a simple and sensible formula that reduces risk and makes property investment more secure and more successful.
While such properties may lack the snob appeal of their more “prestige” rivals, their price point puts them in a rental price range which keeps them in the real world and affordable
for the average working family.
We all know that a lot more Toyotas, Fords and Holdens are bought than Audis, Mercedes or Porsches and the like. We have the evidence that people will spend one third of their income on their mortgage or their rental and in that middle rental band, and that this is where you will find not just more tenants, but more reliable tenants. This translates into both higher occupancy rates and higher yields - crucial considerations for all property investors.
At McCarthy Group we never stop researching the markets looking for steady reliable growth prospects with minimal risk. There is no simple formula that you can read about that will guarantee constant spectacular results (no matter what anybody claims). Property markets are all different and respond to many different influences. We work hard at understanding these influences for the benefit of our clients. And our programs are designed to convert these understandings into actionable strategies.
We ask our investors to take hard-nosed views. Don't ask yourself the question "Would I like to live in this house?" but ask yourself the question, "If I had a budget of $400 to $500 per week, would I rent this house?"
That question reduces the emotion in the picture. This is but one approach we use to encourage our investors to use their heads and not their hearts in these situations.
And when you look at it this way, you soon start to see why high-end luxury properties don't really stack up.
From time to time things do get tough, and in those times many of those top end tenants go downmarket – like everyone else.
Interestingly, while the top end properties may be languishing, this “downward influx” has the effect of bolstering returns in the middle market because of the increased demand in the sector.
So we’re starting to see a few lonely landlords at the prestige end of the market. Don’t say we didn’t tell you - sometimes prestige can make you poorer...
by Stephen McCarthy
McCarthy Group provides professional property investment advice on strategies like negative gearing. Find all the investment properties hot spots and discover why property investing is a stable option. For property investment Sydney, contact us now. |
