An article by Peter O'Brien
What do property Managers do? In short, they manage investment properties for Property Investors.
How much do your Property Managers know about investing in property? How much do you know about investing in property?
If you are in a similar situation to most real estate offices in Australia there is an enormous chance that your property management staff knows very little about investing in property. They might be fantastic at managing property and communicating with Owners and Tenants about tenancy issues. They might be great at managing a team of property managers and have skills that can control budgets and keep expenses to a minimum.
However, I am not referring to a property manager understanding how to complete property management tasks and day to day activities. I am referring to the amount of knowledge and understanding they have about investing money in the property market? Surely you would think that a true Property Manager, expert in their field, experienced manager of properties would have a very high level understanding of the process, advantages and wealth opportunities of buying property????
It is the sole reason why Property Managers have a job!
I am continually surprised at how little property management employees know about investing. It is one of the first areas I cover when commencing a series of mentoring or coaching sessions for individual property manager’s or property management teams. To maintain and build a portfolio communication is paramount. We must communicate with our Owners. What do Owners want to know about? Generally, how their investment is travelling. I believe all property managers need to know the basic fundamentals of investment.
This includes investing in shares, bonds, syndicates and property. Not only will this provide insight to help them with their career in managing propoerty, it will also be a huge benefit to them personally. To have a better understanding in this area will improve their chances of building their own personal wealth.
Over the next few editions I am going to briefly outline some basic principles of investing in property. Firstly, I must advise you that some of the following comments are based on my opinion. I am not a financial advisor or planner and I am not saying that my opinion relates to all situations. I recommend people to seek financial advice from someone qualified to do so before deciding any investment choices. Everyone has different financial capabilities and expectations and all options available to Investors should be considered on a case by case basis.
Capital Growth or Rental Return
Understanding a little bit about capital growth and rental returns is important, especially when providing rent reviews on properties currently leased and providing rental valuations at new listing appointments. Your opinion could possibly make or break a sale of a property. Your advice could meet with the Owners expectations or if you over quote, it could cause a detrimental effect to the Owners financial situation.
Property investment should be part of a wealth creation strategy, not just a purchase for convenience or on a whim.Property investment is a way of building an asset base to one day replaces your personal exertion income. It is to be your “cash machine” that pumps out what you require to live the life you want.
Some property investors look for property that has a good “cash flow”. This is property with rental returns that are higher than the outgoings (including mortgage payments), leaving money in their pocket each month. Others look for property that has a good capital growth projection. (A property that produces above average increases in value over the long term.)
In Australia, properties with higher capital growth usually have lower rental returns. In many regional centres and secondary locations, you could achieve a high rental return on your investment property but, in general, you would get poor long-term capital growth.
Which is the right method?
It really depends on the property investor’s personal situation. I always tell clients that wealth from real estate is not derived from income, because residential properties are not high-yielding investments. Real estate wealth is achieved through long-term capital appreciation and the ability to refinance to buy further properties.
Think about how you as a Property Manager can use this new found knowledge in your working day. Try using it when you are trying to convince a Landlord that he/she must renovate their investment property. Discuss how unlike a cash flow positive property is near impossible to turn into a high growth property; (because of its geographical location) “However Mr Landlord, renovating or developing this property you can achieve both high returns (cash flow) and instant capital growth. This will bring you a higher rent and extra depreciation allowances, which converts high growth, relatively low cash flow investments into high growth, strong cash flow properties.
By understanding rent yields versus capital growth you can understand and explain to your Clients that property in most cities of Australia have strong capital growth but they usually achieve a lower rental yield (the income earned over a year represented as a percentage of the value of the property). Inregional centres and many secondary locations investors can achieve a higher rental return however; poor long term capital growth is achieved.
As the value of a property increases, in general, its rental return decreases.
Rents eventually go up but these increases often don’t catch up for a few years. During a real estate boom when there is an extended period of high capital growth there most often is a market which rental returns fall.
In the slower phases of the property cycle, when interest rates are rising and affordability of housing is decreasing, more potential home owners turn to renting properties. This is the stage of the cycle that rental growth starts to catch up.
Get your Property Managers up to date with the situation of the current property market. Make it an agenda item once a month in one of your rental meetings.