It’s a sad, sinking feeling many investors have experienced. After years of saving money you have finally decided to invest in property. You have seen your friends and family make huge profits for years and are keen to see what the fuss is about. But after doing some research you discover one major problem. Your local area or state is way out of your price range, and your dreams are shattered.
But there is actually a proven solution that doesn’t involve selling your car and living on bread and water. You canalways buy interstate. Not only are prices potentially much cheaper, but the rental returns and capital growth prospects could be much larger. One investor who has discovered this is Peter McRae. Despite living in Newcastle, McRae looked at his financial circumstances and decided the best opinion for his first investment property was one that was cheap, with solid rental returns.
This led him to Tasmania where he bought two houses, in George Town and Launceston. His strategy has worked so well that he has since bought more properties in Queensland, WA, SA, and even the United States.
Buying blind
When people look for investment properties in familiar areas, they can focus too much on trivial things at the expense of the real issue, which is whether or not there are growth drivers, says McRae. “Most people feel comfortable buying in their local area, but usually only because they are used to living in the area. Comments such as ‘I’ve lived there all my life’ are common, but it is not a reason to purchase there for an investment,” he says.
Secondly, he argues that when you see the property you are more likely to be affected by emotional decisions that are also not relevant, such as whether you like the kitchen or not. Therefore, seeing the property can actually be counterproductive.
“Areas that are ‘on the nose’ to local residents are often the best to invest in. I am not a builder or pest inspector, and if a house has structural damage or a pest problem, I’m not going to know, so why not leave it to the experts? At that point, I have all the information I need to make a decision to purchase or not.”
How to do research
For McRae, the first place to bein is to look for areas that are due to grow soon. He does this either by buying property reports or by speaking to his buyer's agent. to look for areas that are due to grow soon. He does this either by buying property reports or by speaking to his buyer’s agent.
“I have used We Find Houses and found them invaluable because they tend to know the areas well from an investing standpoint. They develop good relationships with local agents, and their negotiation skills are exceptional because they do it every day,” he says.
McRae also believes that buyers’ agents are an especially good option for people who are unfamiliar with buying interstate. “I found that I learnt an enormous amount of information from my buyer’s agent, and it saved me making mistakes,” he says. Following that, his next step is to make sure the area has good rental returns, preferably above 6%. Once the area has been decided on, then it’s a case of finding the property.
“From that point it is a matter of looking online at suitable properties, and starting to contact agents to get a feel for the market and get wind of new deals or vendors who may be discounting in order to get out of a property.”
Buyers beware
Cate Bakos, an award-winning buyer’s agent for Empower Wealth, says investors have to be careful not only about the area they choose to invest in but also the buyer’s agent they choose to hire. “I know myself as a buyer’s agent that even when I am familiar with the street or the area, even when the photos look good, even when the agent’s description of the property is encouraging, and even when the rental history might be sound, the property may still have some detractors which could prohibit it from being a suitable purchase,” she says.
This is because the detractors could be subjective (considered in a different light by another individual), hard to see on Google Maps or Street View, not visible to the agent, or there could even be a new element that is about to emerge based on changes to the area or surrounding properties.
She says the buyer’s agent should be able to identify areas that have high crime, high vacancy rates, new house and land designated, clusters of social housing, fight paths, industrial neighbouring and high-trafficed streets.
These are all things that reduce the long-term property growth and rental prospects of the area. But before an investor can even decide on a location, they must ask themselves two things: what type of performance are they hoping to get out of the asset, and why is it advantageous to seek this opportunity outside their home state. “In many cases the rationale is sound, but often I see investors jumping onto a bandwagon on the back of advice from someone who is not an experienced property professional, or after reading an exciting investor story in a magazine,” she says.
“Interstate investment offers portfolio diversity, exciting opportunity and a lot of good BBQ stories to share, but every investor should have a specific plan, as opposed to a good story or an annual tax deduction-based trip.”
A helping hand
Apart from using a trusted buyer’s agent, Bakos advises investors to speak to a range of other professionals before they complete a purchase. These include:
- Conveyancers or legal reps
- Building inspectors
- Pest inspectors
- Owners corp/body corp professionals (if applicable)
- Surveyors and town planners (if applicable)
- Local property managers
In particular, property managers are important because they provide thorough information and explain their role and rates, says Bakos. “Management fees across the country range from 3% to 11%, and investors need to factor this in before they buy and find themselves baulking at the going management rates," she says. “Finally, an investor should familiarise themselves with council rates and insurance rates for given areas. Flood-prone zones and remote areas requiring water can be a bit of a surprise when it comes to ongoing cost of ownership.”
How the contract of sale varies between states
All states have similar contracts but there are key differences investors should be mindful of, says Bakos. “From disclosure documentation to strata reports, from vendors’ statements to Form 30C’s, every state differs, and it pays to have a local professional on your side to explain what you are about to sign.” It’s important for investors to realise that, as it is with real estate (where each agent has a state-based licence), so it is with conveyancers and legal professionals, says Bakos.
“Some agents and some conveyancers have multistate licences. However, the most important thing any buyer should do is ask for referrals and speak to these people before they engage them. Fee disclosure is a legal requirement, so the buyer won't find that they are going in blind in terms of cost expectation.”
Stamp duty and land tax structures
Sam Baker of S. Baker & Co Ltd is an accountant who has bought properties in Queensland and WA, in addition to his home state of Victoria. As both a finance expert and a successful property investor, he says it’s imperative for investors to be aware of stamp duty and land tax differences between states, as this can save considerable annual expenditure.
“Stamp duty is deductible in the ACT but not deductible in other states. Land tax can be reduced by purchasing properties in different states rather than all in one state,” he says. “To limit oneself to one state because one cannot personally travel interstate limits a huge amount of investment opportunities.”
Apart from using property magazines, real estate experts and Google Maps, Baker checks the mainstream media to see if there are any up-to-the-minute announcements or predictions that could positively or negatively affect property prices. This could include loss of industry in the suburb, resulting in unemployment and a hit to capital growth prospects.
This article was published in the July 2014 edition of Your Investment Property magazine. You can subscribe to the magazine here.
