It was great to catch up with my first ever client over the weekend. He bought a property in Brisbane just over 3 years ago, and we're now be able to see the results of the strategy we put in place together.
Our focus for the property was growth rather than cash-flow. As a result, we targeted detached houses in the inner suburbs of Brisbane, rather than townhouses or units. Ultimately, we settled upon a basic post war house on a 600sqm block in Stafford Heights, in Brisbane's inner-north, for $450,000. With some small improvements, including a new kitchen, carpeting, an improved bathroom and air-con, the property has rented consistently throughout. Rental rises and tax deductions mean that the property is now essentially cash-flow neutral.
Since purchase, the property has risen in value approx $120,000 to $570,000. This represents a 26.6% gain in just over three years. This growth has been underpinned by a 25% increase in the land value, driven by basic supply and demand. There are no new land releases in Stafford Heights or its surrounds, while its proximity to the CBD, job sources, services, infrastructure and amenity has created rising demand. A well-executed renovation would add further value to the property, and is part of the longer-term plan.
Meanwhile, the client has implemented a savings plan which means he now has enough deposit for another property. This has been put into an offset account from the beginning to reduce interest, and by submitting a tax variation, money has flowed more quickly into the offset account than if he waited for the end of financial year to receive his refund.
Overall, it's a strong result. The client has a property growing in value, scope to manufacture more of a capital gain, and financial flexibility to make further investments. It's a result that's been achieved thanks to three key areas:
- Property Selection. Buying in an area with high demand and low supply, and focusing on growth instead of cashflow, up to the limit of holding costs the client could afford. The growth in the property's land value has been much higher than it has been in areas further away from the CBD.
- Structuring. Good finance arrangements, use of an offset account and tax variation have improved cashflow and increased savings.
- Discipline. Sticking to a savings plan has given the client a handy buffer, and means he can make his next investment sooner.
Interestingly, the client was offered a property at the time by another investment company - a townhouse in Springfield Lakes. It offered a good rental yield and high tax deductions, and according to the company selling it, plenty of capital growth. Of course, the promised growth simply hasn't happened, and the property is worth the same or slightly less than what he would have paid for it. Overall, he would have cost himself $100,000 in 3 years if he'd bought this property - that's $33,333 a year.
At the end of the day, it's capital growth that will make the money for you, not rental return, negative gearing or depreciation. There's no secret to it either. Buy the best property you can afford to buy and hold, in an area of high future demand and low future supply.
If you want to have a discussion about how best to achieve this yourself, book in a consultation here.