Why it is that residential property easily absorbs the increasing rates of interest? The answer is simple, because mortgage harassed Australians cannot escape the banks that persist for their outstanding debts. In contrast to the 8 million Americans who had to mandatory close their accounts during the last two years, the Australian mortgages provide personal remedies to be enforced which prevent the borrowers from shirking their payments even during difficult times. These are the reasons why in Australia for a long time there has been no auction or sale of bank confiscated properties or even a double digit fall in residential prices.

A more significant insight in to the price absorbing ability of residential property is the fact that there being only a slight increase in their prices it only happens that the buyer comes from a different segment. Investors with high rich cash and buyers with sound financial base emerge even when there are increasing interest rates taking advantage of deals offered by cash needy, interest rate dependant first buyers of home. Over the past six months we have noticed this phenomenon very clearly when, even though there were three consecutive incidents of increasing interest rates, investors and people looking to upgrade their residences were swarming as bees to flowers.

Increasing interest rates separate the boys from the men, as the cash rich buyers are judicious in opting for well located and better serviced inner urban locations. That is the reason that I will not find it surprising if the prices of inner urban properties remain stable in the face of increasing interest rates; even though ultimately this may cause the overall prices in the market to even out or there being a fall in the prices of properties in our far flung urban frontiers.

In the fast developing “Bigger Australia” of Kevin Rudd, it is financially not possible to own a property in the core of any metropolitan city and all buyers of property are aware of this reality. Hence, in spite of increasing interest rates, the choice of an inner urban property is an excellent investment choice for this year.

Take advantage of this early stage of the new property cycle, buy the right property in the right location and you’ll do very well in the long term.

The good news is that Santa has brought us one of the presents at the top of our wish list – confirmation that we are going to have a great year in the property markets of Australia.

I see 5 green lights to selectively invest in now….

1. A stable Australian economy
The Australian economy’s vital signs are healthy and it is performing much better than anyone would have expected this time last year. Ultimately, indicators like strong employment levels, wage and productivity growth and manageable inflation drive prosperity and the demand for goods, including property.

But watch out – every year there is one “X factor”, one unknown that pops up and surprises us and the economy.

Two years ago it was the subprime crisis overseas and its effects on the world financial markets. Last year the Australian government’s financial stimulus, comprising deep interest rate cuts and fiscal stimulus, had our markets surprised on the upside, with their resilience at a time when almost everyone was expecting a recession.

By definition (being an unknown X factor), I have no idea what will crop up this year. It could be rising interest rates stalling our markets, or maybe further financial problems overseas. Who knows? Something always crops up to surprise us – so be ready!

2. Increased Demand but a Lack of Dwelling Supply
Remarkable growth in immigration levels over the last few years plus a baby boom have boosted demand for housing. However despite a shortage of dwellings around Australia builders are just not constructing enough new homes and developers are not producing enough new apartments or townhouses to meet demand.

The problem is that for most new medium and high-density development projects to become financially viable to allow banks to lend for new development and to encourage developers to take the commercial risk, the end value of the apartments or townhouses will need to rise by at least 20% above current market prices.

Putting all this together, a shortage of supply and continuing demand, plus the increasing cost of development (including higher land costs, infrastructure costs and building costs) means that the value of new dwellings will have to rise substantially soon. This will of course have a positive impact on established property prices.

3. Demographics
Our population is fragmenting, with more people living alone; which means we need more dwellings just to house the same number of people. At the same time we are living longer. All of this means that more people will be seeking more accommodation both as tenants and owner occupiers, pushing up property values and rentals.

4. Rents will strengthen in 2010
With demand for rental properties outstripping supply, rents increased strongly over the last few years. Record low vacancy rates, fewer investors bringing new properties onto the market and low housing starts all mean residential rents will rise even further over the next few years. The rental boom has only just begun.

5. Low Interest Rates
Last year saw 3 interest rate rises and even though it is likely that there will be further interest rate rises this year, we still have relatively low rates compared to long term trends.

All this makes 2010 a great time to buy properties, as the beginning of this new economic cycle and this early stage in our property cycle offers great opportunities to create long term capital growth.

But as you’ve heard me say before… you have to be careful because not all properties will perform well.

Our property markets will be fragmented and patchy. Some suburbs will outperform while others will underperform. Some houses within those suburbs will increase in value and some will be duds.

As interest rates increase, affordability will be one of the key issues that limits property price growth in some suburbs in 2010.

Affordability will continue falling as property prices increase and interest rates rise. But this will affect some more than others. First home owners and those living in the working class and outer suburbs are likely to be affected more.

On the other hand those who own properties in the more affluent suburbs of our capital cities, which have exhibited strong capital growth over the last few months of 2009, are sitting on a heap of equity and won’t really be worried about affordability.

These inner and middle ring suburbs are likely to keep performing well again in 2010 and this is likely to lead to a 3 tiered market; especially in Melbourne, Sydney and Brisbane.

The more affluent suburbs near the city and the water will become even more expensive and strongly outperform the averages, as owner occupiers and astute investors chase the small numbers of properties coming onto the market in these locations.

As more and more home buyers and investors find they are priced out of the inner ring they will start looking for affordable properties in neighbouring middle ring suburbs. These will also increase in value, but maybe not to the same extent as the inner ring suburbs.

However the outer suburbs are usually where home owners are more interest rate sensitive, with many currently struggling to meet their mortgage payments. With the likelihood of further interest rate rises in 2010, property values in these suburbs are likely to languish.

So while the news is not the best for first home owners and renters, the current property markets offer good opportunities for investors who buy selectively.

For every month that your property is vacant, you are losing money in revenue. There are some things you can do to reduce the amount of time that your property is vacant; however.

First, when your property is vacant, a quick bit of real estate investment advice is to use that time to your advantage by making any repairs that are necessary and handling any maintenance tasks. In addition, you might also consider doing something to make the property more appealing such as touching up the paint or sprucing up the yard.

You might also consider providing some type of incentive or discount in order to get your property rented more quickly. Certainly this will cost a bit of money but in the long run it is often less expensive to provide an incentive in order to get your property rented more quickly than to allow it to sit vacant for a period of time. You might think about reducing the rent or installing something in the apartment that would be appealing to prospective tenants such as a washer and dryer.

Make sure you making strong efforts to market your rental property but running ads in all of the local papers and hanging up flyers at places of interest. Of course, you should also have a For Rent sign posted on the property so that everyone who drives by will see it and know the property is available for rent or lease. Once again, a small amount of money spent on marketing is less expensive than the amount of lost revenue you could incur by allowing the property to sit vacant.

In addition, take be proactive and begin the search for tenants before your current tenant moves out if you have reason to believe that they will be leaving soon. It is never a good idea to wait until the last minute and then try to fill a vacancy. You might even ask the current tenants if they know of anyone who might be interested in renting the property. It could be quite possible that they have friends who have visited and would jump at the chance to rent the property once it is available.

Keep in mind; however, that as important as it is to rent your property quickly and avoid a vacancy you also do not want to rent out the property so quickly that you fail to conduct a thorough screening. The first time you receive an inquiry on the property, you need to begin the screening process. Take the time to obtain some basic preliminary information about applicants while also providing information about your rental property.

Of course, you must abide by fair housing laws and you also must make sure you are fair in asking the same questions of all applicants so it is a good idea to write down your pre-qualifying questions so you can be sure that you are being fair. If you are unsure of what you are allowed and not allowed to ask by law, consider consulting an attorney.

Before you end the phone call with the applicant, encourage them to drive by the property so they can see it in person and then call to make an appointment with you to see the interior. These are some tips and general real estate investing advice to help you to cope with vacancy

Ideally, it is best to develop a list which you can take with you when you begin the process of shopping around for the right residential property investment. This list will help to keep you on track and focused on what you should look for as well as what you should steer away from.

When looking for the right rental property, you will want to take several factors into consideration.

First, you should always consider the condition of the property. Generally, it is best to keep in mind that if you come across a property with a price that seems too good to be true, there is usually a reason why the property is priced so low. Many real estate investors like to point out the fact that you are able to determine your profit when you purchase a property.

While you may not consider selling the property for some time and will instead be renting it out, it is still important to take into consideration the cost of any necessary renovations and repairs before you make a final decision regarding whether you will purchase the property or not. After considering these factors, you may find that it will actually be less expensive to purchase a residential property investment that is in better condition, although at a higher price, than to purchase a property with a lower price that requires extensive renovations and repairs to get it ready to rent out.

Location is, of course, one of the essential elements of purchasing the right residential property investment as well. Keep in mind that properties which are located directly on a busy street may not be appealing to tenants who like a quiet and peaceful neighborhood. On the other hand, a property which is located near schools or parks will likely be more appealing to families.

It is also important to find out the history on the property and specifically whether the property has ever been used as a rental property. This is important due to the fact that in some cases a property can get a bad reputation. It does not take long for word to get around and once that occurs it can be difficult to get past it.

If the property is currently being used as a rental property, you also need to consider whether tenants are already in the property. If that is the case then you may need to honor the current lease with those tenants. This means that you may not be able to raise the rent until the lease has expired. There may even be state laws in some cases which could regulate how much you are able to raise the rent. Obviously, this is something that should be carefully considered. While there is the obvious advantage of already having tenants in the residential property investment, you may find later that this is actually somewhat of a bit of a disadvantage so be sure to carefully consider this factor.

Maintenance and repair needs of the property should also be taken into consideration. In the event that you are not able to maintain the property or repair it, this will translate to hiring a property manager and/or repair person. This means extra expenses which will reduce your profits. Of course, it also gives you some free time so you will have to weigh the advantages and disadvantages.

Finally, consider the price of the residential property investment. You always need to make sure that you will be able to cover not only the mortgage payment, if you have one, but also other expenses such as taxes and insurance. In the event the property is not occupied for a period of time, you will still need to meet all of those expenses so be certain that you can cover them before you obligate yourself.

One of the best places to start is the newspaper. It is imperative that you do some local research to find out what kinds of prices are driving the local market. Location is the most important factor in determining rental rates. For example, a three bedroom, one bathroom home in one part of town may rent for a $750 a month while another property on the opposite side of town may only be able to draw $500 per month. Most prospective tenants look for convenience when searching for a rental property. They are either looking for a location that is near their work or close to their children’s schools for example. Neighbourhoods that are considered to be trendy or hip can also be a driving factor, as many people like the idea of living in certain neighbourhoods.

Of course, the budget of the renter will also play a role in determining how much they are willing to pay and can pay in rent. Due to the fact that most renters have needs that must be filled, especially in terms of space, it is quite common for square footage to also play a role in determining rental rates. This means that larger homes and units will typically be able to rent for rates that are higher than smaller homes and units.

When setting rental rates and thinking about rental yield, it is also important to keep in mind that there is a certain point when rental rates can reach a cap. When interest rates are low, if rental rates rise too high, renters will quickly make the connection that it just does not make sense to rent any longer when it could be less expensive to buy a home.

Another way to make sure that you stay updated on rental rates and comparable rental yield in your local area is to join a local association for landlords. This is a great way to make sure that you keep your finger on the pulse of the local rental market. Emerging trends in the area will affect not only you but also other landlords as well. For example, if your particular area is in an economic slump or even an economic boom then this could have an effect on local rental rates. Make sure you keep track of whether there have been job losses or the creation of new jobs in the local area.

It is also important to keep in mind that basic amenities can also play a role in determining how much rent you can charge for your unit or apartment. Some of the basics expected by most prospective tenants include off-street parking, washer and dryer hookups, dishwashers, etc. If these basic amenities are not available, you may find that you need to either offer something else that would attract prospective tenants or lower your rental rate.

There are many factors as you can see to consider when setting rental rates. As a property investor it is important to strike a balance between high rental income to achieve high rental yield and low enough rent to keep renters happy and content.

First, you need to carefully examine potential rental income. If the property has already served as a rental property, you need to take the time to find out how much the property has rented for in the past and then do some research to determine whether that amount is on target or not. In some cases, properties may have rented for lower than they should have while in other cases a property may be over-rented. Look at comparable properties in the area to make sure you know whether the property in question is on target; otherwise you may find that the amount you think you will be receiving in rental income is unrealistic.

Mortgage interest is another area that should be considered carefully. Make sure you know and understand prevailing interest rates as well as the details of your specific loan because mortgage interest is the biggest cost you will face when purchasing investment property. First, understand that homes and duplexes tend to have loan structures that are similar to any mortgage loan. If you are looking at commercial property with even more units; the matter of terms and rates is completely different. Typically, the more money you are able to put down on the purchase of the property, the less interest you will have to pay.

One area which many people fail to take into consideration is the cost of the property being vacant. While you would certainly hope that your property would remain rented all the time, this simply is not realistic. There will probably be times when your property will be vacant. Generally, you should assume that your property will have an average 10% vacancy rate. This piece of property investment advice can save you a lot of stress and heard ache.

The cost of tenant turnover should also be taken into consideration. This is often a big surprise to many landlords who assume they will rent out their properties and their tenants will remain in the property for some time. Even more of a surprise is how much it costs to prepare the property to rent out again. Just a few of the costs include not only advertising for a new renter but also repainting, cleaning, etc. If damage was done to the property, the total cost of repair may not be fully covered by the security deposit you charged.

Of course, the cost of insurance should also be taken into consideration. Keep in mind that the insurance for investment properties is usually higher than an owner occupied property. Make sure you obtain a quote rather than just using the insurance cost for your own home as an estimating guide. In addition, make sure you take into consideration not only property insurance but also liability insurance as well.

Utility costs are another area that are frequently under-estimated. If the property has already served as a rental property make sure you find out exactly what the owner pays for and what the renters pay for. You should also make sure to find out whether you will be responsible for other costs such as trash collection.

Finally, take into consideration the costs of property management if you will not be managing the property yourself. One of the best property investment advice that you could receive is that there are many other costs associated with purchasing an investment property outside of the purchase price so it is crucially important that as an investor you take into account these extra expenses to prevent any nasty surprises.

3. You can add value to property

Adding value to property can be done very easily with big impacts. You could simply add a new coat of paint, replace the carpet, change the doorknobs, or just polish the timber floorboards. These simple and low cost improvements could see an increase in the market value of your property. This is great if you are looking to sell an investment property, as you will be able to achieve more money from the sale. It is even more powerful if you are looking to perhaps borrow against a particular property in order to invest in another. You can do some simple improvements to increase your equity and fast-track your property investing.

There aren’t many other investment vehicles that allow investors to add value to their portfolio as a whole with such ease. If you invest in shares there is no way of adding value to those shares, if you invest in a business you most certainly can add value however it will usually require a lot of expertise and capital in order to do so.

The ability to be able to add value to your properties is a very powerful concept and if done properly can make any investor a lot of money and equity.

Stay tuned for more property investment tips.

2. Property Can Be Bought Below Market Value

This is a very important point to understand especially when investing in positive gearing property as it will directly affect your ROI (Return On Investment) and cash flow. Unlike many other investment vehicles property can be negotiated and often times be bought below market value.

Imagine a property with a listed price of $150,000 returning a gross rental yield of $250 per week. A couple of simple mathematic calculations will show us that the gross ROI is 8.67%.

[($250 x 52
) / $150,000] x 100 = 8.67%

However if we are able to negotiate the price down let say $15,000 for example and bring the purchase price to $135,000 the ROI on this property begins to look a lot more favourable. The new ROI will be 9.63%.

[($250 x 52
) / $135,000] x 100 = 9.63%

The fact that real estate and property can be negotiated and therefore bought below market value makes it a great investment and wealth building vehicle. The key to being able to secure deals below market price and increase your overall ROI is to be a skilled negotiator. As a property investor this is a very valuable skill and can save you a lot of money. During my first ever property deal I understood the value of purchasing property below market value and had previously learnt about negotiation. I managed to negotiate about 10% off the purchase price which put me in a very strong position after buying the property.

As an investor when inspecting properties it is important to firstly NOT become emotional and secondly treat your investing as business transactions. Think of termite infections as opportunities to negotiate the price and secure a great deal. Perhaps the carpet is all torn and dirty or maybe there are massive marks all over the wall. These are all opportunities for the astute investor to pounce on and create winning deal when others simply see “rubbish”. As an investor your motto should be “problems equal opportunities”.

In another article I will go more into seeking hidden opportunities and negotiation tips and techniques.

Stay tune for more property investment tips and the rest of the reasons to invest in property .

1. Property always has consistent capital growth over time

The nature of property is for it to increase in price over time. This is what we call capital growth. On average in Australia properties increase an approximate 8% every year. This means that property values and prices will double every 7-10 years. This piece of information is so powerful as it can help you to build huge wealth in equity. This equity can be used as further security to borrow more money and continue investing or you could possibly sell the property to uncover the equity you have gained.

It is also important to understand that you should not expect property to increase the average 8% every year. Property prices don’t increase in a straight line but rather in cycles. I like to picture 3 stages in the cycle, Boom, Slump and Recovery. Overall over a period of time the prices should average out so some years in the “Boom” period you may experience more than 8% growth however in “Slump” periods you may experience less.

There are many factors that influence capital growth and different areas will see different levels of growth. Some of the reasons for faster and increased growth could include, development of infrastructure, new hospitals, new schools, new transport line and demographics of area. Investing and acquiring property needs to be seen from a business point of view. Property or real estate is just like any other commodity traded on the open market, it is affected by supply and demand. So if you can find an area where in the future you can see or forecast the demand for a similar property to yours exceeding the supply than you should experience accelerated capital growth in the years to come.

There will be a lot more property investment tips to come. Tune in over the next few weeks for all 3 of the reasons to invest in property.

This data just came in this week so it goes to show some strong growth throughout Australia. This just means that we will be able to finance more properties with the growth of our current ones.