Fads come and go in the property world. People jump on all kinds of bandwagons, depending on where most of the development dollars are being spent at any given time, and invariably buy something that doesn’t quite gel with their investment goals, strategy or portfolio.
Many of these ‘happenstance’ investors are victims of clever marketing campaigns and salespeople playacting as industry professionals, such as ‘independent financial advisers’.
They might turn to someone for help purchasing their first property investment, or perhaps acquiring one within their SMSF, as is all the rage these days, and the next thing they’re walking away with a ‘purpose built’ property.
Think student apartments, serviced holiday accommodation or perhaps defence housing with enticing rental guarantees.
Is it right for them? Does it align with their goals and plans around wealth creation with residential real estate? Unfortunately, most wouldn’t really know, because this wasn’t the primary concern of the guy (or girl) getting paid a hefty commission to ‘sell’ a product in the guise of impartial advice.
Of course, that’s not to say that ‘purpose built’ properties should be avoided like the plague necessarily. In some instances, they might very well complement an investment structure.
But the point is, you need to ask yourself some serious questions and answer honestly when assessing any potential investment purchase, be it student digs or your standard detached dwelling…
- Would it make a good fit for my existing portfolio?
- Does it support my current asset base and will it help or hinder my success in property?
- Does this align with my investment strategy? i.e. Is the focus primarily rental yield or capital growth?
- Will this work for me as an asset, or will I have to work harder to support it as a potential drain on my cashflow position?
- Will this asset still be working as a viable addition to my portfolio in the next ten to twenty years?
If the answer to any of these is ‘no’, perhaps you need to pause for a moment and reconsider your options.
The tertiary education sector was booming earlier this century. Overseas student numbers were on the rise and developers saw an opportunity to cash in on the cashed up international student crowd and their parents.
University precincts were suddenly a hive of construction activity and within the blink of an eye, the likes of Carlton (an inner Melbourne suburb home to three major tertiary institutions), were dotted with high-rise monoliths filled to bursting with tiny boxes, otherwise known as student apartments.
Many were marketed with the promise of higher than average rental yields and income guarantees. But of course, these guarantees never last long and generally, you’re paying a premium for sub-standard stock in order to cover the developer’s margin, which includes rental guarantees!
Interestingly, since the student apartment boom Carlton’s housing values have been more subdued than in neighbouring suburbs. And herein lies the problem.
Being so student-centric (because no one else in their right mind would want to live in a shoe box), these apartments are incredibly difficult to sustain as a viable asset.
Firstly, they will never appeal to the owner-occupier market and are incredibly prohibitive when it comes to your tenant market too. This presents a double whammy – inconsistent cashflow, particularly as transient students tenants come and go, and sub-par capital growth.
And secondly, with overseas student enrolments having slowed significantly in Australia, the likelihood that a student apartment investment will hold as a long-term prospect is really quite slim.
Serviced holiday accommodation or holiday homes
Often investors buy this type of property with the idea that they’ll perhaps get some discounted accommodation at their favourite beachside resort or coastal town during the summer holidays.
But being a seasonal income prospect, chances are a condition of your contract will be that you can only use the holiday let at certain, off peak times – when it may not suit you to vacation – and even then, you may still have to pay a discounted rate.
There can also be a lot of body corporate restrictions, regulations and ongoing costs associated with the upkeep of a holiday resort apartment and the amenity that generally comes with it, such as on-site gymnasiums and pools.
Then there’s the wear and tear to consider from all those short-term tenants your apartment accommodates, who are renowned for being less forgiving on soft furnishings and lounge suites than their long term, residential counterparts.
The Defence Housing Authority sells homes to investors on leaseback, meaning the property will be rented back to defence force personnel for a specified term, which is generally anywhere from three to twelve years.
The long leases and guaranteed rental income from these assets promise a hassle free and reliable form of property investment.
But as with many other purpose built products, you’ll usually pay more to own one of these assets than what it’s truly worth. What you’re actually paying for is that rental guarantee.
Anecdotally, some industry analysts believe DHA stock can be overpriced by as much as 5 to 10 per cent above market value.
Remember at the end of the day, you don’t need rental guarantees to enjoy a peace of mind, profitable and sustainable property investment portfolio.
What you want is a quality, investment grade property that’s well researched and carefully selected according to strict criteria that complements your own personal investment goals and journey.