No place like home

Greener pastures ... there are pitfalls to investing in overseas property. Illustration: Sam Bennett.
Greener pastures ... there are pitfalls to investing in overseas property. Illustration: Sam Bennett.

Real estate has always attracted more than its fair share of get-rich-quick merchants. The internet is full of ''opportunities'' to take advantage of the high Australian dollar and pick up bargains in the US.

There are certainly hundreds of thousands of very cheap properties there, but the trouble may come when trying to find a tenant. Some of the sites even show maps of the properties for sale. One shows a development of perhaps 100 identical houses where little cars have been photoshopped into each driveway to give the impression the houses are occupied.

Landlords face a lot more costs when buying property overseas rather than at home. Help will be needed to navigate American tax laws, and there is the currency risk. The investors may even have difficulty getting a bank to lend on overseas property.

Property investors are likely to be better off sticking to home. But if you think that a holiday house would make a good investment, think again. The thinking is understandable: acquire a holiday house and cover some of the costs by renting it for part of the year. The main problem is that prices have been falling in many coastal holiday spots. And with the high Australian dollar, more locals are taking holidays in Bali than in Australia.

Property experts tend to favour apartments on good public transport links ahead of free-standing houses, which require too much upkeep. Savvy property investors tend to buy older apartments in the lower price range. With many newer apartments, the landlord can end up subsidising the lifestyle of the tenant via high fees to maintain the gym. The cheaper the property, the lower the transactions costs such as stamp duty. Also, lower-priced properties are more likely to be cash-flow positive, where the rent more than covers the mortgage repayments.

Emotions can muddle the thinking of would-be property investors. But successful investing in bricks and mortar calls for a cool head. That's even more so now, because capital gains are hard to come by.

But patient investors who buy wisely will likely be rewarded with reasonable capital gains down the track. The key is to buy the right property on a decent yield. Having an investment property that is cash-flow positive provides a financial buffer in case there is a squeeze on the family finances.

An investor never wants to be a forced seller.

But some investors put themselves behind the eight ball on day one by overpaying. Australian capital city property is expensive, and it is easy to pay too much. The reasons for the high prices include the domination of our property market by owner-occupiers, who buy primarily on lifestyle and emotion.

But there are reasons for thinking the upward trend in prices will continue, despite the current lull. Australia has one of the fastest-growing populations in the developed world; most people want to live in the coastal cities; and land is scarce in our capital cities.

This story No place like home first appeared on The Sydney Morning Herald.