Now is a good time to become a landlord, but you must do itproperly: Mark Bouris

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General investors and superannuation contributors did not do well over 2011.

The Australian share market lost about 15% of its value, and SuperRatings reports that even conservative “balanced” super funds went backwards by 1.9%.

House values in Australia’s capital cities dropped by around 3% to 4% during 2011.

So what should people be investing in this year?

I suggest a serious look at investing in property and renting it out to tenants.

There are several reasons for this outlook, including soft house prices, strong rental demand and the prospect of solid total returns.

You ideally want to buy the property at a time when real estate is in the downturn phase of its cycle, you want to rent it out when rental demand is high, and these two factors should come together to produce a total return that not only beats inflation but also compares favourably with alternative investments.

One of the first rules of buying property is that you must not overpay. This is important for two reasons: firstly, you don’t want your income from the property being overshadowed by high mortgage repayments; and secondly, capital growth in the property is as important as the monthly cashflow from rental income, and you will enjoy greater capital gains when you buy the property for a lower price.

With property prices having been flat or going backwards for two years, it seems like a good time to buy.

Property can also be looked at in terms of affordability, and affordability is attractive for investors right now. Disposable household incomes grew about 6% in the year to September 2011 while dwelling values declined by a total of 3.3% since May 2010, according to RP Data-Rismark research.

Rismark says disposable incomes per household have risen about 15% further than capital city dwelling values since the end of 2003.

When many people buy investment properties, they simply want to buy the cheapest place they can find and rent it for the highest rent they can charge. I advise potential landlords to hold out for a property that is in a sought-after area, close to shops, transport and schools.

There is no point having a rental property that you can afford when no one wants to pay you to live in it.

Then you have to look at rental demand because when you buy an investment property, you are going into business as a landlord.

On this score, there’s some good news for property investors. Weekly rents across the capital cities rose 1% over the December 2011 quarter and are 6.3% higher than at the same time last year.

This suggests rental demand is exceeding supply, which is good for landlords. Anecdotally, you hear stories of people queuing to see the good properties and offering to pay more rent than advertised to secure the property.

While this is a good result financially, it’s also a benefit in terms of tenant management. One of the biggest headaches for a landlord is a bad tenant, but when demand is strong you don’t have to take the first applicant. You can pick the tenant who is best suited to your property and who has the best record.

If you feel you can buy cheaply in the current property market and you can take advantage of the strong rental demand, then you have to think about your total return.

The total gross return enjoyed by property investors around Australia has averaged 1% per cent over 2011, much better than the 15% losses experienced in Aussie shares.

The average capital city apartment is now offering a gross rental return of 5.1%.

This is looking like a strong scenario for investors wanting to buy property, and if the current financial market pricing for further interest rate cuts comes to pass, the outlook for housing in 2012 looks positive for not only owner-occupiers, but landlords too.

As a final hint to first time property investors, I would urge you to take professional advice before entering into this: consult a solicitor or accountant about your tax position as a landlord, use an insurance broker to get the right insurances, and spend some time finding the right property management company.

It’s a good time to be a landlord, but only if you do it properly.

Mark Bouris is executive chairman of Yellow Brick Road, a financial services company offering home loans, financial planning, accounting and tax, and insurance.

This article originally appeared in News Ltd. papers.

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