Australian Property Bubble set to keep inflating as Investors win with rents set to rise

Posted by Scott Banks on February 15, 2010

The number of people intending to become property investors has almost doubled during the past year

Investment properties back in demand
Investors keen to buy before price rises
Rising rents mean higher returns

WITH demand for rental properties set to soar this year, experts are urging investors and renters to get in now ahead of an expected price rise.

Property investors are gearing up for a bumper year as big rent increases and strong capital gains are expected to offer double-whammy returns during 2010.

Demand for rental properties, from both investors and tenants, is expected to surge during the next few months as people attempt to lock in properties before prices rise even further.

Latest research from Resi Mortgage Corporation has found the number of people intending to become property investors has almost doubled during the past year.

Strong price growth for existing housing, particularly in established suburbs, has led many would-be investors to act sooner rather than later, Resi consumer advocate Lisa Montgomery says.

Anticipated rent increases, because of high demand from renters, is also encouraging people to act promptly so they can take advantage of the expected higher returns.

“It certainly is good times ahead for landlords,” Ms Montgomery says.

“People are noticing that yields are high and property has returned to being the ‘new black’ to invest in. Confidence is out there.”

Research company Australian Property Monitors has forecast rent increases of up to 11 per cent in 2010 after little or no growth during most of 2009. In Melbourne, it expects house rents to rise 5.6 per cent and units to lift 7.5 per cent.

“An improving employment outlook means, overall, renters will be more willing and able to afford rental increases,” APM economist Matthew Bell says.

Ongoing housing shortages are expected to worsen as first-home owners opt out of buying and remain as renters.

Immigration continues to increase and more people are turning to bricks and mortar as an investment after being stung by the share market.

“On the supply side of things, there simply aren’t enough new properties being built for investment purposes to meet this increased demand,” Mr Bell says.

However, he says many rent rises will also be needed to recoup extra costs such as higher interest rates and land tax, not just additional profits for landlords.

Property investment specialist Jock Bing from Portfolio Management Services says the demand for rental accommodation is expected to worsen during the next couple of months as the academic year gets under way.

“Some rental returns had a slight hiccup early in 2009,” Mr Bing says.

“However, with the general short supply, rents have firmed again but not excessively and there is still more room to move.

“The supply and demand gap is only expected to widen further during 2010.”

SOURCE: Karina Barrymore adelaidenow.com.au

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What is your new year resolution for your property investment portfolio?

Posted by Scott Banks on February 12, 2010

The new year is well under way and along with thoughts of new year resolutions and giving your home a good clean-out, investors should think about tasks they need to carry out now to build and keep their property portfolio ticking along nicely.

With our lives following an ever increasingly busy pathway, the temptation to set and forget in regard to property investing is a hard one to overcome. While everything seems to be going smoothly, there’s no point in upsetting the balance, right?

Wrong. Once a year all prudent investors should pull out the investment scrapbook, clean off the dust and ensure that everything is as it should be.

Here are a few tips as to what you need to be doing, right now:

1 Make a list of when your leases are coming up for renewal, and schedule in your diary a phone call to your property managers for one month prior. The next two years are going to herald a period of exceptional rental growth, and now is not the time to leave it to your manager to decide when to increase rents. Remember, a rental increase of $10 a week is only worth about 70 cents to your manager, and so it is not as important to them as it is to you. I have recently reviewed all of my rents, and in some cases I was able to obtain an extra $30 a week because the manager had not been applying rent increases when they should have.

2 For those properties where you are allowed to have an inspection every six months included in your management fee (as in most states), make sure one has recently been done and, if not, order one. Then, consider the resulting report and the suggested work required in terms of its ability to increase income to you. For example, the request for an air-conditioner may be nice, but not urgent and may not result in extra rent, whereas a paint job and new carpets may increase rent return by $20 a week.

3 Review the performance of your property manager. How long have vacancy periods lasted? How good was the communication between the manager and you? Have they been pro-active in suggesting rental increases? Do they attend to requests for maintenance in a timely fashion? If not, maybe it is time to terminate and try a new manager.

4 What is the current value of your property? Even in a downturn, some areas still increase in value.

I recently had seven of my lowest price properties re-valued. I had owned them between two and three years and paid less than $100,000 for each of them. Even though the past 12 months has apparently been very slow in terms of growth, I had an additional $400,000 of value across these seven properties. This was well enough for me to buy several more. Examine your own portfolio to see if you have enough equity increase to add to it.

5 Ensure that you have started the current financial year more organised than you were last year! The more properties you acquire, the harder it gets to track the financial details of each of them, and the more costly it is to have your accountant sort through the mess at tax time. Start the year with an organised approach to your property accounting so that you can simply hand over spreadsheets with full details once tax time rolls around again.

6 Last, but by no means least, don’t forget your personal financial housekeeping. The coming few years will bring a rocky roller-coaster ride from an economic perspective and you can expect interest rate instability as our country fights the inflation crises which threatens us. Now is the time for you to get really serious – the easy property investment ride is well and truly over for now and if you want to invest today (which is probably the best time I have ever seen to buy property), then you will have to make sacrifices to do so. Look at your spending and cut where you can. Pay extra money into your loans and if rates are cut, keep your repayments high so that you can gain equity, sooner.

Warren Buffet says that true wealth comes from the transference of funds from the impatient to the patient. Pay attention to your current portfolio, work on building by adding more properties during the tough times, and be patient, and you will most definitely prosper over the long term!

SOURCE: Margaret Lomas realestate.com.au

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Land prices up by almost 6% in Australia in the September 09 quarter

Posted by Scott Banks on February 10, 2010

Land prices up 5.7pc

A new report shows the median price of residential land in Australia jumped by almost 6 per cent in the September quarter last year.

The Housing Industry Association (HIA) and RP Data says the cost rose 5.7 per cent to just over $181,000.

Compared to the same time in 2008, the median price increased by 11 per cent, while the volume of sales grew by 33 per cent.

The HIA’s chief economist, Harley Dale, says prices will continue to surge unless more land is released for residential development.

“If land isn’t released in a sufficient amount then you get a rapid escalation in prices [and] that has a very detrimental impact on prices, on the affordability of new homes,” he said.

SOURCE: abc.net.au

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Property investing is confusing, bad decisions can cost you thousands!

Posted by Scott Banks on February 3, 2010

Living the dream as a landlord

It may sound easy, but becoming a landlord is not a one-way ticket to riches

BECOMING a landlord is the aim of many, but you need to know what you’re doing.

Property investing is the subject of countless books and seminars in which so-called experts talk about the easy millions to be made.

It sounds easy but becoming a landlord is not an instant one-way street to riches.

It’s to be approached with your eyes open and your wallet shut until you are sure about what you are doing. Here are some key questions to ask.

Have I got a big enough deposit?

Requirements for deposits have increased.

While landlords could get 100 per cent deposits this time last year, the maximum loan-to-value ratios (LVRs) have been cut gradually from 100 per cent to 95 per cent and now to 90 per cent.

In other words, you will need a deposit of at least 10 per cent.

How much rent do I need to earn?

There is no set level of rental income that is relative to the mortgage interest but banks will look at your income and outgoings, including repayments on other mortgages, and assess whether you can afford to cover the interest in the event there is no rent income.

“Most banks will assume four weeks a year when the property is empty,” says Mortgage Choice broker John Manciameli.

How long should I invest for?

Investing in property is a long-term game. You can’t rely on prices holding up or rising in the very short term and the longer you can afford to commit for the better.

What if I have tenant problems?

Many issues can arise with tenants, from late payment of rent to treating the property badly or malicious damage.
Residential tenancies authorities in each state offer plenty of information.

You should take out landlord insurance. It is available from most of the major insurers and covers risks such as arrears and damage.

What if I am self-employed?

If you will have problems verifying your income and need to do a low-doc loan, you will need to stump up a 20 per cent deposit.

But if you can come up with two years’ worth of business statements, bank statements and trading history, you will qualify for a normal LVR of 90-95 per cent.

Where are the best areas to buy?

Location, as any landlord will tell you, is key. But in a country with such a shortage of properties on the market, vacancy rates are historically low.

The old tips about buying within half-an-hour or so of the city centre, near shops, public transport and other local amenities hold true.

“Many banks do not like lending in certain areas, particularly regional locations, so they may insist on a higher LVR or won’t lend at all,” Mr Manciameli says.

“Others don’t like high-rise blocks.”

How shall I decorate the place?

Try not to impose your own taste on the property. Make it as neutral as possible, with white tiles and neutral colours rather than wacky reds. Avoid swirly patterns on curtains simple blinds are popular.

What are the tax advantages?

Negative gearing, the most famous tax break on Australian property investment, is widely misunderstood.
It works like this: if your rent falls short of covering your mortgage interest, you can claim the losses against your taxable income.

However, you don’t get refunded all of the losses, only a proportion equal to your marginal tax rate. If you pay 46 per cent tax and you have a $100 shortfall every month, you get back $46 a month against your mortgage interest.

If you pay tax at 30 per cent, you can reclaim $30. Higher earners benefit from negative gearing the most.

Are apartments different to houses?

Yes. If you buy a strata property, you need to check whether the body corporate is competent and cashed up.

“That means checking the building’s repair history and looking at how much money is in the sinking fund,” says James Garnsey, a director of wealth management firm Yellow Brick Road.

“Is there enough to cover major repairs?”

Repairs and maintenance of the property are shared among the owners but major works can still cost each of them a substantial amount.

SOURCE: Nick Gardner www.news.com.au

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Is Australian property over priced… or will it just continue to increase in value in 2010?

Posted by Scott Banks on January 29, 2010

Will the housing market cool?

Based on the rpdata.com residential property database, which is the nation’s largest with over 280,000 sales in capital cities in the first 12 months of 2009 alone, Australia’s housing market growth came to a halt in December in line with the standard seasonal slowdown.

According to the market-leading RP Data-Rismark National Capital City Hedonic Index – which is published by the RBA in the Statement on Monetary Policy– Australian dwelling values fell slightly by 0.3 per cent in the month of December after 1.1 per cent growth in November (importantly, there was no revision at all to the previous ‘indicative’ index estimate for November).*

In the December quarter, Australian home values advanced 2.1 per cent, which was the weakest result in 2009 and not surprising given the typical summer slowdown (ie, there is some seasonality in the data). More generally, quarterly capital gains in 2009 have been very stable at 2-3 per cent per period.

Over the 2009 year, Australian home values rose by 11.1 per cent following on from their 2-3 per cent calendar-year falls in 2008, which was the worst performance in recorded history.

Based on settled sales over the three months to end December 2009, the median (ie, 50^th percentile) house price in Australia is $485,000, while the median unit price is $400,000.

RP Data-Rismark’s December quarter result is noticeably less the 4.8 per cent growth reported by one median price index provider. As discussed previously, median price indices can be adversely affected by changes in the composition of buyers in the market, amongst other typical biases (such as capital improvements and variations in the type and quality of homes manufactured over time). RP Data-Rismark’s “hedonic” index is not influenced by these changes and seeks to explicitly control for each individual property’s unique attributes, including, but not limited to, its longitude, latitude, landsize, type (ie, detached house or unit), and number of bedrooms/bathrooms using a non-linear, adjacent-period hedonic regression technique.

The problems associated with using median prices were graphically illustrated in the first quarter of 2009, when APM and the ABS reported that house prices were falling – by a record margin in the case of the ABS – when in fact they were rising rapidly. The medians were being dragged down by a surge in first time buyers purchasing cheap homes in the first three months of 2009. RP Data-Rismark’s hedonic index, in contrast, reported strong growth of circa 2-3 per cent during this period.

Since the first quarter, RP Data-Rismark’s index has shown relatively stable quarterly growth. In comparison, the median price indices have reported wild changes in value, which appears to be evident again in the fourth quarter. The latest median price estimates are likely being artificially boosted by the fading of first timers and the return of upgraders buying more expensive homes, which automatically drag the medians upwards (even if one uses the superior “stratified” median price index). At the current time, the true rates of capital gains across Australia are likely to be less than those reported by median price suppliers.

The best capital city performer in 2009 was Darwin with 16.6 per cent growth across all dwelling types. This was closely followed by Melbourne, where dwelling values registered a stunning 15.6 per cent increase (after suffering a 1.8 per cent decline in 2008). Residential real estate in Canberra came a close third with 14.7 per cent growth. Dwellings in Australia’s largest city, Sydney, experienced their highest capital gains since the boom in the early 2000s with values accreting by 11.4 per cent.

Amidst the media hysteria about escalating house prices (which, as we discuss below, have not outpaced household incomes since 2003), it is sometimes forgotten that between December 2003 and December 2006 Sydney dwelling values fell by over 6 per cent. In inflation-adjusted terms, the losses in Sydney were obviously much larger. Similarly, between December 2003 and end 2005 dwelling values in Melbourne registered very weak nominal growth of just 2.8 per cent.

click the image to enlarge

The worst capital city performer in 2009 was Adelaide where home values rose by a still quite reasonable 6.2 per cent (Adelaide had, however, outperformed in 2007 and 2008).

Alongside Melbourne, the other major story of 2009 was Perth’s rebound. Dwelling values in Perth had been falling since September 2007 with total cumulative losses of 7.9 per cent at their nadir at the end of 2008. Yet Perth property has staged a solid comeback in 2009 with capital gains of 7.1 per cent to nearly retrace their 2007 heights.

When we divide the patented RP Data-Rismark Hedonic Index up into the cheapest 20 per cent of suburbs ranked by price, the middle 60 per cent of suburbs, and the most expensive 20 per cent of suburbs, we find that contrary to popular belief the least expensive areas (+8.2 per cent) significantly underperformed the luxury markets (+11.9 per cent) during 2009. This reverses out the trend in 2008 when the cheapest areas fared the best with +0.2 per cent growth while the luxury markets performed worst and realised substantial value losses of 7.2 per cent. The table below shows the relative performance of each cohort on a quarter-by-quarter basis.

In the December quarter every mainland capital registered capital gains. The best performer was Canberra (+6.9 per cent) followed, interestingly, by Adelaide (+2.7 per cent), Darwin (+2.5 per cent), Melbourne (+2.3 per cent), Brisbane (+2.1 per cent), Sydney (+1.9 per cent) and Perth (+0.5 per cent). (Note, however, that the indicative estimates for Canberra are volatile due to its inherently thin market.)

In the December quarter, detached houses (+1.6 per cent) have underperformed units (+3.5 per cent). This trend is also evident in the calendar year results with units (+13.5 per cent) generating higher capital gains than houses (+10.4 per cent).

National rental yields tapered slightly in December with the gross annualised rental yield for units (houses) 4.9 per cent (4.1 per cent).

Is Australian Housing Expensive?

There has been wide public debate around how the cost of Australian housing has changed over time. Media commentators frequently reference “house-price-to-income-ratios” produced by overseas groups to gauge whether Australia’s housing market is over- or under-valued.

These measures typically suffer from a range of shortcomings, including the fact that they ignore non-capital city regions (around 40 per cent of homes are located outside of the capitals), often only examine wages as opposed to “household incomes”, and frequently restrict their analysis to detached houses when one quarter of all homes are semis, terraces, and apartments.

To better examine these issues, Rismark International (“Rismark”) has developed an alternative housing affordability index that compares Australian dwelling prices across all metro- and non-metro regions (including all property types) with the RBA’s definition of national “disposable household incomes” over time. The property sales data in this index derive from Australia’s most comprehensive residential property database (sourced exclusively from RP Data Ltd), which captures 100 per cent of all transactions consummated across the country.

The quarterly Rismark National Dwelling Price-to-Income Index shows that Australian house prices have not risen relative to disposable household incomes since late 2003 (see chart below).

click the image to enlarge

As Australian home values rose robustly in 2009, Rismark’s National Dwelling Price-to-Income Index has risen from its low of 3.7x in December 2008 to 4.1x as at the third quarter of 2009 (which is the date of latest ABS National Accounts data).

Over the last six years, Rismark’s National Dwelling Price-to-Income Index has remained broadly static after solid growth during the early 2000s (refer to chart above). In December 2003 Australian dwelling prices were 4.2x disposable incomes, which is effectively where they remain today.

The fact that there has been no discernible increase in Australian house prices relative to disposable incomes since the end of the last boom in 2003 is one important explanation for the exceptionally resilient performance of Australia’s housing market during the GFC.

In contrast to claims that Australian house prices are 7-8x incomes, Rismark’s National Dwelling Price-to-Income Index implies that the true ratio across all regions and all property types is around half this estimate.

This suggests that Australian housing is not as expensive as is commonly believed. It also reconciles with RBA analysis highlighting Australia’s internationally low mortgage default and mortgage stress rates.

*On a “seasonally-adjusted” basis the December index result was slightly positive.

**Note that there are on average 1.3 employed persons per household, and ‘income’ includes all earnings from savings, investment and labour sources—ie, not just wages.

SOURCE: www.businessspectator.com.au Christopher Joye writes an economics, finance and real estate blog for Business Spectator. His ‘after-hours’ blog can be found here

www.scottbanks.com.au – for help on how to retire with a property portfolio living the life of your dreams… contact us today for a no obligation chat

What you must do when buying a property…

Posted by Scott Banks on January 28, 2010

Buying a property Step 1 – Do your research Step 2 – How much can you afford? Step 3 – Find a lender Step 4 – The buying process

Step 1 – Do your research

OWNING property has always been the great Australian dream. Whether you are a first-timer or an experienced homebuyer, you need to ask yourself why you want to buy.

Will you want to live in it or are you buying it as an investment to rent it out and pay it off. Do you want a house or apartment, large or small, townhouse or land to build?

Whatever your answer, the more real estate market research you do, the more likely you are to effectively define your goals and understand what’s affordable.

Get onto mailing lists and develop good relationships with real estate agents in the area in which you are looking. Keep in regular contact with them. They can alert you to properties about to come onto the market in your price range.

Step 2 – Work out how much you can afford

Calculate how much you can spend, say one third or less of your pre-tax income in loan repayments. The amount will vary with different lenders, so if you don’t get the deal you want from one, try another.

The loan to value ratio (LVR) is the percentage of the purchase price that lenders will agree to lend. Some lenders will insist you have as much as 10 per cent of the purchase price in a deposit.

Don’t forget to factor in the following costs: legal fees, loan establishment fees, government charges (stamp duty and GST), property and pest inspection fees, moving costs and building and contents insurance.

First home buyers may be eligible for grants and exemptions on stamp duty (see www.firsthome.gov.au/).

Step 3 – Find a lender

Look for your loan at the same time or before you start looking for property.

Do some research online to see who is offering the best mortgage interest rates, then approach them in person to get approval “in principle” for your loan. This means if you need to buy at auction, you have the money organised ahead of time.

Banks, building societies, credit unions, solicitors and mortgage originators all offer home loans. A mortgage broker can help you find the best lender and the best rate for you.

There are many loans on offer, so you will need to do more research to understand the terms: a honeymoon rate offers a cheaper interest rate for the first 12 months; a standard variable rate rises or falls when interest rates rise or fall; fixed rates are fixed for a certain period; a redraw loan means you can pay it off, then reborrow that money – you may have to pay a service charge of say $25 every time you redraw.

Step 4 – The buying process

You’ve found the property you want to buy and arranged building or pest inspections. They are good, you make an offer, negotiate the price and the final offer is accepted.

Contact your solicitor or conveyancer (to find one visit www.solicitors.net.au) to do title or body corporate searches, draw up a contract, then arrange to exchange it with the seller.

Once you exchange contracts you are legally bound to go ahead with the purchase. This is also when you pay your deposit of around 10 per cent of the purchase price.

Sign the contract if you and your solicitor are satisfied that everything is in order. Often there are six weeks between exchange and settlement. During this time, you can arrange building and contents insurance on the property, and income protection insurance for yourself.

On the day you are due to settle, before your solicitor passes over the final cheque (or makes the transfer online) you should ask to inspect the property.

You need to check that no damage has been done to it in the intervening period and that all fixtures and fittings that appear in the contract are still in place.

You don’t have to settle on the property until all these conditions have been met.

SOURCE: news.com.au By Perrie Croshaw

www.scottbanks.com.au – for help on how to retire with a property portfolio living the life of your dreams… contact us today for a no obligation chat.

Buying an Investment property

Posted by Scott Banks on January 28, 2010

Buying an investment property Step 1 – Location Step 2 – Buy quality Step 3 – Gross vs net returns Step 4 – Coping with vacancies Step 5 – Triggers for failure Step 6 – Top tips

The number of property renters in Australia is rising as homes become less affordable to buy. This is good news if you own an investment property because maintaining a good occupancy rate is crucial to your investment success.

During the property boom of the 1990s, investment properties were all about capital gains; properties often jumped in value whatever you bought. That’s no longer the case. Now that the boom has passed, investors need to be more selective about the properties they buy.

Step 1 – Location

For a successful investment, you must acquire the right property in the right location at the keenest possible price and with its long-term viability in mind – in both terms of good rental potential and capital growth.

Check for proximity to transport facilities, schools, shopping centres, sports and entertainment facilities and areas of future jobs growth.

The property needs to be located in a safe, clean, attractive environment and the area will have an already established high rental demand.

Step 2 – Buy quality

The quality of the property is crucial.

The building must be appropriate for the market – for example, with at least three bedrooms if located in a family rental area, or with some security if inner-city high-rise.

It should be well-built (brick and tile is desirable) and have low maintenance buildings and external areas (check that the gardens and any other outdoor areas are in good order).

If it is an apartment, make sure it is large enough to meet the approval of your bank or lending institution.

Step 3 – Gross versus net returns

You’ve collected your rents (the gross return or yield) and now it’s time to pay out all your investment expenses.

You are then left with the net return or yield. This net return is this figure you need to capture regularly in order to understand how your investment is travelling.

While rents may not rise so quickly, sometimes the cost of the investment fluctuates and it is this you must keep a close eye on.

A quick way to calculate the net return is to determine the gross rental and then deduct 25 per cent (for outgoings such as rates, insurance, maintenance and body corporate levies). This gives you a rough idea of the net return before tax.

Step 4 – Coping with vacancies

Around 30 per cent of all Australians are renters, providing a huge pool of around 5.4 million people who are housed in or looking for rental accommodation.

Vacant properties can spell real trouble for the investor and are a security risk.

You should calculate on a loss of around 2 per cent of your gross possible returns for each vacant week.

However, a well kept, appealing property in good condition and in the right area should not be vacant for long periods.

If you are managing the property yourself and having difficulty finding tenants, you might want to approach some local property management agencies to see if they can help (for a fee, of course).

Step 5 – Triggers for failure

• The purchase price was too high.
• The property is in an area of low capital growth potential.
• The property is too high maintenance.
• The rent is too low.
• Vacancy periods are too long or too many.
• The loan taken out was structured wrongly.
• Some tax deductions are missed.

Step 6 – Top tips

Because of depreciation entitlements on properties (including the purchase price, the construction price and the land value), units generally provide higher depreciation and can often provide a better return than houses.

Revalue your properties every year, so that you can use your additional equity to negotiate a larger loan which you can reinvest in another rental property.

SOURCE: news.com.au If By Perrie Croshaw - you find the right property, buy it. Don’t be put off by the economic cycle. Even in the worst recession, there is always a suburb growing in value and producing good rent.

www.scottbanks.com.au – for help on how to retire with a property portfolio living the life of your dreams… contact us today for a no obligation chat.

Property investment tips you must know about…

Posted by Scott Banks on January 20, 2010

Buying real estate, whether you are buying the family home or an investment, is one of life’s most important financial decisions. However, in buying an investment property, it is wise to remember that you are making a business decision. You are not buying from the heart but from the head. You are buying the property because you expect it to appreciate in value. Common mistakes made in investing are that people look for the same things they would want in a home or buy in their local area so they can ‘keep an eye on it’.

In searching for a residential investment property it is important to consider three things:

Look for a consistent streetscape. A mixture of conflicting building styles lowers the desirability of the street.
The property should be located within easy walking distance of all amenities.
The street should have potential.

As a business and financial investment decision, it is important to make your purchase in a methodical way:

Assess your financial position,
Decide on your strategy,
Assess the financial capability of the investment,
Negotiate effectively,
Shop around for finance,
Obtain legal advice, and
Obtain professional property management services.

Assess your financial position

When investing, it is important to assess your current financial position. What are your cash reserves and what equity do you have in your present home? Look at your long term objectives, for example, will the property be part of your retirement financial plan?

Potential changes to your current situation should also be factored in such as the birth of a child or the loss of one income. It is wise to seek advice from an investment adviser or qualified financial planner to help determine goals and strategies.

Decide on your strategy

Some properties provide good rental returns but have little potential for capital growth; for some the converse is true. It is more difficult to find the ideal of high yield and high appreciation potential.

It is important decide on your strategy before you start you search.

Assess the financial capability of the investment

You should try to assess the soundness of your investment. Study the capital growth history and the potential rental income.

If you are familiar with computer spreadsheets, try to analyse the impact of an interest rate change or a potential vacancy period.

Negotiate effectively

Professional negotiation can help ensure that you do not pay too much for a desirable property. Negotiation can also include structuring a contract to allow items favourable to the purchaser such as access or installation of tenants.

Shop around for finance

The choice of your loan can be just as important as the choice of property. Some lenders have a different (and higher) rate for investment; others have the same rate. Some lenders have a package where your entire borrowings are just one big mortgage but with different accounts with different features. In this competitive environment, it pays to shop around.

Obtain legal advice

Sound legal advice will ensure that the contract is fully examined and approved and that any changes are allowable. A good solicitor should be an integral part of your investment strategy.

Obtain professional property management services

Professional property management frees you from dealing with tenant issues and gives you more time to concentrate on your portfolio. Your property manager is also up-to-date with changes to the Residential Tenancies Act and is better suited to negotiate on your behalf should the need arise. He or she is also in a position to obtain credit checks on potential tenants and has access to tradespeople. If you prefer not to meet to your tenants then a managing real estate agent is definitely recommended.

SOURCE: www.realestate.com.au

www.scottbanks.com.au – for all property investment in Australia

This extract from an investor guide gives you an understanding of why you should invest in property and the basic information you need know to make an informed decision.

Posted by Scott Banks on January 19, 2010

The great Australian dream is to own your own home.

It is built into our psyche that owning property is something to strive for and be proud of. And today, three out of four properties are bought by owner-occupiers.

Before you start investing in property, however, you need to ask yourself: what is my goal?

Do you want to:

retire richer?

retire earlier?

supplement your income?

give up your day job?

Buying the right type of property in the right location will help you to achieve your goal. It is important to establish what your goal(s) is at the outset because it will determine which strategy — renovate, develop or buy and hold — you apply.

But why choose to invest in property rather than the other growth asset — shares? There are many good reasons, including:

capital growth

rental income

hedge against inflation

tax benefits

greater degree of control

lower volatility

high demand.

Let’s take a look at each of these in detail.

Capital growth

Putting your money in the bank or investing in fixed interest does not give you any capital growth. If you purchase property, however, you do so expecting that the underlying value of the asset will grow. While this is generally the case, you need to ensure that you buy property in the right location to maximise your capital growth. For example, a new house on the outskirts of Melbourne’s metropolitan area bought for $400 000 may grow at 5 per cent per annum, whereas a well-located property in an up-and-coming suburb, bought at the same price, could grow at 10 per cent per annum. In 10 years’ time, the new property on the outskirts will not have even doubled in value, while the well-located property will be worth more than $1 million. If you had bought the property in the prime location, you could possibly retire in 12 years’ time, based on your increased net wealth; you could not retire on the funds from the poorer performing outer suburban property. Even though properties increase in value over time, it is crucial that you buy in the right location to maximise your returns.

Rental income

One of the benefits of owning investment property is that you start receiving an income almost straightaway. In the current market, you could settle on a property during the week and by the weekend you could have a tenant who will have paid you some rent in advance. With the other asset classes, you often have to wait until the end of your term (in the case of a term deposit) or until your dividends are due, which is usually two to four times per year.

Hedge against inflation

An inevitable part of life is inflation, and the rate of inflation varies according to the strength of the economy. One of the benefits of holding property is that property values increase at a greater rate than inflation. This is great news if you already own property, but not such great news if you are looking to buy property. The important thing to keep in mind is to buy the right property in the right location.

Tax benefits

There are several tax benefits available to property investors, including claiming interest and expenses, and depreciation (both on the building and the fixtures and fittings).

Using property as security to borrow money to purchase other property allows you to leverage (borrow against the security) to a greater extent than if you were using a share portfolio as security. Most lenders generally lend up to 95 per cent of the value of the property being purchased, whereas they generally lend up to 70 per cent if you were purchasing shares. For example, if you wanted to purchase a property worth $400 000, a lender may be willing to lend you $380 000. This means you need to fund only $20 000, plus fees (assuming that you have no other security). If you wanted to purchase $400 000 worth of shares, however, the same lender may only advance $280 000. This means you have to fund the shortfall of $120 000, plus fees. Another advantage is that you can claim a greater tax deduction on the interest charged on the loan.

Any legitimate expense incurred in running your investment property should also be tax deductible. For example, if you travel to the property to collect the rent, you can claim a deduction. Alternatively, money paid to a property manager to manage your property is tax deductible. Even money spent purchasing this book may be tax deductible!

Depreciation of the building may also be claimed as a tax deduction. The age of the building will determine if you can claim any depreciation and at what rate you can depreciate it. Buying a new or relatively new property (built after 17 July 1985) allows for the greatest amount of depreciation. Claiming building depreciation is a smart way to increase your cash flow.

Bear in mind, though, you should never buy property just for tax purposes. Getting a tax benefit should simply be a bonus of investing in property, not the sole reason for purchasing.

Greater degree of control

Owning property allows a greater degree of control than owning shares. For example, as a share owner you cannot improve the value of your shares. However, as a property owner you can add value to your investment by painting, landscaping or renovating. For a few thousand dollars, you can get much more than that back in added value.

Lower volatility

Although it does have downturns, the property market is not as volatile as the sharemarket. You can sleep well knowing that the price of your property will not plummet overnight, which can happen to shares. Keep in mind also that the security is in the land, not necessarily the building, which makes getting the location right particularly important. As mentioned in chapter 1, land appreciates, whereas buildings depreciate as they get older. The exceptions to this rule are period-style houses, which increase in value over time due to their rarity.

High demand

Everyone needs a place to live. For this reason, property, especially well-located property, will always be in demand. At the time of writing, our capital cities are recording high rates of immigration and a rise in international student numbers. But while demand for property is steadily increasing, supply is unable to keep up with it. If this situation continues, prices are likely to increase sharply in the near future.

This is an extract from The Property Professor’s Top Australian Suburbs – A Guide for Investors & Homebuyers published by Peter Koulizos published by Wrightbooks

SOURCE: www.realestate.com.au

www.scottbanks.com.au – for all property investment in Australia