Investing in Property
What type of residential property is best for you?
Old vs. New Property
When considering a residential investment property there is in many cases a consideration of whether to buy an established old property or a new off the plan property. There are many reasons why an investor may choose one or another.
Below is an outline of what you may wish to consider:
Advantages of buying a New Property:
• Due Diligence on the Development is possible
• Statutory Protections from the Builder
• Reduced Maintenance Costs
• Higher Tax Deductions
• Higher Component of depreciable plant and equipment
• Higher Rents as many tenants prefer new property
• Buying off the plan can allow you to save for a larger deposit
• Long Construction time allows for capital gains to occur while you are not paying a mortgage
• Well designed for today’s tenant
• Easier anticipation of cash flow
Disadvantages of buying New Property:
• Price is higher than established older property
• You can’t inspect the property if buying off the plan
• Developer could take longer to complete the project than anticipated
• Opportunity cost of the Developer not attaining finance and thus not proceeding
• Market could go down during the construction phase and you are locked into a contrac
• Estimate strata costs only
Advantages of buying an Old Property:
• Due to Age, the property may be cheaper than a new property
• Finance is easier as the property is built
• You can inspect the physical product
• Can add value through renovation
Disadvantages of buying an Old Property:
• High maintenance costs
• Missing features in demand by tenants today
• Older buildings may be more difficult to lease
• Special Levies are very possible
• More time consuming if renovating
• If renovating costs can blow out well above initial budgets
So now that you are aware of the Advantages and Disadvantages of buying a new property, let’s look at a case study as to how investing in both types of properties may play out.
Let’s assume Jack & Jill are married with a house worth $700,000 and a mortgage of $500,000 with $200,000 in equity of which at 80% Loan to Value Ratio provides a maximum borrowing capacity of $560,000. From this we now have $60,000 of equity to use towards an investment property. They also have cash savings of $40,000 in their offset account which they could use if required.
Now let’s assume Jack and Jill earns $100,000 and $60,000 per annum respectively. They now have the option of purchasing a $400,000 investment property and are considering buying an off the plan property that won’t be ready for 12 months or an established property which was built over 10 years ago.
We have assumed that there is 0% vacancy, an interest rate of 7%, property management fees of 6.6% and a LVR of 80% on the new investment meaning a $80,000 deposit is made against the new investment made up of $60,000 of equity and $20,000 from cash savings.|
OLD Property Review
The property is purchased for $400,000 and rented at $400/week resulting in total rental income of $20,800 per annum. There is a depreciation claim of $1,500 available and interest costs of $26,600. Rental Expenses are $6,123.
The result is that the investment will cost $7,314 per annum to hold the property.
NEW Property Review
The property is purchased for $400,000 and rented at $400/week resulting in total rental income of $20,800 per annum. There is a depreciation claim of $9,667 available and interest costs of $26,600. Rental Expenses are $6,123. As it is a new property purchased off the plan, there is a stamp duty incentive provide by the state government meaning an immediate saving of over $13,000 in stamp duty.
The result is that the investment will cost $3,693 per annum to hold the property or only $71/week.
By purchasing a new investment property in this example, you are saving over $3,500 per annum! This is a fairly typical scenario we see with all our clients. This is before we take into account higher rental returns for tenants paying premiums for new property or increased maintenance costs for older properties.
Off The Plan vs. Newly Completed
Now that you have decided to purchase a new property your choice becomes whether you would like to purchase something that is off the plan or newly completed.
Off the plan refers to buying an apartment that is bought by looking at the architect plans, finishes schedules and 3D renders of the proposed development and making the decision to buy. The Development may be under construction or yet to start.
A newly completed property is one where the developer hasn’t yet sold the apartment off the plan and has held units off the market until completion. This allows prospective buyers to walk through the apartments just like they would a normal property purchase but attain some of the benefits of buying a new property.
Some of the advantages of buying an off the plan property include:
• First opportunity to select your apartment giving you the greatest options
• Only a 10% deposit required at the time of exchange
• Delayed Settlement can allow you to save more funds for deposit on settlement
• Delayed settlement could result in your property increasing in value over the time without the need to pay interest on a mortgage
• Can appoint and select property manager prior to settlement to minimise your vacancy
• Could use a Bank Guarantee or Deposit Bond minimising your capital outlay on the initial deposit
• Stamp Duty Benefits available across the country (varies from state to state) saving you tens of thousands of dollars
Some of the advantages of buying a newly completed property include:
• Immediate settlement
• Get tax benefits of ownership straight away
For those that don’t like to wait for completion, you still get all the tax benefits of buying off the plan
Building a property portfolio
Finding the RIGHT real estate investment property is where most people begin when considering a real estate investment to increase their personal wealth and financial security.
There are many things to consider when considering how to invest in property
• How much we should borrow, as distinct from how much you can afford to borrow.
• How much you can afford to invest.
• The cost to the investor before and after tax.
• Which area will potentially give you the best return and in the long run the optimum capital growth.
…and many other issues, all of which help determine the property that best suits your circumstances and helps you attain your goals and objectives.
We can refer you to advice and support from unbiased, fully qualified professionals: accountants, solicitors, and finance.
Simple rules in building a property portfolio:
|•Buy brand new to maximise tax benefit
• Buy in a recognised developing area to maximise capital growth
• Buy houses as a first choice for better capital growth
• Buy in the median price range for the locality to maximise its appeal
• Excellent transport facilities and close to schools.
• Spacious in area, inside and out.
• Approved by Banks and Insurance Companies.
• Low maintenance building and grounds.
• High capital growth potential.
• Highest building standards.
• Close proximity to shopping centres.
• Reliable property management.
• Close proximity to major city.
• High employment area.
• Use the right solicitor, experienced in conveyancing
|•Use the right accountant, experienced in property investment
• Obtain the right Quantity Surveyors Report to maximise tax deductions
• Have the right insurance safety net package
• Obtain the right finance package
• Refinance only when necessary not as a matter of course
• Employ the right property manager who has your interest at heart not the tenants
• Seek the guidance of professional people when making any decision in relation to property investment.
• When listening to the ‘advice’ of ‘friends’ seek their qualifications and experience prior to taking their advice. Their ‘negativity’ will often ensure that you both enjoy a poor lifestyle in retirement.
• Don’t sell in the short term – hold property long term to maximise return
10 essential property investor rules
To be successful in property investment you must develop a strategy that fits your personal and financial position. Seek the advice of experts and put yourself in a position to make informed decisions. Below are some general rules which we have put together after many years of property investing experience:
For a successful property 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 preferably the area will have an already-established high rental demand.
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 and have low maintenance buildings and external areas (check that the gardens and any other outdoor areas are easy to maintain). If it is an apartment, make sure it is large enough to meet the approval of your bank or lending institution. Irrespective of the type of property you buy, a pre-purchase building inspection and pest inspection is a must.
3. Gross versus net returns
Long-term capital growth is highly desirable when investing in property, but on a year by year basis you will also receive income in the form of rent. It’s useful to understand the difference between your gross return (rent) and your net return (the rent minus your investment expenses). Some examples of typical investment expenses include interest on the investment loan, rates, insurance, body corporate fees and maintenance. The net return (or loss) is the figure that helps you to understand how your investment is traveling.
4. Coping with vacancies
Approximately 35 per cent of Australian households rent, providing a large pool of people who are housed in or looking for rental accommodation. Nevertheless, you do need to be prepared that your investment property may well be vacant for a period of time, hence it is important to allow yourself a cash buffer to ensure that you can continue to pay the costs of owning the investment even if you are not receiving rental income. 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, in the right area and most importantly at the correct market rental should not be vacant for long periods.
Before investing when establishing affordability with your finance advisor be conservative and calculate with a vacancy period built into the figures. Professional property management is essential.
5. Issues to avoid
Some common triggers for failure include:
– The purchase price was too high.
– The property is in an area of low capital growth potential.
– The maintenance costs are too high.
– The rental income is too low.
– Vacancy periods are too long or too many.
– The loan taken out was structured wrongly.
– Some tax deductions are missed.
6. Properties must be easy to hold
Property investing is a long term proposition.
Holding costs must be manageable and low risk or you may be forced to sell when you don’t want to. New quality properties are usually easier to hold onto than older properties due to the additional tax depreciation benefits for new property, plus “gearing” tax benefits and on average higher rentals. In addition very little maintenance is usually required on a new property in the first 5 years and most new properties have a statutory construction warranty of up to 7 years (depending on property type and location).
7. Invest in a diverse range of properties.
There is no magic suburb or city that is always the optimum location to invest – more than ever today’s investor need greater flexibility to invest where the best opportunities are located. Geographically diverse portfolios reduce risk and maximise returns.
8. Avoid Student Accommodation or Serviced Apartments
National Investment Planning strategically targets properties that with strong capital growth potential, are easy to finance and can potentially be sold to either owner occupiers or investors in the future. This factor will ensure the best price and easiest sale in future if/when an investor needs to sell (even though you should never sell unless you absolutely have to). Serviced Apartments and Student Accommodation operate more like commercial properties than residential properties (even though people live/stay in them). The advantage of them is that usually they will generate a higher rental return but they are hard to finance and have a lower capital growth
9. Always budget and crunch the numbers carefully with a finance professional to confirm affordability.
Successful investors utilize their strengths and manage their weaknesses by utilising the services of finance specialist to ensure affordability.
Successful investors identify specialists who have experience in accessing, researching and selecting quality investment properties, and get them to do all the work.
10. Top Tips
Avoid buying a property on impulse; spend time researching the area that you are considering thoroughly before you commit to a purchase.
Consider the funders property valuation before you buy, and also get independent advice on the sale contract before you sign, ie: from a solicitor.
Remember that interest costs and property-related expenses are tax deductible.
Speak with your accountant about the issue of depreciation.
Have a long-term view. Build a portfolio of property over time. The ultimate goal of property investors is a passive income from their rental properties, therefore you need to get more properties than you intend to ultimately hold onto.
What are the finance options are available for off the plan apartment purchases?
When looking to buy an off the plan property there are a number of ways you can secure the investment before settlement occurs upon the completion of construction.
When buying an off the plan apartment you have three options for the 10% deposit which is required at exchange. These are:
1. Cash Deposit
This is generally the most common method for a deposit on a property. You can use cash savings or draw equity from your home.
2. Bank Guarantee
A Bank Guarantee is provided by your bank as a guarantee of future payment. The applicant ensures there are sufficient funds in their account or places funds in a term deposit. The bank freezes the use of these funds.
A Bank Guarantee is different to a Deposit Bond as the money must remain within the selected bank account and cannot be used more freely like that of a Deposit Bond.
Bank Guarantees are not always accepted by Developers. It is also important to note that an application may take up to 1 month to be approved by your bank, while a Deposit Bond can take as short as 48 hours.
3. Deposit Bond
Basically, a Deposit Bond is an insurance policy. The Deposit Bond is the policy document that tells the vendor that the insurance company will pay the 10% deposit to the vendor in any of the circumstances where the deposit would ordinarily be forfeited by the vendor. No money actually changes hands under the Deposit Bond. Instead, all purchase funds are paid at settlement. In the ordinary course of events, settlement takes place, the purchase price is paid in full, and the deposit bond simply lapses.
A Deposit Bond can be issued for all or part of the deposit amount required, up to 10% of the purchase price. Acceptance of the Deposit Bond in lieu of a cash deposit is at the sole discretion of the vendor. There are many cases where Deposit Bonds are not accepted.
The Deposit Bonds available include:
• Short Term Guarantee – for settlement terms up to 6 months • Long Term Guarantee – for purchase contracts where the Sunset Clause is between 6 and 48 months
The Fee is determined by the size of the deposit and the length of time until settlement (including the sunset date). In the example below, the Deposit Bond is to substitute a deposit of $50,000.
• 12 Month Deposit Bond: $1,500
• 18 Month Deposit Bond: $2,325
• 24 Month Deposit Bond: $3,625
It should be noted that you will be required to qualify for a Deposit Bond. An application must be made and a review of income and current equity will be conducted to approve or reject your Deposit Bond application.
Now that you know how you are going to make the deposit it is also incredibly important to make sure you have the right loan structure in place to ensure that not only your interest repayments. This also includes ownership of the property as this could affect the tax savings you could attain and possible hinder the investment significantly. Some questions our clients ask include:
• Whose name should I purchase the property in?
• Can I purchase it in both names?
• If I purchase in both names does it have to be 50/50 split?
• Can I buy this in my Self-Managed Super Fund?
• Am I eligible for the current Government Grants?
• Should I pay interest only or principal and interest on my loan?
• Is the cheapest rate the best rate for me?
• When should I have the property valued after purchase?
• Will my loan structure allow me to draw out equity for another investment property purchase?
• I don’t have a full 10% deposit, what options are available to me?
There is a lot to think about when looking at finance options for an investment property and as such it is always important to speak with a mortgage broker that has had a lot of experience in working with property investors. This way you can be assured that you establish your loan structure and product correctly from day one to allow for future expansion of your property portfolio in the future should you wish to grow it.
Initial Consultation: An Australian Residential Group property advisor will assess your goals, and discuss strategies that best suit your individual circumstances.
Strategy and Assessment: We will discuss the pros and cons of various strategies to decipher which will be the most practical in the long term.
Finance Consultation: This is a critical step in your property investment journey – ensuring your finance is set up correctly. Not just now, but every time you purchase property over the long term.
Property Investment Options: We will present you with the most viable options in a variety of locations, and at different prices. This will allow you to select your ideal choice of investment.
Finance Pre-Approval: The most important step in the process is finance approval – without it there’s no property.
Property Selection: By this stage, your property investment team will have finalised your personalised strategy, finance structure, and goals. It is merely a question of which one to choose from the short list.
Construction & Settlement: Wait for completion of construction
Regular Reviews: We will continue to check back with you throughout your entire property investment journey