Property Investment Insights

The problem in Australia is that our property prices have continued to rise, and many people will never be able to afford to buy unless they receive a windfall or inheritance.

Getting the deposit together is the most important start to the property investment cycle. I often recommend a regular savings plan for saving the property purchase deposit in the form of a high-interest internet account (a kick start account) or a regular contribution to a conservative share portfolio, if you have a savings time horizon of more than three years. Once you have bought property, the best thing is that it is forced savings. Since the bank direct debits your accounts, you have no choice but to prioritize the mortgage payment before every other item in your budget.

So, when you are saving for a property, its best to get into the same habit and establish a regular savings plan with a high-interest internet bank account that takes the money straight out of the bank account that receives your salary each month. Think of this as paying yourself first. In the classic book about managing your finances through a series of parables ‘The Richest Man in Babylon’ by George Samuel Clason, one of his first principles is to teach you to pay yourself first. It sounds so simple, but most people can’t grasp the concept because they say they can’t afford to save. But you can. Pay yourself some savings before you pay the phone bill, the electricity bill, the credit card, and all the other monthly payments you may have. This is an important principle.

The other option for coming up with a deposit is to get some help from family. Most banks have a specific loan product to allow parents to act as a guarantor; that is, your parents provide a guarantee to the bank that if you can’t afford the property, they will pay it off.

Naturally, the risks are high for the guarantor. A retired client of mine provided such a guarantee for his son. The son then lost his job and declared bankruptcy and the bank sought a remedy from the client by making him repay the $200 000 loans. The $200 000 had to be withdrawn from his superannuation retirement fund and repaid to the bank immediately. While the bank delayed, the client had no option as his son had no other assets for the bank to repossess. Be warned and be sure you know exactly what you are doing and what the potential consequences are if you enter into such an arrangement.

The best thing to do with any good appreciating asset is to keep it. When many Europeans migrated to Australia after the second world war, they bought property for themselves and their family They helped other family members repeat their investment strategy in subsequent generations, and they have accumulated masses of wealth through property investment as a result of not selling and allowing the assets to grow in value over time. More of us should take notice and be more community-minded in helping our families get ahead through investment

Time is your best friend if you a property investor. If you need money you can always take out a loan against one of the properties to provide you with liquidity, you can always borrow against a property to buy another property and the banks with gladly lend you more money in these situations.

The only problem with never selling a property is that one day you will need cash flow and, generally speaking, the purpose of accumulating wealth is to retire and live happily ever after. If you keep buying property, you will probably have a lot of equity, but you may also have a lot of debt. That debt needs to be retired, and you will probably have to- one day- sell a property or two.

Or you may want the equity put into a tax- free haven, such as superannuation, so its important to either buy your properties inside super(only possible in self-managed super fund) from the beginning or sell the property and contribute to super to create a tax- free income stream. That being said, the ability to purchase and gear property within superannuation is only a recent change to superannuation law, and very few people are taking advantage of this yet.

If you already own a property and the property has gone up in value, then the bank may you lend you the money up to 100% or even more to buy another property for investment this is called cross-collateralisation. This means that the bank will take into account the value of both properties when it undertakes its finance assessment before making the loan.

For example if you have bought a property worth $ 400 000 and have a loan of just $200 000  then you can effectively use the equity of $200 000 as a deposit for a second property by combining the values and loans of both properties if you want to buy another $400 000 property you could effectively use $800 000 from your equity in your original home  as 20% deposit against  The investment property your total property values would be $800 000 with a total loan of $600 000 assuming you savings for the purchase costs such as legal fees.

A specific bank loan product called a line of credit would allow you to do this efficiently and repeatedly, but the bank will need both houses as security against a possible default you will need to assess whether you can afford to repay. The debt before you undertake such a large loan, but this is a common method of gearing up (borrowing) to buy a property.

Once you have the deposit saved, you’re well on your way to acquiring an investment property. There are, however, other cost involved in buying and owning a property and it is essential that you understand what these costs are and how they apply to you. 

These costs include stamp duty (Different in every state)  mortgage stamp duty and mortgage establishment costs, lenders mortgage insurance (LMI) – insurance that covers the lender in the event of your defaulting on the loan (discussed on pages 100- 101 ) – building inspection fees  property research fees from resides (www.residex.com.au) or RP Data (www.rpdata.com.au) conveyancing or solicitors fees, land tax, strata fees maintenance rates (council,water,electricity,gas) and agents management fees.

Stamp duty

Stamp duty a is one-off lump-sum state- government tax that is imposed on all purchases of property differs from state to state depending on where you live and the purpose of the property purchase that is principal residence versus an investment property in New South Wales and Queensland the relevant department is called the office of State revenue in Victoria and Tasmania it is called the State revenue office in Western Australia it is called the Department of Treasury and finance in the capital Territory is called ACT revenue office and in South Australia it is called revenue SA. And online search will take me to the relevant department you can view the stamp duty dates for your state. 

Mortgage stamp duty and establishment

Mortgage stamp duty has been abolished Australia wide 

Some banks charge fees to set up your mortgage for you, and this is called mortgage establishment cost I suggest you negotiate a fee-free deal before you sign anything as this fee is often discretionary and may be dropped.

Building inspection fees

Before you buy a property I strongly recommend you spend the money to have a building inspection carried out by a professional and number of companies specialise in pre-purchased inspections that will give you an idea for condition from the property whether there are any termites or other pests and create a list of building defects and any other building issues that you should be aware of before you buy an inspection should cost around $500

The Royal Institute of architects can give you some design ideas through its referral program for a very reasonable sum. It also has a do-it-yourself fact sheet that you can download from its website (www.archicentre.com.au) for a pre-purchase inspection

Property research fees

You can access the research report about the suburb you are buying from providers www.realastate.com.au, Residex (www. Residex.com.au), or RP Data (www.rpdata.com.au) it will cost less than $100 and allow you to check prices of recent sales is more about these reports in the case study on page 88.

Conveyancing or solicitor’ fees

Conveyancing is the act of confirming the title of the property as transferred from one owner to the next it can be carried out by a specialist conveyancer or solicitor for around $1000-$1500 the process requires property title searches to confirm the seller is the real owner and has a clear title of the property in order to sell it

A conveyancer will also check the special conditions of the contract including encumbrances or easements on the property which may include trains running through your property fences inside your boundaries or pieces of neighbour’s houses hangover will build on your land just to name a few. 

A conveyancer will also ensure all rates fees are up-to-date and that the appropriate parties paid the correct fees before you buy the property is final payment can be taken from the purchase price if there are any arrears and debts, so the purchaser doesn’t end up with a pay council rates for example

Land tax

Land tax is an ongoing annual payment applied by the state government to the value of property excluding your own home it will be great for differing from state to state depending on the location of the property my opinion is governments taxing.  Landholders to simply hold land is another disincentive to investing in saving for future generations; nevertheless, investors have an imposition of land tax, and it must be paid.

An online search will take you to the relevant land tax rates for your state.

Strata Fees

Strata fees Are payable to body corporates or owners corporations (groups of owner that manage the maintenance of properties) of units and townhouses to maintain the common areas of property between units these are usually quoted in dollar cans per quarter and can range from a few hundred dollars per quarter to many thousand per quarter depending on the property strategies are tax-deductible for investment properties.

Depreciation is the ability to claim expense on the falling value of the building on the land that you have purchased. For example the kitchen may have the useful life or 15 years it can be written off over 15 years so you can claim a portion of the original value each year as the kitchen deteriorate the real benefit arises when you add up all of the depreciable assets within the property to give you a lump sum and insure you can write off that lump sum as a tax-deductible expense.

 Interestingly you have not expended the amount that you write off so we call this a ‘non-cash cash flow expense.’ The benefit is the ability to claim an expense for money that you did not spend in the year that you claim it on your tax.  The result is an increase in your cash flow from money that you didn’t spend.

The Newer the property, The higher the depreciation available so sometimes it’s best to buy a new property to obtain a better level of depreciation if you are looking at a new unit and an older one once you do your cash- flow analysis you may be better off going for the new investment unit.

Companies specialise in providing assessments for depreciation the professionals that work on the calculation of depreciation are called quantity surveyors. quantity surveyors are in the business of providing ‘depreciation schedule’ For property owners who show how items in their property are depreciated over time.

Most world charge for around $600-$800 per property and they often offer a guarantee that if you can’t claim back at least the amount of the cost of the depreciation schedule, then they will give you a refund it’s hard to go wrong under those circumstances, and I certainly recommend you call a quantity surveyor. 

Now you know about the cost of buying a property you can calculate the upfront and ongoing expenses to assess the property viability for purchase many people don’t undertake this process properly or at all and it can mean the difference between a long-term success and a short-term disaster or even worse a long-term disaster I see plenty of people who invest in the wrong property and hang onto it for far too long waiting for it to rise in value which never happens

On the income side of the equation, we know there is just one source of income on an investment property: rent. It is often said that you should receive a weekly rent equivalent to the value of a property, less the last three zeros. For example, a property worth $400 000 should rent $400 per week

Using these figures, if we multiply the weekly rent by 52, we come up with the figure of $20 800 ÷ $400 000 = 5.2 percent. That’s the rental return you will receive from your property before expenses, assuming your property is fully leased for the 12 months. If you try the calculations with other amounts it works out the same for example, if I own a property worth $675 000 and rent it for $675 per week the calculations are $675 x 52 weeks =$35 100; $35 100 ÷$675 00 =5.2 percent

And, how do I claim my tax deduction and when I can get my claimable amount back? These are very pertinent questions that you must ask when undertaking your research for a property your cash flow will be negatively affected if you are making a loss on the property and despite the fact that you may be eligible for tax deduction you will probably need to find the full loss  with your after-tax income tax deduction will ordinarily come back to you when you do your tax return

If the ATO owes you money, then it’s best to do your tax return immediately after the end of the financial year. If you owe the tax office money, then it’s best for your cash flow to do your tax return as late as possible before incurring a penalty.

You maybe even allowed to pre-pay your interest for the coming year on 30th June (of any financial year) and then do your tax return the next day (July 1st) To claim back the interest pre-payment. This also improves cash flow, but you must have the money for the interest payment available in a cash count for the similar liquid form.

If you do not have enough cash flow to meet the expenses of the property, then you can apply for a tax variation to the ATO; that will result in your salary increase because a lower tax rate will be applied by your employer. It is important to seek tax advice on this matter, and that added cash flow can help, especially when interest rates are rising: talk to your tax advisor for information on tax variation.

Tip 

That ATO provides a multitude of information on rental properties go to the ATO website (www.ato.gov.au) and type. ‘Residential rental property’ into a search engine in the top right corner for more information. The ATO regularly runs webinars for property investors.

Short-term property speculation is best left to the developers but if that’s what you want to do then make sure you understand how property taxes, capital gains tax, income tax and other transaction costs such as agent fees and legal costs will affect your outcome.

During the GFC this area was one of the hardest hits, so be aware get educated and make sure you understand the true cost of property development and sale. Many so-called experts have gone bust trying to make what seems like a quick dollar only to be shot down by holding costs (such as interest), development risks (council rezoning, funding neighbours’ objections) and regulatory cost (capital gains tax, income tax, land tax).

Every investment has risks. Your job is to do your research and make sure you are confident that you will receive the capital growth that you anticipate from the property. Capital growth is always inconsistent, and prices may also fall. The risk is that the value does not increase (or decrease) and you keep losing money on the property – that simply does not make sense.

The worst thing that can happen is if property prices decrease and you end up owing more than you own. This is your situation many Americans end up in during the GFC and are one of the catalysts for the GFC.

While working out cash flow scenarios is sensible and looking at past research is very helpful economics can throw unexpected curveballs. Always make sure you can afford your decision to invest into property or any other asset and make sure you take the necessary precautions to protect yourself against the worst case scenario such as recessions ( by initially you have spare cash and job security) or health issues such as death, disability, and disablement( by using insurance product)
You can reduce risk by buying the best areas where there is a consistent demand for both sales and went so your property is liquid if you need to sell it and easily rentable if your tenant leaves.
Interest rates can go up can and lending can become very expensive very quickly. Always make sure you allow for 2% or more on top of your calculations for interest rates to ensure you can afford the loan for the long term not just for today’s economic conditions.
While properties are not particularly volatile, they can be inflexible and Illiquid. You can’t simply sell part of a property to release equity to create spare cash or buy something, but you can increase your dip into your line of credit to increase your flexibility. By comparison, share ownership allows both more flexible and liquidity: you can sell some of your shares to raise funds very quickly when needed. Timing property markers can be difficult, and the cost of both purchasing and maintaining property can be high, so some savings planning will be needed.
Properties can be a very taxing 15 investment as we’ve seen in the previous example looked back to table 4.3 (See page 60) for a summary of the attributes of the property.

Property is not an automatic win 

Increase in property values never occur at a steady rate and in fact values can fall to a point where people can owe more than they own.  This is a very dangerous situation to get yourself into so undertaking thorough research is imperative for the property decision-making process. Property is in the wrong area can also stay the same value for many years. Producing negative cash flow and negating the investment purpose of negative gearing. Risk management is fundamental, and when done properly you can profit very handsomely. When executed incorrectly it can be very costly; Property is not automatically a winning investment.

If you sell a property, you will also need to take into account, your costs and capital gains situation as well as other compliance costs such as accounting and land tax when undertaking all these calculations.

What is wrong with the property

One of the key problems with the property, if you are an average wage earner or even an above average earner, Is that at some time you will hit your limit on how much you can borrow and how much you can comfortably pay back 

Also, carrying a lot of dirt and a few properties can create stress, and your investments can become a financial and mental burden: be careful not to binge on debt and be too greedy. It may be your downfall when the economy slows.

In theory, you are investing for the bad times, not the good.  The good times with after themselves but you have to look after the bad times, and it can be difficult to always do your homework and make sure you can afford your property purchases. If you add the responsibilities of managing and maintaining your properties to the mix property ownership can be a real pain. I often have clients coming to me in retirement wanting to sell all the properties to alleviate the pressure of holding down. They also want to put the money into a tax-free environment inside superannuation, which wasn’t available to them when they first bought. Super is a great way to buy property, but it is only available through a self-managed super fund.

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Property is a good tool for building wealth because you can effectively borrow someone else’s money (the banks) to buy the property and then have someone else (the tenant) Pay it off for you. This only makes sense when you have a reasonable income to meet the difference between expenses and the rental income. So, retirement or the years just before retirement Are not necessarily the best time to gear into property investment through super, because you need a free cash flow to pay a pension in retirement unless you can repay the debt.

The best friend of a property investor is time: when people retire, they need an income to support your lifestyle, and they no longer have time to let the property increase in value and pay down the debt. When you take into account property rental yields, Council rates, water rates, maintenance, agents’ management fees in all the other costs of maintaining the property, often it makes little sense to own an investment property in retirement. Add the burden of interest on an investment property loan, and the equation rarely makes Sense unless you have a positive cash flow property, or have you nearly paid off the property.

Shares and cash or fixed interest often make a better investment for retirees. Because the yield is higher after expenses (there are a few expenses with share ownership, and dividends can offer tax refunds, increasing the income yield) and you can specifically pick stocks that have high tax-effective income.

With that being said I have some clients with good commercial properties that have been paid of producing excellent income for retirement. Commercial properties typically return 6% to 10% per year the key here is to do your homework and stay focused not on the actual investment but your life goals and financial objective. If you need a certain income from investments, then it may make sense to sell a property and put the money into superannuation where it will be tax-free in retirement and produce a good income to sustain your lifestyle. Thus, property works well for creating wealth and shares and their low ongoing costs and good income work well for wealth management.