Top 10 Sydney Suburbs – Be Careful With Best Suburbs

It is relatively simple now to pick up Market intelligence for every Australian suburb just by Googling on the web. If you’re unsure of which suburb you’d like to research, you can also search by preferences, budgets or a host of other indicators. I recently tried these searches:

• Top 10 Sydney suburbs for 2016
• Top 10 Melbourne suburbs for 2016
• Top Brisbane suburbs for 2016
• Top 10 Perth suburbs for 2016

The problem is what do you actually do with the information you discover? For example, just a few years ago, one of the very ‘best’ areas to investment in through historic capital growth, huge rental return and even affordability (if you got in early enough) would have been the mining town of Port Hedland in WA.  A search may also have picked up a town like Moranbah in the coalfields of Central/north Queensland. Both places were exceptional performers, probably the best in Australia, for a short time of a few years at the height of the mining boom. Now property investors in these towns have gone from positively geared property to very highly negative geared property as their huge yields have disappeared and they struggle to find a tenant. Also, the chances of finding a buyer, even at a very low price, are minimal.

Even in the Sydney market over 2015, the suburbs popping up as ‘the best performing” were in the far west or south west such as Liverpool or Campbelltown; both did perform extremely well for most of 2015 but maybe an investment in these ‘top’ suburbs in late 2015 was not necessarily the ‘best’ investment.

Sites like realestate.com.au and domain.com.au can be very helpful in reviewing a suburb for possible purchase of an investment property but a lot more research is necessary before making a decision on the best investment property for you or understanding why a negatively geared property may be a better investment initially for you rather than a positive geared property.

It is always a big mistake to try and manage a property by yourself unless you are a trained and qualified property management agent. Lime Property Solutions will always refer clients to quality managing agents in the area of your property investment. We also explain some of the insurance products that are available to ensure fully covered for any eventuality including tenants defaulting, damages etc. Lime will assist you in all aspects of purchase and management of your property investment.

Finding a Good Tenant   

Recently there have been a few articles on the topic of finding a great tenant for your property investment. We don’t mind giving you a summary of what to look for according to these experts but this really goes against the grain of long-term passive investment which is a big part of the long-term investment philosophy of Lime. So, before you waste time reading the rest of this article, lets explain in a very few words how to get the best tenants!

• Buy in a good socio-economic area; you very rarely hear of bad tenants in good properties on the lower north shore, or inner west or the eastern suburbs!
• Employ a good and experienced rental agent who will ensure you get an excellent tenant.

That’s it finished!

The following was a brake down by someone with experience in managing properties and also a blogger by the name of Michael Glibert of Cubbi. Each section is abridged and I’d suggest you find the blog for yourself if you are really interested in doing a part time job as a professional property manager.

“Hours spent managing a property with a Bad Tenant:

• Advertise & Inspections – 3 hrs
• Lease & Condition Report – 2 hrs
• Routine Inspections – 4 hrs
• Repairs & Maintenance – 4 hrs
• Rent Collection & Arrears – 8 hrs
• Vacating & Bond – 10 hrs
• Re-advertising & Inspections – 6 hrs
• New Lease & Condition Report – 4 hrs

Total of 41 hours for a year spent managing a property with bad tenants in it.

Now, here are the hours spent managing the same property but with a Good Tenant:

• Advertise & Inspections – 6 hrs
• Lease & Condition Report – 4 hrs
• Routine Inspections – 2 hrs
• Repairs & Maintenance – 1 hr
• Rent Collection & Arrears – 1 hr

Total of 14 hours for the year.”

Remember, even doing a job you are not qualified to do, that is a rental manager, is still going to take you time and effort but getting a professional to do the job will increase your negative gearing, save you time and let you forget about your investment property until tax time!

I’m not sure if all the following of Michael’s suggestions are covered in the assumed 14 hours of your valuable time … and this is abridged

1. Who is the right fit for your house?

When you know who the most suitable tenant for your house is, you can start preparing your property and creating an effective advertisement focused to attract those types of people….. Keep in mind you can always make a couple of small adjustments or additions to the property in order to attract the right tenants.

2. Get your house tenant-ready

You’ll have to roll up your sleeves and get your hands dirty if you want good tenants fighting over your house. Get these completed even before the photos are done: Any small additions to help attract the type of tenant you’re after, e.g., installing an air-conditioner. General maintenance jobs such as unfinished painting or replacing missing light globes. Clean the house from floor to ceiling and front to back and make sure the garden is manicured and inside everything works!

3. The price is right (note – not sure if anyone other than an experienced local agent can actually do this?)

It’s understandable the temptation to price it at $15 more as that’s nearly $800 a year extra. That could pay for your landlord and building insurance in one hit.

The problem with pricing your house too high is the extra time it takes to lease it and the desperate tenants you might attract at that high price.

I have found that pricing the property at or just below (around 3-5 per cent) (this is where you really need a local agent  … is it 3% or 5% or 4 %?). Here are the benefits:

1. Find a tenant quicker. Little or no vacancy between tenants
2. Find a tenant who pays rent on time and looks after the house
3. Spend less time managing the property
4. Less stress
5. Longer term tenants. Less likely to re-advertise again in six to 12 months time

4. Show great photos in your ad – (so maybe you need the skills of a professional real estate photographer?)

The photos in your ad play a big part in getting the right people to inquire about your property. Not making the effort to get good photos of your house on property websites can backfire.

5. Create a killer advert (and the skills of a professional marketer/!)

You know who is most suitable for your house. Your house is in presentation-perfect condition. The price is all sorted. The photos are done.

All you need to do is put everything together. Upload your photos and enter in the rent amount.

6. Proactive tenant approach to showing your home

Alright, your ad is live and you’re getting heaps of calls from potential tenants. This can die down quickly, so don’t take them for granted. If you or your agent are slow responding to inquiries or are not getting tenants through fast enough, you are losing good leads that you’ve worked hard for. Besides, your house does not stay clean forever. If you are busy, create multiple open homes for when your most suitable tenants are likely to be available. For example, if you want a working couple, don’t set an open home in the middle of a working day. Set it after work while it’s still light enough for people to see all the good things your house has to offer, or late Saturday morning, at around 11am. Advertise your open home at least two full days before the inspection. Longer is better.

7. Screen applications like a ninja

If you have done everything correctly, you should have a bunch of high quality applications ready to be checked. You need to be cut-throat here. You need to prove what they told you in the application is correct, and calling referees and viewing evidence such as bank statements and payslips is critical.

I always prefer to speak to all referees on the phone, including past and present employers, and owners and agents they have rented through. Also, call any personal and professional referees you can get your hands on as well.

8. Go with your gut

I could not leave you without telling you about your gut instinct. It’s powerful – listen to it!

 …. And all of this done within 6 hours! All good advice if you have the skills to implement. It’s much easier to just find a professional who will do all this and more for you.

Long Term Investment Made Easy – the benefits of investing long-term.

Adopting a buy-and-hold strategy is our preferred way to invest and we believe that investing for shorter time frames is less likely to generate lasting wealth.

Investing for the long term will almost ensure you do not make any losses as good, well-positioned property, particularly in our major capital cities, never stays down for very long. We do see “corrections”, particularly after long periods of continuous price growth but invariably the market will surge forward again after a few years of little to no growth.

Long Term Hold should ensure:

1. More time in the market

If you are investing in property you should be prepared to hold for at least one full cycle. This may take up to 12 or 14 years. During this time the capital value generally increases. In the past, property values generally doubled every 10 years but this may no longer be the case. Over the long term, property is a very forgiving asset class and if you chose a good property investment in a good location, most property values will increase substantially over a cycle.

2. Increasing rent returns

It is always best to buy at the beginning of a growth cycle when yields are high. Investors do not always take into account the long-term benefits of an improving cash flow as rents increase over time. It is important to consider future returns, what will your property be yielding tomorrow, not just what it is achieving today?

If you are receiving a 5% return on your investment today, rental increases over time will lead to your investment providing you with a higher income, very often turning your negatively geared property to a cash positive property putting money in your pocket.

3. Potential for above-market capital growth

Successful developers in particular, purchased areas of land very often in the outer areas of our major capital cities. Developers buy for the future potential of the land.

Our recommendations to property investors are to purchase investment property in a balanced way in order that lifestyle is not affected. This makes it easy to hold on to for the long term and allow for maximum growth without unduly affecting lifestyle.

In purchasing investment properties, consider the long-term effect of rent. Always do your own due diligence and check out the information and research you are given as this can give you the edge and provide you with opportunities many investors miss.

How much can I borrow for my property investment?

Looking to find out how much you can borrow? It’s always best to use the free services of a good Broker. A quick phone call is all it takes to get an accurate indication of how much you can borrow.

Most people new to property investment are surprised at how much they can borrow for property investment, usually a lot more than you can borrow as an owner occupier as lenders will take into consideration the rental you will receive and also allow for some negative gearing.

A quick rough estimate can always be obtained from the many calculators available on the net from your preferred lender. Here is a link to the Westpac Bank calculator. You must include the anticipated rental. As a guide, use an approximate 5% yield on the amount you intend to borrow. For example if you are looking at $450,000 spend use $450 per week; on a $500,000 spend use $500 per week. In its rawest form, the borrowing power calculator uses your expenses and income to determine a rough guide as to the maximum amount available for a loan. http://info.westpac.com.au/homeloans/calculatortools/borrowing-capacity-calculator/?cid=wc:hl:CALC_1602:sem:goog:gene_how%20much%20can%20i%20borrow_e&gclid=CL2is9e11csCFdgjvQodlr4KBw

Stamp duty is payable on property investment transactions. Stamp Duty is a tax on written documents (‘instruments’) and on certain transactions. It is imposed by state and territory governments. It can vary depending on the state or territory, and may be called stamp duty, transfer duty or general duty.

What transactions are taxed?

Taxable transactions include:

• motor vehicle registration and transfers
• insurance policies
• leases and mortgages
• hire purchase agreements
• transfers of property (such as businesses, investment property and owner/occupier real estate or certain shares).

The rate of stamp duty varies according to the type and value of the transaction involved.

Stamp duty is a payment that should not be overlooked when doing your due diligence and planning. Lime Property Solutions will always supply you with accurate assumptions on cash flow and what you are buying. Again there are many web sites that will assist in calculating stamp duty which will vary depending on which state you are purchasing your investment property in. Again a good site for calculators is Mozo.

Here is the link https://mozo.com.au/calculators

On this link, Mozo also offer various other calculators that some may find useful. Remember, conditions and amounts will vary depending on your choice of lender and these should only be used as a guide.

 Home loans

• Switch & Save Calculator

How much could you save by switching home loans?

• Repayments calculator

How much will my repayments be?

• Rate change calculator

How will rate changes affect my repayments?

• Comparison calculator

Which home loan will cost me less?

• Extra repayments calculator

How much will I save with extra repayments?

• Borrowing calculator

How much can I afford to borrow?

• Stamp duty calculator

How much do I have to pay?

Personal loans

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• Comparison calculator

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Car loans

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• Comparison calculator

Which car loan will cost me less?

What is Negative Gearing?

Negative gearing is a practice whereby an investor borrows money to acquire an income-producing investment property and expects the gross income generated by the investment, at least in the short term, to be less than the cost of owning and managing the investment, including depreciation and interest charged on the loan (but excluding capital repayments). The arrangement is a form of financial leverage. The investor may enter into such an arrangement and expect the tax benefits (if any) and the capital gain on the investment, when the investment is ultimately disposed of, to exceed the accumulated losses of holding the investment.

Tax treatment of negative gearing would be a factor that the investor would take into account in entering into the arrangement, which may generate additional benefits to the investor in the form of tax benefits if the loss on a negatively geared investment is tax-deductible against the investor’s other taxable income and if the capital gain on the sale is given a favourable tax treatment. Some countries, including Australia, Japan and New Zealand allow unrestricted use of negative gearing losses to offset income from other sources. Several other OECD countries, including the US, Germany, Sweden, and France, allow loss offsetting with some restrictions.

Here is a basic example of a negatively geared property:

*Amount owed to bank                                               $400,000

Annual Interest rate @5.5% on $400,000                                                      = $22,000 pa

Outgoing costs on property; rates, strata, management insurance, etc           = $6000 pa

Total annual holding cost                                                                                = $28,000 pa

Total annual income (rent)                                                                              = 20,000 pa

Total Loss per annum                                                                                   = $8000

On a new property there could be depreciation on fixtures and fittings and building materials of around $12,000 in the first year. Depreciation is also a loss.

Total tax loss would be actual loss (8000) + depreciation loss (12,000) = $20,000 Tax Loss

Assuming you earn $100,000 per year, the last $20,000 is normally taxed at 37% + 2% Medicare = 39%. The last $20,000 (negative gearing loss) you earn is now tax free – giving you a tax saving of 39% x $20,000 = $7800

* Disclaimer:  Please note that the figures and assumptions incorporated in this analysis are estimates for the purpose of illustration only. Whilst every care has been taken to reflect   reality, all figures should be confirmed with a Tax Agent/Accountant prior to any investment decision.

How often should you look for a rental increase on your property investment?

As a landlord you are providing someone with a home, but you should also be profiting from your investment property asset. Your goal is to make money from your property, so giving a tenant a discount may be doing them a huge favour, it does no favours to you and may obstruct you achieving your longer term financial goals.

If you have a tenant on a preferred 12 month lease there is generally not much you can do about rental increase but even on a six month rental period, you should review your property’s rental rate before renewing any rental agreement. “Reviewing” does not necessarily mean you should increase it.

As stated elsewhere on this site, a good property manager should be very aware of their local market and by and large, we would suggest you do not go against your property manager’s recommendations. However, all too often, particularly with a good long-term tenant, your manager may just inform you that your lease with your tenant is coming to an end and seek your permission to renew. I NEVER accept this request from any of my rental managers. The first thing I do on receiving this (usually generic) letter is respond by asking on what basis do they suggest we renew the lease. Should I be decreasing the rent, increasing the rent or keeping it the same? …. And I want JUSTIFICATION from the managers as to why they are making their particular recommendation.

Remember, as real estate prices change and sales markets evolve from month to month, so do rental markets. It is very important for you to keep a close eye on your property investment local area market and be able to question your manager on whatever recommendation they give you.

Reviewing your investment property rental market

A ‘balanced’ rental market is between 3% and 4$ vacancy rate. When vacancy rates are tight (under 3%), the market is more competitive and landlords can push for ‘better’ tenants and rental increases.. When vacancies are really tight  (at say under 2% ), this will usually allow landlords to increase their profits by pushing up the rent.

When vacancy rates are ‘balanced” around the 3-4% mark, it is unusual to be expecting any rental increase and as you would expect, with vacancy rates in your investment area over 4%. You may find you are getting recommendations to discounting your rent or even offer enticements like one or two weeks’ free rent to encourage someone to sign a lease.

It is very important to review the rental market in your property investment area every few months, so you know what is happening in the area and avoid being caught by surprise as a landlord. A good property manager will give advice on current market conditions, but you should be checking out competitive listings in your investment property area every few months to ensure your property is well-priced within current market conditions.

Raising the rent

Under normal circumstances, rental review should take place at lease renewal time. However, if you identify an opportunity to increase the rent on your investment property during a lease period  you’ll need to give your tenant appropriate legal notice. This differs between contracts and between states, but is often around 60 to 90 days notice for a rental increase to take effect. In most cases, your tenant will be on a fixed-term lease, rent increases are generally only allowed if they have been stipulated in the tenancy agreement.

The legislation in the state or territory in which your property investment is located will often state how often you can increase your property’s rent. In Queensland rent can only be increased every six months, while the bond can only be increased if it’s been at least 11 months since the last bond increase. Victoria, also only allows six month increases.

How much do you need to invest in an investment property?

Property investment is probably the most common form of long-term wealth creation.

We find there are so many people who would like to invest in property but have no idea just how easy it is on your back pocket. We’ve read many articles with the title “ What will an investment property cost you?” ; “How much money do you need to invest in property” ;“The cost of investing in property”; “How Much do you need to get started in property investment?”  … and at the end of the article you are as confused as you were at the beginning. So, before further explanation, let’s give you the answer up front then some explanation.

For most people reading this article you need exactly $0. So is this affordable for you now?

The reason the figure is $0 is because, with most clients, they are buying their first property investment after they have built up some equity in their own home. Lenders are therefore prepared to lend you the full amount of purchase, plus stamp duty plus legal fees so the actual amount of cash you require is approximately $0.00!

“But I don’t have an existing property!” … then again, the amount you may need is still $0.00.

This would assume that you have parents who are willing to give you a lot of trust – not cash, just a lot of trust. Many lending institutions today will take a guarantee against a home owned by a very good friend or family member. Basically, you are receiving nothing but absolute trust from the guarantor(s) that you will not default on the loan. This is the only time that the guarantor’s property will be placed at risk. So if you are confident in a secure job and a reasonable income, then using a family guarantor is an easy way forward. Speak to your local broker or Bank about this type of loan.

“I have no-one to help me, I’m on my own and I don’t have any current property or property investment”

In this case, you will require some funds. There is no one answer on how much money you will need to start investing in property. The amount required will depend on a few factors, some discussed further below, but as a summary the minimum you will require will be:-

• 95% of the purchase price of the property
• Stamp duty payable on the property
• Legal costs in purchasing the property
• Mortgage insurance – (This in some cases can be loaned (capitalized) against the property loan but almost certainly there will still be some cash cost)

** Let’s say it is a $450,000 property investment. You would require:-

Minimum 5% deposit – $22,500

Stamp duty                   – $6000  (this would ONLY be for a new house and land, for an  apartment or townhouse it would probably be around $14,000)

Legal Cost                    – around $2000

Mortgage insurance      – allow $11,000

** All costs are indicative for this exercise only

So how much do you need to get started? Probably around $45,000 to purchase a property valued at around $450,000. This figure is indicative only and should all be checked by your Broker and/or accountant.

Costs can vary considerably between houses and units, and regional and city-based locations. The location and type of property you are targeting can affect these figures even on a timing basis. For example, a lender may request a minimum 20% deposit in an area like inner Sydney in 2016 where there may be greater risk in apartments due to a possible over-supply.

Your investment strategy may also impact on how much you need to spend on your investment property. It’s important to remember that a very high rental and/or a low entry cost doesn’t necessarily mean the property investment will give significant future  growth.

Most Lime property investors choose to purchase a slightly more expensive property a ‘blue-chip’ suburb, usually in close proximity to the CBD of one of our major capital cities and utilise negative gearing to keep cash-flow very manageable and increase the probability   significant capital growth.

For some investors who place high value on cash flow, a lower-cost property with a high rental yield may be an ideal investment although in doing this, capital growth potential is often much less.

All investors need to conduct thorough research into the investment property they are planning to purchase. Lime Property Solutions makes this easy but completing the due diligence for you to ensure the property investment stacks up, minimising your risk and maximising the capital growth potential while looking after the cash-flow of your investment dollars.

Important Notes on this information
Deposit costs can vary enormously. The deposit is the amount of money you must ‘deposit”  at the start of the purchase in order to secure the property and full future financing. Deposits are almost always calculated as a percentage of the purchase cost. Usually, a 10% deposit is required by the vendor but 20% of the purchase cost may be stipulated, (normally by the lender!). Some lenders might even be higher depending on the timing and location or even based on the purchaser’s borrowing profiles. Lending  guidelines are dynamic, for example, in 2015 The Australian Prudential Regulation Authority lending guidelines led to many lenders requesting a lower loan-to-value ratio (LVR) on prospective purchases, putting the onus on investors to come up with higher deposits. LVR is calculated by dividing the amount borrowed against the value of the property then multiplying by 100 to get a percentage.

For example, a $500,000 value home with $300,000 owing would be $300K/$500K x 100 = 60%  LVR.

Note if you wished to purchase an investment property of around $450,000 and you already own a $500K home with a $300K mortgage then your borrowing LVR would be:-

Home Value $500K=$450K = $950K  Loan Mount $300K + $460K (allowing for borrowing of stamp duty and legal costs) = $760K so LVR = 770/950 x 100 = 80%. At 80% LVR there would normally be no mortgage insurance to pay.

Lenders will often require investors with a lower deposit (almost always 20%) to pay for lender’s mortgage insurance (LMI). This is a type of insurance that protects the lender (not the borrower) if the borrower defaults on their mortgage. Mortgage Insurance is a one-off payment but it can often be capitalised (added on to) the ongoing repayments on the investment loan making very little difference to the over-all cash flow. Normally a mortgage insurance premium to pay should not be seen as any ‘game-changer’ in purchasing a property investment.

All property investors are required to pay stamp duty on their property purchase. The amount of stamp duty varies by state and property value. Buying a new house and land property investment can lower this cost substantially as you are only required to pay stamp duty on the value of the land.

Property investors will also have to pay legal costs or conveyancing fees to their legal representative looking after the purchase of the property plus any title searches the legal person has to pay on the property.

 Invest in Property for less than $5 per day.

We are constantly reading about ‘Property Bubbles” and Unaffordable Property and how it is impossible for young people in particular afford to jump on the property ladder.

It sounds like we have a media blitz on property not being affordable and so many being locked out of being property owners. There is a lot of truth in these reports. We can’t deny that the median price of property in Sydney is in excess of $900,000, (although I really doubt that it is over $1 million!), and it is very difficult for first time buyers to buy into this market. However, there are very affordable options elsewhere for those you can’t afford their own home as owner/occupiers to enter the property market as property investors with their own investment property.

In March of 2016, we saw all of our new clients who purchase a brand new property in March, with a net weekly outgoing cost costing of less than $5 per day. In most instances, these property investors actually had a positive cash flow after tax; in other words, after negative gearing, they were better off after buying the property than they were before they bought it!

Clients and all potential property investors must understand that good investing is based on numbers. Understanding  financial goals, having the right finance structure in place, working on an investment property strategy on where to invest and what investment property to buy, making sure there is a balanced cash flow and buffers in place for any eventually, all leading to secure and stable property investment.

In many cases, after you have spoken to Lime Property Solutions, you will have a full understanding of the numbers and investing in property for less than the cost of a cup of coffee per day really becomes a no brainer! Maybe you should look at our related article on “What is negative gearing” on this web site to see how a cash flow on a good investment property can work for you.

If you are one of the many who has been convinced that real estate is now unaffordable then these facts and figures (understanding the numbers) should make you think again. …

Ongoing costs of property investment

Structured properly and purchasing the right property investment, in the right area at the right time, the initial on-going costs of owning an investment property should be less than the total income after tax. The largest cost is normally the interest on the investment loan (normally an interest only loan) so you have to consider:

• Loan repayments
• Council rates (usually no land tax for first time personal investment)
• Water rates
• Insurance
• Body corporate fees (if the investment property is a unit or strata’d townhouse/villa)
• Repairs and maintenance costs (absolutely minimal if you buy new investment property)
• Property management fees (to the company looking after the rental)

It’s also important to leave yourself a little ‘safety net” when purchasing your property investment. Keep some equity or cash left over It might be tempting to go all out and tip your life savings into your investment portfolio – but that would be short sighted and it may come back to bite you. Investment loans or home loans are susceptible to change, both inside and outside of your control. It is important to maintain a buffer for emergencies such as short periods of vacancy or minor repairs or even if your income becomes subject to an unforeseen change.

Bottom line in all of this is seek professional guidance in purchasing your investment property and don’t attempt to do it all by yourself, particularly as a first or second time buyer.

Use your property equity to build your investment property portfolio

If you have one investment property or a multi-million-dollar portfolio, the chances are you have been using equity to increase your property asset acquisition. What is equity and how can we use it to accelerate our property investment portfolio?

What is equity? 

• Equity is almost as good as cash in the bank and can be used in almost the same way as cash in building an investment property portfolio. Equity refers to the difference between a property’s market value and the amount of money owing on it. So let’s say your current property (investment property or home) is worth $800,000 and you only owe $200,000 on your mortgage, then you have $800,000 – $200,000 = $600,000 in equity. You can then use most of this $600,000 equity in the same way you would use cash to purchase more investment properties. There are many property investment stories that make equity sound like something magical:
• tapping into the equity in your property
• using equity
• extracting equity
• maximising equity
• accessing equity’

These are all phrases you may read in any investment property article but it’s not terribly difficult to understand and it’s not something that only experienced investors with large established portfolios use.

Equity can be used on any property you own, including the family home, and in fact this is probably by far the most common way for first-time property investor will structure to enter the property investment market.

Equity is created in two main ways, either by paying down your mortgage or investment loan or, more usually, benefiting from the increased value of your property during a growth cycle in your geographic region.

Generally not all of your equity in one property can be used. If you are taking out an equity-based loans, your lender would prefer you to ‘keep’ at least 20% of the property’s worth in the loan so that you are normally not borrowing more than 80 per cent of the available equity.

Most lenders will allow you to borrow against this equity to fund additional asset purchase. The equity can be taken out by re-financing the existing loan(s) to reflect your property’s increased value, which frees up the capital you may require to purchase your next property investment. Usually this is done by just taking out a new loan against the equity in order to fund deposits on a further investment property.

These types of loans are sometimes called home equity loans. They can be a flexible lending solution for property investors to borrow against the equity in their existing property(s). The big issue to avoid is making sure your sub-account is ‘for purpose’. Keep any single home equity loan that is being used for investment property separate to all other loans as the interest accrued on the sub loan will be 100% tax deductible but interest accrued on all or part of say, your home loan, is not tax deductible. Take advice from your tax advisor on the structure of these loans and do not depend on your lender knowing about tax!

This method of extracting equity from property is often used to fund upgrades and/or renovations to a property also. Again, if it is an investment property, interest paid is usually tax deductible.

Lime Property Solutions can organise excellent brokers who understand tax matters and will only structure your investment loans AFTER a full discussion with your tax adviser.

Risks and benefits of using equity?

The obvious principle benefit of using equity to build your portfolio is that you are able to use equity to accumulate wealth quicker than if you were simply trying to save the additional cash you may require for another property investment.

Through the use of equity, properties can be added to your portfolio at a faster rate, and the more properties you have in your portfolio, the more equity you are likely to generate.

To make the most of the equity in your portfolio you must structure your finances correctly and be aware of your cash flow and budget. In our experience the average young bank lender can easily assess an application on aspects such as your current income, dependents and outstanding debts but is unlikely to have the property investment skills or tax knowledge to properly structure your investment loans. Give Lime a call to discuss this.

In looking at risk and return in property, it is very common to find that equity growth does not necessarily translate to high rental yields, meaning that a property may generate enough equity to fund further purchases but not enough cash flow to cover current loan commitments. The opposite is commonly true also, a property with a very high yield may not achieve the equity growth require to purchase another property investment. Lime Property Solutions will constantly look for investment property which will give a fair ‘balance’ between yield and future equity growth.

Property investment that has the highest probable short-term growth, appreciating in value, is our key strategy. If you invest in a property that goes backwards in value, you may find yourself struggling to service all of your investment loans.

The simplest solution to avoid losing equity is to ensure you include a ‘safety net’ and/or a buffer in your repayment calculations before taking on a new investment loan using your existing equity. Ensure you can afford to repay all loans in the ‘worst scenario”, and also ensure that you use diversification in building your property portfolio and don’t just purchase your property investments in one location and/or in a single type of property.

Often, experienced property investors will spread their investment loans between different lenders and only ever tap into a finite amount of funds avoiding overextending themselves.

How can I maximise equity?
Maximising equity can really only occur in a few ways: pay off some of the loan; ensure you buy in an area where prices are currently rising or by undertaking value-adding projects on an investment property. This might be just cosmetic renovations such as re-painting and re-carpeting, or full-blown renovations involving new kitchen and bathrooms.

Adding on to or extending an investment property or adding a granny-flat can simultaneously add equity and increase cash-flow. However, never lose site of an exit strategy. A Granny flat in the garden may not be an addition a future owner/occupier wants or is willing to pay for!

It’s also very important to ensure you do not overcapitalise in trying to increase equity. An increased valuation achieves nothing if you have spent the same money on renovation works as the increase!

The simplest method to add equity quickly is to ensure that you purchase in the market with the highest possibility of short-term growth as well as long-term sustainable growth. This is where the research provided by Lime so important.

We have read that buying a property under market value is another way to maximise equity. This, of course, is Real Estate Agent nonsense. The price you pay for a property is the market value! No-one in their right mind is going to sell you a property worth $600,000 for $570,000.

Creating instant equity can sometime be possible in buying and building a duplex-type house and land. Otherwise you will pay market value!

CGT or Capital Gains Tax is the tax charged on any capital gains that arise from the sale or disposal of any asset bought or acquired after September 1985. It is not a separate tax in its own right. Rather a ‘net capital gain’ is included in your taxable income and taxed at your marginal tax rate.

A capital gains tax event is any transaction or event that results in a capital gain upon the disposal of an asset. The term ‘asset’ includes shares, vacant land, holiday homes, a business premises or of course, a rental property or investment property. A capital gain (or loss) is the difference between the purchase price and selling price of a particular asset. The fees for buying, such as stamp duty, and the fees for selling, such as agent’s fess, are added to the cost base. For example, if a property is purchased at a total cost of $500,000 (including fees) and sold for $720,000 (less $20,000 in agent’s fees), the tax will apply to the $200,000 gain. There are a few exceptions to paying capital gains tax. The main one being that it does not apply to the sale of your principal place of residence – that is, your own home. Holding an investment  property for more than twelve months may mean that the owner is eligible for a 50% discount on the capital gains tax payable.

The above is general information on capital gains tax. If you’re considering buying or selling property, it’s advisable to speak to a good accountant that understands property before you buy.

What If Interest Rates Rise?

There are a few issues here. Basically you were assessed by your lender at (usually) around 1-2% higher than the interest rate at the time you took out your loan. This gives your lender some confidence that you will still be able to pay your investment loan at a much higher rate.

The second point to consider with investment loans is that your ‘losses’ through negative gearing are tax deductable. If you are on the top marginal rate and your loan payments increase by $50 per month, then your tax relief will increase by around $24 per month meaning that you only have to find around half of the rise after tax. His is a very different scenario to your personal home loan which is not tax deductible. If your home loan increase by $50 per month and you are on the top marginal rate, then you would have to earn around another $100 per month before tax to pay for the $50 increase!

Correct structuring of your investment loans for your investment property will ensure that you have a”safety net’ for such eventualities as interest rate rises. This is when working with experienced and reputable companies like Lime Property Solutions can make a big difference.

Just as a last thought. We’ve been asking clients with this question “What if Interest Rates go up?”since 2008 to consider “What if interest rates go down?” It’s not often considered by prospective first buyers of investment property but we have only seen decreasing rates since the last quarter of 2008 and at time of writing it is half way through 2016!

There is Nothing to Worry about for Investors Who Are Negatively Geared

Check out our blogs on the subject of negative gearing. It is a constant topic and has been a constant topic in the media for the last 20 years.

“The current media scare campaign is definitely on. Virtually every year for the last 20 years that we know of, there has been some scaremonger in the media about changes to negative gearing “in the next budget”.

This time, for those who actually read the articles rather than glance at the headline and guess the rest, there is no talk of changes in the May Budget but Labour has made a policy statement that things will definitely change under a Labour Government for those that do not currently have an investment property! Yes people, the current system will be grandfathered, meaning that only new purchasers of investment property after 2017 will be affected. The word “New” should probably not have been used in the last sentence, I was referring to buyers after 2017 but even buyers after 2017 will NOT be affected by any changes if they purchase brand new property!

The Liberals are still talking about what they may do, but again, they have been making some references to any changes they may make being “grandfathered”.

Instead of being fri9ghtened off of investment property with some scary headlines, the big message really is BUY YOUR INVESTMENT NOW before things might change!”

Which property type will be best for you in 2017?

The cost of money (capital) is increasing for lenders. Property investors will now find it more difficult to obtain loan approvals.  There has always been a degree of “stress testing” when applying for a loan, where loans at 4.5% are tested at say a 6.5% rate, these margins are now even higher. The Big Four Australian banks have a large amount of security tied to residential debt, so while you may put in an application at four point five per cent it is likely to be tested at six point five or seven per cent. Many banks also feel that inner city apartments should be avoided in 2017 and are making borrowing on this type of property more difficult. House and land and townhouses and villas are likely to perform best in 2017 and 2018.

This means that being able to prove cash flow is now the number one concern, highlighting two major players: those who have assets but are cash flow poor and may struggle to liquidate and those with strong balance sheets with a large amount of cash on hand.

The temptation in these circumstances is to look for higher yield, nearly always available through commercial property which traditionally offers better yields at the expense of often a much poorer   capital growth potential.

There are a few articles in this section arguing the fact that property is not a short-term venture and as such, disruptions in the market should not instantly prompt investors to sell. Almost always, the only people who lose in investing in property are those who panic and sell in a softening market. It is extremely likely that interest rates will remain low for several years to come. If you are sensible with the amount you are borrowing, and gear yourself comfortably, you are likely to be in a winning position in the long run.

There is now a fantastic opportunity for real success in investment property. With prudent and logical advice and understanding the current research, there’s plenty of opportunity to capitalise through property investment.

Is this a good time or a bad time to be investing in property?

There is an old adage in property buying,

“The best time to buy a property is yesterday,

The next best time to buy is today

The worst time to buy is tomorrow!”

There are always good and bad times to be buying investment property. It’s about understanding how our market cycles work and understanding the drivers of growth that make the difference. Between 2003 and 2010 was a bad time to be investing in Sydney as we were looking at relatively high prices and poor yields. However, between 2003 and 2010 saw price growth of around $150% in SE Queensland and around 200% in Perth.

Now that the Sydney growth cycle has ended, it may not be such a good time to be investing in Sydney, but we are now at the beginning of a growth cycle in SE Queensland. No matter how successful our investments, the one thing we can never buy id time and successful property investment is all about time in the market. There is always a good opportunity for successful property investment somewhere in Australia – Cease the chance when you see it and if you can’t see it, contact Lime and we can show you where the opportunity is today.

An analysis of property price growth over many years reveals that historically, prices generally rise between 2% – 4% above the prevailing inflation rate.
No one, with absolute certainty, can predict future values; however history shows that property prices in Australia will always outgrow inflation.

Why can’t I find a tenant for my investment property?

For over 20 years, we have been working with a strict selection criteria. Once you see and understand the selection criteria, you will also understand why the type of investment property we recommend is seldom empty for any more than a few days between tenants. In our modern Australia where there is still, in most capital cities, a deficiency of housing stock, there must be something far wrong if you can’t find a tenant for your quality property investment.

Many excellent areas of our major cities may, at times, have a slight over-supply of rental stock. Keeping your property rented is a high priority and you may even have to lower your weekly rental to secure a tenant in the worst of times. This is not the end of the world and there are two major points that must be understood;

• A lower rental means an increase in over-all loss. In most cases where your property is negatively geared, between the slight lowering of the management fee because of the lower income and the ATO increased rebate, you are likely to be paying less than half of the decrease in the weekly rent, particularly if you are on a high marginal tax rate.
• Correct financial structuring at the time of purchase will ensure that funds are available for any eventualities. It would be a very poor property investment that was lying empty for 6 months but even so at say $400 per week, this would be a gross loss of around $10,400 but probably net of around $6000. On a reasonably located property (which would not be empty for 6 months anyway!), $6000 is equivalent to a 1.5% annual growth. In a market like Sydney which has seen double digit growth for the last few years, it’s still ‘money in the bank’.

What’s the best investment? Property or Shares?

The shares vs. property debate is one of those eternal questions. Each has its diehards with their own set of statistics that prove that one is a better bet than the other.

Both arguments are pushed by vested interests: money managers rake in billions a year by taking a tiny slither of your investment and making it theirs (via asset-based fees), and there’s an entire industry of agents, banks, politicians and retailers that feed off a strong property market.

Shares can be a more volatile investment than property investment. Over the last year, the value of shares has declined by over 40%, while overall national property prices have risen slightly. The other thing to remember is that with real estate you have the safety of bricks and mortar, so even if prices fluctuate with the property cycle, you don’t have to sell until you are ready. This contrasts with companies on the share market which can go bust, leaving share holders with share certificates that are worthless.

The huge advantage we see in investing in property is the idea of “using other people’s money” or LEVERAGE. The vast majority of property investors are using substantial leverage, borrowing hundreds of thousands off the lender and looking for growth. The majority of funds placed in the share market do not tend to be leveraged but are more likely to be owned asset (cash). A fabulous return of 20% gross on $100,000 invested in shares would see your wealth grow by $20,000. A 5% growth on a leveraged property of value $600,000 would see your wealth grow by $30,000 gross. There is a place for both types of investment but property does tend to do better after all considerations.

 The ANZ report, “Asset Returns: Past, Present and Future” found that the highest returns over the past 24 years came from owning your own home. The report states that on average owning a home generated an annual return of 12 per cent, even with costs and taxes factored in. Homes trumped both investment properties at 9.6 per cent and shares at 8.9 per cent.

I’ve been taught to stay away from debt. I’ve always been told debt is a bad thing?

We would agree that non-deductible debt such as car loans, holiday loans or even mortgages are bad debt that must be paid off as quickly as possible with what you have left in your pocket after earning income and paying tax on that income.

However, asset accumulation debt is something quite different. Even our wealthiest families in Australia like the Packers and the Reinhardt’s understand that ‘good’ debt, which is tax deductible and asset producing is a tool that must be used. The wealthy get wealthier by ‘leveraging’ to buy assets that increase in value.
Borrowing to invest in appreciating assets   is considered ‘good’ rather than ‘bad’ debt and provides legal tax minimisation benefits. It is much easier to create wealth using careful borrowing and investment strategies compared to saving your hard earned, after tax income.

How does Lime Property Solutions get paid?

This is a very common question but the answer is very well advertised throughout this website.

Lime offers free property investment consultations. There is no catch here, ‘Free” means you pay nothing.

Lime Property Solutions holds Real Estate Licences. Like all other Real Estate Agencies, Lime is paid a commission by the vendor (seller) of the property, normally the developer or builder, just like any other Real estate agency. If you are satisfied with the service Lime provides, then we may ask for 2 names of people, similar to yourself, that we can assist in using investment property to help them achieve their goals.

What is a lender property valuation?

A property valuation is generally conducted on request by your lending institution (such as a bank) to ensure that they are lending an appropriate amount against the perceived value of your property investment. Normally ‘the valuation” is produced as a report. A property valuation includes property information – rates, size of the land and building, physical details on the construction and condition of the dwelling, details on any immediate issues that may need addressing – as well as information on comparative sales in the area. It is important to note that a bank valuation, like mortgage insurance when you have to pay this, is paid by you the buyer but the valuation is generally confidential and belongs to the bank, not you the buyer!

You normally hear people discussing house valuations when lending institutions are financing a certain property – it is an essential part of the investment loan or home loan application process.

When obtaining a mortgage or investment loan, a bank requires a valuation to ensure the security value of a property covers the loan. If anything happens and the loan is unpaid, the bank needs to be confident that it can recover any outstanding amount owing on the property if it had to re-sell it.

Lending institutions usually use their own nominated panel or preferred licensed property valuers and there are plenty of anecdotes out there as to how they come up with their values

How do valuers come up with a figure?

For a valuer to do their job, they generally need to visit the property, measure it and note details on the building structure and its condition, number of rooms and layout and their presentation and inclusions, fixtures and fittings and shred areas. They will also note the property’s vehicle access and any garages, carports or out buildings. Sometimes the valuation will include photos of the property highlighting certain features.

Once they have visited the property, they also look at planning restrictions and council zoning and its relative location. The valuer then compares all these attributes to recent comparable sales in the surrounding area before coming up with his ‘bank valuation’.

What is the difference between a Bank Valuation and a real estate agents’ appraisal?

Real estate agents will give you an appraisal on your property on request. They base their appraisals on other sales in the area and their experience in selling in the local area. Real estate agents work for the vendor (which could be you) who pays the commission on the price they achieve, not the official valuation. There is often a significant difference between a ‘market value’, what you should hope to achieve if you sold the property and what the valuer says the property is worth to the bank.

After 20 years in the industry, it would be wonderful to explain fully how banks value a property and what instructions they may give to their valuation panels. However, this remains a mystery! We have had experiences of the same valuer in the same building with virtually identical apartments being valued at substantially different values. We have hundreds of examples on new developments where one bank (or one valuer employed by a certain bank) decides that unlike all other valuers who have been to the development, the particular units are all worth many thousands less than his colleagues agree! For most of 2014-2015 the fastest growing region in Australia outside of Sydney was the northern Gold Coast. We know from experience that virtually all land valuations in the area were around 10% less than the sale price. As land values on an average 500m2 lot, gradually increased over the period, so bank land valuations continued to grow by the same amount but always around 10% less than the sale price. On a couple of occasions when valuers were questioned as to where one could purchase a similar sized lot for the value they had given, no answer was available (and from our own research we knew it was absolutely impossible to buy similar land in the area at the value the bank was giving!). In 2015 we were informed of a few purchases where a property sold at auction was deemed to be worth a lot less than was paid at Auction clearly demonstrating the difference between market value and bank valuation.

Valuers are generalised as conservative. They are tasked with assessing what price the bank could reasonably achieve for the property if the borrower fails to service the loan and it needs to take possession.

A property sale may fall over on a valuation if the property’s value doesn’t come close to the agreed sale price. A buyer, on behalf of their lender, could deem the finance clause in the contract is reason the property can’t go ‘unconditional’. They may at this point decide to exit the contract. It is important to complete your own due diligence in purchasing an investment property and be convinced, from your own research, that you are paying what you believe to be a fair and reasonable price. If you have done this and then later the bank decides not to value “to market” then you should still be reasonably comfortable with your decision.

One of the criteria a valuer will use is ‘comparable sales’ in the neighbourhood. In new developments in particular, they are not permitted to use other sales in the same development as ‘comparables’ and it is often almost impossible to find a new development in the neighbourhood that is a good comparable in terms of size, age, inclusions and location. It is common for “comparable sales” to then be in neighbouring suburbs or closer much older developments that cannot really be true or good comparisons.

It’s important to remember that the job of the property valuer is not a science and valuations can vary considerably from one individual valuer to another.

Deposit Bonds

A deposit bond, sometimes referred to as a deposit guarantee, is an insurance policy that acts as a guarantee to the vendor that the purchaser will pay the deposit at settlement.

These are often used in off-the-plan investment. A finance Broker or a bank can arrange these for you.

A Deposit Bond allows you to purchase a home or invest in property without having to provide the deposit in cash. A Bond is a substitute for the cash deposit required when purchasing a residential property – you simply pay the full purchase price at settlement. Both short and long term guarantees are offered to suit any settlement terms.

It should be noted that applicants need substantial equity – usually around FIVE TIMES the value of the bond. A bond is no easier to acquire than a loan to pay a deposit …. and basically the applicant has to supply very similar complying documents to the Broker to apply for the Bond as they would a   loan application.

Positive Gearing and potential down-side to looking for positively geared property

(See also negative gearing) Positive gearing occurs when the income from your investment property exceeds your interest expense and all other deductions such as council rates and management fees. Nearly 100% of investment property purchased will eventually become positively geared, even although your investment property may have started off as negatively geared.

It is extremely important to understand that the rules of investment in terms of risk versus return will almost always result in a positively geared property giving a very high rental yield at the expense of future capital growth and of course increased risk.

Beast examples of this are all round Australia during the recent ‘mining boom’. Investment properties in coal towns, iron ore towns and other mining areas were giving fabulous yields. It was not uncommon to be offered an investment of around $400,000 with annual yields in excess of $50,000! Now that the boom is over, these same properties are lying empty, still with the landlords paying maintenance and rates and are almost impossible to sell as demand has disappeared.

In a case of positive gearing, the landlord will generally be subject to additional tax on income derived from the investment property.

What is Co-ownership and joint ownership and how can this help me?

Generally, when a couple purchase an investment property, it makes sense for the highest earner, and therefore usually the highest tax payer, to ‘own’ a larger percentage of the investment. This is because the tax relief (the money back from the taxman) will be more if the person is paying more tax. For example, a couple buying their first investment property currently are purchasing their own home on a 50/50 basis. There is no problem with this and the structure is probably the most common. However, the wife earns $110,000 per year and the husband earns $80,000 per year. A new investment property they are about to purchase will have a total negative gearing loss of say $16,000 in the first year. If the new property is owned 50/50 like the home, then both have $8000 each on tax relief. However, the husband will have his deduction calculated at his marginal rate of 32% tax while the wife will have her deduction calculated at 39%. The wife will receive more back because she is paying more tax so it would make sense for the wife maybe to be a co-owner with maybe 90% or more and the husband to be a co-owner with 10% or less. In this case they would not be joint owners but classed as ‘tenants in common”.

“Joint tenancy” and “Tenants in common” can be used between unrelated people buying a single investment property.  Co-ownership and joint ownership means that financial resources can be pooled with friends and/or family to help invest in a property. However, this strategy carries more risk if one of the co-investors became bankrupt or suffered other financial hardship. Purchasing in this way with friends or relatives has other drawbacks but buyers should ensure they access good legal advice to create a contract that outlines each applicant’s commitment and percentage of ownership.

Top Five Property Investor Questions Answered

After years of working with thousands of investors, we have put together the five most frequently asked questions. Even if you know just a little about the investment property market, the results probably will not surprise!

What Are The Top Features To Look For In An Investment Property?

• Location: Definitely the number one concern, the location must have strong population growth, low unemployment, good job growth, a diverse economy. A good location, particularly in one of our larger cities, provides a lower-risk investment environment
• Infrastructure: Best if it is already an established area with plenty of desirable infrastructure close by. If gentrification is continuing with more bigger and better infrastructure programs, these always drive price growth  
• New: ­Depreciation is a massive help to cash flow and helps to drive tax deduction. Older properties have little or no depreciation, need more maintenance and are more costly to run. Generally they do not demand as high a rental and are more likely to suffer vacancy.
    
• Balance between yield and capital growth:A gross yield of around five per cent is a good rule of thumb. This ensures holding costs are manageable and cash ­flow is manageable. It also gives you a good ‘split’ between capital growth potential and good yield. Normally one offsets the other.
• Slightly above average price point: ­Property should be no more than slightly above the median or around the middle of the suburb’s price range. This firstly will ensure constant tenancy and low vacancy but usually also assists when you sell as most transactions are around the median level.

Property as an investment class is the preferred vehicle to create wealth. Most would desire that this be as passive as possible. In this case, new properties with high depreciation and low maintenance make this possible.

What should be avoided when buying an investment property?

• Basically for low risk investment, stay away from regional towns but specifically avoid:
• One-horse towns, where economic life depends on one activity
• Older houses with no depreciation
• Expensive features such as swimming pools and heritage-listed properties, as they create problems
   
• Locations near power poles, factories, and busy roads
• Ensure you buy your property investment where there is a strong demand from owner occupiers, not just investors.

What research should I do to find the best investment property?

Basically have a team of trusted professionals around you will ensure you are supplied with the best research material. You should be prepared to do the following:

• Research the web. Have a look at CoreLogic RP Data, Realestate.com.au, Domain.com.au even Wikipedia.
• Talk to your mentor/adviser. If you don’t have one, phone us now
• Talk to other investors
• Talk to local real estate agents only to find out about the rental market. You’ll find they are hopeless for anything else! (It’s always the best time to buy now in their area and with the best investment in the area which just happens to be in their window right now!)

 Ignore the old “uncle Bill syndrome” – the one that always knows!  Do not take advice from friends and professionals who do not own investment properties.

What if I can’t work or lose my job?

This is one of the ‘best’ procrastination reasons for doing nothing about your financial future. The ‘bad’ news for you procrastinators out there is that there will always be a chance of maybe losing your job or being sick but it does not necessarily mean you should not invest. In fact, arguably, because of the chance of you needing future asset to live on, it is all the more reason to take action now while you can.

Losing your job can create the fear that prevents you ever investing and getting ahead. The number one protection you can have is to ensure that when you purchase your investment property, you have your borrowing structured to take account of any eventualities. If a ‘safety net’ of say $20,000 is built in to your investment loan then this should take care of any eventualities for a year or so. Think about this – you are investing in say a $500,000 property in the belief that in 10 or 12 years it should be worth $1 million+. You have an ‘extra’ $20,000 set aside in your investment loan for unforseen emergency and you use most of it over a 12-18 month period while you find a new job. You decide to sell after 12 years or so of ownership and you get your $1million. Would it really be such a huge hardship if you were now paying a loan of $520,000 back rather than just the initial $500,000 borrowed? … And yet you have had no worries and peace of mind through using the emergency funds put in place at the time of purchase of your investment property.
There are, of course, very necessary insurance options that will replace your income if you stop work due to accident or illness.
Even job loss from redundancy, which is often only short term, can be covered by insurances.

New Property V Old Property for your investment

Basically you will find that cash flow on a new property is significantly better than in buying an older property. A new investment property around $500,000 could have in excess of $16,000 depreciation in the first year; an older property may have virtually nothing in depreciation.  Older properties can have many hidden traps leading to costly repairs and maintenance, newer properties are usually ‘guaranteed by the builder for at least 7 years against any structural problems.  Buying new has many advantages including peace of mind with lower maintenance costs, generally a higher yield on a comparable older property and they are likely to attract a better quality tenant.

Should I sell my non-performing property in order to buy a better one?

This question is really answered in looking at our articles on Buy and Hold investment property and long-term investment. Generally the answer to this question is do not sell unless you have to. The costs of selling can be large including real estate agent costs and the possibility of having to pay capital gains tax.  Look at ways to make your current property perform better.

This question will always be personally assessed by one of the highly experienced Lime Property consultants as the best answer is dependent on individual circumstances, but in most cases we find   that holding your existing investment property is the best option.

What do your property researchers do?

Lime Property Solutions Property Research plays a critical role in finding the best property investment for clients. Much of the research is analysing professional data purchased from Australia’s most respected property research agencies such as Australian Bureau of Statistics and BIS Shrapnel. Much can also be found by daily scrutiny of quality media such as the Financial Review. This outsourced research involving the growth and development prospects of different locations, is assessed by Lime by visiting areas and increasing our knowledge through meetings with local developers, real estate agents and local Chamber of Commerce representatives. Once our research is satisfied with an area or suburb we seek out suitable property that meets our very strict selection criteria.
By developing strong relationships with developers and builders, we negotiate deals for our clients.

Lime often sources potential developments ahead of general market release, providing clients with unique property investment opportunities.

How are villas, townhouses and apartments different to house and land?

In any property portfolio, we believe diversification is important. This includes the type of accommodation you purchase as your investment property. The real answer to this question, however, lies in understanding fully the selection criteria that is explained to all clients.

One of the principal considerations an investor should make before purchasing an investment property is a consideration of ‘exit strategy’.  In other words, how will you sell this investment property when the time comes? The obvious solution is to ensure you purchase an investment property that will appeal to the most common owner/occupiers in the area in which you are investing. Censes data tells us that the majority of homes in our CBD’s and fringe suburbs in all major cities now have less than 2 persons per household! Is it any wonder that the vast majority of properties sold in these areas now are one and two bedroom units? Surly, from an investment point of view, a one or two bedroom unit is by far the best investment to make if you are within a few kilometres of a CBD? However, if you decide to invest in one of our outer suburbs, there is probably little demand for a one or two bedroom unit and the obvious best investment would be a 3 or 4 bedroom house and land.

Purchasing higher density accommodation, such as townhouses or units, also help investors into more desirable locations closer to city centres. These types of property usually have higher rental yields and higher demand compared to house and land in similar locations.
Understanding cash flow is also very important and we all wish to maximise tax deductions. Villas, townhouses and apartments do not have as  high a land component in the overall cost, so depreciable tax deductions are usually greater . You cannot depreciate land, only the improvements made upon it.
Be aware that the land component of investment properties is subject to land tax when an investor’s properties (land value) in that state reach the tax threshold. This is an important consideration for investors wishing to build a portfolio with multiple properties.

Getting Advice from Accountants

An Accountants main concern should be to maintain expertise in accounting and taxation affairs. Most don’t have the time or inclination to keep across all the details of specific property investment strategies.

Very few accountants have the necessary qualification they need to give clients financial planning advice and the bottom line is that accountants are really more about your history, where you have been, than your future – where do you want to be?

Lime consultants have extensive knowledge in all aspects of property investment and are happy to share this with you and your accountant. We always recommend you discuss your investment plans with your accountant to ensure that it fits your overall financial situation.

Can I invest while I still have a large mortgage?

Using the advice of qualified Brokers and accountants (who can all be recommended by Lime), it is much easier and quicker to pay off a home mortgage through the assistance of owning an investment property. We believe one of the biggest mistakes some clients make is waiting until their non-deductible mortgage is paid off before thinking about property investment.

Many of our parents have always suggested that if you want to retire early and be financially free, you need to be debt free.  This statement comes from a total misunderstanding of the difference between good debt and bad debt. Would you have any idea of how much Australia’s richest man, Kerry Packer, had borrowed on his business empire at the time of his death? Money makes money!

Many of us have been brought yup to believe debt is evil. I actually believe this myself when thinking about the type of debt most of us are used to; mortgages, car loans, overseas holidays, credit cards and the like. All debt that must be paid off as quickly as possible with what is left of your after-tax dollar!

As you get older, there is often a large amount of equity in the family home. Having it sit there doesn’t make you any richer, however, if you get it working you could have twice as much, if not more, on retirement. Most people spend a lifetime paying off their mortgage and when they finally do, the banks say, “Why not use that dead equity to invest elsewhere?”

Instead of waiting to pay off your first home, why not invest now?

Reducing your personal, non-deductible debt is a good thing. However, investing in a second or third property will often make hundreds of thousands of dollars more than the few thousand you’ll save in interest paying off your home. Your lifestyle does not have to suffer if you buy more investments, even if they are negatively geared.

Just as you can use your spare equity as a cash buffer, you could use your equity to help cashflow any difference between the rent and the mortgage.

Think of it as working capital in your business. Banks have responsible lending codes to abide by which should ensure you have the serviceability to cover extra borrowings.

If you want to play things safe you should buy a home, pay it off, and invest from there. However, if you want to create an extraordinary retirement, you need to go against the crowd.

Investing can be risky if you don’t know what you’re doing. Make sure you hire professionals who are making money through property investment themselves, rather than people who have the qualifications but aren’t practising what they preach.

The biggest difference in a property investment loan is that the interest paid on the loan is most usually tax deductible. If, for example, you are paying $20,000 annually on interest on your home loan, then for you to pay that $20,000, it would be taking maybe as much as $35,000 or more of your current gross salary! As interest is tax deductible on an investment loan, then if you paid $20,000 interest on your investment loan it would ‘create’ a tax deduction of around $7800 per year for someone on the middle tax bracket of 37% (over $80,000 gross income per year).

This means you would only need to ‘find’ an additional $20,000- $7800 = $12,200 to pay the interest. This would normally be covered by the rental received from the investment property.

There are few differences between what you need to do to borrow for a property you’ll live in and for one you’ll rent out. The most common difference is that a property investment loan is almost always on interest only while your current home loan is most commonly principle and interest.

Some lenders charge a slightly higher interest rate for investment properties because their risk may be seen as higher but this is not necessarily the case.

Your Lime property investment consultant will explain  how an investment loan would potentially impact your financial circumstances. Working with a highly experienced property investment Mortgage Choice broker can help you to explore the implications and perhaps structure your loans in a way that your mortgage may end up being paid off much faster than you ever thought possible.

Is it only wealthier people who can afford to invest in property?

Anyone with some reasonable equity, (we recommend usually around $120,000 + depending on individual circumstances), or a deposit of around $50,000 and a reasonable joint income of around $120,000 can usually invest in property with reasonable comfort.

Rental income and the use of negative gearing to reduce tax means many people find their investment property more than pays for itself, or results in minimal out of pocket expense for the investor. Many Lime clients have an annual income of less than $70,000.

What advantage is there in using a property investment company like Lime Property Solutions?

There are many advantages to using the services of an expert property investment company. The first advantage has got to be the fact that you are working with a professional investment company who just happen to use property as their preferred investment class. As property investment professionals, you are given access to free property investment education and free research. Apart from these two major factors, there are many pitfalls even experienced investors meet. A Company like Lime will ensure you are fully in control and fully understand all steps you take in purchasing and managing your investment property.

All successful investors have a good and experienced team of professional around them including tax advisors, brokers and solicitors as well as property research experts. Lime will ensure we help you build this team around yourself.

Real estate agents earn commission based on the sales price of the property they sell, generally only in the area in which they are based. They can give an excellent service to anyone who is looking for accommodation in the small geographic area they serve. It must also be noted that, by law and ethics, a local real estate agent’s interest and loyalty is with the vendor, not the buyer/property investor.

Lime Property Solutions focuses solely on the interests of the property investor and are there to offer clients a full property investment support service. Lime will negotiate the best possible benefits and price on the property investment for every client.

Can I move into my investment property when I retire?

The simple answer to this question is that your investment property belongs to you and you can do what you want with it as you can with your own home. There are people who buy property investments with an aim to move in themselves at some stage although this is NOT a strategy we would encourage. Your future dream property may not necessarily be a good investment and trying to kill two birds with one stone (buy a great investment and a dream home for the future) is often a very risky strategy.

Always, it is best to invest in an area with the highest possible potential growth. Specifically we are investing to make money! Seldom do we find that the dream future property has all the attributes of a great investment. Of course by sticking to buying great investment property, you will soon have the funds to buy that dream property to live in! Lime can always advise about whether the area where you want to live in the future is an area of solid capital growth and the type of property in the area that is most likely to make the best property investment choice.

This is a very difficult question that really needs a full explanation, based on your particular circumstances, from a qualified tax advisor. Many clients think this is ‘a good idea’ without really considering the full reasons and the goals for investing in property.

Often, it makes much more sense to invest at a personal level to assist in the cash flow of the property, particularly if you are paying tax at a higher marginal rate. However, once the money is made on the investment property, then trusts can be very tax effective in distributing profit. Trusts can also be a very good idea to protect your assets; if you don’t actually own the asset then it can’t be claimed if you are sued!

Here is an extract from the Sydney Morning Herald that could prove to be useful.

“ There are many types of trusts and which one you should choose depends on many factors such as the type of investment, whether you will require a loan, your marriage status and your susceptibility to being sued. The most common type of trust thought is a discretionary trust, commonly known as a family trust.

Basically a family trust is a vehicle to accumulate investments that are protected, with the profits distributed in the most tax-effective way. A family trust allows the trustee to use their discretion in distributing funds to the beneficiaries, which is where the real value of a trust can occur.

Here is an example of how this can create wealth.

Consider a couple earning $85,000 each with two dependent children.  One child is 21 and the other is 19. The 21-year-old works part-time while studying and earns $12,000 a year. The other child doesn’t earn any income and is a full time university student.

They have a family trust and have accumulated investments in their trust over several years. This year it has generated a profit of $23,000. Because the fund is discretionary, the trustee can distribute the profits at their discretion.

If all of the money was distributed to the parents, they would pay 37 per cent (their marginal tax rate) income tax on the full $23,000, an additional $8510 tax on what they are already paying.

Alternatively, if the trustee distributed $18,200 (tax free threshold) to the 19-year-old and $4,800 to the 21-year-old, remaining under the tax free threshold, there would be no tax on the entire trust profits.

By distributing the funds in the most tax advantageous manner the amount of tax the family pays is reduced from $8510 to zero.

So purely by minimising your tax, you can create wealth quicker in a family trust.

Here are five benefits of using trusts to manage family wealth.

Asset protection

A trust can be used to keep the wealth in the family. Where a parent might want to buy a house for their child, using a trust will allow the child to live in the house but the ownership remains with the trust.

If there were potential issues with an in-law, the trust structure assists in potentially keeping the property outside of the marital asset pool.

Cost effective

The cost of establishing a family trust is relatively low.  A trust generally can cost between $500 and $2000 in legal documentation with accounting fees varying between $500 and $2000 each year.

Tax minimisation

Trust distributions can be directed to family members on lower tax rates, potentially saving you thousands of dollars in tax.

If purchasing a property for a child, this effectively becomes a rental property which allows the trust to claim expenses in the same way that a landlord can for a rental property. Keep in mind though that buying a property in a family trust does not qualify you for the first homeowners grant or stamp duty concessions.

Retirement planning

While the superannuation rules continue to change, a trust provides a flexible structure to accumulate long term wealth with tax benefits. Consider accumulating funds both in your super fund and also within your trust. Unlike your superannuation fund, your trust doesn’t have any rules about when you can access the funds and can provide for an early retirement prior to gaining access to your super fund monies.

Flexible and estate planning

Most family trust deeds are flexible in their operation and can provide for good estate management, allowing for assets to benefit generations without the need for ownership to change from one individual to the next.

It’s no surprise that trusts are a popular way to not only accumulate money, but to protect it and keep it in the family. Talk to your financial adviser about the suitability of a trust for your family and start gaining the benefits that many Australians are already enjoying.

Why not increase the financial savviness of those around you – pay it forward and pass on these tips to your family, friends and kids.”

The following is an extract from “Family Trusts Explained”

What is a Family Trust in Australia?

“An Australian family trust:

• is generally established by a family member for the benefit of members of the ‘family group’;
• can be the subject of a family trust election which provides it with certain tax advantages, provided that the trust passes the family control test and makes distributions of trust income only to beneficiaries of the trust who are within the ‘family group’;
• can assist in protecting the family group’s assets from the liabilities of one or more of the family members (for instance, in the event of a family member’s bankruptcy or insolvency);
• provides a mechanism to pass family assets to future generations; and
• can provide a means of accessing favourable taxation treatment by ensuring all family members use their income tax “tax-free thresholds”.

A family trust has many other potential benefits, including avoiding issues such as challenges to the will following a death of a senior member of the family.

Trust deed

The terms and conditions under which a family trust is established and maintained are set out in its deed.

The trust is established by the trust’s settlor and trustee (or trustees) signing the trust deed, and the settlor giving the trust property (the “settled sum”) to the trustee.

The settlor

The settlor’s function is to give the assets to the trustee to hold for the benefit of the trust’s beneficiaries on the terms and conditions set out in the trust deed. The settlor executes the trust deed and then, generally, has no further involvement in the trust.

The trustee

The trustee is responsible for the trust and its assets. The trustee has broad powers to conduct the trust, and manage its assets.

In a family trust, the trustees are usually Mum and Dad (or a company of which Mum and Dad are the shareholders and directors). Their children and any other dependants are usually listed as beneficiaries.

Family Trust income

One of the key benefits of a family trust is that the trustee can distribute income earned by the trust [from the trust property] in any way they see fit, provided distributions are made to people who qualify as beneficiaries. They do not have to make trust distributions in any particular proportion or in the same proportions as they did in previous years.

A trust does not have to pay income tax on income that is distributed to the beneficiaries, but does have to pay tax on undistributed income. The trustee is free to distribute trust income to as many beneficiaries as possible, and in proportions that take best advantage of those beneficiaries’ personal marginal tax rates. The beneficiaries then pay the tax on distributions made to them.

For example, if an adult beneficiary of the trust only receives income from a trust and has the benefit of the tax-free threshold (currently $6,000) for the year, the trustee could distribute part of the family trust’s income to this person. The result is that the beneficiary will receive some income but may not have to pay tax if that amount is less than $6,000. If the distribution to the beneficiary exceeds his or her tax-free threshold, the excess amount will be taxed at the beneficiary’s personal marginal tax rate.

Distributions received from a trust are not a special form of income, but instead forms part of a beneficiary’s assessable income. If the beneficiary receives income from other sources in addition to distributions from the trust, all of the income will be taxed together.

Even if the beneficiary’s income does exceed the tax-free threshold for a particular year, the rate of tax applied to the amount of the excess income over the tax-free threshold may be lower than for other beneficiaries because of the total income that these other beneficiaries already receive.

Undistributed income is taxed in the hands of the trustee at the top marginal tax rate of 45% for the 2006/2007 year, giving a strong incentive to family trusts to fully distribute the trust’s income before the end of each financial year.

The trustee should also take care in relation to which beneficiaries are chosen to receive distributions, as penalty tax rates can apply to distributions made to minors.

Family trust elections — a word from the ATO on income distributions

One important aspect of a family trust that must be kept in mind is to whom the distributions are made.

First, all distributions must be made only to people who qualify under the terms of the trust deed to be beneficiaries of the trust.

Secondly, for trusts that have made a family trust election, the distributions may only be made to beneficiaries who are within ‘the family group’. In relation to this the ATO states on its website:

“A consequence of making a family trust election is that any distributions (broadly defined) outside the family group of the family trust by the trust will be taxed at the top marginal rate applying to individuals plus the Medicare levy.”

In other words, if a family trust makes a family trust election and then pays out to someone not a member of the family group, they will be taxed at the maximum rate possible! Be warned…

Seek legal advice — especially about Family Trust Elections

The family trust information here should be considered general in nature, and in no way interpreted as legal advice. You should always seek your own independent legal, accounting and financial advice before ordering any of these types of complicated legal structures.”

Land tax is a tax levied on the owners of land in each state in Australia. It is a State Tax so it differs between states.

In New South Wales (NSW) and Victoria it as levied as at midnight on the 31 December of each year. Land tax applies to land regardless of whether income is earned from the land. Land tax is an annual tax levied on the owners of land.  For example, the 2013 assessment is based on land holdings as at midnight on 31 December 2012.

In general, your principal place of residence (your home) is exempt from land tax.

You may be liable for land tax if you own:

• vacant land, including vacant rural land
• a holiday house
• one or more investment properties

In NSW the general threshold is $482,000 – in other words you can own that amount of land (NB Not land and building, land only) before paying tax. In Victoria, generally if your land holdings have a total taxable value of $250,000 ($25,000 for trusts subject to surcharge) or more (excluding exempt land) you must pay land tax. For all entities, trusts and superannuation funds for example) there is generally NO threshold in NSW.

Land Tax by state is another reason (although not as important as others) why we believe in diversification of a property portfolio. In this way a property investor can take advantage of the total thresholds in each state before becoming liable to any land tax.

When a land title is shared between units or an apartment building, the owners of the properties make up a group called the ‘Owners Corporation’ (sometimes referred to as body corporate or Strata Corporation).

Some property investment clients do not like the idea of paying a strata fee for their investment property and cite house and land packages as maybe a better option. This can be false economy. Remember a big part of the cost of Strata Fees  is building insurance so if you are in a Body Corporate there is no individual building insurance to concern yourself with. In a house and land, this cost could easily be more than $1600 per annum. Add on to this the general outside maintenance costs of house and land plus say a $10,000 to $12,000 bill for a new outside paint job and roof repair every 10 or 12 years ( these ‘outside’ costs would all be covered by a Body Corporate), then a good well-ruin strata can be just as inexpensive as a property without a body corporate.

The owners elect a Body Corporate committee to handle administration or upkeep of the site including matters regarding common land. Usually this responsibility is referred out to a property management company for a fee. The benefits of an owner’s corporation include:

• the value and integrity of your investment  is protected through frequent maintenance and landscaping
• you are insured against accidents that occur on the common property (eg: shared driveways)
• you may have access to very competitive building insurance pricing, as all properties combine to get a reduced bulk rate. In this case, owners would only need to secure an additional contents policy to complete their insurance needs on the investment.

Most new home construction these days are done by property developers who acquire land when it’s released by the government. The developers lay down infrastructure (roads, utilities, water and sewage), then either:

1. Build homes and sell them as a complete house and land deal

   or

2. Offer a number of standard or customisable home designs, so that you can choose the block of land you want and the features you’d like in your new home. House and Land Package

A potential benefit of buying your new home or investment property this way is that you can ensure you get a property that suits your needs.

As an investor in property, a major benefit in buying house and land is that you will only pay stamp duty on the value of the land only. This can save thousands of dollars on initial costs.

House and land packages are often tailored to appeal to specific groups of buyers. You might find the one you want in a golfing estate, retirement village or even an eco-village. Then there are the new sub-divisions, usually creating a great opportunity for the property investor.

Is buying a house and land package purchase any different to buying a house?

Financing for a house and land package usually consists of two steps: buying the land then building the house. The loans can be arranged separately, but are usually bundled together.

Buying the land is a standard real estate transaction with a regular mortgage. The second step requires a construction loan where you ‘draw down’ an agreed amount to pay for each stage as your home is built. That way, you only pay interest on the money you’re using at each stage.

A good Broker, such as those recommended by Lime, will make a very significant difference to your investment up front by structuring the construction loan in such a way that you will benefit greatly from the type of loan a normal lender is likely to offer which will almost certainly be just cost plus stamp duty plus legal costs. More can be done in structuring your investment construction loan.

Other considerations

As an investor, make sure you are fully aware of all inclusions. In most cases for property investment a full turn-key property (fully finished with window coverings) with landscaping, fences and driveways included in a FIXED PRICE contract is most desirable.

LMI insures the lender, NOT the borrower. The insurance covers the lender of any shortfall should the borrower default on the mortgage repayments and the property can end up being sold for less than the outstanding loan balance plus some costs. Do not confuse LMI as a ‘Mortgage Protection Insurance’, which covers your repayments should you die, lose your job or become incapacitated.

The borrower must realise that it is the borrower who is paying for the insurance policy, even though it is the lender who benefits. Borrowers pay the premium for the insurance up-front either from cash deposit funds or more commonly, by adding or ‘capitalising’ it into the loan, meaning it can be payed off as part of normal mortgage repayments.

It is really important to understand the real lack of cash flow implications an LMI can have on an investment loan. As the LMI is usually capitalised against the new investment loan then even a $10,000 LMI at an interest rate of 4.5% is only going to add an additional $450 gross per annum on to investment property holding costs. On the top marginal tax rate this would reduce to a $229 per annum net cost. This is just over 6c per day additional cost on a properly negatively geared property investment – hardly a reason to walk away from a property with a great growth potential!

The cost of LMI varies according to deposit size, loan size and type.

As an example: buying a $500,000 property with a $50,000 deposit, resulting in only 10% equity and a loan-to-value ratio (LVR) of 90%, would mean at current rates with a standard loan, the LMI costs could be around $8,000.

Cross collateralisation is a finance structure where a single lender is used to finance multiple properties you own. This allows the lender to secure one property against the value of another in the portfolio, thereby tying the two assets together, financially. A cross collateralised structure benefits the lender by providing it with greater security should you fall into financial hardship or try to manipulate the portfolio by purchase or sale of any properties.

The BIG Misconception!

There is much misinformation in the public perception about ‘protection’ that can be achieved by not cross-collateralising the home with an investment. The belief seems to be that if something goes wrong with the investment, then the home will be safe. This is an absolute nonsense. In Australia, if you owe money, especially to one of our major lenders and you have assets, be it your home or your car or any other significant asset, then you will go through a legal process until the debt is paid. In other words, do not believe that by avoiding cross-collateralisation you are also avoiding any possibility of losing your home should anything go wrong in the future!

Conveyancing is a term that refers to the transfer of ownership of a property. This legal process is normally carried out by a conveyancer or solicitor to handle this process on the buyer’s behalf.

It is possible to act on your own when making a property purchase but the process of documentation and settling can be complicated is quite daunting without training and experience. Bringing in support from an expert who is familiar with legal documents and legislation can make the process easier and take away a lot of the risk.

It is very important to realise as a property investor that Australia operates a Federal System of government which means that the laws are different for conveyancing in each state. If you are purchasing an investment property inter-state, it is important to ensure you are working with a conveyance/solicitor, qualified to do the work for you and not someone who is likely to work as a ‘middle-man’ while the real work is done by someone else in the state you are purchasing the property investment.

Lime Property Solutions will always be in a position to recommend a good conveyance in your area, qualified to do the work for you.

Once a conveyance is appointed, they will be responsible for a number of tasks as they help you through the settlement process. These jobs include acting as a liaison between you and your lender’s solicitor, checking your contract of sale, performing title searches and acting as your legal representative for the transaction.

Your conveyancer will also check on a number of important things for you, including whether there are any outstanding out-going costs on the property – such as council rates or taxes or water payments or outstanding strata/body corporate fees. In many cases, a conveyancer will also check over loan documents for you.

The cost of hiring a conveyancer can differ from state to state – and even from transaction to transaction, depending on the amount of time and work involved.

It is important to enquire about fees before you agree to appoint anyone.

Depreciation Schedules – Why do I need one?

This is the primary area in which Buying new investment property makes such a huge difference as there can be very large depreciation on a new property investment but virtually no depreciation on an old property investment.

The simple answer to the question is that a depreciation schedule (outlining the costs of all depreciable items) is a necessity and you must have one. The schedule is a one-off purchase (always organised by Lime Property Solutions for their clients at a very large discount) and the purchase is 100% tax deductible.

A Depreciation schedule is an accounting procedure for determining the amount of value left in a piece of equipment. There are several methods for calculating depreciation, generally based on either the passage of time or the level of activity (or use) of the asset. When a Quantity Surveyor completes an investor’s capital allowance and tax depreciation schedule, two main elements are generally included:

• Capital works deduction (division 43 – building materials) and
• Plant and equipment  (fixtures and fittings – division 40).

These two “divisions”, 43 and 42 are treated differently by the ATO.

Capital works deduction:

Also known as building write-off, this is a deduction available for the structural element of a building including fixed irremovable assets. Residential properties built after the 15th September 1987 are eligible to claim this deduction of 2.5% over the Australian Tax Office (ATO) specified life of the property – 40 years.

Plant and equipment:

The plant and equipment depreciation deductions are available for removable assets. Plant and equipment assets are identified through ATO legislation as assets which have a limited effective life and can reasonably be expected to decline in value over the time they’re used.

Depreciation benefits vary depending on the type of building, its age, its use and its fit out. Commercial, industrial and residential investment properties can all claim depreciation based on either the diminishing value or prime cost methods of depreciation. The prime cost method is the more common method to be used by your accountant for the average property investor as it allows acceleration of deductions in the first few years. It is very important to note that you can’t switch between methods of depreciation so it’s always best to consult with your Accountant to work out the best method to suit your investment strategy.

This is actually a tax minimisation strategy which may be recommended to clients with lump sum funds towards the end of a financial year. Sometime referred to as “creating an obligation” the strategy involves paying the interest that will accumulate in advance on a property investment loan over the following tax year before it is actually charged.

This allows you to claim the costs against your current tax year (the year the interest was paid. In almost all cases, this must be approved by your lender before proceeding. Some lenders may even offer a small discount on the interest rate if you do pay in advance. Full documentation of the bank transaction must also be given to your tax advisor before a claim can be made.

Property & Borrowings in an SMSF

You can buy direct property within your superannuation fund.

One of the biggest advantages that having a self-managed super fund (SMSF) offer, is the opportunity to invest in property.  New legislation was introduced in 2007 that permitted borrowings to occur within self-managed super funds to invest in direct property.

If you don’t have sufficient funds in your superfund to buy a property outright it is now possible for your SMSF to borrow funds for property investment if structured in accordance with the ATO’s requirements. By taking control yourself with appropriate advice you can maximise your potential retirement benefits.

It is essential to seek out advice from a good solicitor and often a financial planner before going down the track of buying investment property in your SMSF. Generally, there should be more than $150,000 in the SMSF before even first considering an investment property. Your fund can usually only borrow a maximum of 80% of the purchase price so the fund has to pay 20% plus stamp duty and other costs. Some types of property investment purchase are not suitable for SMSF’s.

You should talk to Lime Property Solutions, about the right way to structure your SMSF before you do anything else. They can have a discussion then put you in touch with the necessary good professionals who will assist in making sure you have a compliant fund.

A final inspection is not necessary but we would suggest that anyone who opts to pay for a new investment property without ensuring that all is in order and it has been built properly is probably a bit mad!

Lime Property Solutions will always assist in putting you in touch with very reasonably priced hand over experts. These companies will do a very thorough inspection of your new investment property for a small fee and give you a full report of what needs to be done, then ensure that the property is perfect before you settle. Even if you are in a position to do a final inspection yourself, we would still recommend the use of a professional company to do the final handover inspection on your behalf.

Lime Property Solutions will not give advice on this matter. This is a discussion you should have with your Broker or lender. However, for anyone who is concerned about fluctuating interest rates or rising interest rates in particular, it is by far one of the best ways of securing cash flow in the future. Even fixed rates of up to 10 years are currently less than variable rates of a few years ago.

On a personal note, I have fixed rates recently for the first time in my life. I’ve been examining the fact that some 2 year or even 3 year fixed rates are already over 2 interest rate cuts lower, (that is 0.25% + 0.25%), than the current variable rate. The question to me then becomes, “Even if interest rates should collapse over the next 2 years, would I be comfortable and happy paying 4.18% on these fixed loans?” My answer was ‘yes’.

A rental guarantee on your new investment property, usually given by the developer or for a certain period of time) can sound very attractive. Guarantees are usually used quite liberally in a housing market that is heading towards oversupply and is not looking too attractive to the property investor based on the specific market’s own merits. For example, now in 2017, the inner-city Melbourne apartment market and in Brisbane rental guarantees are the norm on new investment units, because finding tenants is getting tougher and rentals are on the way down. 

Rental guarantees usually have strings attached. The cost of the guarantee can be factored into the purchase price, the old adage, and “There is no such thing as a free lunch!”. In effect property investment buyer is paying the developer upfront for the rent he will repay you over the next few years. Not all guarantees are like this.

 A “no vacancy” guarantee is a more genuine assistance sometimes offered by good developers. In this case, the developer is recognising that it may significantly affect the cash flow of prospective property investment buyers if their new investment property lies vacant for a number of weeks, (which can be common in larger new developments as the mangers seek a very large number of new tenants over a short period of time). To avoid this, the developer will offer to pay (usually at current market value) the rent until such times as the first tenant is found or for a period up to (usually) around 12 weeks. It appears to be a more ‘honest’ way of assisting investors in that they are not being offered an inflated amount of rental which has already been added to the purchase price, but are being given a more genuine ‘assistance’ with any possible cash flow issues at the time of purchase.

So, in summary; If you come across a property marketed with a rental guarantee, tread carefully. Guarantees were traditionally associated with government supplied housing, such as Defence Force Housing, they are becoming more commonplace in private developments   offering guaranteed yields of 6% or 7% for up to three years. These yields are usually quite unattainable in the real market.

The guaranteed rental is usually already factored into the initial purchase price of the property which, in some but not all cases may over-value the property. When the guarantee period is over, the rent you can realistically achieve will often be far less.

No vacancy guarantees are usually a better and more accurate option and are often provided as a more genuine commitment from the developer to assist the buyer overcome any initial cash flow problems which may occur if it takes slightly longer than anticipated to find a first tenant.