Mercia | Taxation, Business & Finance Advisers

Investor loan changes continue to unfold

Australia’s finance watchdog, the Australian Prudential Regulation Authority (APRA), has continued to increase pressure on the country’s lenders in a bid to restrict further growth in investor loans.

Since the June edition of Property Wealth News, when we first reported APRA’s intentions to implement tougher lending criteria for investor loans, Australian lenders have moved to meet the new requirements.

This entails lenders observing a speed limit of 10% annual growth in investor loans, which is designed to cool the overheated property markets in Sydney and Melbourne, which have been driven largely by investor activity.

Effectively, there’s no silver bullet for lenders to meet the new requirements and as such these institutions are changing any, or all, or the following to meet the 10% target:

• Acceptable loan-to-value ratios
• Serviceability requirements
• Interest-rate buffers
• Negative gearing allowances
• Rent allowances
• Rate adjustments

To ensure lenders are taking the necessary steps to increase scrutiny of investor-loans, APRA has begun auditing these financial institutions on a weekly basis.

Amid these changes to assessing investor-loans, property investors should seek advice from brokers that specialise in investment finance.

This is particularly pertinent for investors who are considering purchasing a property within the next 12 months, but also applies to any other property investors to ensure their loans remain the most suited to their long-term circumstances.

Why property selection is critical to creating wealth

Not all properties in one single city or suburb record the same growth rates and the cost of buying the wrong property could be higher than you think.

While anyone with a deposit or enough equity in their home can become a property investor, buying a high-performing investment property is a totally different ball game.

It requires a comprehensive understanding of the property market, a firm knowledge of the underlying economic drivers that will lead to higher capital growth and literally hundreds of hours of research and monitoring the market to find the right property.

Quite simply, finding the right property is hard work, and then you have to make sure your finances are structured effectively as well as negotiating the purchase to ensure you secure the best price and contract terms.

However, when it comes to property investment, the hard work is generally worth the reward.

For example, if an investor purchases an investment property for $500,000, the capital gains will be substantially different depending on the growth rate.

At a compounded growth rate at a moderate 5%, the capital gains on the property will be about $140,000 after 5 years and about $320,000 after 10 years.

While these returns might seem sufficient, the capital gains are significantly more if the compounded growth rate is only slightly higher at 8%.

At this rate, the capital gains on the property will be about $235,000 after 5 years and about $580,000 after 10 years.

Given this, it’s easy to see why property selection is critical to optimising your wealth.

The performance of your first investment property will also have a large impact on how soon you can purchase subsequent investment properties.

Indeed, the sooner you can purchase another high-performing investment property the quicker you can build your wealth, so it pays to select the right property the first time.

How to build your way to wealth – part 2

Property development is regarded by many investors as the Holy Grail because of the huge profits on offer. So what does it take to be a doyen of development?

In Part 1 of this article series we outlined the first 3 steps to becoming a successful property developer.

This included the necessity to know the intricacies of the property development industry, to hold a firm understanding of the property market and the essential considerations when searching for a development site.

In the second part of this three-part series we explain steps four to six – the need to complete a feasibility study, determining if you’re an investor or a developer (as this will impact your tax bill) and how to buy your site wisely.

1. Complete a feasibility study

After you’ve located a potential site that you believe meets your criteria, you’ll need to complete a feasibility study to ensure it does. Unless you’ve done this before, you’ll need to engage professional assistance to compile a feasibility study. The aim of this is to determine the size of the profit, or loss, that you would make should you proceed with the development.

The following information should be detailed in a feasibility study:

• All easements or covenants on the land title and any impact on development
• Analysis of soil to determine engineering and drainage requirements
• Position of utilities and services, such as power poles and sewerage drains
• A calculation of building and subdivision costs
• A detailed timeframe of the project

At this stage you would have invested a considerable amount of time into the project, however if it doesn’t pass a feasibility study you’ll need to consider a different site.

5. What’s your tax status?

Whether you’re considered a developer or an investor can determine the amount of tax you’ll have to pay on the development.

For example, as an investor you will pay tax on any profits from your development but if you hold onto the property for more than 1 year you may be entitled to a 50% discount.

Conversely, as a developer you may not be eligible for a tax discount and you may have other tax obligations.

To provide peace of mind, you should seek advice from tax accountants to determine your likely tax status.

Your accountant should also be able to advise as to the best type of structure to acquire the development, whether it’s an individual name, joint ownership, as a company or in a trust. Each has its own financial and legal pros and cons.

1. Be an intelligent buyer

The amount you pay for your development site is one of the few factors that is within your control and this will have a considerable impact on the profitability of your project.

It’s also important to secure favourable contract clauses. Ensure an adequate due diligence period is included in the contract so you can conduct thorough research into the site’s profitability as well as walk-away clauses that allow you to cancel the acquisition if you’re not fully satisfied.

Keep in mind, sales agents work for the seller so it can be wise to engage the services of a buyer’s agent to oversee negotiations and ensure contracts are weigh in your benefit. A buyer’s agent can also keep your identity and motives confidential.

The third and final part of this article series, to be published in the October edition of Property Wealth News, we will explain how to properly structure your finances, how to choose the best designers and builders and whether to sell or hold your final product.

What your property manager needs to do at the end of a tenancy

While landlords fear vacancy periods in between tenants, there are certain matters your property manager needs to attend to before a new tenant can move in.

It might seem ideal for a tenant to move into your property the day after another vacates, thereby ensuring no disruption to your rental income.

However, this rarely occurs and in the large majority of situations, this is not entirely practical.

Generally, there has to be at least a few days when the property is empty so the property manager can conduct the necessary tenant-vacate checks.

One of the most important tasks to complete when at the end of a tenancy is the final inspection and the completion of a property condition report.

This is necessary to ensure the property has been adequately cleaned and prepared to a suitable condition for the new tenant.

It’s also a chance to identify any excessive wear and tear to the property, if any items have been wrongly removed or left at the property or if there is any damage to the property.

In some instances, the outgoing tenant may be required to revisit the property to amend any issues and, subsequently, the property manager will have to reinspect the property to ensure the problems have been addressed.

Provided these processes have been followed, the bond can be finalised and the appropriate amount returned to the tenant before the property condition report is updated.

While a brief vacancy period allows the property manager time to complete the necessary processes, it’s also a good time for the landlord to consider any maintenance issues.

Ideally it’s better to complete larger jobs when the property is vacant, such as painting, flooring or minor renovations, which will help to optimise rents.

Although landlords do lose rental income during vacancy periods, these times should be used to ones’ advantage because completing tenant-vacate checks and maintenance jobs will ultimately

Buzzing inner-city suburb highly sought after

This affluent suburb is located in the hustle and bustle of inner metropolitan Perth making it a highly sought-after area for many younger people.

Highgate is situated just 2 kilometres from the Perth central business district and has a population of nearly 2,000 residents with a median age of 33 years.

As well as being located close to the Perth CBD, Highgate’s other major drawcard is the Beaufort Street café strip, which features a variety of cafes, restaurants, retail and nightlife offerings.

Given these highly appealing aspects, Highgate’s average house price is considerably high at $840,000.

About two-thirds (61%) of dwellings are rented in the area, which is more than double the Perth average of about 29%.

Highgate comprises a mix of residential zoning ranging from R30 through to R80, however the City of Vincent has released a draft town planning scheme that incorporates rezoning throughout much of the suburb.

In addition to the slated zoning changes, revised criteria for development has also been proposed.

The suburb has many parks, including the well-known Hyde Park, and multiple primary schools which service the area.