Lenders continue policy changes following APRA restrictions

Most property investors are aware of APRA’s recent clampdown on lending in the Australian residential mortgage market, however some have been caught unprepared for the implications. What are the actual changes that have been implemented and how do they affect investors?

The Australian Prudential Regulation Authority (APRA) is the national regulator for banks, credit unions, insurance companies and most of the superannuation fund industry. It is largely funded by the industry it regulates.

Essentially, APRA provides guidelines to the banks and other institutions to ensure they are not over-committing themselves. Failure to adhere to these guidelines will result in substantial fines to the institution.

APRA has been closely monitoring residential mortgage lending in recent years due to heightened activity and growth in the Sydney and Melbourne markets, and has imposed restrictions in a bid to cool off some of this activity.

Lenders have been ordered to reduce their mortgage exposure and reign in investment lending growth, with interest-only loans being targeted in particular.

As of March this year, limits were put in place for interest-only loans to amount to no more than 30% of new loans – or roughly 1 in every 3 loans – and rates increasing substantially on this type of loan.

Servicing rates have also changed, which are what the banks use to calculate the repayments on the loan you are applying for, and this is then used to determine how much you can borrow. Currently, banks are using a pre-determined interest rate to calculate your repayments, regardless of your actual rate.

Such substantial changes can have a significant impact to investors, as demonstrated in a recent webinar held by two of our mortgage specialists, Ashleigh and Scott. They uncovered some real-life examples of the effects of these changes, and the advice they’re giving to clients. You can catch the webinar here.

Deals and Don’ts – Bassendean, South Perth, Greenwood

Here we take a look at just some of the different properties on the market and explain why they’re either deals (that represent a good investment) or don’ts (that should be carefully avoided by investors).

Deals

Bassendean Purchase price: $530,000 Purchase date: August 2017 Block size: 878sqm corner block Specification: 3 bedroom, 1 bathroom, lock up carport, built in 1971, zoned R20.

Deal: This property represents a good deal because of its corner block location. Under the Bassendean local planning scheme, corner blocks receive a density bonus, increasing this property’s zoning from R20 to R25 and giving it good development potential. Approximately 90% of its value exists in the land component yet the property is still in good rentable condition.

South Perth Purchase price: $677,500 Purchase date: April 2017 Block size: 227sqm Specification: 3 bedroom, 2 bathroom, double garage, built in 1993, zoned R25/40.

Deal: This street-front townhouse in a small complex of three represents a deal because of its excellent location. Tucked away in a desirable pocket of a blue chip suburb, it is situated within 3km of the Perth CBD, and within walking distance to the South Perth foreshore and café strip. The townhouse is in good condition and will be easily leased at a yield close to 4%.

Greenwood Purchase price: $538,000 Purchase date: July 2017 Block size: 689sqm Specification: 4 bedroom, 2 bathroom, double car port, built in 1979, zoned R20/60

Deal: This green title home represents a deal because of its location within the suburb and its significant development potential. Situated in a quiet cul-de-sac the property is within 600m of the Greenwood Tran Station and just a short walk to a local park. Its zoning means the land can be developed into multiple lots in the future.

Don’ts

Huntingdale For sale price: Offers above $350,000 Block size: 716sqm Specification: 4 bedroom, 1 bathroom, single garage, built in 1977, zoned R17.5

Don’t: This property doesn’t represent a good investment because it’s located on the busy Warton Road and would frequently be disrupted by noise and traffic pollution. The house is in original condition with no major improvements, so attracting quality tenants would be difficult. It has been on the market for over a year proving there is little demand from buyers.

3 questions to ask when investing in commercial property

When investing in commercial property, many investors seek out research and statistics to aid in their decision, only to discover the actual performance of the property is vastly different. Why does this happen and what should investors look for instead?

There is a myriad of statistics offered in property industry publications, such as rental yields, vacancy rates, capital growth, incentives, land value, and replacement value. The problem for many investors is they base their purchase decisions on these figures, only to find their commercial property performing very differently down the track.

It’s not that the statistics are necessarily incorrect – but they may often be incomplete or irrelevant if the investor simply takes them at face value. This data is only useful when you’re asking the right questions.

Here are 3 questions every commercial property investor should ask before their next purchase:

1. Are the statistics relevant to the investment location? Large research houses will generally focus on locations with a higher concentration of property. This means that numbers for the office segment, for example, tend to be from the city centre. Industrial figures may be from one or several key industrial locations.  But it’s important to keep in mind that commercial property vacancy rates and rental incomes can vary widely from one suburb to another – even when they are only a few kilometres apart. For instance, the Perth office market has rental vacancy rates ranging from 2% to well over 50% in different suburbs. If an investor has the CBD rental vacancy in mind but purchases a suburban office property, they may find this a poor indicator of the property’s performance.
2. How important is the size of the property? Most investors will have a budget which will likely influence the size of property they consider for purchase. In some cases, a commercial investor will choose to buy several smaller properties instead of one large one because it may seem less risky. This would be a good strategy if the performance of different-sized properties was consistent. Unfortunately, the yield and vacancy of a commercial property can be significantly affected by the property size and grade. For example, a smaller property that works well for an owner-occupier may not be suitable for attracting quality, long-term tenants. Generally speaking, rental yields are lower for smaller properties and they typically fall vacant more often, which means less income and greater re-leasing costs over time. So is larger always better? Having a larger budget won’t necessarily result in a higher return, but it does provide more opportunities to source a quality property. For some, this could mean opting for a different location in order to obtain a higher-quality property. For others, they may decide their best option is to invest with others in a property trust, and own a smaller percentage of a high-performing portfolio instead of owning 100% of a smaller property.
3. Are there any hidden factors influencing the rental yield? Commercial properties are often advertised with a passing yield percentage. Purely assessing this figure on face value might attract an investor to a property or make them dismiss it straight away. Unlike residential property transactions which are fairly transparent, there can often be factors influencing commercial leasing and sales listings which are not on record. For example:

• A vendor offers to lease back a property at an above-market rate, but a credit search shows the business is in trouble and may not be able to meet the terms of the lease long-term
• An office has a high rental yield, but there are several incentives built into the lease that will effectively lessen the yield over the next 2 years
• The yield for a retail property is below market, however it turns out that the supermarket tenancy is bringing on new managers which will have a positive impact on the performance and income of the centre

Without professional connections, it can be difficult for investors to access all of the relevant information on a property. Not having all the information can turn a commercial investment into a costly exercise, so it’s wise to seek professional advice before making any purchase decisions.

If you want to learn how to get started in commercial property, check out this useful guidebook from our sister company, Mair Property Funds.

Boom in Jobs as Resources Take Off

A new report revealed a 30% rise in job vacancies in the last year.

A jobs bonanza is about to be unleashed with thousands of construction and operational jobs forecast for at least 15 different mining projects.

Although the sector has been in the doldrums for several years, the Chamber of Minerals and Energy claims confidence has finally returned.

Analysis by The Weekend West of 15 mine projects that have been approved or are likely to go ahead within years shows about 10,000 new construction and operational jobs.

The list considers most of the major new projects due in WA within a few years but is not a comprehensive tally of all upcoming projects, expansions, extensions or upgrades.

Iron ore projects are leading the charge, after a resurgent spot price, which rose to $US75 a tonne last week from $US31.50 in January last year.

Lithium — a key ingredient in the batteries that power electric cars — is also responsible for thousands of jobs in WA, though gold producers claim they may have to cut positions if the State Government’s planned increase in the gold royalty goes ahead.

CME acting chief executive Nicole Roocke said most commodities — excluding gold — were in a strong position.

“The industry is a lot more optimistic now and is well-positioned for new growth opportunity and replacement mines,” she said. “There is a sense of stabilisation in the sector.

“We have to be careful about (calling it a) jobs bonanza, but there is an increase in job opportunities and advertisements, and with that we are seeing an impact on wage pressure as well.”

The DFP Resources job index out this week showed a 29.6 per cent rise in WA job vacancies in the year to August compared with the same period the previous year, in fields including geology, drilling, engineering, business support, operational managers and trades.

Pilbara Minerals managing director Ken Brinsden said lithium was an important new subset of WA’s resources economy.

Pilbara Minerals is investing $235 million in its Pilgangoora project, creating 400 construction jobs until mid next year.

It will create about 150 operational jobs thereafter.

“The lithium sector itself is the new kid on the block in terms of commodities that WA is investing in, but I am really optimistic about it being one for the future of WA,” he said.

“I think WA is going to be a really important global supplier to the global market.”

Mr Brinsden said the gold industry was partly responsible for buoying the WA resources sector last year by helping lift confidence. Changes in the global economy had also lifted it out of a slump.

“The market has definitely turned a corner, for sure,” he said. “We saw the bottom of the market about mid last year and in the period of time since there has been a general uptick in mining — in most commodities — and I think that is reflected in the level of activity.”

Northern Star Resources chairman Bill Beament said the State Government’s gold royalty hike could drastically undermine the sector that had been crucial in restoring WA’s resources confidence.

He said the royalty hike would affect coming decisions by WA’s three biggest gold mines over whether to extend mine life, which were due in the next six to 12 months.

“A lot of people made investment decisions based on a royalty scheme they were promised was never going to change,” he said. “So a 50 per cent increase is going to put a lot of people’s expansion’s and future extensions of life … into jeopardy.”

The Weekend West revealed last week the number of mineral exploration licence applications — known as the canary in the coal mine because the number indicates the amount of work in the pipeline — was up 45 per cent in the June quarter, at 669, compared with 460 in the June quarter the previous year.

The annual figure was up 29 per cent last financial year compared with 2015-16.

Mining tenure applications — usually the first step in setting up a mine project — rose 14 per cent from 3685 in 2015-16 to 4197 in 2016-17.

The demand for professionals involved in exploration has been so intense that skills shortages are starting to emerge in some fields, such as exploration geologists, drillers and underground engineers.

Mine projects that will definitely or most likely commence in the next few years in WA:

Rio Tinto – $US2.2 billion Koodaideri – 1600 construction jobs and a 600 operational staff if approved – 2017 to 2021

Rio Tinto – $US338 million Silvergrass – 500 construction jobs from early this year, operational job numbers not available

Rio Tinto — Yandicoogina mine – 470 construction jobs from this year, operational job numbers not available.

BHP Billiton – $US3.2 billion South Flank – several thousand jobs – 2017 to 2021

Newcrest — Jundee and Kalgoorlie mine expansions — 200-300 jobs (if gold royalty hike does not go ahead) — due late 2017/early 2018, operational numbers not available.

Pilbara Minerals – $235 million Pilgangoora project — 400 construction jobs and 150 operational jobs — construction until mid 2018.

Altura Resources – $139 million Pilgangoora project — hundreds of jobs — construction from March this year and operational from early next year.

Talison Lithium – $340 million Greenbushes expansion — 200 construction jobs from May 2017, 40-60 operational jobs from mid 2019.

Tianqi Lithium – $400 million Lithium Hydroxide plant and a possible $317 million expansion —500 construction jobs — phase one to finish late 2018 and the expansion would finish late 2019

Dacian Gold – $200 million Mt Morgans gold project — 330 construction jobs and 300 operational jobs — construction underway and due for completion early next year.

Gold Road Resources/Gold Fields – $532 million Gruyere gold project — about 500 construction jobs and 300 operational jobs — timing not available.

Gascoyne Resources – $100 million Dalgaranga gold project 180 construction from December until mid 2018, 250 operational jobs from March 2018.

Sheffield Resources — $350 million Thunderbird mineral sands project in the Kimberley — 200-300 construction jobs — commencing later this year

Iluka – $250 million – $275 million Cataby mineral sands project — 220 construction job, 120 operational jobs — construction likely to start next year.

Blackham Resources – $115 million Wiluna expansion — 100 construction jobs, 80-100 operational jobs — construction to commence mid 2018, operational from mid 2019.

Northern Minerals – Browns Range rare earth project Kimberley

Kidman Resources – Mt Holland lithium project

FMG – Eliwana or Nyidinghu replacement options for Firetail mine, both in feasibility stage.

FMG – Iron Bridge magnetite project, in feasibility stage.

WA Budget a Positive for Property Investing: Momentum Wealth

The WA Labour government’s first state budget is relatively positive as there are no direct increases to property costs for residents of Western Australia though foreign investors will face new taxes, according to property investment consultancy Momentum Wealth.

The government, recognising that the market was still recovering, decided to leave land tax, stamp duty exemptions and first home owner grants unchanged. Lobbying from key property industry bodies such as REIWA and Master Builders WA helped.

Momentum Wealth managing director Damian Collins said the fact that there were no major changes directly effecting domestic buyers was “important for the rebounding industry”.

A recent report by Momentum Wealth said that Perth’s property market had entered a recovery period amid tightening housing supply, with better affordability and a strengthening labour market being tipped to draw buyers back.

However, there will be a four per cent foreign owner duty surcharge introduced on purchases of residential property by foreign individuals and entities from 1 January 2019, which aims to increase state revenue by $48 million by 2020/21.

“While there could be a slight impact from this, foreign investment only represents a small proportion of the WA property market, instead, the billions of dollars’ worth of key transport infrastructure spending will put the property market in a strong position to continue its steady recovery,” Collins said.

“It is also encouraging to see such positive estimates for the economy which supports our view on the recovery of the residential property market as well,” Collins said.

He added competition was already increasing along with confidence.

Road and rail infrastructure has been the main focus of the budget with billions of dollars put aside to increase the networks, including 20 road projects totalling $2.7 billion.

The budget announcement also included the identification of the first stage of funding for Labour’s ‘Metronet Plan’ with a total of $1.34 billion over the next four years of the project.

“Property owners will also welcome the investment in infrastructure, in particular public transport infrastructure, as it adds to the amenity of the nearby residential areas and is a strong driver for property price growth as well,” said Collins.

The infrastructure improvements in the first stage include:

– $535.8 million for the construction of the Thornlie to Cockburn line with new stations at Nicholson Rd and Ranford Rd. – $520.2 million for the construction of a 13.8 kilometre rail extension from Butler to Yanchep which includes new stations at Alkimos and Eglinton. – Continual planning and detailed design for the next stages including the Morley-Ellenbrook Extension, the Midland Station Project and the Byford Rail Extension.

Vacant Perth rental properties drop below 10,000

For the first time since January 2016, the number of vacant rental properties in Western Australia’s capital have fallen below 10,000, which may be indicative of future rent rises.

Data from the Real Estate Institute of Western Australia shows the fall of vacant Perth properties to 9,990.

Shane Kempton, chief operations officer of Professionals Real Estate Group, said this fall is significant and attributes it to an increase of investment in the resource sector and improvement in WA’s state economy.

In comparison to this time last year, there were 10,924 vacant rental properties.

“Over the past two years, there has been a surge in vacant rental properties in Perth due to weak population growth and a boom in new home construction. The number of vacant rental properties in Perth peaked well over 11,000 earlier this year and has been on a steady decline since,” Mr Kempton said.

“With the number of vacant rental properties on a downward trajectory, Professionals is predicting that by mid next year landlords in Perth will be able to review their rents upwards once the rental vacancy rate falls below 3.5 per cent.”

Over the last two years, Mr Kempton said landlords in Perth have cut rents, discouraging new investors entering Perth, but now expects to see an increase of investor levels with the decrease of vacancies.

“Once rents start to rise, we should see an influx in property investors into the Perth market particularly as property prices in Perth are so competitive,” he said.

“For example, the median price of a home in Perth is around half that of Sydney and substantially below that of Melbourne.

“Now is a great time to buy an investment property in Perth, especially in the more affordable areas of Perth where there a still a plentiful supply of homes for under $400,000.”

Of note is the south-eastern corridor of Perth from Kenwick to Armadale Armadale, WAArmadale, VIC, to which Mr Kempton stated: “is very established with a high level of social infrastructure including a rail link to Perth as well as schools and shopping [areas] which appeal to renters”.

Kenwick in particular, Mr Kempton said, offers a median price for a home of $340,000, located 15 kilometres away from Perth’s CBD, and is in proximity to a train station and has access to the Albany and Roe highways.

MPF secures 2 commercial properties in $20m deal

Momentum Wealth’s sister company Mair Property Funds has entered into agreements to acquire two commercial properties in Melbourne for $20.3 million in two off-market deals.

The properties are located in Ravenhall and Altona North in Melbourne’s west, and will form part of MPF’s Diversified Property Trust, which already holds commercial assets in Western Australia, Queensland and Victoria.

The Ravenhall property is a modern industrial facility constructed in 2010 and is located 22 kilometres west of Melbourne CBD. The building is 100% occupied with a 15-year lease until 2031, and there is the potential for future expansion on a vacant part of land.

The property in Altona North is an industrial warehouse built in 2008 and located 13 kilometres south west of Melbourne CBD. The building is also 100% occupied with a recently agreed 8-year lease that expires in 2025.

Upon completion of the acquisition, the properties will be included in MPF’s Diversified Property Trust, which already holds four commercial assets in three states.

These include a retail premise in Maroochydore (Queensland), a medical facility in Ellenbrook (Western Australia), an industrial premise in Henderson (Western Australia) and a retail industrial premise in Lynbrook (Victoria).

The trust was established to offer investors a sustainable income with the potential of future growth, and has targeted commercial properties in high profile locations with strong lease covenants.

Previous capital raisings for the acquisition of the existing properties in the trust were strongly supported by investors and closed oversubscribed.

The acquisition of the Ravenhall and Altona North assets takes the value of properties under management by MPF to $208 million as the company continues to grow its funds to meet investor appetite.

MPF are continually searching for and assessing new investments. If you are interested in being notified of their next opportunity, simply follow this link.

Buying a tenanted property – what you need to know

At first thought, buying a tenanted property may appear to be an advantage. However, acquiring an investment property that’s already tenanted can pose a number of problems. So what do investors need to be aware of?

There are a number of benefits to having tenants in place. Firstly, you’ll likely save money from having to pay letting fees if you use a professional property manager. You’ll also save on advertising costs associated with finding a tenant.

If you decide to manage the property yourself (which we advise clients against) you’ll save yourself time – no need to vet applications and choose a tenant.

One of the biggest advantages though is that you’ll start to receive rental income immediately, as your property won’t be sitting vacant. This is helpful when you’ve first acquired a property, as cash flow can be constricted with additional associated costs such as insurances and rates.

However, while these aspects are beneficial, there are also a number of potential drawbacks that investors need to consider.

1. Are they good tenants?

It’s important to ask the selling agent or property manager about the tenant’s history:

• Who is living in the house?
• What do they do for work?
• Do they have a good track record of paying the rent on time?
• Do they take care of the property?

If the tenants are sub-standard, they may consistently miss rental repayments and may fail to maintain the property, or worse, they could trash it.

1. What’s in the lease agreement?

The terms of the lease agreement may be highly favourable to the tenants, so it’s important you know:

• The amount of bond held

• How much the tenant pays in rent each week (it may be under-priced)
• How often inspections are scheduled
• The length of the lease

Review the lease agreement to ensure there are no surprises after you’ve bought the property.

1. Are there likely to be any immediate maintenance requests?

With a new owner, the tenant may see an opportunity to lodge their list of maintenance requests, leading to unexpected costs for you. Speak to the selling agent or the property manager to determine if there are any pending or potential maintenance requests in the near term.

1. What are your intentions with the property?

If you’re planning to develop the property, or want to undertake renovations, you may have to wait for the existing lease agreement to expire. This could cause complications with your plans, particularly if the tenant is on a long-term lease.

Before you buy your next investment property, ensure you review all relevant documentation, including existing lease agreements, thoroughly.

This will help ensure risks are mitigated and give you a comprehensive understanding of the associated contracts, and how these might impact your investment strategy.

$1b upgrades set to benefit this NOR suburb

The redevelopment of Scarborough Beach and Karrinyup and Innaloo Shopping Centres, with a combined cost of more than $1 billion, are set to significantly increase amenity for this neighbouring suburb.

Doubleview is located in the City of Stirling, approximately 9 kilometres north west of the Perth CBD, with a population of 8,404 and a median age of 35.

The suburb is bound by Newborough Street in the north, Wau Lane in the west, Huntriss Road in the east and Williamstown Road in the south.

The main arterial roads of Scarborough Beach Road, Sackville Terrace and Ewen Street provide Transperth bus services to Glendalough Train Station or straight through to the CBD.

Doubleview is in good company with neighbouring suburbs including Scarborough to the west, Karrinyup to the north, Innaloo to the east and Wembley Downs to the south.

It is an established residential suburb, named due to its views of both the Indian Ocean to the west and the Darling Range to the east.

Original subdivision of the area dates back to the early 1900s, however blocks were slow to sell. Significant development didn’t occur until post World War II when the government begun providing returned soldiers housing in the suburb, hence why much of the housing still consists of post-war, original timber-framed dwellings.

Doubleview is made up of medium and low density residential housing, with the majority of the suburb zoned R30 or R40. A special control area along Scarborough Beach Road was recently gazetted by the state government, encouraging mixed-use and higher density residential development along the activity corridor.

While not within the suburb, the redevelopment of Scarborough Beach and upgrades to Karrinyup and Innaloo Shopping Centres, which are in close proximity, will help boost amenity in Doubleview.

The $500 million upgrade to Karrinyup will near double the size of the centre and include additional retail space as well as a new cinema and office and residential components.

Similarly, the $600 million upgrade to Innaloo Westfield will also double the size of the existing centre and include public open spaces, more retail and food and beverage offerings as well as a cinema.

Furthermore, the $100 million-plus redevelopment of Scarborough beach will include a public pool, upgraded main square and parkland as well as a redeveloped surf lifesaving club. Further private investment will also follow, such as cafes, restaurants and hotels, which will transform the area into a major tourist destination.

Approximately 72.7% of dwellings in Doubleview are houses, 24.9% semi-detached, row or terrace houses and townhouses and 2.1% flat, unit or apartments. The median house price is $732,000.

About 64% of properties are either owned outright or being purchased while 33% of properties are being rented.

13.5% of the population identify as technician and trades workers, 13.4% clerical and admin and 32.5% professionals, which is above the WA and national average at 19.9% and 21.3%, respectively.

Features of the suburb include Doubleview Primary School, John K Lyons Oval and Munro Reserve.

Perth’s 10 cheapest suburbs near the CBD

Nollamara, Cloverdale, and Belmont are among Perth’s 10 cheapest suburbs in terms of median house price within 10km of the CBD, according to the latest data from the Real Estate Institute of Western Australia (REIWA).

“Buyers in Perth really are in an enviable position. It’s unheard of in other parts of Australia, particularly in Sydney and Melbourne, for buyers to be able to purchase a house close to the city for less than $530,000,” said Hayden Groves, president of REIWA.

“We are very lucky in Western Australia that there are still great bargains to be had in and around the CBD. It won’t always be this way, so I advise buyers to act sooner rather than later if they are wanting to secure an affordable house close to the city.”

Nollamara was the most affordable suburb on REIWA’s list, with a median price of $410,000, and a lower quartile price of $375,000.

“Buyers only have to look 10 kilometres north of the Perth CBD to find great value. Nollamara is currently undergoing a lot of change, with infill redevelopment rejuvenating the well-established suburb and attracting a lot of first-home buyers to the area,” Groves said.

Of the 10 suburbs on the list, seven were situated east of Perth.

Groves said that the eastern corridor of Perth’s inner-city area held a lot of opportunity for homebuyers and property investors.

“The median house price in suburbs like Cloverdale, Belmont and Redcliffe is hovering around the $450,000 mark, which is notably lower than the Perth median house price. First home buyers in particular will find good opportunity here, especially if they look to these suburbs’ lower quartile prices, which are even more affordable,” Groves said.

“With the Perth Stadium and surrounding infrastructure nearing completion, the opportunity is there for savvy buyers and investors to purchase in a fast growing area at an affordable price.”

SUBURB MEDIAN HOUSE PRICE LOWER QUARTILE PRICE

1. Nollamara       $410,000 $375,000
2. Cloverdale      $443,500 $408,750
3. Belmont           $450,000 $408,000
4. Redcliffe          $452,000 $395,000
5. Bentley            $480,000 $430,000
6. Embleton         $490,000 $450,000
7. Osborne Park $490,000 $450,250
8. Kewdale          $497,500 $390,000
9. Morley              $500,000 $450,000
10. Carlisle            $525,750 $445,000

Should I buy a negatively geared investment property?

A negatively geared investment property is commonly considered a tried-and-tested approach to property investing, however this strategy certainly isn’t suitable for everyone. Here’s why.

Although negative gearing can be beneficial as it allows property investors to reduce their taxable income, it shouldn’t be viewed as a standalone investment strategy.

If an investor buys a property purely for its negative gearing benefits, they’re likely to be left with an under-performing investment that doesn’t align to their wealth creation strategy.

Cash flow or capital growth?

Typically, the goals of any given property investor fall under two broad groups – that is they either want additional cash flow through rental income, or they want to increase their wealth via capital growth of the property.

Negative gearing is not suitable for investors who want additional cash flow. That’s because it actually costs money for investors to hold a negatively geared property because the rental income doesn’t fully cover the repayments for the loan (and therefore the investor has to use their own money to meet the balance of the repayments).

Investors who want additional cash flow need to target positively geared properties – these are typically newer residential properties but commercial properties generally make the best cash-flow positive assets because they offer higher rental yields than residential.

So what about investors who want capital growth – should these people seek a negatively geared property? In short, no.

Understanding your priorities

For investors who want to increase their wealth via capital growth, negative gearing should not be a priority.

Instead, the priority should be on finding investment properties that will record superior capital growth. By doing so, investors will be better positioned to grow their personal wealth.

Put simply, negative gearing should only be viewed as a by-product of properties that offer high capital growth prospects. So it’s important to stress that negative gearing should not be used as a standalone strategy.

In summary, for investors wanting to increase their personal wealth, choosing a property should always be based on its capital growth potential and not its negative or positive gearing benefits.

What about properties with high capital growth and high rental yields?

Typically, residential properties will either offer high capital growth prospects or high rental yields.

There can be rare instances when properties do offer both, but these are generally for only a short period of time. For example, take some rural towns in Western Australia and Queensland that experienced double-digit capital growth and yields of 10%+ during the resources boom.

Therefore, investors who want to increase their personal wealth should focus on properties that are set to achieve high capital growth over the long term.

Simply seeking properties with the best negative gearing benefits could lead investors to acquiring an under-performing asset that will fail to optimise their returns.

Top 6 considerations when subdividing the family home

If you’re contemplating subdividing the family home there are numerous issues you need to weigh up to ensure you’re making the right decision. Here are the top 6 things you need to consider when deciding to subdivide your property.

Owner occupiers are increasingly deciding to subdivide their family home as areas in our capital cities are rezoned for higher-density development to make way for our growing populations.

Carving up the family block isn’t a step to be taken lightly as there are many issues that need due consideration. Here are the top 6 points you need to weigh up before making a decision to subdivide your own home.

1        It could inhibit the future sale price of your home.

Subdividing your family home impacts its value. To which extent will depend on the size and type of your home as well as the way it’s subdivided. For example, you may have a large 4-bedroom, 2-bathroom property suitable for a larger family, however if you subdivide the property and sell the backyard, this may deter prospective buyers in the future and impact the sales price of your home if you wanted to put it on the market.

2        Can you use the equity in your home instead?

When subdividing a family home with the goal of realising the value of the property, another option would be to use the equity in the home instead. This way you’re able to keep the property as is, but you can then draw the equity to use as desired.

3        Will you make a profit?

After you have subdivided your property and taken all costs into consideration, will you make a profit? This includes costs of a land surveyor, selling agents fees as well as any negative impact on the value of your existing home.

4        What are the tax implications?

A common mistake made by those who subdivide their family home is a lack of understanding about the tax implications. Make sure to speak to a qualified accountant so you’re aware of what you’ll need to pay the tax man.

5        It allows you to downsize without moving

If you’re an empty-nester and your children have grown up and moved out of the family home, you might be considering downsizing, particularly if you have a big backyard that requires considerable upkeep. If you can keep the existing dwelling, subdividing the backyard off from your family home can be a good way to downsize without the headaches of moving. You may also prefer to subdivide the land, build on the new lot and move into the new dwelling before selling or holding the old house.

6        Is it better to sell or hold?

While subdividing the family home and selling a vacant parcel of land can provide a financial boost, it may be better to build on the new parcel of land and lease the new property. By doing so, you will receive rental income and can take advantage of future capital growth.

Everyone’s situation and goals will be different when it comes to subdividing the family home, but it’s important to weigh up these considerations to determine what’s right for you.

Case study: Knowing motivations key to good deals

When it comes to buying or leasing commercial property, it can be highly advantageous to understand the motivations of the seller or lessor.

Once you understand these motivations, you can use this knowledge to negotiate harder on these specific points to secure a better outcome.

This worked particularly well in one instance with a Momentum Wealth client, who was seeking a commercial space to lease.

The client, a financial services firm, had been leasing in East Perth for several years but with their lease due to expire, and an unreasonable landlord who was unrealistic during new contract negotiations, the client engaged us to find them a new space.

The brief included:

• Circa 1,500sqm of open-plan office space with 30-50 car bays
• Ready to go with existing systems (such as AV, high-speed internet, furniture in breakout rooms, desk and chairs etc.)
• Preferably in West Perth (or close to but not in the Perth CBD)
• Scalable floor plan allowing room for expansion

Armed with the brief and a 6-month deadline, our commercial property consultant began the search and issued a request for proposals.

After shortlisting several properties and showing them to the client, our consultant began initial negotiations with a handful of potential landlords and leasing agents.

During the process our commercial consultant learned that one of the shortlisted premises would be negotiated under a sublease agreement.

The existing tenant in the premise had several years remaining on their contract but had recently consolidated their office premises to another location amid financial pressures. The tenant was also dealing with some major and very public disruptions to their operations, which proved to be a large distraction to the company as a whole.

In short, the existing tenant wanted a quick resolution to subleasing the office space that they had recently vacated. Understanding this, our commercial property consultant was able to negotiate hard on price and incentives.

The A-grade office space was a perfect fit for our client and included 40+ car bays, circa 1,800sqm of space and included a high-specification fitout, including reception space, tables and chairs, AV equipment and breakout amenities.

Although negotiations for the space proved complicated, having to deal with the existing lessee and the lessor, our commercial property consultant knew the outcome would be very beneficial for the client.

Understanding that the existing lessee was motivated to sublease the space immediately, our consultant was able to secure a highly favourable agreement at a significant market discount with favourable incentives for up to a 9-year term.

Subsequently, the client was able to move into a larger, more modern office space on much more competitive terms.

Every commercial property seller or lessor has a problem to solve, and by gaining a more in-depth understanding of this problem, you can help resolve the issue faster and secure a more favourable deal.

Young Perth suburb offers major potential to investors

Padbury offers some major benefits to property investors, following the recent rezoning for higher density development and a soon-to-be finished $80 million shopping centre upgrade.

Padbury is located within the City of Joondalup and is approximately 17 kilometres north-west of the Perth CBD.

The suburb is well serviced by public transport with bus services running through all main arterial roads as well as offering the Whitfords train station and Greenwood train station along the Joondalup train line.

Neighbouring suburbs include Craigie and Kallaroo to the north, Hillarys to the west, Kingsley to the east and Sorrento and Duncraig to the south.

Padbury is a relatively young residential suburb, only being named in 1971 after the Western Australian settler Walter Padbury followed by the start of residential development of the area in the late 1970s.

It wasn’t until the late 1990s that the area was fully built out, fuelled by the development of the Whitford City Shopping Centre and Hillarys Boat Harbour.

Padbury is predominantly low-density residential, with the majority of the suburb zoned R20.

However, in early 2016 the City of Joondalup implemented an R20/40 split zoning for certain pockets of the suburb to encourage higher-density development.

This will help diversify the composition of dwelling types in the suburb, which currently stands at 92.6% houses, 7.4% semi-detached, row or terrace houses and townhouses and 0% flats, units or apartments.

79% of properties are either owned outright or being purchased, while 19% of properties are being rented. The median house price is $540,000.

Padbury has a population of 8,183 residents with a median age of 37 years. 21.2% of the suburbs residents identify as professionals (19.9% WA and 21.3% national averages), while 19.1% are technician and trades workers and 16.8% clerical and admin.

Features of the suburb include Gibson Park, Macdonald Park, Hepburn Heights Conservation Area, Padbury Primary School and Padbury Shopping Centre.

There is also Whitford City Shopping Centre (1km) and the Hillarys Boat Harbour (3km).

The $80 million redevelopment of Westfield Whitford City Shopping Centre is now nearing completion with less than 70 days to go on its construction calendar.

Residents of Padbury are set to benefit from the increased vibrancy the upgrades will bring with plans including a casual dining piazza with 10 new restaurants as well as an entertainment precinct with an eight-screen Event Cinema complex.

The suburb is bound by Whitfords Avenue in the north, Marmion Avenue in the west, Hepburn Avenue in the south and Mitchell Freeway in the east.

The main arterial roads nearby are Giles Avenue, Gibson Avenue, Hepburn Avenue and Whitfords Avenue.

Deals and Don’ts – Woodvale, Leederville, Belmont

Here we take a look at just some of the different properties on the market and explain why they’re either deals (that represent a good investment) or don’ts (that should be carefully avoided by investors).

Deals

Woodvale

Purchase price: $581,000

Purchase date: May 2017

Block size: 729sqm

Specification: 4 bedroom, 2 bathroom, single garage, below ground pool, built in 1979, zoned R20/60.

Deal: This green-title property represents a deal because its split zoning means it has good development potential, and it is located just 500m to Whitfords train station. The property is also highly presentable with a good fit-out, meaning that it’s highly rentable and would attract quality tenants.

Leederville

Purchase price: $776,800

Purchase date: June 2017

Block size: 243sqm

Specification: 4 bedroom, 2 bathroom townhouse, built in 2002, high specification finish.

Deal: This townhouse on a strata lot represents a deal because of its location and specification. Tucked away in a quiet street of a blue-chip suburb, it is situated within 3km of the CBD, 100m to the vibrant Leederville café strips and 600m from Leederville train station. The high-quality build, which features 3 living spaces, means the property should be easily leased at a yield close to 4%.

Belmont

Purchase price: $491,000

Purchase date: May 2017

Block size: 713sqm

Specification: 3 bedroom, 1 bathroom, single garage, below ground pool, built in 1974, zoned R20/50/100.

Deal: This green-title property represents a deal because of its significant development potential. Located within 7km of the Perth CBD and within 2km of the Swan River, the property has good growth drivers for the future as well. Over 90% of the value exists in the land component yet the property is still in good rentable condition. It is also located within 500m of Belmont Forum Shopping Centre.

Don’ts

Thornlie

For sale price: $355,000

Block size: 680sqm

Specification: 3 bedroom, 1 bathroom house built in 1987, zoned R17.5.

Don’t: This property doesn’t represent a good investment because it’s located on a busy road (Forest Lakes Drive), which is a high frequency route for public transport buses. Although good for overall amenity, the bus and car traffic would frequently disrupt the property with noise and traffic pollution, restricting demand from tenants and buyers, and lowering its overall capital growth potential.