Cross collateralisation – what is it and why is it bad?

Cross collateralisation is one of the most common mistakes made by property investors. But what is it and why should it be avoided?

Cross collateralisation is when an investor uses more than one property as security for a loan.

For example, let’s say Jane Doe wants to purchase a $400,000 investment property.

Jane currently has:

• A house worth $600,000
• $200,000 remaining on her mortgage with Lender A
• No deposit or cash

Given the amount of equity in Jane’s house, she can approach her lender (Lender A) and secure the entire $400,000 needed to buy an investment property.

Following the transaction and acquisition, Jane will have $1 million worth of property and $600,000 worth of debt.

What’s more, with an 80% loan-to-value ratio, Jane will also have at least another $200,000 of equity in her properties.

If Jane wants to utilise this equity to purchase another investment property, she can approach Lender A for another loan. However, depending on her circumstances and the lender’s policies at the time, they may reject another loan application from her.

No big deal, right? Jane can always approach another lender?

Actually, it’s not that simple.

In reality, it’s unlikely that Jane would secure a loan from another lender (Lender B) because her original lender (Lender A) would have taken first mortgage security against both her home and her investment property.

Generally, lenders won’t issue second mortgages because they aren’t in control and can’t hold existing property titles as security. Given this, it’s likely Lender B would reject a loan to Jane unless all properties were refinanced to Lender B.

If an investor has purchased several properties using cross collateralisation, their ability to borrow from their lender becomes increasingly harder.

Savvy investors know that it is beneficial to spread their borrowings among different lenders.

In the above example there is a better way to secure all the finance needed for the $400,000 investment property.

What Jane should have done is approached Lender A for a home equity loan of $280,000 – if she has good credit, and she can service the loan, there is no reason why she shouldn’t have this approved.

Using $80,000 of the home equity loan as a deposit, Jane can approach Lender B to loan the remaining $320,000 needed to buy the investment property.

Jane now has $1 million worth of property and two lenders who both only control one of her properties.

She also has $200,000 remaining of her home equity loan, with which she can use to purchase more properties, if desired.

Another major downfall of cross collateralisation occurs if you want to sell one, or more, of your properties.

This is because you are essentially changing the terms of your contract with your lender.

By selling one property you are taking it away from your lender as security and changing your loan-to-value ratio.

Subsequently, your lender may require you to reapply for your loans in order to release the property you want to sell. They can also ask you for revaluations on your remaining properties, which are completed at your cost.

The lender can even take proceeds from the sale of your property, or deem that you no longer meet their lending requirements and force you to sell more properties than you intended.

By choosing not to cross collateralise, you will only ever be required to repay the loan that the property is secured against.

Furthermore, having separate lenders for separate properties will give you more options should you choose to refinance.

Although the idea of cross collateralisation can sound confusing, it’s important to remember to only offer the property you are purchasing as security.

6 reasons why good properties are sold below value

The notion of undervalued property might seem inconceivable – why would anyone sell their most expensive asset for less than its worth? However there are many reasons why people sell property for below market value.

Acquiring a good property for below market value can deliver huge financial windfalls and even help investors buy their next property sooner.

Owner-occupiers and investors, alike, sell property for less than it’s worth for a number of reasons.

Before listing these, though, it is worth noting.

While undervalued properties can be found from time-to-time, in the large majority of cases if the price of a property seems too good to be true, there is generally a reason.

Subsequently, it pays to complete adequate research because the price may have been lowered for a number of reasons, such as delinquent neighbours, structural issues with the house or noise factors, among others.

However, here are six reasons why good properties can be sold for below market value.

1. Downsizing: If older owner-occupiers want to downsize, or move into a retirement home, in many cases price won’t be a priority. The owner may prefer a quick sale and therefore advertise the property at a lower price.
2. Presentation: In soft markets, when housing stock is high, buyers can be more selective and will generally prefer renovated properties. Savvy investors can purchase older homes that will demand higher prices after minor and cost effective upgrades are completed.
3. Divorce: Similar to the downsizing situation, when a couple is separating, the price of the property may not be a priority. Rather the owners may require a quick sale.
4. Uninformed selling agents: If an agent isn’t familiar with the suburb they may under-price the property. Additionally, the agent may not be familiar with the particular zoning of the property. For example, a selling agent may advertise the property as a potential duplex development, however planning rules may allow a triplex, or bigger.
5. Financial distress: The owners of the property may be under financial pressure. They may have had a bad tenant that hasn’t paid rent or amassed too much personal debt to meet mortgage repayments.
6. Difficult tenants: Existing tenants may be difficult and only provide limited access to the property for home opens. This can discourage potential buyers, which means less competition and the chance of a lower price.

It’s certainly more important to buy a property with the best long term growth prospects rather than focussing on the best “deal”, as that initial saving can soon disappear if the property performs poorly. You should always focus on the better long term investment. However in a softer market there are opportunities to get great properties and get a little more off the price.

Shopping centre redevelopment to complete leafy suburb

A $600 million redevelopment of a major shopping centre is set to complete the picture for this family-friendly suburb.

Carine is located about 13 kilometres north west of Perth city and features predominately low-density residential housing, which comprises 90% of dwellings in the suburb.

Carine encompasses about 5 square kilometres in which there are 17 parks that cover nearly a quarter (24%) of its area.

Another major drawcard for Carine is its proximity to the beach, which is positioned less than 1 kilometre from its eastern border.

Its boundary runs along major roads, which makes accessibility easy, including Mitchell Freeway to the east, Beach Road to the north, Marmion Avenue to the west and North Beach Road to the south.

This provides good public transport links with buses down the urban corridors and access to Warwick Train Station.

Carine’s main shopping complex is the Carine Glades Shopping Centre and features an IGA, speciality stores, fast food, butchers and tavern.

The suburb is set to benefit from a proposed expansion of the Karrinyup Shopping Centre, though, which is a short 5 minute drive away.

The shopping centre’s owner has lodged plans for a $600 million expansion after more than a year of negotiations with the City of Stirling.

The redevelopment would include 150 apartments and aim to draw Australian and international retailers and restaurants.

If approved, construction is tipped to start in late 2016 and take 3 years to complete.

The centre would be the third largest shopping complex in the state and bigger than the recently opened Lakeside Joondalup Shopping Centre.

Carine identifies as an upper-class area due to its high median household weekly income ($2,135), high level of ownership (88%) and large number of professional workers in the area (32%).

School facilities include Carine Senior High School, which is highly rated in the state at 90/100 in the 2014 Better Education Guide, and Carine Primary School.

Are furnished properties a good option for landlords?

Offering a furnished property to tenants can demand higher rental yields, but is it worth the extra effort?

In Australia, there are generally five ways a landlord can make their property available for lease.

1. Unfurnished – the landlord doesn’t provide any furniture
2. White goods – some or all white goods are supplied
3. Partly furnished – some lounges or tables and chairs are provided
4. Fully furnished – the landlord provides all furniture
5. Fully furnished and equipped – all household items are included, from cutlery and kitchen utensils to beds and desks.

The majority of landlords lease properties as unfurnished, or with some white goods included.

This is because if any white goods, furnishings or other included equipment break during the tenancy it is the responsibility of the landlord to replace the item, in most cases.

This can prove to be highly costly, particularly when larger pieces of furniture break, such as washing machines or lounges.

Additionally, landlords are generally required to replace smaller items, such as cutlery and kitchen utensils, in the event that they are broken. For landlords, this can become an ongoing hassle that they have to deal with.

The upside to providing furnishings is that, in most cases, landlords can claim depreciation on the items they have supplied.

Although landlords can demand higher rent with furnished options, this can be offset by tenant turnover, which may lead to longer vacancy periods.

Furnished houses usually attract more transient tenants who need accommodation for short periods (6-12 months), such as students or business people.

Given this, if you are fully furnishing, it’s best that the properties are located close to employment hubs, such as city CBDs or universities.

Equally, the quality of the furniture a landlord provides will also determine the quality of the tenant.

Students might be content with worn couches or furniture from IKEA, but it’s less likely to suit a corporate businessperson.

While providing a furnished option might sound like too much effort, there are instances when it can be beneficial.

For example, take an international business person that needs a fully furnished apartment in the city. Wear and tear on the furnishings is likely to be minimal if the tenant only stays at the apartment every other week when they are in town for business. Furthermore, a tenant such as this is likely to spend more of their time in their office rather than the apartment.

In any event, it’s always best to consult with your property manager when considering a furnished option for your investment property.

Is a development the best option during a building boom?

Residential building approvals in Western Australia hit record highs over the past year, but is it a good time to start your own development?

The number of residential buildings approved for construction in WA reached an average of 2,680 dwellings per month in 2014, according to the Australian Bureau of Statistics.

That is more than 30% higher than the state’s decade average, which stands at 2,043 per month.

There are a numerous factors that have driven the high number of building approvals in WA including record-low interest rates and high population growth.

Another major factor has been the increase in the number of large apartment projects being approved for construction in the Perth central business district (CBD).

However, with such a high amount of activity in the residential construction sector, is it a good time to undertake your own development?

The short answer is yes it is – in the right locations.

There remains opportunities in the Perth market to make a large profit from property development.

However, as is the case in any other economic environment, research is the key to help ensure you mitigate the risks and maximise the profits.

Before you start a development you need to gain a firm understanding of the industry and its intricacies, including how it works and who specialises in what services.

You also need to understand the state of the market – what stage of the growth cycle is the city and selected suburb in? Will the type of development be in demand in that suburb and what price can you receive?

It’s important to spend time researching sites until you have found a project that fits your specifications. Following this, it’s essential to complete a feasibility study to make sure it meets all your requirements and whether you can make an adequate profit.

Once you’ve chosen your site, you’ll have to tactfully acquire it, properly structure your finances and deal with designers and builders.

However, success in property development all starts with comprehensive research and securing the right location.

For example, choosing a development site in Perth’s CBD for a small apartment complex is unlikely to be profitable given the high number of large apartment towers currently planned or under construction.

However, a small, multi-residential development several kilometres from the CBD, but close to a train line, parks and a vibrant activity centre, would typically pose a better investment.

Therefore, undertaking adequate research, completing due diligence and utilising professional services firms where necessary will help to reduce risks and maximise profits for any development project.

What does the RBA rate cut mean for property investors?

The Reserve Bank of Australia (RBA) surprised many last month when it cut rates following its first meeting of 2015, but what does this mean for property investors?

The reduction in the official cash rate to 2.25% came in February after the RBA had left rates on hold at 2.5% since August 2013.

The move on rates caught many experts off guard with the majority of analysts predicting that the central bank would again leave rates on hold.

However, delivering its decision the RBA said it made the cut because growth was continuing below-trend pace and that it expected the move to add some support to demand and help to foster growth.

So what does this mean for property investors?

Most importantly investors with a variable-rate loan should review their loans with their mortgage broker to ensure they are receiving a competitive rate and a product that suits their needs.

A property investor with a loan of $500,000 will save just over $100 per month if their rate is reduced by .25%, so it’s important to speak with your broker about your current situation.

The savings may be enough for a property investors to make their next acquisition to further build their property portfolio.

Alternatively, any savings could be used to complete minor renovations on existing properties to demand higher rents.

Furthermore, with historically-low interest rates it might be worthwhile for property investors with variable home loans to fix their rates.

Again, the decision to fix rates should be discussed with your mortgage broker who will be able to recommend the best course of action to take.

However, fixing rates can provide surety over the repayment amounts and can help you save further.

While the February rate cut is beneficial for property investors, there could be further good news on the way.

Many analysts have tipped that the RBA will again cut rates later this year by a further .25%, taking the official cash rate to just 2%.

Whether this occurs remains to be seen, however to ensure you’re receiving a competitive rate, it’s important to regularly review your situation with your mortgage broker.

Does an apartment make a good investment?

With lower price points and stronger rental yields apartments can be an enticing proposition for many investors, however are they a smart investment option?

The short answer is yes, they can be.

However, when it comes to property investing, the general rule is that land appreciates in value, while dwellings depreciate.

This is why houses or villas generally make a better investment option – because they often have a large land component, unlike some apartments.

Another major downside of buying an apartment as an investment property is that you have significantly less control.

In an apartment complex you are just one of many property owners and therefore represent just one of many votes in the strata complex.

If you own a house, you don’t have the inconvenience of having to consult other owners if you want to make changes.

However, if you are set on buying an apartment there are a number of points to consider to ensure you make the best acquisition.

Firstly, high-rise apartment buildings, especially in the CBD of major cities, should generally be avoided by property investors.

This is because additional supply of high-rise buildings, often with hundreds of extra apartments, can be constantly built in the immediate area and weigh down capital growth of existing dwellings.

Alternatively, investors should seek low-rise, or boutique, apartment complexes in areas where planning rules cap the number of apartment buildings. This will limit the capacity for new supply to be added in the area and will help to support capital growth.

Furthermore, low-rise apartment buildings have a higher land-to-value ratio than high-rise complexes, and therefore are better placed to increase in value.

It’s also important to buy an apartment in a complex with a high ratio of owner-occupiers, as they tend to maintain the property to a higher standard, are less likely to sell and are easily contactable for maintenance issues.

Another key consideration is the additional amenities an apartment complex offers. Pools, gyms, saunas and other luxury facilities might be appealing initially, however these frills often result in higher strata fees for the owner and can reduce net rental returns.

While apartments generally aren’t viewed as a great investment option for all, they can suit some investors depending on their individual circumstances.

As usual though, it’s best to speak with a professional buyer’s agent to ensure an apartment suits your investment plans.

Suburb set to benefit from surrounding development

Cockburn_stn2This overlooked suburb is ideally located to leverage off a number of ongoing development and revitalisation initiatives in its surrounding areas.

Bibra Lake is conveniently located being just several kilometres from a number of major shopping, entertainment and employment precincts, including Fremantle and the North Coogee Marina to the west, Cockburn Gateway Shopping City to the south and the Murdoch Activity Centre to the north.

Furthermore, the Kwinana Freeway lies across the suburb’s eastern border, which makes Perth CBD, and many other parts of the metropolitan area, easily accessible.

Bibra Lake is mostly low-density residential structures with more than 90% of dwellings listed as houses.

Located within the City of Cockburn and 15 kilometres south of the Perth CBD, the suburb has a population of about 6,000 residents with a median age of 39 years.

Bibra Lake’s value lies in the development occurring in its surrounding suburbs including major residential and commercial land development in Coogee, continued redevelopment of the Cockburn Gateway Shopping City and the recent completion and ongoing commissioning of the Fiona Stanley Hospital and the Murdoch Activity Centre (MAC).

Neighbouring suburbs include North Lake, Coolbellup, Spearwood, Yangebup and South Lake.

As well as low-density residential housing, Bibra Lake also contains an extensive light industrial area, a portion of the Beeliar Regional Park and a large part of the Bibra Lake Reserve.

The light industrial area is located on the south-western side of the suburb and takes up a large portion of the suburb, while the Western Power substation is in the south-east pocket.

Containing the light industrial area and in close proximity to the MAC there are a variety of job opportunities in the immediate area.

School facilities include Bibra Lake Primary School, Perth Waldorf School and good access to Murdoch University.

As well as Cockburn Gateway Shopping City, there is also Phoenix Shopping Centre in Spearwood and the Lakes Shopping Centre on the border with South Lake.

Bibra Lake boasts good accessibility bordering the Kwinana Freeway and Stock Road and is split by North Lake Road, which connects to South Street and Beeliar Drive.

4 features to look for in an exceptional property manager

Finding a property manager that will help you to maximise value from your investment property portfolio can be an extremely tough exercise.

With so many different property management companies in the market the degree of service you will receive can vary dramatically.

Too often do property managers promise the world before disappointing and becoming just another ‘transaction filler’.

Here are four features to look for in a property manager to help you find a professional advice-driven service, which will help you make the most of your investment property.

1. Communication

Open and clear communication should be maintained by the property manager at all times. Check to see if the property manager has a customer service charter that outlines their commitments to you. A good property manager will ensure they return phone calls or emails within one working day or contact land lords within one working day after becoming aware of required repairs or maintenance. They should also provide regular (monthly) updates on the performance of your property and if rent is being paid on time.

2. Negotiation

Property managers are constantly in negotiations, whether this be about the rental price, lease contracts or gathering quotes for maintenance services. An outstanding property manager should hold good negotiation skills to ensure you, as the landlord, receive the best outcome.

3. Knowledge and passion

While the number of years a property manager has worked in the industry can be an important factor, it’s not the be-all and end-all. What’s more important is their enthusiasm for the industry – do they read industry publications to expand their knowledge, for example? Do they have a comprehensive understanding of the Residential Tenancies Act? Do they attend regular industry training courses and seminars? An outstanding property manager will have a passion for the industry to ensure they stay abreast of the latest trends and information.

4. Professionalism

Professional property managers will be active participants in the broader industry. Is the property manager a member of any credible industry organisations? Has the property manager, or their company, won any industry awards for their excellence in property management and customer service? Furthermore, ask if the property manager has a cap on the number of properties they can manage as some individuals will handle hundreds of properties, which will mean a poorer service for you.

The importance of completing a pre-acquisition feasibility study

Property development can be a fine line between huge windfalls and financial disaster; however a pre-acquisition feasibility study can go a long way to mitigate the risks.

If you’re searching for a property to develop it’s important to complete a feasibility study prior to purchase to ensure the site meets your expectations.

This can be done before final settlement by including adequate clauses in the sales contract that will provide a sufficient due diligence period on the site and allow you to cancel the acquisition if you’re not satisfied for any reason.

To complete a thorough feasibility study during the due diligence period it pays to hire a professional company that is qualified and has experience with the construction and approvals processes.

A feasibility study should outline how much the site is worth, the number and type of dwellings you can build on it and a forecast of the size of the profit, or loss, you would make.

It will also provide finer details including a brief of the building and subdivision costs, a working timeframe of the project, soil analysis and engineering and drainage requirements, location of service and utilities (such as sewer lines), any covenants or easements on the land title and political or community opposition to the development.

By completing adequate due diligence at the feasibility stage you will be able to maximise your profit margin, or potentially avoid a disastrous financial loss if the project isn’t viable.

It’s also important to remain emotionally detached from the project, particularly if you may have spent substantial time and money searching for a development site and it fails to pass a feasibility study.

In this case you need to forget the site and continue your search – it will pay to be patient until the right development property arises.