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Property Newsletter – April 2014
April 14, 2014 | 
Author The key characteristics commonly shared by top property developers
Not everyone has what it takes to plan and undertake a successful property development. There is a lot you need to know, and last month we looked at four of the critical knowledge areas. It’s not just about what you know; having certain character traits can also prove extremely advantageous.
This month we outline some of the key characteristics commonly shared by top property developers. How many do you have?
Decisiveness
The best property developers live by the old truism ‘time equals money’. They know that unnecessary delays are to be avoided at all costs, because even a small delay can have disastrous flown-on effects to the schedule and budget. Decisiveness, or the ability to make quick decisions, is therefore an important trait to have.
Ability to spot potential
When searching for a development project, great opportunities are typically few and far between. And when these opportunities do come along, they certainly don’t hang around forever. Successful property developers can spot a good opportunity very quickly and in a matter of moments do a ‘quick feasibility’ to determine whether further investigation is warranted.
Deal making
Securing a development site isn’t always straight-forward. When negotiating with a seller, sometimes the developer needs to think outside the box and come up with a solution that works for all parties – they need to get the right deal done. This may involve, for instance, securing an option to buy the property, buying the site outright, or even entering into a joint venture with the property owner.
The key to making some developments profitable can come down to something as simple as a long settlement or an extended due diligence period.
Solution oriented
In any development, problems will arise that can sap the motivation of even the most motivated developer. It’s the developers who don’t get bogged down with the problems and choose instead to focus on solutions that have greater chance of success.
Big picture focus
Professional developers seem to have an innate ability to see the big picture and recognise ‘the wood through the trees’. They have an unwavering focus and the patience to see their vision gradually become a reality, even if it means making mistakes from time to time.
An understanding of quality vs time
There is a constant battle all property developers face. It’s comes from the reality that producing a better quality product will generally cost more in terms of time and money. With any project, you need to find the right balance, which means carefully understanding the particular market you are targeting. There’s no point in spending extra money in a particular area of the project if the market simply won’t pay for it.
Excellent people skills
The best property developers have excellent communication and interpersonal skills. They can relate to people from all walks of life and quickly build genuine rapport. Think about the variety of people a property developer might deal with, from property sellers, consultants, builders, and tradespeople to neighbours and members of the local council. It takes leadership skills and sometimes a big dose of diplomacy to successfully get the most out of these relationships.
Conclusion
This list provides a useful overview of the personal traits and characteristics that lend themselves to the property development arena, but it is by no means comprehensive.
A property development project is almost always a serious undertaking and not one to be faced unprepared. But if it’s done right, the rewards can be excellent.
For this reason, aspiring property developers without the necessary time and resources should always seek the help of a development manager or team, who can coordinate the entire process and provide valuable advice along the way.
Should you spread your loans amongst different lenders?
One of the financing decisions you’ll have to make as you grow your portfolio is whether to spread your loans amongst different lenders. The alternative option, of course, is to keep your loans with a single lender. So, what are the relative advantages of each of these strategies?
Going with one lender
The biggest advantage of having all your loans with a single lender is that you may benefit from volume-based discounts offered by the lender, depending on the total amount of your borrowing. This could mean slightly cheaper interest rates and reduced fees, potentially saving you money over the period of the loans.
There is also a convenience factor in having all your loans in one place, both in terms of managing your loans and submitting further applications.
Some people will also argue that, with this strategy, your lender will be more willing to lend you further money as they have a complete picture of total borrowings. This, however, is debatable.
Going with multiple lenders
A strong argument for having your loans with different lenders is that you can potentially borrow more money versus the single lender scenario. A lender who is right for your first loan is highly unlikely to be the lender most suited to your 4th or 5th investment property. Lender policies constantly change and spreading your loans makes it more likely you can move to the next property sooner.
It’s not a universal rule but in my experience you can typically do more with multiple lenders, but it does depend on your specific strategy.
One of the great things about spreading your portfolio amongst different lenders is that you can pick which of your properties you want to refinance when releasing equity. If all your loans are with one lender, the lender may require current valuations on all properties. In this case, the growth in one property may be offset by the decline in another, leaving you unable to draw equity.
Using multiple lenders also makes sense from a risk-management point of view. If you default on a loan, it may be more difficult for the lender to get its hands on other properties not under its control.
Spreading your lender exposure also means minimising the negative impact that could result should one lender decide to dramatically change its lending policies.
Conclusion
Despite the potential cost savings of having all your loans with one lender, many investors choose to spread their loans because of the increased flexibility and protection. A good mortgage broker can usually find ways of minimising costs while still utilising different lenders. Ultimately, the choice depends on your overall strategy, risk profile and financial resources, but for property investors looking to build a large portfolio spreading your lenders is the preferred strategy.
The pros and cons of investing in a brand new house and land package
It’s easy to see the appeal of investing in a new house and land package. Not only does this type of property look amazing in the brochures, it’s an easy option and comes with a host of advantages. However, do these benefits outweigh the negatives? Let’s look at the main pros and cons.
The Main Pros
Tenants love new homes
Tenants typically love brand new property and, let’s face it, why wouldn’t they; everything is in perfect condition, with up-to-date features and modern floor plans. For investors with this type of property, finding a tenant can be fairly easy (depending on the overall supply in an area) and rental returns can be strong.
Maintenance
With new property, there is none of that dreaded maintenance, at least for the first few years. You don’t have to worry about something falling apart after buying the property.
Depreciation benefits
New properties will generally get higher depreciation deductions than older properties, given the high starting value of the building, fixtures and fittings. More deductions means the out-of-pocket cost to hold the property may be lower.
Stamp duty saving
When investing in a new house and land package, you typically only pay stamp duty on the land component, which could mean saving thousands of dollars.
Flexibility
When building a home you can often tailor certain elements to suit your specific needs or to maximise the investment potential.
The Main Cons
Paying for someone else’s profit
When you buy any brand new property, factored into the price is the developer’s profit margin and a proportion of the high marketing costs that come with selling this type of property. These hidden ‘costs’ could be the equivalent of a few years of capital growth, putting you behind the eight ball from day one.
Compromised location
The majority of home and land packages are located on the outskirts of the city, in areas often with abundant supply of land, weaker economic drivers and a lack of infrastructure. Capital growth is therefore often harder to come by.
Uncertainty
When buying off the plan, you really don’t know whether the quality of the finishes will meet your expectations, or what the surrounding facilities and other homes will be like. There is also the uncertainty that the final bank valuation won’t stack up. Also you won’t know how many other similar rental properties have been sold to investors in the area.
Land value
Logic dictates that when investing you should seek out a property with a high proportion of land value, as this is what will drive capital growth. With new property, however, most of the value lies in the building component and not the land, which will hamper capital growth as the building depreciates.
A 30 year old property on a good size block in the middle of suburbia might not look too glamorous when compared to a brand new property, but chances are it will make a far better investment over the long term.
Paying without receiving
When building an investment property, you don’t receive any income while it is in the planning stages or under construction. But you will be paying interest on any money you have borrowed by that point.
Building surprises
Building can be a nightmare at the best of times, with construction delays a fairly common occurrence. The biggest surprise for many first-time builders is the amount of extra money that needs to be spent to get the property ready.
Inability to add value
Smart investors know that adding value to a property through renovations is a key strategy for accelerating the wealth-creation process. This option is rarely available with new property.
Conclusion
The bottom line is that while investing in new property can seem appealing, it often proves unsatisfying over the long term due to weaker capital growth. If you are looking at a long-term investment opportunity, more often than not, your best option will be a second hand property.
What exactly is fair wear and tear?
The reality of owning an investment property is that, in all likelihood, the condition of your property will decline over time. This can be hard for some investors to accept, especially when they don’t see their property very often.
All tenanted properties will experience some wear and tear, just as your own home will inevitably show signs that it has been lived in. If the wear and tear is considered to be ‘fair’, the tenant will not be liable for the damage and it cannot be claimed on your landlord’s insurance.
So, what exactly is fair wear and tear? There is no formal definition in the Residential Tenancies Act (1987), but it’s generally considered to be the damage that naturally and inevitably occurs as a result of normal use or ageing.
It sounds relatively straight-forward, but it’s an area of constant friction between landlords and tenants because of differing interpretations.
To clarify, let’s consider an example. Carpets have a limited life-span, probably between five and ten years, depending on a number of factors. Therefore, after a few years of use, you would expect to see signs of foot traffic in some areas. This damage would generally be considered fair wear and tear.
Faded curtains could also be an example of fair wear and tear, as the fading has most likely occurred through ageing and normal use. Other examples could be minor scratches on paintwork or even a lock that has broken because of its age.
What about accidental damage? How is that different from wear and tear? Accidental damage is caused by a sudden and unexpected event, such as spilling red wine on the carpet or damaging a wall while moving furniture. Wear and tear, on the other hand, accumulates over time.
What about neglectful damage? Like wear and tear, this sort of damage happens over time, but through some negligence on the part of the tenant rather than normal use. For instance, allowing mould to form in an area by failing to properly ventilate the property could be considered neglectful damage.
Tenants are normally liable for accidental and neglectful damage.
Clearly, when determining what is and isn’t fair wear and tear, it’s vital to have a comprehensive Property Condition Report. This document, produced at the start of a tenancy, will provide the basis for comparison in assessing any sort of damage.
An established favourite with a promising future
Warwick is located approximately 13km north of the Perth CBD and 5km from the ocean. It’s a suburb with a relatively small population, given the eastern third is devoted to native bushland, known as the Warwick Open Space.
Located within the City of Joondalup, Warwick was predominantly developed in the 1970s and consists mainly of three and four-bedroom brick and tile residences. It is a well-established area surrounded by other established suburbs or infrastructure, making the availability of land there very restricted.
Warwick hugs the Mitchell freeway, which is the lifeblood of the northern suburbs, offering quick and easy access to and from the Perth CBD and Joondalup, whether by car, bus or train. It has a substantial shopping complex with cinema, schools and plenty of parks and sporting facilities.
Part of Warwick’s appeal is that it is just a short drive to many of Perth’s most popular beaches, as well as Hillary’s Boat Harbour, a favourite destination for tourists and locals.
By Perth standards, Warwick is considered an affordable suburb with most properties priced close to the median house price of Perth. It offers good value for money, especially compared to the suburbs located to the west.
According to recent figures from REIWA, the median house price in Warwick is $560,000, representing a growth of 13.9% over the past year, with the highest sale price being $738,000. The median rental price is $440 per week
Warwick is in the midst of a transitional phase, a factor that has caught the eye of many investors. Many homes in the suburb are undergoing expensive renovation and some older properties are being demolished and replaced with modern buildings.
Of particular interest to investors is the fact that Warwick is part of the Joondalup Draft Local Housing Strategy, which aims aim to rezone parts of the suburb to allow for more dense residential housing. Large parts of the suburbs look set to be rezoned to R20/R40 or R20/R60.
According to our analysis, Warwick has a high demand-to-supply ratio, meaning demand is very strong compared to supply. Part of the reason is that it appeals to both owner-occupiers and investors. Owner-occupiers love the location, the amenities and the affordability. Investors love the price tag, larger lot sizes, and the ability to add value to old properties via renovation and development.
The Reserve Bank of Australia has decided to keep interest rates the same
The board met today and decided to keep the cash rate unchanged at 2.5 per cent. This is great news for investors looking for their next investment property.
“The latest housing market statistics are likely to have caused the Reserve Bank some additional deliberation at their latest board meeting,” said RP Data’s head of research Tim Lawless.
The amount of investment in the housing market would be causing them concern, Mr Lawless said.
“In Australia, the economy grew at a below trend pace in 2013. Recent information suggests slightly firmer consumer demand over the summer and foreshadows a solid expansion in housing construction. Some indicators of business conditions and confidence have improved from a year ago and exports are rising.
Glenn Stevens the Governor of the Reserve Bank said “resources sector investment spending is set to decline significantly and, at this stage, signs of improvement in investment intentions in other sectors are only tentative, as firms wait for more evidence of improved conditions before committing to expansion plans. Public spending is scheduled to be subdued. “
Mr Stevens said “monetary policy is appropriately configured to foster sustainable growth in demand and inflation outcomes consistent with the target. On present indications, the most prudent course is likely to be a period of stability in interest rates”.
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Tax Newsletter – April 2014
Tax data net to be widened
The government has proposed to improve taxpayer compliance through new third-party reporting regimes and has undertaken public consultation to seek feedback on possible policy issues. The proposal aims to improve taxpayer compliance by enhancing the information reported to the ATO by a range of third parties. The proposal is currently scheduled to commence from 1 July 2014 (although first reports would not be due to the ATO until after 1 July 2015).
The government notes that some of the elements of the proposal can be implemented by the ATO, whereas other elements will require tax law changes. This would involve the creation of new third-party reporting regimes in relation to:
- sales of real property;
- sales of shares and units in unit trusts;
- sales through merchant debit and credit services; and
- taxable government grants and other payments.
In respect of these transactions, the government suggests that the ATO would initially seek to receive annual reports and then seek to move to quarterly, monthly or real-time reporting.
ATO compliance approach can be improved
The government has released several reports prepared by the Inspector-General of Taxation, Mr Ali Noroozi, into the ATO’s compliance approach to individual taxpayers.
The Tax Inspector found that data-matching was generally positively received where the ATO uses it to assist individuals. However, he found that stakeholders were concerned that the data used by the ATO could be inaccurate and not sufficiently vetted before comparisons were made with taxpayer-reported information.
In relation to the ATO delaying tax returns to check refund claims, the Tax Inspector recommended that the ATO improve its processes as well as communication with taxpayers. Among other things,
Mr Noroozi thought the ATO could better differentiate potentially fraudulent claims from mere mistakes. The ATO could also improve the time taken to review cases, and provide clearer reasons for any adjustments made.
ATO complaints-handling report highlights issues
The Australian National Audit Office (ANAO) has recently reviewed the ATO’s complaints-handling processes. Although the ANAO found that the ATO’s complaints-handling framework is well designed, it found that there are opportunities for the ATO to improve its practices, including by obtaining a better understanding of the issues that are the subject of complaints and the needs of the complainants themselves.
It said there is scope for the ATO to:
- improve reporting against complaints-handling timeliness measures;
- implement a more coherent agency-wide quality assurance framework for complaints and other feedback;
- restrict sensitive information about named ATO officer complaints from being included in records on the ATO’s client relationship management computer system; and
- implement measures to periodically check that ATO officers have not accessed client relationship records inappropriately.
The ANAO made three recommendations, all agreed to by the ATO, which are aimed at improving the ATO’s handling of complaints and its monitoring and reporting of performance in managing complaints.
No deduction for preparatory activities
Successful entrepreneurs are a creative and motivated bunch, but it generally takes several attempts to develop a successful business venture. Costs are quickly incurred in determining the viability of, and in pursuing, a business idea. However, careful consideration of the deductibility of such costs needs to be taken. If the idea is a winner and a new business venture is born, a deduction may be available. However, in other cases, the deduction may not be available.
In one recent case, an individual was unsuccessful before the Federal Court in relation to his claims for deductions incurred in pursuing 14 business ventures on a 500-acre property. The Administrative Appeals Tribunal (AAT) had earlier found that although the man’s operations met a number of criteria relevant in determining whether a business was being carried on, none of the activities had advanced much beyond the planning stage.
The AAT held that the individual was not “carrying on a business” and that the claimed deductions were therefore not available. The Federal Court affirmed the AAT’s decision.
TIP: Given the breadth of examples covered in this decision, the decision is a useful reference point for taxpayers dealing with the issue of deductibility of costs incurred in preparatory activities associated with a business idea that is later abandoned or a business venture not yet generating income. Please contact our office for further details.
Penalty for late superannuation contribution
The Federal Court has affirmed an excess superannuation contributions tax assessment issued to an individual after finding there were no “special circumstances” to warrant reallocating excess concessional contributions that had been received late via BPAY.
The Court heard that the bookkeeper of the individual’s employer had made two payments on 30 June 2009 via BPAY to the individual’s superannuation fund, and that those payment were received by the fund on 1 July 2009. The Court also heard that the bookkeeper had mistakenly made an early payment to the individual’s superannuation fund on 27 May 2010, which was meant for the following financial year.
As a result of these payments, the total amount of funds received by the superannuation fund in the 2009–2010 financial year exceeded the individual’s $50,000 concessional contributions cap for the year.
The individual argued that there were “special circumstances” and that the Commissioner should reallocate the two late payments to the 2008–2009 financial year, and the 27 May 2010 payment to the 2010–2011 financial year.
However, the Court said late BPAY payments did not amount to “special circumstances”. Further, simple errors such as making a contribution too early also did not amount to “special circumstances”. The Court was also of the view that the individual had been in a position to ensure that the contributions were made in the correct year.
TIP: A taxpayer who has contributed above his or her concessional or non-concessional contributions caps can apply to the Commissioner to exercise his discretion to disregard or reallocate excess contributions for a financial year. However, it should be noted that the discretion is not easy to obtain.
Individuals should consider keeping track of contributions and avoid making last-minute contributions that could be allocated to the next financial year. Individuals with salary-sacrifice arrangements should carefully identify the timing of superannuation payments relating to wages accrued for the June quarter (or June month). Please contact us for further information.
ATO eye on dividend stripping
The ATO has released details of “dividend access share” arrangements that it considers to be dividend stripping schemes under the tax law anti-avoidance provisions. These arrangements aim to allow ordinary shareholders of a private company and/or their associates to derive the economic benefit of significant profits accumulating in the private company in a substantially (if not entirely) tax-free form.
These arrangements involve a number of features, but principally include the company issuing a new class of shares to another entity (eg another company controlled by the original shareholders) for nominal consideration, and the company declaring and paying fully franked dividends on the new class of shares of an amount approximately equal to the accumulated profits in the company. The ATO says these arrangements generally result in a reduction or elimination of the taxation liabilities that would normally arise with the payment of dividends (that is, if those dividends were paid to the company’s ordinary shareholders).
The Commissioner is of the view that under such circumstances, he can exercise his power to cancel all or part of the tax benefit obtained from these schemes.
Finance Newsletter – March 2014
With house prices moving it’s even tougher for first home buyers to enter the market. If you want to assist a family member to buy their first home there are a number of thing you can do:
Provide a gift or loan
Offer equity in your own home as security
Use Commonwealth Bank or other banks Family Equity products.
Family Equity is a home buying solution unlike any other, designed to help first home buyers enter the property market. It’s a range of financing options that can help customers secure a home loan, repay a home loan, or a combination of both. The main customer benefit is the ability to enter the property market by relying on guarantors for security and/or servicing support.
A family member has always been able to assist with providing equity or funds for a deposit. What’s good about family equity is it also allows servicing support. This means that if an applicant’s income is not sufficient to service the loan required, a family member (or anyone for that matter) can assist by paying some of the repayments on an ongoing basis. The person providing the equity or servicing support is not required to be on the title of the property being financed. Remember there is a grant and stamp duty incentives from the State Government for first home buyers too.
Do you have the most suitable loan for your circumstances?
Do you have the best rate available?
If your interest rate is over 4.84% that you may be able to save thousands per year by changing loans and or banks. Homeloans is currently offering customers 4.84% variable for loans conditions apply. So if you are interested in saving thousands per year call Mercia finance to see if we can show you how benefit from a better rate.
If you have any questions about Family Equity, Reverse Mortgages or any other type of loan, call Dan Goodridge on 04144 233 40. Our service is free of charge to you the borrower and we have access to all the major lenders in WA.
Property Newsletter – March 2014
What does it take to become a successful property developer?
Property development is a currently a hot topic amongst investors. While some dream about making huge profits in a short space of time, others are simply looking to manufacture capital growth, putting them a step closer to achieving their long-term goals.
With many pockets in Perth and around Australia recently rezoned or in the process of being rezoned for higher density living, property development is now within the grasp of many everyday investors.
Despite what some people think, you don’t need to be a builder to be a successful property developer. Whether a development project involves building a few units or townhouses or something more substantial, there are always considerable risks involved.
While you can’t control everything, many risks can be minimised through having the right knowledge and skills. What does a developer need to know to succeed? Here are four critical knowledge areas.
1. Your Market
At its core, developing property involves producing a product for a particular market. Therefore, you need to have intimate knowledge of the market you are trying to serve. Who are the people that will buy or rent your property, and importantly, how much would they be willing to pay (when the time comes)? What specific features do these people expect and look for?
While it’s critical to understand your target market, it’s also important to be aware of the potential competition. What type of property would compete with yours and how much choice do buyers have?
One area where many developers falter is not matching the project to the site. In other words, they build a product that is either too expensive (overcapitalising) or not good enough (undercapitalising) for the specific location.
As a developer, you don’t want to be a trend-setter and try to break price records. This is a very risky strategy, as the market might not support your plan. It’s far safer to develop product that is already in demand and that is in line with market trends.
2. Money Matters
Property development is a aimed at making a profit sometime in the future and property developers need to be financially savvy.
Specifically, they need to be able to assess the financial viability of a potential project, taking into account the completed value of the project, transaction (buying and selling, if applicable), construction, holding and any other associated costs.
A key question when doing a feasibility analysis is whether the project provides an adequate level of return to justify the risk and investment of time and money.
Project financing also needs to be considered carefully, ideally with the help of a qualified finance broker. How will the project be funded? What level of deposit will be needed?
3. Project Management
Just because a project shows a potential profit on paper, it doesn’t mean this profit will come to fruition.
At the core of successful property development is project management. This is essentially the process of planning the project, developing appropriate budgets, procuring services and managing the project through to completion – hopefully on time and on budget.
Successful project management involves a detailed understanding of the various stages of the construction process, from excavation to the final fit out. Normally these stages are mapped out in a document, along with the associated timelines and costs.
In ensuring a project runs smoothly, an important role of the project manager is quality assurance, making sure every aspect is completed to the appropriate standard.
Project management also involves being aware of the roles played by each consultant, including architects, engineers, surveyors, accountants, and lawyers.
4. Council Regulations
A stumbling block for many inexperienced property developers is their lack of understanding regarding local council regulations and what it takes to obtain Development Approval (DA).
Many underestimate the amount of information that needs to be supplied and the seemingly endless conditions that must be met. Inevitably, the process takes far longer than expected, which often puts financial pressure on the project.
Understanding council requirements involves researching complicated and lengthy documents, and compounding the problem is the fact that every council operates differently.
Having this knowledge is not only relevant when assessing a potential project or trying to get a project off the ground, but also to ensure the project takes full advantage of the site. Often, subtle changes to a plan can dramatically increase a developer’s return.
Obtaining DA is a big step in any project and it is at this point that some developers choose to sell-on the project to another developer who wants assurance of having the DA in place.
Don’t know? Don’t worry
If you are genuinely interested in becoming a property developer and think your knowledge is lacking in any of the areas above, don’t be disheartened.
Many successful developers employ the services of a company, such as Momentum Wealth, that can manage the entire process for you. With the right team in place, even an armchair developer can achieve great success.
Next month we round up this discussion by outlining the characteristics and personal traits commonly shared by top property developers. Don’t miss it.
Selecting a mortgage broker
A few mortgage brokers in Australia have been behaving badly and the Australian Securities and Investments Commission (ASIC) isn’t happy about it, increasing efforts to stamp it out.
What sort of behaviour is being targeted? Misleading advertising is one. A number of brokers have recently been fined tens of thousands of dollars for making statements in their advertising that were deemed likely to mislead or deceive consumers.
Late last year, one of Australia’s largest broker franchise groups was hit with a $30,600 penalty following the airing of TV and online commercials that claimed the group had, on average, saved customers ‘$10,000 over five years’.
ASIC investigated the claim and found that no customer had actually saved $10,000 over five years (at the time of the advertisement being run). The figure was rather a projected saving based on calculations from a sample of around 300 refinancing customers over a six-month period. While the broker would save the clients’ money, it had not yet occurred to that extent.
In a serious example of bad behaviour, a few brokers have been singled out for submitting loan applications containing fraudulent documents. These renegades deliberately falsified documents to obtain loans, totalling hundreds of thousands of dollars, for themselves, clients and family members. Some of these brokers have rightly been criminally charged and convicted.
We welcome the moves to clamp down on dodgy behaviour and strengthen customer safeguards. Around half of all loans are done through a broker, so it’s extremely important to put protective measures in place.
As with any industry, there are always a few bad apples. Mortgage broking has around 10,000 people providing broking services, so there will be a few who don’t conform. Most brokers take great care and responsibility in their role and don’t step over the line.
Brokers have a far greater selection of products than going to a bank directly, so it makes sense to use one for your loan needs. When you do choose one, it pays to go with a reputable company that you can trust and a broker who understands your specific requirements.
How selling agents can influence you and make you pay more than you should
Part of the role of a selling agent is to handle enquiries and manage buyers on behalf of the seller.
The problem is that sometimes buyers forget that selling agents aren’t on their side because they are being so helpful. This misplaced trust can lead the buyer into paying more than they should. I’ve heard of cases where buyers have paid $30,000 more than was necessary to secure a property. Great for the seller but not so good for the buyer.
It might sound obvious to some, but selling agents represent sellers. They are legally obliged to act in the best interest of their client, the one paying for the service. Of course, when you are selling you expect the selling agent to represent your interests.
Many agents are highly trained and know how to influence buyers with subtle tactics of the trade. Here are some of the strategies used by selling agents to steer buyers in a direction that favours the seller.
Act now!
Selling agents are masters when it comes to creating a sense of urgency. They know that people will make faster decisions when a deadline is looming and that the less time you have to make a decision the less opportunity you have to think about it.
A classic ‘deadline scenario’ used by selling agents involves encouraging early-bird buyers (probably from their database) to make an offer or increase an existing offer before the property hits the market or before the first home open. Fearing they will lose out to another buyer, these buyers often oblige. In some cases, it may make sense to get in early, but make sure you aren’t being influenced against your better judgement.
Lots of potential competition
Smart selling agents know that to secure the highest possible price for a property they need multiple buyers to compete for the same property. Sometimes, a property naturally attracts a number of genuine buyers who are prepared to compete.
How does a selling agent generate competition? It may simply involve organising multiple viewings at the same time to show potential buyers how ‘sought-after’ the property is. When you notice other buyers hovering around a property, you’re more inclined to move quickly to snap it up.
Luring you in
Selling agents know that potential buyers are more likely to fall in love with a property when they see it in person. This is why they will go to great lengths to get buyers to a property.
Ever visited a property and were surprised when rooms were far smaller than they seemed in the photos? Put this down to ‘clever’ photographic techniques.
Remember, the best ally a buyer can have is a buyer’s agent, who has experience working with selling agents and is focused on protecting the interests of the buyer.
The vacancy rate in some mining towns is skyrocketing, but why?
If you have been keeping an eye on vacancy rates in mining towns across Australia over the past 18 months, you would have probably seen some crazy numbers.
While each town’s rental market has unique dynamics, causing different results, the general trend has been a significant increase in the number of properties available for rent.
Many of the larger towns in Queensland and Western Australia’s Pilbara region have recorded large increases, with Port Hedland’s vacancy rate now sitting at around 8%.
In smaller towns, which often rely heavily on one mining operation, vacancy rates have even climbed as high as 18%.
With more competition for tenants, rental prices have inevitably dropped, sometimes up to 20%. Places like Gladstone and Mackay have seen average weekly rents drop by more than $100 in 12 months.
So, what has happened?
In some areas, demand for accommodation has simply dropped as mining projects transition from a labour-intensive construction phase to an operational phase.
Over-inflated prices have also driven many potential tenants further out of town or to neighbouring towns. These workers prefer to commute some distance rather than pay exorbitant rents.
In some areas, the weak rental market is a result of an over-supply of property. During the last boom, developers responded to the strong demand by building more and more homes, which were sold to eager investors looking to cash in. This has dramatically increased the supply of rental properties.
Unfortunately, some areas have experienced both a drop in demand and an increase in supply.
Although it’s true that mining towns can deliver strong rental yields and capital growth, there are considerable risks. Market dynamics can quickly shift (for a variety of reasons) and leave unsuspecting investors in a cycle of falling rents and falling property values.
Proof of the high risks associated with mining towns is the fact that most of our largest lending institutions now carefully limit their exposure to these areas. Some have introduced a maximum rental yield of 8% when assessing applications for investment properties, believing that anything higher is unsustainable. Other won’t lend more than 80% of the property’s value.
While some mining towns will certainly bounce back in coming years, recent events will hopefully serve as a lesson to investors trying to strike it rich.
Two great opportunities to learn directly from Damian Collins
Later this month, people in Perth will have an excellent opportunity to learn new strategies directly from some of the country’s top experts, including our own Damian Collins.
And as a Momentum Wealth subscriber, you’ll receive a special deal on tickets.
The Home Buyer & Property Investor Show, which will be held on 22-23 March at the Perth Convention & Exhibition Centre, will provide a banquet of information for hungry investors of all levels of experience.
Attendees can choose from a host of free seminars, as well as in-depth workshops covering a variety of property investment topics.
Damian will be giving an insightful presentation explaining exactly where you should invest in order to profit. He’ll also explain why 97% of properties on the market are unsuitable for investors and how to find the 3% that can make you wealthy.
In what is a rare and exciting opportunity, Damian will also present a 1-hour in-depth workshop demonstrating exactly how experts find the best properties in the market. Plus, he will show you how to negotiate the best possible price and contract terms. If you are looking to buy a property soon you can’t afford to miss this. Bookings are strongly encouraged due to limited seating.
http://www.homebuyershow.com.au/perth/visitor
City of Armadale may be the next hot spot
City of Armadale – Amendment 72 (allowing of multi-density development)
At the City of Armadale’s August 2013 meeting, the Council initiated an amendment to the Zoning Table and Clauses 5.2.3 to 5.2.6 of TPS No. 4 to enable the consideration of “Multiple Dwellings” across the residential zone, in accordance with the Residential Design Codes. The amendment is presently before the Minister for Planning for final adoption. Currently “Multiple Dwellings’ are prohibited within areas coded R30 and below and the change proposed is to a discretionary land use in the Use Table, allowing for increased apartment-style living. The amendment also enables the consideration of “Multiple Dwellings” on all dual-coded residential lots, which currently have only been receiving the higher split coding for grouped dwellings developments.
Change of the Town Planning Scheme increases development potential for residential blocks. By allowing apartment-style construction, the City will increase its amount of dwellings. The newer apartment complexes will remove some dated housing stock which detracts from the streetscape and helps improve the area.
In terms of how this amendment will benefit investors, it’s simple. It creates greater residential development opportunities. Currently under the town planning scheme many properties are in a split-density zoned area and can only be developed into villas or townhouses. This amendment allows for an increase in housing density, meaning more dwellings may be created in the same space. This can make previously unfeasible development properties, feasible, leading to a more active development environment. A savvy investor will consider investing in these property types now, anticipating this amendment passing. Once passed, the number of properties with feasible development potential will increase and their associated land values. Of course, there is no guarantee the amendment will pass, so investors should do their homework. Momentum Wealth’s team of buyers’ agents have been working with our Research Department and in-house town planners to identify opportunities in the Perth market not widely known of. If you are thinking of developing, you should speak to one of our expert team today.
Tax Newsletter – March 2014
Local government payments in ATO sights
The ATO has previously sought from local government council and shire authorities throughout New South Wales, Victoria, Queensland, and Tasmania details of entities who provided contractor services in the 2011 and 2012 financial years. The ATO says it will now acquire details of entities receiving taxable payments from local government council and shire authorities throughout the country covering the 2011 to 2014 financial years.
The ATO says it will electronically match the information collected with its own data holdings to identify instances of non-compliance with tax lodgment and payment obligations. Records relating to 20,000 to 40,000 individuals are expected to be matched under the program.
TIP: Be aware of the ATO’s use of electronic data-matching to check tax compliance. According to the ATO, most people are willing to meet their tax and superannuation responsibilities. However, the ATO says it uses a range of measures, including electronic data-matching, to identify the small minority of taxpayers who do not fully meet their responsibilities.
Tax bill for transfer of land to joint development trust
A taxpayer (the trustee of a trust) has been unsuccessful before the Federal Court in arguing against a capital gains tax bill following a transfer of land it owned to a “joint venture trust”. The transaction took place in August 1998 and the amount in dispute totalled some $7.6 million. The joint venture trust was set up to facilitate commercial development of the land owned by the taxpayer as well as adjacent land owned by other owners.
The taxpayer argued that there was no change in the beneficial ownership of the land and that there should therefore be no tax liability on the transfer. However, the Court held that the transaction was taxable and that the exceptions to the tax liability as argued for by the taxpayer did not apply in the circumstances. The Court also affirmed the Tax Commissioner’s decision to impose an administrative penalty at the rate of 25% of the tax shortfall.
Forestry managed investment scheme losses refused
An individual has been unsuccessful before the Administrative Appeals Tribunal (AAT) in a matter concerning losses claimed in tax returns for the 2006 and 2007 income years.
The individual had invested in a forestry managed investment scheme and the losses from that investment, which amounted to $1 million over the two years, had been claimed on the basis that he was a member of a partnership. During an audit of the taxpayer’s affairs, the taxpayer disclosed to the Tax Commissioner that the partnership losses should not have been claimed and that the 2007 return had been lodged by his tax agent without his authority. The Commissioner refused the claims for losses and issued amended assessments. However, the Commissioner also treated the taxpayer as a person who had made a voluntary disclosure and he decided to reduce the shortfall penalty originally imposed by 80%.
The taxpayer objected to the amended assessments and penalty on the basis that an ATO officer had led other taxpayers to understand that the investment he had made in the scheme could be made. However, the AAT affirmed the Commissioner’s decision. It held, among other things, that the returns had been lodged by the taxpayer’s tax agent with his authority and that he had failed to discharge the onus of showing that the scheme had not been entered into or carried out for the sole or dominant purpose of the individual obtaining a “scheme benefit”. This meant that in the circumstances, the Commissioner could, under the tax law, refuse the losses claimed and issue the amended assessments.
Property rental deduction claims mostly refused
An individual has been mostly unsuccessful before the AAT in challenging the Tax Commissioner’s decision to refuse a variety of deductions relating to rental properties. The individual, who worked full-time as an industrial chemist, owned rental properties with her husband and had done so for many years. In the 2003, 2004 and 2005 income years, they owned nine rental properties. The taxpayer declared a net rental loss for those years, arguing that she carried on a business of letting rental properties.
The AAT agreed that the taxpayer was carrying on a business of letting rental properties and allowed some claims, including part of her telephone, computer and other work-related expense claims. However, it refused most of the other disputed expenses, which included car expenses, travel expenses, repair and maintenance costs and the costs of investment courses and seminars. The AAT refused the claims, saying they either lacked the necessary connection with the individual’s income-producing activities, or there was insufficient evidence to support the claims.
Brothers in business together, but not a partnership
The Supreme Court of Western Australia has found that two brothers were not in a partnership. The two brothers had spent some 30 years in business together – their businesses included an accounting practice, property development, share dealings, corporate consulting and farming. However, the Court heard that their relationship deteriorated and culminated in a dispute as to whether they were in a partnership in those years – one brother (referred to by the Court as John, who was an accountant and tax agent) said no, while the other brother (referred to by the Court as Tony, who was not an accountant) said yes.
The Court said thousands of documents were filed, but none of them were a partnership agreement between the two brothers. It said the various deeds of settlement establishing trusts presented in evidence provided proof of the brothers’ intentions to trade exclusively through corporate entities and trusts and not to trade as partners. At the time of writing, it is understood that one of the brothers (Tony) is seeking an appeal against the decision.
Daughter found to be “puppet director” of company trustee
A married couple has been successful before the AAT in a matter concerning access to the capital gains tax concessions for small businesses. The key issue in dispute concerned a trust (in respect of which the couple were beneficiaries) and the trust’s entitlement to the concessions in connection with a capital gain made on the sale of assets by the trust in the 2008 income year. Specifically, the main issue was whether the trust was controlled, either alone or with others, by the couple’s daughter.
The Commissioner argued that the daughter was a controller of the trust and that, therefore, the trust was connected with other entities controlled by the daughter, with the result that the trust breached the eligibility requirements for any of the capital gains tax concessions sought by the couple. However, the AAT found that the husband alone was the person who controlled the trust for the purposes of the small business concessions. Therefore, entities connected with the daughter, who was found to be a mere “puppet director” of the company trustee, did not have to be taken into account in determining the trust’s entitlement to the concessions claimed by the couple.
In finding that the husband alone controlled the trust, the AAT noted, among other things, that the trust was not accustomed to acting in accordance with the daughter’s wishes independently of her father’s wishes in circumstances where her wishes and directions were actually her father’s.
TIP: The tax law provides four concessions to reduce, eliminate and/or provide a roll-over for a capital gain made on an eligible asset that has been used in a small business. These concessions include the “15-year exemption”, the “50% reduction”, the “retirement exemption” and the “roll-over” concession.
The availability of the concessions is subject to satisfying a range of conditions, and these rules can be tricky to apply in practice – improperly claiming the concessions can have devastating consequences. Please contact our office for further information.