Author Archive
Property Newsletter July 2012
July 18, 2012 | 
Author •The Housing Shortage is a Local Story
•What is Market Value?
•Preparing for the Unexpected Purchase
•Suburb Snapshot – Morley
•The Implications of Diabetes
•Getting the Most out of Your Investment Property
•Time is Money
•The Reality of the Average Australian Investor
The Housing Shortage is a Local Story
The Housing Shortage is a Local Story and WA is the One telling it. According to figures from the Housing Industry Association (HIA), half of the 30 local government areas with the most chronic undersupply of housing are in Western Australia. Whether or not there is a shortage in Australia is hotly contested, but the figures make for interesting reading.
The breakdown of the rest is Queensland (7), Northern Territory (3), Victoria (3) and one each in NSW and South Australia. Of the 15 WA areas mentioned, 9 are in Perth and 6 are regional areas including the South West town of Manjimup, which tops the list on a per head basis. The area with the biggest shortage in absolute terms is Joondalup, about 16 kilometres north of Perth. Joondalup has a shortage of 3,955 houses or a shortage intensity of 2.38 houses for every 100 people.
The other areas in the Perth metropolitan area with under supply are Subiaco, South Perth, Claremont, Melville, Fremantle, Cambridge and Vincent. HIA senior economist Andrew Harvey says the mining boom and strong population growth are largely to blame for WA’s strong representation on the list. “The population growth for mining related and engineering construction related to mining is just massive so it’s no surprise at all,” he said.
What is Market Value?
Being able to determine a property’s market value is a useful skill when it comes to investing in property. Ray explains the concept of “market value,” and how to spot an investment bargain. Astute investors always keep a careful eye on property values in the areas in which they are interested in. This way, they can avoid paying too much for a property and can always be in a position to distinguish a bargain.
So what is market value? In general terms, the market value of a good or service is the price at which a willing, but not anxious, buyer will pay to a willing, but not anxious, seller for that good or service. For products which are plentiful, transacted often, and are largely the same as each other, determining market value is relatively easy. But property is typically not like this. Each property tends to have features that make it unique in the market – its location, size, age, etc. Even two properties side by side on the same street will be valued differently if they differ in size or age. To make things even trickier, property is typically not transacted very frequently, making it hard to compare a property you are interested in to a similar one that has sold recently.
Fortunately there are a number of information sources available to make your estimates of market value as accurate as possible. It’s also a good idea to drive through the neighbourhoods you are interested in and check with real estate agents the prices that recently-sold properties fetched.
There are many situations in which a property can be purchased under the market price and if you are able to get a good estimate of market value you will be able to identify the bargain buys. It will also prevent you from over-paying for a good investment property.
Preparing for the Unexpected Purchase
Being unprepared for the unexpected purchase can prove costly in the long run. But there’s an easy way to avoid the heartache and stress.
There is a funny thing about property buyers. They often tackle the property search in a very rational way, with a commitment to view many properties until one eventually ticks all boxes. But when buying a property, particularly a home, emotions will always play a key role, which means there is always the chance of a spontaneous purchase.
Think about the buyer who notices a house – the dream home – while walking one day to the local shops and makes on offer that very evening. Or, what about the casual auction attendee who makes a winning bid after seeing the property for the first time just minutes before.
You never know when the right property will come along, so you need to be prepared from the very beginning, especially when it comes to finance. You need to have a clear understanding of your borrowing capacity, the type of products that suit your needs and, importantly, what sort of documentation you may need to obtain on short notice.
This is why I strongly recommend buyers seek out advice from their finance broker before even stepping foot into a home open, to help avoid any unwanted surprises in the event of a spontaneous purchase. A competent finance broker can quickly assess the buyer’s circumstances and make recommendations that best meet the buyer’s needs.
A finance application can be an involved process and there are intricacies that most people just aren’t aware of. Also, policies can change regularly, which can throw up unexpected hurdles. The biggest stumbling block tends to be the documents that a borrower needs to produce, such as tax returns and statements. It can take time for the borrower to gather all the paperwork that is required, a stressful situation when the property is already under offer and the finance deadline is looming.
Finding the right property can be an exciting moment but being unprepared and making uninformed decisions can end proving costly in the long run. Speaking with your finance broker early in the piece will help you avoid the potential heartache and stress and make sure you are prepared for an unexpected purchase.
Suburb Snapshot – Morley
Our bi-monthly Suburb Snapshot section shares our tips on the best suburbs to keep a watchful eye on for your next investment purchase. In this month’s issue, we’re going to profile the changing suburb of Morley.
Morley is a well located suburb approximately 7 kilometres northeast of Perth’s central business district and 7 km from Perth Airport. It sits within the City of Bayswater local government area and is surrounded by the suburbs of Bassendean, Bayswater, Bedford, Beechboro, Dianella, Eden Hill, and Kiara. Morley residents have a wide choice of local schools and access to 31 parks, which cover 6% of the total suburb area.
Morley was established in the late 1950s and over time has become a major shopping and commercial centre. In 1961, it was the home to Boans, Western Australia’s first single unit shopping centre and the largest of its time in Perth. Today Morley is home to Centro Galleria, Perth’s second-largest commercial shopping centre, which was constructed in 1994.
It doesn’t have a train station, but Morley is well serviced by a comprehensive bus network making it a significant regional hub for bus transport. Average travel time to the Perth CBD from the Morley bus station, by bus, is approximately 15 minutes.
The suburb provides excellent access to the major arterial roads of Morley Drive, Tonkin Highway and Guildford Road and is only 2 km from the Ashfield Industrial Precinct, which is marked for future expansion.
Households in Morley are primarily couples with children and the predominant dwelling type is houses, which generally sell from the low $300,000’s to the high $600,000’s. Property listings typically stay on the market for around 80 days, similar to the overall market average, and there are around 320 sales per year.
The future looks very bright for Morley. The Western Australian Planning Commission’s ‘Directions 2031 and Beyond Strategy’ identifies the Morley City Centre as a Strategic City Centre. This is because it is already an important employment node and strategically located to capitalise on existing and future economic and population growth.
Building on the principles of Directions 2031, Council endorsed the Morley City Centre Masterplan in October 2010 following widespread community consultation. The Masterplan provides a vision for an attractive and prosperous city centre, with increased business and employment opportunities, enhanced lifestyle options such as cafes and restaurants, and more housing choices. According to the Masterplan, developers will have significant redevelopment opportunities, with the potential for buildings up to 12-16 storeys in the centre.
Some of the major projects outlined in the Masterplan include creating a new central park on Russell Street, improving the look and accessibility of bus services, upgrading streetscapes and public spaces, and making streets more pedestrian friendly.
December 2011 saw the opening of Morley’s Coventry Square, Perth’s biggest markets complex and billed as a new tourism precinct offering 179 stores and restaurants in a 2ha indoor building. This development, which took 3 years to complete and cost $60 million, marks a significant turning point in the transformation of Morley with $3.5 million also spent on road upgrades around the markets.
As more aspects of the Masterplan begin to take shape, over time Morley should become a more desirable place to live and the demand for property in the area should grow. It is a suburb that should be on most investor’s radar.
Key statistics
| Growth rate (1 year average) | -2.1% |
| Growth rate (5 year average) | 1.4% |
| Growth rate (10 year average) | 10.8% |
| Population | 18,564 |
| Median age of residents | 38 |
| Median weekly household income | $980 |
| Percentage of rentals | 24% |
Source: REIWA.com.au, May 2012
Getting the Most Out of Your Investment Property
Is your rental property performing to its full potential? Clare Christiansen explains the simple steps you can take to ensure you are getting the maximum possible return from your property investment.
No matter what your situation, property investing is about generating wealth. Although the rewards are typically realised over the long-term, the question is what can you do now to put more cash in your pocket? The good news is there are many things you can control to help improve the cash flow on your properties.
Here are three simple ways to ensure your investment is performing at its best:
Increase the rent
It sounds rudimentary, but you’d be surprised how many landlords are reluctant to do so because they have a fantastic long-term tenant or empathise with the plight of their tenants. Although this is understandable, the fact of the matter is that owning an investment property is like owning a business; you’re in to make a profit. So if your property is not achieving market rent, this is the first area to focus on.
If your rent is already fair and reasonable for your property’s current state and the market, look at ways in which to make the property more attractive as even a fresh coat of paint can make all the difference. Also consider installing a dishwasher or air-conditioning, these mod-cons may allow you to charge an extra $10-$25 per week in rent. However, you want to be sure that the “payback period” of investing in these items is not too long.
Decrease the vacancy rate / increase the occupancy rate
With current demand, most investors probably have little concern with vacancy issues. If your property is sitting vacant in the current market then you need to reassess the rent you are asking. Sometimes lowering your rent to a more competitive rate, even though it puts less in your pocket per week, over the longer term, it pays off in less vacancy time where you are receiving no rent at all.
Maximise your deductions
One of the most critical aspects of improving your cash flow that is often overlooked is maximising deductible expenses. Deductions you can claim immediately include advertising for tenants, bank charges, body corporate fees, council rates, land tax, insurance, legal costs, repairs, and cleaning. There are also deductions you can claim over a longer period which include borrowing expenses, declining value of depreciating assets and capital works. It is well worth the small expense to obtain a Tax Depreciation Schedule which outlines the depreciation allowances that you are entitled to on your property and submit this with your tax return.
Time is Money
Many property developers are so eager to jump into a project that they forget to take the time and look at the big picture. This is especially true when it comes to making important decisions in regards to project management, consultants, finance, and builders or architects.
When making these types of decisions, which could affect the timeframe or quality of the development, it’s important to remember that old cliché – that time is money. Yes, you’ve probably heard this before but that doesn’t mean it’s not relevant. Many first-time developers seem to forget that for every month (or day for that matter) that you are delayed; you’re paying interest on your loans used to fund the development. For example, if you had $1 million in outstanding loans, each month your project is delayed could cost you more than $5,000 every month! Every wrong decision could seriously dent your profit margin.
With this in mind, as soon as you have a signed contract you should get your finance application in with your broker as early as possible. If you have a short settlement or your offer is subject to finance, you will not be able to wait until you’ve completed your due diligence so you must act quickly. Assuming everything has been done correctly, you will probably get finance approval for the land purchase and perhaps some level of indicative approval on the construction.
With finance out of the way, you need to consider whether to use a project manager. A project manager’s role is to take responsibility and control of the development from start to finish. You have to decide whether you have the time available and skills required to manage the project yourself. In most cases, I would recommend you hire a professional. I have seen many clients attempt to do it themselves only to find it’s not as simple as they think and it ends up costing them more at the end of the day because of their inexperience.
Assuming you are managing it yourself, start by approaching the consultants you’ll need. If it is a land subdivision you will need surveyors. If it’s construction, you’ll still need surveyors but possibly at a later stage. And if constructing units or townhouses, you’ll need to decide whether to engage a builder directly or an architect or building designer for the project.
In Inner city “trendy” locations buyers will typically appreciate the style and flair a quality building designer or architect can bring, and they will be willing to pay a price premium. If you are going direct to a builder, comparing quotes can be difficult so ensure you develop your own understanding of costs. And don’t focus exclusively on cost. Time to complete the construction and work quality is very important criteria to consider when selecting a builder (remember time is money).
Depending upon the size of the project, it can take anywhere from 6 months to 3 years. It requires a great deal of determination, can be stressful, and to really be successful you often need to undertake many developments of which not everyone you’ll win. So if your development doesn’t go to plan, learn from your mistakes so that history doesn’t repeat itself.
The Reality of the Average Australian Investor
Who is the average landlord in Australia and how wealthy are they? Thanks to statistics from the Australian Taxation Office (ATO), we now have a much clearer picture.
Landlords are sometimes portrayed in the media as wealthy individuals who would do anything to squeeze an extra dollar out of their tenants. But while this may be true for a few, the reality is that the average landlord in Australia doesn’t match this description at all.
So, who is the average landlord in Australia and what do we know about him or her? Well, thanks to statistics for the 2009-10 financial year released by the Australian Taxation Office (ATO), we now have a much clearer picture.
The first thing to note is just how many landlords there actually are in Australia – more than 1.7 million of them. That means 1 in 7 Australians is a property investor, which goes some way into explaining why politicians might be wary of upsetting this rather large voter pool.
The ATO statistics show that 63% of investors are negatively geared, which means that their holding costs (e.g. interest payments, rates, and other costs) are greater than their rental income. Clearly, most Australia landlords are making a loss week to week.
As a group, these negatively geared investors made a total loss of $4.810 billion. But what is most revealing is that nearly 75% of these people earned less than $80,000 per annum. I would hazard a guess that half of the tenants renting from these landlords earned more than that!
It might be surprising that the majority of property investors in Australia are in the low-to-middle income brackets, but their age is perhaps less of a surprise. According to the 2009-10 Household Wealth and Wealth Distribution statistics from the ABS, nearly three-quarters of investment properties were held by individuals aged 45 and over. Baby Boomers held just over 55 per cent of these properties.
Retirement planning seems to be a driving factor for the majority of property investors. However, many of them are leaving it too late to start investing. The earlier you can get started the more time you have to build your equity base and the fewer risks you have to take.
Research conducted by property analyst Michael Matusik a few years back showed that three out of five investors borrow money to invest and more than 80% of investors buy for long-term capital gain. Mr Matusik also observed that most investors expect that property values will double every ten years.
Whilst historical data might suggest that this expectation isn’t unrealistic, the reality is that different properties will always perform at different rates. If the right properties aren’t purchased, investors could easily see their portfolio stagnate or even decline over a ten year period. This is why expert assistance is needed when it comes to selecting an investment property.
According to Mr Matusik’s findings, about 25% of the investors decided to sell within 12 months of purchasing the property and 50% sold within five years. The reasons for selling were varied. About one third of investors sold because they needed the money, a quarter due to disappointing capital growth, 20% because of low rental returns, and one in six because they believed owning an investment property was simply too much hassle.
Given that most investors understand that property is a long term investment, and buy with the intention of realising long term capital gains, 75% will sell within the first five years. Ironically, it is generally after 5 years that property investments begin to truly realise their capital growth potential.
What’s clear to me is that to create serious wealth, you can’t afford to be an average property investor. You need the right information, advice and opportunities to give you an edge and ensure your properties outperform the rest. Only then will you reach your goals in a reasonable timeframe.
Posted in 
Tax Newsletter July 2012
Private health insurance rebate changes looming
Income testing of the 30% private health insurance rebate starts on 1 July 2012. Essentially, singles earning over $84,000 per annum and families earning over $168,000 per annum will receive a reduced rebate that is less than the current 30% rebate.
The ATO says that it will calculate a taxpayer’s private health insurance rebate entitlement after they have lodged their income tax return for the 2012–2013 year. If a taxpayer has claimed too much of the rebate, the ATO says it will “recover the amount” as a tax liability by adding the amount to the tax bill. However, if the full entitlement was not claimed, the ATO says it will credit the amount to the taxpayer as a refundable tax offset.
TIP: You may want to carefully consider your personal circumstances in response to the changes. Please contact our office if you have any questions.
CGT small business concessions denied
A recent case before the Administrative Appeals Tribunal (AAT) has demonstrated the need for great care when structuring arrangements to ensure a taxpayer’s eligibility for the small business capital gains tax (CGT) concessions.
The Tribunal held that the taxpayer had not passed the “maximum net asset value” test for the purposes of the CGT small business concessions in respect of a capital gain made on selling shares to his family trust. The taxpayer was a director and shareholder of a series of interlocking companies. The issue turned on whether a bank loan to the family trust was a liability that could be taken into account in applying the “maximum net asset value” test. However, the Tribunal held the loan could not be taken into account for various reasons.
TIP: One of the conditions for accessing the CGT small business concessions is that the taxpayer (other than those who qualify as small business entities) must satisfy the “maximum net asset value” test. To pass this test, the net value of all the CGT assets of taxpayer (including affiliates and connected entities) must not exceed $6 million (previously $5 million).
The rules are complex. The AAT decision highlights the importance of careful planning when structuring transactions. Please contact our office if you have any questions.
Director penalty regime – take two!
The Government has reintroduced legislation into Parliament to extend the director penalty regime. This will, among other things, make directors personally liable for their company’s unpaid superannuation guarantee amounts.
The changes also aim to ensure that directors cannot discharge their director penalties by placing their company into administration or liquidation while PAYG withholding or superannuation guarantee remains unpaid and unreported for three months after the due date.
The changes also propose a new “PAYG withholding non-compliance tax” that arises when a company has failed to pay amounts withheld to the Commissioner of Taxation. This tax will be levied on directors or associates of directors, provided certain criteria are met.
TIP: In 2011 the Government withdrew its original legislation from Parliament following calls for more consultation after a Parliamentary committee noted that innocent directors could be caught by the proposed rules.
Directors and those considering becoming a director (or those who might be considered an associate of a director) should take note of the changes. Please contact our office if you have any questions.
Minors and low income tax offset changes
The Government has introduced legislation to implement its 2011 Budget announcement to bring an end to the ability of minors (children under 18 years of age) to access the low income tax offset (LITO) to reduce tax payable on their “unearned income” such as dividends, interest, rent, royalties and other income from property.
The changes are designed to discourage income splitting between adults and children, including through the use of trusts. Once formally enacted, the changes will apply to assessments from the 2011–2012 income year onwards.
Under the new rules, a trustee who is assessed on the income of a minor will not have access to the LITO in circumstances where the income is considered to be unearned income of that minor.
Non-resident tax rate increases on the way
Legislation has been introduced into Parliament to amend the income tax rates for non-residents from 1 July 2012.
The changes, pending formal enactment, will essentially increase the non-resident tax rates from the 2012–2013 year onwards. Changes have also been made to the tax rates applicable to non-resident minors. Please contact our office for further details.
Commissioner’s new power to withhold refunds
Legislation is making its way through Parliament to give the Commissioner of Taxation a new power to withhold “high risk” refunds pending integrity checks of a taxpayer’s claim.
The changes are being introduced in response to court proceedings in which the Commissioner was ordered to pay a GST refund to a taxpayer, despite the fact that the outcome of an ATO audit was still pending. The proposed legislation is designed to address this by providing the Commissioner with a new legislative power to retain refunds in such circumstances.
It should be noted that the Commissioner’s power will apply to all refunds and claims arising under the tax law – not just GST. Some commentators have warned that the proposed measures are very broad and provide the Commissioner with the widest of discretions to withhold refunds.
Living-away-from-home concessions to be tightened
The Government has proposed a raft of changes concerning living-away-from-home allowances (LAFHAs) and benefits. Essentially, the Government is restricting access to the concessions. Employers and employees who may be affected need to take note.
Broadly, the following will apply:
- LAFHAs will no longer be available for international secondments to Australia;
- LAFHAs will only be available to Australian taxpayers who maintain a second home and only then for a time limit of 12 months per location; and
- allowances will be taxable to employees with deductions for actual expenditure, rather than being taxable as fringe benefits that are subject to exemptions.
In order to obtain a deduction, the proposed new regime will also create requirements for employees to provide written evidence of their expenditure in some circumstances.
The proposed changes are set to take effect on 1 July 2012. However, there will be grandfathering provisions to preserve tax concessions for up to two years for some arrangements that were in place prior to Budget night (8 May 2012).
TIP: The proposed changes are complex and will raise significant issues for affected employers and employees.
Following these developments and before the enactment of the legislation, it will be critical to identify how the changes may apply to your circumstances. If you have any questions, please contact our office.
Tax Newsletter – June 2012
ATO targets disclosure of foreign sources of income
Following recent compliance activities that have been conducted, the ATO says many Australian resident taxpayers may not be aware of their Australian taxation obligations in relation to their worldwide income. The ATO has reminded taxpayers to correctly report foreign sources of income when required. Examples of foreign sources of income can include:
- interest accrued in an offshore bank account;
- income derived from a foreign investment (eg dividend or rental income);
- income from an asset that has been inherited from an overseas source;
- a foreign pension or annuity; and
- foreign trust income.
The ATO has announced that for taxpayers who make full voluntary disclosure of their foreign source income, any applicable penalties may be reduced by 80%.
Investment loan interest payment arrangements
The ATO has released a Taxation Determination that provides the Commissioner’s views in respect of certain “investment loan interest payment arrangements”. According to the Commissioner, the general anti-avoidance provisions in the tax law can apply to deny a deduction for some, or all, of the interest expenses incurred in respect of these arrangements.
The type of arrangements discussed in the Determination broadly involve outstanding loans on a residential home, an investment property and a line of credit. The ATO says a key feature of these arrangements is the use of the line of credit to pay the interest on the investment loan. This results in all (or most) of the interest on the investment loan being, in effect, capitalised. That is, the payment of the investment loan interest is deferred.
According to the ATO, the deferral has the economic effect of allowing the taxpayer to repay the home loan at a faster rate than would otherwise be possible.
ATO reporting requirements for builders and contractors
The Government has introduced regulations that require certain businesses in the building and construction industry to report annually to the ATO details of payments made to contractors in the industry.
The new requirements essentially mean that purchasers must report certain transactions for which they have been issued an invoice. The reporting requirements will commence on 1 July 2012.
Deduction for property expenses denied
In a recent decision, the Administrative Appeals Tribunal (AAT) denied a taxpayer’s claim for a deduction for various expenses incurred in buying, renovating and selling properties.
Among various issues, the AAT noted that the taxpayer was unable to produce documentary evidence in relation to stamp duty, legal expenses, renovations, wages and director fees, interest and legal expenses.
TIP: All documents supporting deductions must be kept for five years from the due date or actual date of lodgment of the return for the year to which the expense relates, whichever is the later.
If an objection, a review or appeal arising from an objection, or a request for an amendment of an assessment, is outstanding when the five-year period ends, records must be kept until the matter is resolved.
Pitfalls of “late” super payment
A taxpayer has been unsuccessful before the AAT in arguing that the Commissioner should exercise his discretion and reallocate excess super contributions to a previous financial year.
The taxpayer had used an electronic funds transfer on 30 June 2007 to transfer the funds, but they were not credited to the super fund’s account by the bank until 2 July 2007, thereby pushing the transfer into the next financial year. The excess concessional contributions for the 2008 financial year amounted to almost $54,000 and the Commissioner imposed excess contributions tax of around $17,000.
In rejecting the taxpayer’s arguments, the AAT noted the Commissioner’s practice to deem contributions as having been made “when the funds are credited to the superannuation provider’s account”.
The AAT also disagreed that there were “special circumstances” that would allow the Commissioner to exercise his discretion. It noted that the taxpayer was in the same situation as every other taxpayer and that it was incumbent upon the taxpayer to ensure that the electronic funds transfer was effective and completed at the right time.
TIP: Amounts contributed and counted in the “wrong” financial year, causing an investor to exceed the relevant superannuation contributions cap, could lead to an excess contributions tax bill. Investors should consider planning any extra contributions early and should not leave transfers to the “last minute”. Note that this year, 30 June 2012 falls on a Saturday.
TIP: The Commissioner may only exercise his discretion to reallocate or disregard excess contributions if “special circumstances” exist and the making of a determination is consistent with the object of the superannuation law. Please contact our office for more information.
Doctor found to be a share trader
In a recent decision, the AAT held that a medical doctor was engaged in a share trading business not only in relation to listed shares she acquired, but also in relation to units she acquired in a listed aged care property trust that she had purchased from her family trust (albeit, for more than their market value at the time). Moreover, it was these units that generated an unrealised loss of over $1 million and which, as a result, enabled to her to reduce her other taxable income for the year ended 30 June 2009 below nil.
In arriving at its decision that the taxpayer was carrying on a share trading business, the AAT took into account the following factors:
- the nature of the activities and whether they have the purpose of profit-making;
- the complexity and magnitude of the undertaking;
- an intention to engage in trade regularly, routinely or systematically;
- operating in a business-like manner and the degree of sophistication involved;
- whether any profit/loss is regarded as arising from a discernible pattern of trading; and
- the volume of the taxpayer’s operations and the amount of capital employed by her.
TIP: If the taxpayer is a share trader, losses may be deductible against other income. If the taxpayer is not carrying on a business of share trading, capital losses can only be applied to reduce capital gains.
FBT rates and thresholds for
2012–13
The ATO has announced important FBT rates and thresholds for the 2012–13 FBT year (which commenced on 1 April 2012).
Some of the key rates and thresholds include:
- The benchmark interest rate is 7.40% pa (down from 7.80% pa for the 2011–12 FBT year).
- The record-keeping exemption threshold is $7,642 (up from $7,391 for the 2011–12 FBT year).
Car expenses – rates per km for 2011–12
The Government has announced the “cents per kilometre” rates for calculating tax deductions for car expenses for the 2011–12 income year. Note that these are unchanged from 2010–11 and are as follows:
- Small car (non-rotary engine up to 1600cc, or rotary engine up to 800cc): 63c/km.
- Medium car (non-rotary engine 1601 to 2600cc, or rotary engine 801 to 1300cc): 74c/km.
- Large car (non-rotary engine 2601cc and above, or rotary engine 1301cc and above): 75c/km.
Property Newsletter – June 2012
5 Signs that a Suburb is Hot
Everyone wants to know which suburbs will be the next hotspots. But would you be able to recognise one if you saw it? How can you tell when a suburb is booming or, more importantly, ready to boom? Here are 5 signs to look out for.
Wise property investors know that regardless of how the overall capital city market is performing at any given time, there will always be some suburbs that will be performing better than others.
When deciding to make an investment purchase, it’s important to have an understanding of what is happening at a suburb level. It’s especially important to be able to identify which suburbs are booming or ready to boom – those with a high level of sales activity, strong competition amongst buyers, and a high likelihood of price increases.
Here are 5 signs that could indicate a suburb is red hot.
1. Days on market (DOM)
The average time it takes to sell a property in a suburb will tell you a lot about the state of the market in that suburb. When the figure is smaller than the overall city average it means that demand for property is relatively strong in that area and properties are selling quickly.
The lower the number, the hotter the market is. For instance, if the overall city has an average of, say, 80 days, then a suburb with a 30 day average is clearly in high demand from buyers. Bear in mind however that a short average days on market doesn’t necessarily make a suburb a good area to invest in as the market may have already peaked. Similarly, a suburb with long average days on market could still offer great options for long term investment.
Investors should note that average days on market figures can be misleading as some suburbs contain sub-markets in them that may be performing quite differently.
2. Vendor discounting
Knowing how much vendors are discounting their properties can be very revealing and indicate whether a suburb is booming. This discount refers to the difference between the asking price and the final sale price and it is typically provided as an average across all sales in a given time-frame.
If the discount is quite large, say above 8%, than it’s safe to assume that buyers hold the majority of power, given that sellers are willing to accept a lower price in order to secure a sale. This might sound like a positive situation for buyers but it could indicate that the market is falling.
A small discount, say less than 4%, indicates that there could be strong demand for properties and that it’s essentially a seller’s market, which could indicate that prices could be on the way up.
3. Percentage of stock on the market
Looking at the number of properties currently for sale in a suburb as a percentage of the total number can offer some important clues as to the state of the market. A low figure, say less than 2%, could indicate that property is tightly held in that suburb and that supply is generally low, which can easily lead to price increases if demand outweighs supply. A high figure of more than 3% could indicate that supply is plentiful in the suburb and price rises are unlikely in the immediate future.
4. Tightening rental market
Investigating the rental market of a particular suburb can offer some important insights into determining what’s happening in the market.
As renters are often more mobile than buyers they tend to respond more quickly to changes in the dynamics of the market. As an area becomes more desirable, renters will move into the area before buyers catch on and start pushing up prices.
A low rental vacancy rate means that there is high demand for rental properties relative to supply and is a sign the suburb may be hot or heating up. Bear in mind though that a low vacancy rate could mean that people would rather rent than buy in a suburb as is the case with some mining towns.
5. Expert opinion
The people working in the industry every day, such as buyers agents and sales agents, can provide great information about what’s happening in specific suburbs and identifying hotspots. So, it’s worthwhile listening to what they have to say.
These industry professionals often have access to more up-to-date information than what is published in the media and will often have first hand evidence that a market is hot before others find out.
When talking to experts however, it’s important to consider any potential bias with the opinions you receive. For instance, it is in a sales agent’s best interest to tell buyers that the market is hot and prices look set to rise.
Conclusion
While it’s important to be able to evaluate the current state of a market within a particular suburb, you should remember that investing for capital growth is about identifying future prospects. If a suburb is already red hot it may be too late to invest. On the other hand, a hot market may indicate that a suburb has fundamental advantages and is ripe for consistent price growth.
Before investing in any suburb you need to understand what that suburb has to offer compared to others, and what’s likely to change in the market to make it more desirable in the future. It’s also important to know exactly where within a particular suburb you should invest as this can make an enormous difference to your capital growth.
How to Calculate Your Break-Even Point
Some people, can be hesitant to invest in property as they often perceive the risk to be high. Whilst every investment carries an element of risk, investors can calculate the property’s break-even point of capital growth to assess the risk of a potential property investment before making the purchase. This is the point at which the capital gains equal the cash shortfall of holding the property (assuming that the property is negatively geared).
Let’s look at a simple example. Assume you purchase a $400,000 property (worth $400,000). When you subtract all the expenses (including interest on the loan, management fees etc) from the rent and take into account depreciation and tax benefits, this property has a negative cash flow of $10,000 pa, which is fairly typical. So, in other words it costs you $10,000 out of your pocket to hold this property. In this example, what is the break-even point? It’s easy to calculate. By simply dividing 10,000 (the cash shortfall) by 400,000 (the value of the property) and multiplying the figure by 100 (to make it a percentage) we obtain an answer of 2.5%. Therefore, if the property grows 2.5% in that year, your investment has broken even.
Obviously you would want more than 2.5% growth to justify the risk, especially when long term growth rates are generally much higher than that. But it shows nonetheless how little capital growth you actually need on an investment to break even.
For the sake of this example let’s assume that the property does grow by only 2.5% in the first year you own the property. What happens to the break-even point in the second year when you take into account that rent on this property has now increased. Let’s say that your out of pocket expenses are now $8000 pa rather than $10,000. With a quick calculation you can work out that your break even point is now only 1.95%. Anything above that figure and you’re ahead.
Here’s an interesting question, what happens to the break even point when you buy a property below market value? It involves the same calculation but brings up a strange result. Let’s go back to the earlier example where you bought the $400,000 property but let’s say the property is actually worth $450,000 when you buy it. All of your costs are the same and so is the rent, which means your out-of-pocket costs are still $10,000 pa. So what’s the break-even point? You might be thinking to yourself that you’re already $50,000 ahead so isn’t the break even point negative? You would be right. It is now -8.9%. This means that even if through some shock and highly unlikely occurrence, the property value falls by 8.9% you would have still broken even. Clearly, if you manage to buy a property below market value you give yourself a great head-start.
While I would always recommend hunting for the best capital growth opportunities, it’s still important to consider your out of pocket expenses so that you can work out your break even rate of capital growth. If you’re unsure how to work out your out-of-pocket expenses, your Momentum Wealth consultant will be able to assist you. It’s important to remember that property is a medium to long term investment. Focus on choosing the property that will generate the best returns over time and try not to focus on the short term fluctuations.
Home Buyers and Investors Causing a Flurry of Activity in Perth
First-home buyers and investors are driving a recovery in the Perth housing market, with latest figures from REIWA showing the volume of Perth property sales in the March quarter reached its highest level in two years.
First-home buyers are driving a recovery in the Perth housing market, with latest figures from REIWA showing the volume of Perth property sales in the March quarter reached its highest level in two years.
The data shows there has been a surge in the number of first home buyers, with 8 out of 10 buying established houses rather than building.
REIWA’s president David Airey says first home buyers are choosing to buy near established infrastructure such as shopping facilities and good transport links rather than in newer areas, which is good news for the overall market.
“The strong activity from first- homebuyers has been a tonic to the market and we can see from current figures that as a result of this activity, trade-up purchases also improved during the March quarter for many properties above the current median of $465,000,” he said.
REIWA has also seen a rush of investors, attracted by recent rental growth. Preliminary data for the March quarter show that rents have increased by around 10% since the same time last year. The overall median rent for Perth is now $420 per week.
The influx of investors is a trend that should grow as the end of the financial year approaches.
Insurance – Can You Afford Not To?
I remember reading an article which had some worrying facts and figures regarding Life Insurance. One of these was a report from the Australian Bureau of Statistics which revealed that, on average, 12 parents of dependent children die each day in Australia. And of these, only 4% will have sufficient life insurance to assist their families. This means that, each year in Australia, roughly 4,200 parents leave their families exposed to financial hardship or even ruin.
One of the reasons behind the low uptake of life insurance protection in Australia is thought to be the confidence that employees place in the life insurance component of their superannuation fund. However, the same article points out that estimates show that the average worker would not have much more than $70,000 life insurance cover via their superannuation fund – a figure which represents only about 20% of estimated average needs.
The article also indicates that another apparent reason for the low uptake in term life insurance is the general perception that it’s just too hard to obtain protection. And even if it’s not too hard, it’s just too much work, not just to apply, but to try to understand the subtle differences between the various life insurance products.
The good news is that an increasing number of Life Insurance Companies are developing simpler products which are not just easier to understand, but which also require less ‘hoops’ to be jumped by the applicant.
These life insurance products are also available through Momentum Wealth Risk Services, so now there’s no excuse: will you fall into the 4% that have sufficient life insurance cover, or will you be one of the remaining 96% that leaves their dependents to cope with the situation?
Justin McManus is a Corporate Authorised Representative of Marsh Pty Ltd Australian Financial Services Licensee No. 238983. This information has been prepared without taking account of your objectives, financial situation or needs. Before acting on this information you should consider its appropriateness, having regard to your objectives, financial situation and needs.
Cross-Collateralisation
Cross-collateralisation can greatly jeopardise investors’ property plans. But what exactly does it mean and how can it affect your investing potential?
Lenders generally want to get their hands on everything you have. You will find out that they will want security not only on the property you are purchasing, but also on your own home, your car, your first born child and your dog. Well, they won’t really ask for your first born child and dog, but they might take them if you offered.
Cross-collateralisation is where more than one property is used as security for a loan. Cross-collateralisation should be avoided as much as possible as it will limit your ability to borrow further funds if another financial institution has some type of security over the property you are trying to borrow against. Unfortunately most novice investors do not understand the restrictions cross-collateralisation puts on your wealth creation strategy.
For example, let’s assume you own your own home worth $600,000 and you have a $200,000 mortgage. You have no free cash available. You decide to purchase an investment property for $400,000. You would go to your current lender and say, “please lend me the entire $400,000”. Given the amount of equity you have in your home, they should loan you the entire amount, and they will take first mortgage security against both properties. You have purchased an investment property. You now have both your properties tied up to the one financial institution. You also have $1,000,000 worth of property and $600,000 worth of debt. You have at least another $200,000 of equity in those properties you could obtain for further use (based on an 80% loan to value ratio LVR).
If you were to ask for a loan for the additional $200,000, who do you think will lend you the money? Probably you’re current lender, but perhaps not many other financial institutions. Financial institutions hate second mortgages. They aren’t in control and don’t get to keep the property title as security. This is held by the first mortgage holder. Therefore in this scenario your best chance to get another loan is with your current lender. The trouble is that they now have already lent you $600,000. If they say “no more money” you have to accept that or refinance that financial institution out of all the property you hold with them and start the search for finance from scratch.
Successful investors know that it is wise to spread your borrowings around amongst different lenders. In this example we just reviewed there would have been a better way to get all the finance you needed. Firstly you should go to your current lender (or find another) and say “Mr Lender I have a property worth $600,000, my mortgage is $200,000, I want a home equity loan with redraw for another $280,000”. If you have good credit there is no reason why you should not get this money. Suddenly you have a $280,000 facility available. You purchase the $400,000 property. You come up with a $80,000 deposit from your redraw account and go to another financial institution. You say “Mr Lender, I have purchased a property for $400,000. I want a loan for $320,000. Please give it to me now”. Assuming your credit is fine there should be no reason why you wouldn’t get this loan. You now have $1,000,000 worth of property. You have two lenders who both only control one of your properties. You also still have $200,000 left in your redraw account with which you can purchase more properties or other investments. You could buy another $800,000 worth of properties with that $200,000 redraw account, or you could invest it into the share market or any other investment you decide.
Having different mortgages and different lenders on each individual property also gives you many more options should you choose to refinance. For example, if you have all your loans with one institution and they reject a new loan application, you are going to have to refinance all your properties with someone else. If it relates to one property only, you can just refinance the one property and keep all your other loans in place.
Each property you purchase should be assessed on a stand-alone basis only. You should only offer as security the property you are purchasing. If another property is cross collateralised it will limit your borrowing ability.
The Lowdown on Tenant Databases
Most landlords would have heard of a tenant database. But how much do they actually know about them? What information do they store? Who can access them? When can a tenant be listed?
A tenant database is typically run by a private company and contains details about the problems landlords and property managers have had with tenants. This information is made available to property managers, and licensed agents for a fee, who use the information to assess risk by checking whether an applicant has an unfavourable rental history.
A tenant can only be listed on a database under certain circumstances. Normally it is for a serious breach that has resulted in a lease being terminated, such as unpaid rent, intentional damage or a failure to make payments directed by a court. Generally, the amount of money owed to the landlord has to be greater than than the bond amount recouped.
There are strict rules with regard to submitting any person’s name to a tenant database, mostly around providing full disclosure.
It is also important that, before even signing a lease, applicants are informed that a breach of the lease agreement may result in a listing on a tenant database, normally done on the application form. Please note that the legislation surrounding tenancy databases varies from state to state. Therefore the terms of their use and how informationis recorded needs to be within the guidelines and legislation of that state.
As property managers, we use these databases as part of the process in screening prospective tenants. Whist a very useful source of information, tenancy databases contain limited data and therefore do not replace vigilant reference checking and other criteria in reviewing a tenant’s application.
Hot Property
In this month’s Hot Property section, we take a look at a purchase made recently in Victoria Park by one of our buyers’ agents, Yanti Sujatna. This one ticked all the boxes with strong growth potential and high rental yields.
Victoria Park is one of the few suburbs that meets Momentum Wealth’s strict investment criteria. With its proximity to the CBD, access to key transport nodes and burgeoning café/shopping strip, the suburb offers both strong growth potential and high rental demand.
After a thorough search and selection process, a double storey 3 bedroom 2 bathroom terrace-style townhouse was purchased. The property is positioned at the end of a small row of four and located very close to the desirable ‘Raphael Park’ precinct of Victoria Park.
A townhouse was selected as this style of housing is popular with the key demographic of Victoria Park, namely young professionals. Townhouses offer a low maintenance lifestyle but with most of the benefits of a free standing house.
The property features off street parking for two cars and a good sized outdoor entertaining area, making it very appealing to prospective tenants. An added benefit is that the property has a bathroom on each floor which allows someone to live upstairs and another to live downstairs quite independently. At the time of purchase, it was already rented to 3 young adults so rental income was already guaranteed.
The internal condition of the property was quite run down, which provided the clients with the opportunity to consider cosmetic renovations to add value and help maximise tax deductions. With the clients eager to leverage this opportunity, Momentum Wealth introduced a suitable company to help plan and manage the $15k worth of renovations.
The property was purchased for $490,000 even though there is strong evidence to suggest that the market value is around $520,000, giving the clients equity from day one. The financing was structured in such a way that the client could capitalise most of the renovation costs and therefore minimise the cash outlay.
At the time of purchase, the property was rented at $435/pk but Momentum Wealth’s property management team successfully increased the rent to $525/wk. This represents an impressive gross yield of 5.6% even before any renovations, which will likely increase the rent even further and also boost the capital value (without overcapitalising).
After purchasing an excellent property at below market value and with extraordinary rental yields and enormous potential for growth, the clients are justifiably excited with the outcome.
Finance Newsletter – April 2012
Good news for all borrowers – the banks have broken up with the Reserve Bank.
This means if you look around you are likely to find a better rate than you currently have.
Use this opportunity to speak with a mortgage broker to ensure your bank is looking after you and that you have the best loan for your circumstances.
Some banks are currently offering great discounts on home and investment loans. Fixed and variable.
If you think rates are going up, (the last independent move by the banks was up) then consider fixing. You can fix for 1-3 years at a lower rate then you currently have. So if rates do go up you will save even more.
A great fixed rate is available from ANZ. You can get a fixed rate of 6.29% for 3 years. Compare that with your bank’s current offering? There are many benefits of using a mortgage broker and our services are provided to the borrower free of charge.
Call Dan Goodridge on 0414 423 340 or e-mail dg@iinet.net.au at Mercia Finance for obligation free finance information.