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 4^th or 5^th 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”.

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.

5 ways to boost your rental yield

Rental growth in 2014 seems unlikely in some markets in Australia, but there are still ways for investors to increase the rental income from their existing properties.        

 After a period of impressive growth, the rental market in Perth came to a grinding halt in 2013 and in some areas rents even went backwards. Unfortunately for landlords, the prospect for rental growth in 2014 isn’t much better. There are, however, ways for investors to increase the rental income from their existing properties, even when the market is stagnant.        

1. Minor makeover

It’s no surprise that making improvements to your property will generally result in a higher rental return. But many investors don’t realise that even minor improvements can be worthwhile. Tenants are often happy to pay a bit more for things like new carpets or a fresh paint job, and these jobs can be done in between tenancies. Exactly what you should do varies from property to property, so ask your property manager for a list of recommended improvements.

2. Substantial renovation

For those investors with an appetite for a larger project and the right property, it may be worthwhile undertaking a more substantial renovation of the property, such as a new kitchen or bathroom, or even extending the floor space. Clearly, this sort of work can only be carried out while the property is vacant, but if planned properly it can dramatically increase both the rent and the value of the property.

3. Build a granny flat

With changes to the residential design codes in WA, you can now rent a granny flat (ancillary dwelling) to a third party. Adding a granny flat to your property can therefore boost your rental yield without having to formally subdivide your property. For around $100,000 – $140,000 you can construct a high-quality dwelling that will provide a secondary source of rental income. You can often secure more than a 12% return on the construction costs and increase your overall rental yield substantially. With interest rates as low as they are, you can see why building a granny flat could make such financial sense. 

4. Furnishing your property

Another strategy for boosting your rental yield is to furnish your property, but this is only worthwhile for specific properties and tenants. If your property tenancy targets are executives or university students, who require relatively short-term leases, it may be worthwhile fully furnishing your property and then asking for a higher rent. With the right circumstances, you can often obtain a strong yield on the cost of the furnishings.

5. Asking for more rent

Some investors are missing out on rent simply because their property is rented for less than fair market value. This situation often arises because the property manager is either reluctant to increase the rent (for fear of losing the tenant) or simply out of tune with the market conditions. By employing a different property manager who understands the needs of investors, you may receive an increase in rental income. However, it’s important to remain realistic with the rental asking price, especially when market conditions are soft.     

The best time to gamble on a fixed loan

When is the best time to bet on a fixed-rate loan and potentially save yourself thousands?

There is speculation that interest rates have bottomed out and that the next RBA movement will likely be to increase rates. Does that make it a good time to choose a fixed-rate loan?

Personal circumstances and preferences should always drive the decision to fix your loan, and you should discuss the pros and cons with your broker before doing anything.

But putting aside the relative differences between a fixed and variable loan, what’s the best time to ‘bet’ on a fixed-rate loan and potentially save money?

People naturally think about fixing when variables rates start to increase, but if you wait until then, you’ve almost certainly left it too late to get a good deal on a fixed-rate loan. If lenders expect variable rates to increase (due to an increase in the cash rate or other factors), they will inevitably price their fixed-rate loans accordingly, eroding any potential gain.

Clearly, the ideal time to lock in a rate is before variable rates start to increase, while fixed-rates are still relatively cheap.

While comparing current fixed and variable rates is a useful tool in deciding which way to go, you really need to compare fixed rates and consider what you think variable rates will be throughout the period of the fixed term. This is obviously a much more difficult proposition and highlights the gamble involved with choosing a fixed rate.

Theoretically, even if fixed rates are similar to, or higher than variable rates, it could still be beneficial choosing the fixed option if variable rates increase substantially during the term of the fixed-rate loan. However variable rates may have to increase substantially before you’ll save with a fixed-rate loan.

Choosing a fixed-rate loan is always a bit of a gamble. You should make sure that you intend to be in the loan for the period of time you are fixing (given that there can be substantial penalties for early exit). If you prefer the comfort of certainty in your loan repayments and rates are towards the lower end of a normal range, then fixing may be a good strategy for you.

Have Perth investors missed the boat?

With the Perth market producing solid value growth over 2013, many would-be investors are asking whether they have missed the boat.

While it’s true that growth may slow this year from last year’s growth rates in some parts of the market, the good news is that there are still fantastic opportunities available. Here are my tips for making the most of those opportunities.

Focus on the long-term picture

In the long term, you certainly haven’t missed the boat. Perth is a rapidly-growing city with strong fundamentals, including a solid economy and a rapidly-growing population.

The market hasn’t overshot those fundamentals by any stretch of the imagination. Demand for housing still remains strong, evidenced by the fact that rental yields are still good, even after last year’s growth. Perth is still in a recovery phase.

Always be picky 

You should always be picky when it comes to investing your hard-earned cash, but if you want to see growth over the short and medium-term, you need to be particularly astute with your investment decisions. Specifically, you need to understand what really drives values in the market and look for more localised growth drivers rather than relying on the whole market to shift.

Choose areas that are being re-assessed

Look to invest in areas that are being re-assessed by the market. What do I mean? Imagine there was a ladder of suburbs in Perth with ‘best suburb’ at the top and ‘worst suburb’ at the bottom. What you are looking for are the suburbs that are moving up the ladder, the ones that are changing both physically and in the minds of buyers and renters. There are many examples of such areas in Perth that will outperform the rest of the market.

Keep an eye on supply

The supply of property in some parts of Perth is expected to increase, which will put the handbrake on growth for a number of years. Consider how much future supply an area has before deciding to invest there.

Give yourself the option to manufacture growth

Even if you plan to buy and hold for the long-term, it makes sense to choose a property that has value-add potential. This way, when the time is right you can manufacture your own growth through renovation or development.

Accept the bumps in the road

Emotion is the enemy of investing. It’s important, therefore, to always remain level-headed, regardless of the events that may unfold. When economic conditions take a turn for the worst, creating headwinds for the property market, it’s important not to be spooked into selling what could otherwise be a fantastic long-term investment. Similarly, when the market is red hot you shouldn’t rush in and pay above the odds just to secure a property.

Will we see growth in the rental market this year?

After a lacklustre year, what can we expect for the Perth rental market in 2014?

As far as landlords are concerned, 2013 marked a year of solid capital growth but a year of flat to declining rental returns. So what can we expect for the Perth rental market in 2014?

Let’s look at the major factors at play. Although the population is still growing at an impressive pace, growth has started to slow, putting less pressure on the rental market. Demand is also being affected by the fact that many renters have recently become home owners, reducing the pool of potential tenants. Plus, the situation has been further compounded by an increase in investor activity, which has created more supply.

The vacancy rate now sits at above 3% and while this figure is representative of what many would consider a balanced market, it certainly highlights how things have changed. Go back to the end of 2012 and the vacancy rate was 1.9% and rents were growing at around 15%.

There are simply more properties now available for rent, and for this reason, opportunity for rental price growth will be limited until the situation changes.

Some areas, which are still undersupplied, will record growth in rents, but areas that are oversupplied will suffer, particularly those with a high concentration of investor-owned apartments.

With supply catching up to demand, landlords should think carefully about increasing the rent in the current market and avoid taking unnecessary risks.

A glimpse of the future spurred this young investor

With a level-head and the drive to build a successful financial future, Coby Dawson isn’t your average 24 year old.

While others in similar high-paying jobs indulge in new cars and other extravagances, Coby understands the importance of saving your money and spending wisely, values instilled in him by his father.

Even before entering the lucrative mining industry, Coby was always eager to get onto the property ladder. Scraping together whatever money he had, he purchased his first property, with a friend, in the suburb of Cloverdale.

Yet it wasn’t until a ‘crystal ball’ moment years later that Coby would step up his wealth creation journey.

Speaking with older colleagues, he realised that despite earning good money, many had very little to show for it in terms of assets. Some still rented and others even had to come out of retirement after running out of superannuation.

He wanted to take a different path and use his wages to build wealth, which would provide financial security in the long term and allow him to live his chosen lifestyle. Simply, he wanted his money to work for him.

He says that despite what many people think about the high wages you can earn as a fly-in-fly-out worker, “It’s not all it’s cracked up to be”. Working four weeks on and one week off, Coby has very little down-time to spend with friends and family. “It’s a tough job and I don’t want to have to do it forever”, said Coby.

Coby knew he had to do something, so he set out to speak to others who had already achieved what he wanted to achieve. Like many people, he wasn’t sure who to turn to. A real estate agent? A financial planner? An accountant?

After a few bad meetings with various professionals (including one financial planner who admitted to being broke), Coby was left feeling rather discouraged. However, all this changed when he met with Mark Casey, one of the buyer’s agents at Momentum Wealth. “Everything that Mark said was on the money,” explains Coby. Mark provided exactly what he was after, someone to walk him through the process of building wealth through property, while also sharing his knowledge and experience.

With Mark by his side, Coby purchased his first investment property in early 2013 in the popular northern suburb of Heathridge. The property was purchased below market value and the suburb has already seen 14% growth.

Coby describes the process as “one of the easiest things ever” and that he never once felt pressured.

Mark and the Momentum Wealth team gave him all the information he needed to make an informed decision, and handled everything from the finance through to property management.

What does the future hold for this focused twenty-something young man? Keen to continue investing and building his asset base, Coby wants to finish renovating his Cloverdale home (which he now fully owns after buying out his friend) and then use any available equity to purchase another property. He’ll only stop when he has a substantial portfolio that can support him in the future.

With a passion for health and fitness, Coby is now studying to become a personal trainer. This will allow him to spend more time in Perth and do what he loves to do, even if it means he’ll have to take a pay cut, but that’s why he is investing.

When asked whether he will work with Momentum Wealth again, his answer is an emphatic, “One hundred percent!”

For someone who never knew anything about equity or leveraging your money, Coby now sounds like a seasoned investor and is happy to pass on advice to friends and family.

A riverside suburb currently in hot demand

Named after a major horse-racing track located within the suburb’s boundaries, Ascot is bigger than most people realise.

Previously part of Belmont and Redcliffe, Ascot is a relatively new suburb established in 1991. It covers a narrow strip of land along the southern bank of the Swan River, around 10 km from the Perth Central Business District (CBD).

Named after the Ascot Racecourse, a major horse-racing track located within the suburb’s boundaries, Ascot is bigger than most people realise, stretching out some distance along the river.

Generally considered to be an up-market suburb, Ascot has many luxury homes, some with direct river access, as well as a popular marina development. Uniquely, it also has an area specifically catering to the equine industry, which allows horse stables to be kept.  Adding to the mix of property, west of Tonkin Highway, are several apartment complexes and small townhouses.

Although located close to the city, some parts of the suburb wouldn’t be out of place in the countryside with mature trees and beautiful greenery. Located right on the river is the popular Garvey Park Stables, a park providing for a range of recreational pursuits.

According to the latest figures from REIWA, the median house price in Ascot is $762,500 with the highest sale price being $1,850,000. The median unit price is $502,500, which reflects a growth of 12.8% over 2013.

Based on data from realestate.com.au, Ascot is considered to have a ‘high demand market’ given that there is an average of 97 people looking per property. The WA average is 14.

The City of Vincent has a new Town Planning Scheme

With the City of Vincent recently releasing a draft of town planning scheme changes, there are some opportunities for astute investors and developers.

The City of Vincent has prepared a new draft town planning scheme, which has been adopted at a recent council meeting. A town planning scheme dictates zoning and land uses and also guides development throughout the council. The Minister for Planning has granted consent to advertise the draft town planning scheme between February and May 2014 as the first process to initiating the new town planning scheme for comment.

There are many changes proposed by the new town planning scheme. These  include changes to the zoning of more than 400 properties, the addition or removal of various development standards within the scheme and the change of allowable land use for certain properties and zonings.

The new town planning scheme is proposing higher densities and a greater mix of land uses along major roads, close to train stations and high-frequency bus routes. This is consistent with the State Government’s “Directions 2031” planning policy. The new town planning scheme reduces the number of planning precinct areas from 15 to 5, which will result in a more consolidated approach to development controls. The removal of the R 80 zoning in the Cleaver precinct, coupled with the removal of the multiple-dwelling development restriction may allow for apartment-style housing to be constructed. This denser style of living is an example of a change that may positively affect property values.

A change of town planning scheme gives those with the knowledge the ability to capitalise on the lesser-known information affecting specific properties. It gives the savvy investor an opportunity to get in before the prices reflect the real development potential.

RBA update

Many economists were not surprised that the RBA decided to leave the cash rate unchanged at 2.5 per cent. Rates have now been steady since August last year and they are at a 60 year low.

RBA Governor, Glen Stevens said “In Australia, information becoming available over the summer suggests slightly firmer consumer demand and foreshadows a solid expansion in housing construction.”  He believes that the monetary policy is appropriately configured to foster sustainable growth in demand.

The Australian dollars jumped more than one full cent after the RBA made the announcement.

In Australia the only area of concern is inflation which is expected to be higher than what was forecasted three months ago, but it is still within the 2 to 3 percent target range.

This is good news for many property owners as it will keep mortgage repayments down and it may also allow them to use the equity from the increased value of their investment properties to purchase another property.

It seems likely that if the economy keeps tracking the same way for the next six months and inflation doesn’t increase considerably that the rates may stay consistent for the rest of year.

Decade of Growth Ahead for WA

The Western Australian economy has been given a massive vote of confidence in a recent report from Deloitte Access Economics.

The state is expected to remain the fastest growing economy in the country over the next decade and the positive long term outlook hasn’t been dampened by the Governments’ credit rating downgrade.

Astonishingly, there is a quarter of a trillion dollars being invested in the state, primarily on major gas projects that more than half of which are currently underway or committed.

As mining construction subsides, housing construction is expected to step up driven by strong population growth.

“In terms of population growth rates, the west has long been a national leader, but now the state is growing so rapidly it is seeing absolute population growth levels running close to those in the three eastern states,” Deloitte said.

“Construction sector employment – even beyond the heavy engineering sector – remains a strong growth area, suggesting there is capacity to expand the state’s housing stock to meet current demands.

“So despite the doom and gloom in some quarters, our analysis indicates the medium term outlook for Western Australia is broadly positive.”

The Changes That Could Make or Break the Fortunes of Property Developers

The market is throwing up some magnificent opportunities thanks to a number of important changes. But it’s not all good news. Some of these changes could significantly devalue existing development sites and impact on the fortunes of developers.

If you like the idea of substantially increasing your wealth in a relatively short space of time, property development could be a viable option. Depending on your goals and how well the process is managed, a development project can increase your equity, boost rental returns or make you a very healthy profit.

Changes to R-Codes

Earlier this year, the West Australian Planning Commission (WAPC) released a new edition of the Residential Design Codes, otherwise known as the R-Codes. The R-Codes essentially provide a framework for controlling development and population density in residential areas and are therefore of critical concern to property developers.

The new codes outline a series of changes that property developers should know about. One of these, which we have spoken about previously, is the fact that granny flats (ancillary dwellings) can now be occupied by a non-family member, opening the door to new income streams.

However, perhaps the most significant changes relate to the reduction in the average and minimum lot sizes that are permitted under some of the R-Codes. For instance, under the new R20 code the average lot size has been lowered from 500sqm to 450sqm, and under the R60 code it has been lowered from 180sqm to 150sqm.

Minimum lot sizes have also changed. Lots with a minimum site area of 350sqm are now permissible under the R20 code, 300sqm under the R25 code and 260sqm under the R30 code. Bear in mind that although minimum lot sizes have been lowered for many of the codes, lots must still comply with average size regulations. So unless the average lot size requirement has also changed (as with R20 and R60), the reduction in minimum size simply allows for greater flexibility in lot design rather than necessarily increasing densities.

Let’s take a look at a simplistic example to demonstrate how changes to the R-Codes could create opportunities for developers. Under the new R20 zoning, given that the average lot area has been lowered to 450sqm, it means the minimum lot area for subdivision is 900sqm (2 x 450sqm).  Previously, you would need at least 1000sqm to subdivide. Under the current rules, a 5 per cent variation may also be allowed, meaning it could be possible to subdivide a lot as small as 855sqm.

But it gets even better because of the reduction in the minimum lot area. Let’s say a landowner wanted to subdivide their 900sqm lot while keeping the existing house. This could have been quite difficult under the old rules unless the house was positioned just right on the lot to allow enough clear land for the second lot.

With the minimum lot area now decreased to 350sqm, the land could potentially be subdivided into a 350sqm lot and a 550sqm lot (average remains 450sqm), allowing for greater flexibility to keep the existing house and potentially make for a more profitable development.

The changes to the R-Codes provide a great opportunity for savvy investors. Those who understand the codes (or employ someone who does) may be able to find a property with a land area large enough to be subdivided but whose price doesn’t factor in the property’s true development potential. Given the right circumstances, an investor could make a nice profit instantly.

Changes to local housing strategies 

When a local council introduces a new local housing strategy, the changes have enormous potential to benefit property developers, especially those who are ahead of the knowledge curve. The overriding purpose of these strategies is to increase housing density through rezoning. More specifically, they generally aim to increase density around certain activity centres, transport nodes and corridors in order to provide an opportunity for increased diversity of housing.

There are a number of these new strategies at various stages of progress throughout Perth’s 32 local councils. Some are currently out for public comment or awaiting approval by WAPC. If and when these new strategies are eventually implemented, properties in the designated zones will have their zoning increased (to a higher R number), which means some will instantly gain subdivision potential or greater potential than they had.

Remember that having the right zoning doesn’t automatically ensure that a property has development potential as there are many requirements that need to be met to obtain development approval.

Keeping abreast of what is proposed under these draft policies and tracking their progress can produce enormous opportunities.  It does however require considerable time and effort, not to mention a clear understanding of planning regulations. Momentum Wealth employs a team of specialists to research and track these changes in order to identify opportunities for our clients.

Before you rush out and buy a property because it is located in an area marked for rezoning, keep in mind that it can take many years (even a decade) for the policies to be introduced. Also, there can often be numerous changes to the policies before they are finally implemented.

A major worry for developers 

You may recall that Directions 2031 and Beyond, the framework for managing the growth of the Perth metropolitan area, sensibly calls for 47 per cent of new housing to come from infill development.

Despite this fact, however, some of the councils in Perth, including the City of Stirling, are taking a backward step. They are trying to introduce amendments to local planning laws that effectively ban multiple dwellings being built in areas already zoned for development at less than R60. This move, if it gets approved, will remove or substantially limit the development potential of some lots.

What could happen if these changes go ahead? It spells disaster for some property owners. Here’s an example. If the City of Stirling gets what it wants, multi-residential sites within the City that currently allow up to 6 apartments or 3 units to be built could be downgraded to have only duplex potential. This equals a significant financial loss for people with those sites. The value of these sites will drop instantly if this down-coding takes place, which could severely impact the financial plans and retirement nest egg of owners.

Worse still, even before these proposed changes are implemented (while they are out for public comment), the council can take them into account when assessing new development applications. This is likely to result in the rejection of previously sound development applications.

I don’t agree with the council’s move and strongly encourage anyone who thinks they may be affected to speak to our Planning and Development team to get advice and see what can be done. One option, for instance, may be to lodge a development application right away, which would provide up to 2 years to develop even if the zoning changes take place.

Conclusion

Clearly, knowledge is a powerful weapon when it comes to property development, especially in regard to the changes that are taking place in our city. If you can identify opportunities (or threats) before others, you may be in a position to profit handsomely.

However, identifying the opportunities and turning them into reality are two very different things. Property development is a significant undertaking requiring both broad-based and specialist skills. It comes with significant challenges and often involves large sums of money, which is why it’s almost always best to get expert help along the way to ensure a successful outcome.

Property Acquisition: The Location Within the Location

Choosing the right suburb is critical, but to get the best returns, it’s just as important to invest in the right areas within a suburb.

When looking for an investment property in Perth that will achieve strong capital growth, it makes sense to spend considerable time researching the suburbs that will outperform the wider market. But this is only a part of the process.

Choosing the right suburb or macro-location is of course critical, but to get the best returns, it’s just as important to invest in the right areas within a suburb. This is the location within the location, or the micro-location.

Statistics show that not all properties in a suburb perform at the same rate when it comes to capital growth and the differences can be quite significant. Commonly, some pockets of a suburb or certain streets will always perform better than others. Even one side of the street may prove to be a better investment than the opposite side.

But why is this so? What are the features that cause a part of a suburb to be a strong or weak performer? Firstly, let’s look at the negative features that may cause a micro-location to underperform.

Some parts of a suburb will always be closer to a main road than others and the resulting noise and traffic problems can easily drag down values. Similarly, some parts may have closer proximity to undesirable landmarks, such as industrial complexes, petrol stations, cemeteries, or certain types of shops or venues. The existence of hi-rise apartments and concentrations of state housing can also adversely affect certain parts of a suburb.

You might argue that a property’s poor location (within a suburb) is factored into its value and doesn’t necessarily cause it to underperform in terms of capital growth. While there is some truth to this argument, in many cases the negative features of a micro-location consistently dampen buyer demand making growth far more difficult to achieve. And these negatives are often permanent issues that can even worsen over time, such as with noise and traffic levels.

While these negatives can adversely affect the demand for housing, they can also offer opportunities if you believe the negatives will diminish in the future. For instance, you might notice that a shabby part of the suburb is being improved through public and private investment. Or maybe an ugly commercial area or old school is being knocked down and transformed into an attractive residential estate. In some cases, the uglier parts of a suburb may actually end up outperforming the rest of the suburb because of this gentrification.

What are some of the features that can make one part of a suburb more appealing than others? Clearly, the parts that are closer to the city, coast or river will typically attract more attention from buyers. Many suburbs also have an ‘expensive’ side, which might border a more prestigious suburb. Views, attractive streets, low levels of traffic, and good access to amenities can also raise the desirability of a micro-location, as is being within the zoning for a sought-after school.

Remember, the better parts of a suburb won’t necessarily achieve higher rates of growth than the cheaper parts. It depends on whether the demand for properties in these parts will increase at a greater rate relative to the supply. Determining this requires careful analysis and can involve looking at demographic changes, local area planning and the potential for future supply.

Even once you’ve identified the areas within a suburb that have the best potential for capital growth, individual property differences can also play an important role. But this is for another discussion.

Finance: Why Every Borrower Needs to Know About “Comprehensive” Credit Reporting

Australia’s credit reporting system is in for a major shakeup and it has the potential to affect your ability to get a loan. The change involves the introduction of “comprehensive” credit reporting and it will be here in March 2014.

The new regulations will give lenders far more information about your credit history, allowing them to more closely scrutinise your credit worthiness and calculate the risk of you defaulting on a loan.

What sort of information will be available to lenders? They will be able to view the last 24 months of your credit repayment history on all open credit accounts in your name. This could include your mortgage payments and credit cards.

Lenders will also be able to see all of your past and current credit accounts and enquiries, meaning they will know how many credit accounts you have and when each account was opened and closed. This information will clearly be useful when determining your ability to take on additional debt.

How do the new regulations compare to the current arrangement? At the moment, lenders can only access a limited amount of information about your credit history, such as your recent credit applications, any major credit infringements or whether you wrote any cheques for $100 or more that have been dishonoured twice.

Lenders currently can’t find out whether your previous applications were approved or declined or whether you actually pay your loans on time, just that the applications were submitted.

An inevitable outcome of lenders having more information about credit applicants is that it may become harder for some people to obtain a loan. If you have black spots in your credit history, it’s going to be nearly impossible to hide them.

But are there any potential benefits to borrowers? Theoretically, yes. Firstly, if the new regulations allow lenders to better assess risk and minimise defaults, it could drive down the overall cost of credit. Secondly, lenders may start to offer discounts and incentives to borrowers with good credit histories.

All this extra information will give lenders a more comprehensive picture of people’s overall financial position, which could perhaps lead to the development of more tailored products.

Only time will tell how the new regulations will impact the marketplace. But clearly everyone needs to be more conscientious about keeping a clean credit history. It’s never been more important to make sure you pay your bills on time because a bit of carelessness could easily end up affecting your ability to get a loan in the future.

Also, it makes sense to regularly check your credit report, so you can resolve any issue before they become a serious problem.

Property Management: Is Property Management a Team Sport?

Property management companies differ in the way they structure their human resources and this can affect the experience of owners and tenants.

For most property investors, the decision of whether or not to appoint a property manager is a relatively easy one. If you want to protect your valuable property asset and don’t have the time and expertise to do it properly, then it makes sense to rely on a professional.

Property managers perform a wide variety of vital tasks, from finding and screening tenants to conducting inspections and organising maintenance. Plus, all of this must be done within strict legal guidelines, which is why the majority of investors appoint a property management company.

The decision of which property management company to appoint, however, is a more difficult one. While on the surface many companies appear quite similar, dig a little deeper and the differences soon become apparent.

One of the differences, which is rarely spoken about, relates to the amount of human resources available to the company. While some property management companies operate a team, with multiple property managers and assistants, others prefer the one-man-band model.

What are the advantages of a team? Firstly, a team can better accommodate temporary absences, such as when a property manager is unwell or attending court. There’s nothing more frustrating for tenants and owners than not being able to get in contact with someone who has the right information at hand.

Similarly, a team is better positioned to manage staff turnover, which unfortunately can be a frequent reality in the property management industry due to the high stress levels involved. If a company relies too heavily on one staff member, you can image the massive upheaval when that person leaves.

Another significant advantage of having your property managed by a team is the opportunity for greater specialisation of tasks. Different individuals can focus on different tasks, honing their skills and increasing efficiency. For instance, some teams include a dedicated trust accountant or new business consultant.

Although there are differences in the way that property management teams are structured, commonly each property manager is allocated a particular portfolio of properties. This means that property owners have a dedicated property manager, just as with a one-man-band operation. The difference is that property managers within a team will have access to far greater resources and better processes.

The “does it all” property manager is often extremely busy trying to perform a catalogue of different tasks. While these individuals can be highly skilled and excellent at their job, the limitations of time and space eventually get the better of them and slow turnaround times result.

Everyone likes a personal touch, but a one-man-band will inevitably struggle to keep “in touch” as much as many owners and tenants would like.

Property Development: Should you Sell or Hold Your Development?

For many property investors, the appeal of property development is the promise of creating enormous capital gain in a short space of time. Most people assume that to make money out of property development you need to sell the properties you develop. Is this a common misconception?

The decision of whether you should sell or hold the properties you develop depends on a number of things, including your financial position, the market conditions and the type of development you are undertaking. But primarily it comes down to your objective in doing the development in the first place. Some property developers aim to increase rental returns, while others seek to make a cash profit or simply increase and unleash their equity. Developing property can also be a way of obtaining new property at wholesale prices. It’s important that you are clear on your objective prior to starting a development as it can influence many aspects of the development.

People often sell properties they have developed because they think they have to sell to make money or “realise the profit”. However, by refinancing you can still access the equity you have created. Why might this be a better option than selling? It comes down to the risks and costs associated with developing to sell. Developing to sell requires expert market timing to get the property cycle right. Plus, if you sell properties that you have developed you will likely have to pay Sales Agents Fees and Marketing (3-4%), GST on the Profit Margin (2% if a 20% margin), and Income Tax (as much as 9% if a 20% profit margin).

It’s clear that if you develop and sell, transaction costs will eat away at your profit. For that reason, I believe developing to sell should not be the first choice in every instance. You could be far better off by hundreds of thousands of dollars by holding the properties. Many of the most successful property developers, such as Frank Lowy (developer worth $6 billion who has built a worldwide shopping centre empire) rarely sell.

So when should you develop and hold? The simple answer is when it is feasible. Depending on the type of development you do, you will generate either additional rental income over and above the interest costs OR you will generate additional equity. But preferably you will do both.

So when is the best time to develop & sell? Being a successful property trader requires focus, commitment and a lot of time. You need to do much more market analysis and it is inherently more risky as you are timing the market. To justify continual buying and selling, you need to generate high returns to warrant the transaction costs (agent fees, stamp duty, income taxes). You also have to be prepared to “landbank”, which is common amongst developers, who may hold land for 10 or more years.

Depending on the project there may be an opportunity to develop and hold some of the project (e.g. 3 units of 6) and sell the rest to pay down some debt. Professional developers can make a lot of money developing and selling, but it is a full time profession. Most developers still hold some part of their portfolios for long term investment.

Property Management: Is Being Anti-Pet Costing You Money?

The decision of whether or not to allow your tenants to keep pets in your property is a personal one. For most landlords, the decision is ‘no’. Surveys have shown that only 1 in 4 landlords allow pets, and WA landlords are among the least pet-friendly in the country.

So why are so many landlords anti-pet and could they be putting themselves at a financial disadvantage?

The general concern for anti-pet landlords is about the potential property damage that a pet can cause. Animals, particularly those of the four-legged variety, can certainly cause damage to carpets, floor boards, paint work, and not to mention the garden.

Animals can also affect the ‘aroma’ of a property. How many times have you walked into a home and knew instantly that a dog lived there. And there are noise issues as well. Barking dogs and fighting cats can often create issues between neighbours and put a landlord in a difficult position.

There are, however, plenty of positives to allowing pets in your investment property. For those landlords concerned about vacancies (and who isn’t?), being open to pets can dramatically increase your pool of potential tenants. This can mean shorter vacancies and better quality tenants. Around 60 percent of Australian households have pets and with so few pet-friendly rental properties, it’s easy to see why allowing pets could put you at a competitive advantage.

Some people argue that tenants who own pets are more likely to stay in a property for longer than those without pets. The reason is two-fold. Firstly, pets help tenants feel more ‘at home’ in a property. And secondly, tenants with pets are less likely to want to move for fear of disrupting the pet/family-member..

Clearly, some properties are just not suitable for pets including some strata properties or those with no suitable outdoor areas. But in many cases, it is simply the preference of the landlord not to allow pets. Landlords who are themselves pet owners seem to better understand the relationship people have with their pets and are more open to the issue.

Being too quick to close the door on pets could mean longer vacancies and missing out on quality long-term tenants. This is especially true for owners of property in pet friendly areas such as near dog beaches and parks. And it’s not just families who own pets but also many couples and singles, a growing segment in society.

When making the pet/no-pet decision, it’s perhaps human nature to think of the worst case scenario. There are ways to minimising the risks associated with pets by requiring a pet bond (this only covers fumigation costs), putting restrictions on the number or size of animals and by asking for ‘pet references’ that demonstrates previous good pet behaviour.

Property Acquisitions: How Buyers Can Tell the Difference Between a Salesperson and an Advisor

One of the things all property investors need to understand relates to who you should trust for advice and, specifically, the difference between a salesperson and an advisor.

For anyone considering investing in property, there can be a lot of information to take in, and it’s not just about property. One of the things all property investors need to understand relates to who you should trust for advice and, specifically, the difference between a salesperson and an advisor.

You would think that this is an easy distinction to make, but not so. Many salespeople wrongly present themselves as “advisors” and go to great lengths to convince you of this. They do this to build trust, knowing that you would probably rather buy from someone you trust. So how do you tell the difference? Here are some key things to look out for.

The ready-made solution

There are many skilled and honest salespeople out there, and many of them may genuinely want to help you. The problem lies in the fact that salespeople often have a solution already in mind before they even know what you might need.

Salespeople may appear as though they are representing you, the buyer, but in fact they are working for a seller or property developer. How many times have you heard a salesperson recommend a competitor’s product or steer you towards an option that doesn’t result in a sale? And you can’t really expect any different because it’s their job to sell.

Advisors will generally provide a consultation before recommending any course of action, carefully listening to your needs before considering a variety of options. A true advisor won’t be swayed one way or another but rather focus on what is best for you.

It’s their duty

Salespeople are trained to overcome objections, win trust and ultimately get the deal done. Advisors, on the other hand, are trained to asses a client’s circumstances and offer the best alternatives in the area of their expertise, whether it is property investment or taxation.

Advisors generally have a legal duty to do what is best for their clients. But it’s important you always know whether or not you are actually ‘the client’. Many buyers take the advice of selling agents, for instance, even though these agents must represent the interests of their sellers.

Follow the money trail

If you’re unsure whether someone is a salesperson or an advisor, just ask them how they get paid. Generally, people who are paid by the seller are sales people, whereas those who charge a fee for their service are more likely to be advisors.

Buyers’ agents typically get paid when you buy, but their fee is fully disclosed at the start in a very transparent manner, which can’t be said for many salespeople cloaking themselves as advisors.

Conclusion

Whenever seeking advice or guidance on buying property, it’s important to be acutely aware of the differences between an advisor and a salesperson. While you are free to hear anyone’s advice, you should always put the advice into the correct context and consider whether the advice has been tainted by any specific motivations. Your ‘advisor’ may end up just being a salesperson in disguise.

Suburb Snapshot: Inglewood

Inglewood is sometimes noted for being ‘where you buy when you can’t afford Mount Lawley’ but this is probably an unfair description as the suburb has a lot to offer beyond its proximity to its “fashionable” neighbour.

Inglewood is located 5km from the Perth CBD and part of the City of Stirling. It borders Mount Lawley to the south, Dianella and Yokine to the North/East, Bedford to the North/West and Maylands to the West.

Inglewood is a relatively small but affluent suburb that is popular amongst families and professionals. It is sometimes noted for being ‘where you buy when you can’t afford Mount Lawley’ but this is probably an unfair description as the suburb has a lot to offer beyond its proximity to its “fashionable” neighbour.

It is admired by its residents for its safety, strong community feel, cafe culture, wonderful mix of character and modern homes, and attractive tree-lined streets.

Dwellings in the area are predominantly of pre-war vintage, including many Federation and Californian Bungalow style homes sitting on green title lots. There are also a number of unit developments and flats, mainly constructed after 1960, as well as many modern homes scattered throughout the suburb.

Like Mount Lawley, Inglewood is designated a Heritage Precinct by the Council, ensuring streetscapes are protected and the demolition of older dwellings is all but impossible.

The main commercial area and cafe/restaurant precinct within Inglewood is concentrated on Beaufort Street, which contains retail services, fantastic eateries, a library and a recreation centre.

Young families in the area are well catered to with Inglewood having two very popular local primary schools. However, secondary school students typically attend either Mt Lawley Senior High School or John Forrest Senior High School in Morley.

There are plenty of parks and recreational facilities for residents in Inglewood including the popular MacAuley Park, Mount Lawley Tennis and Golf Clubs (both located in Inglewood) and the Terry Tyzack Leisure Centre.

With its location so near to the city, public transport options are in good supply. There are numerous bus services passing through the suburb, especially on Beaufort Street, and there is a train station in nearby Maylands.

According to REIWA, the median price in Inglewood currently sits at $792,500. In terms of price growth, the suburb has outperformed the Perth metropolitan area over the past 1 year and 5 years, but not over 10 years. The proportion of renters in the suburb is higher than the Perth average.

Recently, Inglewood received prominent attention when it was identified in Australian Property Investor magazine as one of only a few WA suburbs considered to be “immune” to drops in home prices. This is based on data that showed it ended each year in the past decade in positive property price territory.

There seems to be nothing significant on the horizon that could change the landscape of the Inglewood property market. The proposed MAX light rail system will have a stop adjacent to Terry Tyzack Aquatic Centre, which will benefit the northern end of suburb, but this project is certainly not set in concrete.

With its mix of ‘suburbia’ and inner-city living, which many people crave, Inglewood will always be a popular choice for owners and renters. As a destination for property investors, it should remain a reliable if not an extraordinary performer.

Source: REIWA.com.au, September 2013

Finance: Two Ways to Fund a Renovation

Planning a renovation? One of the difficult decisions you will face is how to pay for it. You have 2 main options when it comes to getting a loan for a renovation.

In Australia, renovating is one of the most popular reasons for refinancing, whether it is for lifestyle purposes or to add value to a property. But one of the many difficult decisions facing would-be renovators is how to pay for the renovation.

Some people may have savings or the ability to redraw funds from their home loan. Others may use a credit card or personal loan as a quick way of getting the money they need. But most renovators, especially those planning large renovations, will need to organise financing.

You have 2 main options when it comes to getting a loan for a renovation.

The first is to borrow against your equity, which either involves increasing or refinancing an existing loan or taking out a new loan on an existing property. This is probably the most common method because it’s relatively easy.

The amount you can borrow is determined by the amount of equity available and the lender’s servicing criteria. Typically, you can borrow up to 80 percent of the value of the property without paying Lender’s Mortgage Insurance (LMI), but every lender has different policies.

With an equity loan, interest only starts accumulating when equity is drawn down. This is why these loans require discipline because the money can essentially be used for anything.

The key thing to remember about this type of renovation financing is that the lender won’t take into account the post-renovation value of your property, which could limit the amount you can borrow.

If you don’t have enough equity to fund your renovation, you could consider another option: the construction loan.

This sort of loan is similar to an equity loan but in this case the lender will take into account the finished value of the property when determining how much to lend you. This means you could potentially borrow a larger amount, making the loan a good option for more substantial renovations.

Like an equity loan, interest on a construction loan is only charged when money is drawn. But the lender won’t give you all the money upfront because a construction loan is a riskier prospect for the lender. The money is generally released in stages as the renovation progresses, just as if you were building an entirely new home. This gives the lender more control and ensures the money is not used for other purposes.

Getting approval for a construction loan may require you to have council-approved building plans and a fixed-price building contract in place. Plus, the lender will not only organise a valuation pre-renovation but also assess the project at each stage before an instalment is paid. When the project is completed the loan will generally revert to a standard variable loan or you may be able to refinance to a loan of your choice.

Beware the Lure of the ‘Sexy’ Investments

In Greek mythology, there lived a beautiful but dangerous creature known as the Siren. This femme fatale would supposedly lure nearby sailors with an enchanting song, causing them to shipwreck and ultimately perish.

For property investors, there are modern day equivalents of the Siren that need to be resisted at all costs. I am talking about the types of property that look unbelievably good – sexy even – but that don’t particularly make good investments. For those without the right knowledge or cool head, the consequences can be disastrous.

Here are some of the common culprits…

Culprit #1: Brand new house and land packages

Let’s face it, we all love shiny new things, which is why it’s easy to see the appeal of investing in a new home and land package. Not only does this type of property look amazing in the brochures, but it is loved by tenants and can even be tailored to suit your specific needs.

The tax benefits of new property, with its depreciation, are well-documented, plus there should be no maintenance, at least for the first few years. Clearly, investing in a beautiful house and land package is an easy option.

Like so many things, however, what looks good isn’t necessarily good for you. And when it comes to house and land packages, there are a few reasons why they often let investors down.

Firstly, when you buy new property, you’re not just paying for the building and land. Factored into the price are also the developer’s profit margin and a proportion of the 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.

Secondly, the superficial appeal of these properties is often enough to distract investors from the fact that the location of the property is less than ideal. The majority of house and land packages are located on the outskirts of the city in areas with abundant potential supply.

The bottom line is that while investing in new property can seem appealing, it often proves unsatisfying over the long term due to poor capital growth.

Culprit #2: Off the plan apartments

Like a brand new house and land package, a stylish off the plan apartment can seem an attractive option. The innovative architecture, modern interiors and funky inner-city location can make any investor weak at the knees. Add into the mix potentially strong rental yields and great tax benefits and you have one pretty package.

Sadly, however, the reality rarely lives up to the fantasy. Low valuations and finishes that don’t meet expectations are common outcomes after settlement. Worse still, investors later realise that their property is one of hundreds of similar properties all competing for tenants and buyers, driving values down.

When it comes to off the plan apartments, you must not be distracted by the glossy brochures, incentives and promised rent returns. In the cold light of day, these investments just don’t deliver the capital growth on offer with other types of investments.

Culprit #3: Holiday homes

Who hasn’t been on holiday, fallen in love with a place and thought to themselves ‘I should buy an investment property here so I can enjoy it while also earning an income’.

Holidays have a wonderful way of distorting reality – making everything seem better – and this can lead a normally astute investor to make extraordinarily bad decisions.

There are certain types of holiday investments, such as short stay apartments, that are particularly risky. But even a regular type of property in a holiday location can seem a far better investment than it actually is.

Holiday destinations typically have a very transient population, which means that demand for property can fluctuate immensely. Property investors often have to put up with massive vacancy periods, putting a major dent in their wallet. Also, a holiday home investment can require many additional costs to furnish, maintain and manage the property, which investors fail to take into account.

Selling a holiday home investment can often be tricky and take far longer than an equivalent property in the city. Property values in holiday destinations are notoriously vulnerable to changes in the economy. It’s an asset that quickly gets offloaded when times are bad, which drags down prices. Holiday destinations were some of the hardest hit during the GFC and many have yet to recover.

Competition with your future self

Why are so many investors lured in by these seemingly attractive investment options? I think it comes down to the fact that when faced with certain decisions, especially involving your future, it can be hard to put the needs of your future self ahead of your present impulses.

Some investments look good and might even seem satisfying at first, but they are ultimately not good for your future self. And making the wrong investment decision can cost you.

Ugly is often the way to go

If you care about building wealth and retiring wealthier or sooner, you need to beware of the types of investments I have mentioned. This advice applies not only to investors but also to home buyers who want to build equity and upgrade their home down the track.

There is always a compromise with ‘sexy’ investments. You’re paying for all the ‘gloss’ and in most cases sacrificing important aspects such as location, which inevitabley leads to poor growth. They may offer short term benefits because they are ‘easy’ and immediately gratifying, but the lure quickly fades.

Sometimes the best property investment option is the ‘ugly’ one. Picture an old house needing renovation, sitting on a large block in an established suburb. It might not look that great to the eye, but it could offer an exceptional opportunity for the investor who can see its true beauty – potential for strong capital growth.

Unglamorous properties don’t attract a lot of attention, which means you can often secure them at a great price. Plus, they allow you to manufacture growth by making them a little sexier.

The bottom line is that before entering the market as an investor, you need to be absolutely clear on why you are investing. Is it to show-off to your friends and family? Is it to pay less tax? Or is it to build serious wealth that provides you with a financially secure future? Keeping your eye on the prize will help you stay on course for the long term, even if you encounter many distractions along the way.

Perth Offers Above Average Yields Despite Being Growth Leader

The big story for property investors in Perth is that despite very strong growth in values, the city’s rental yield remains above the average for all capital cities.

Perth currently has the strongest housing market of all the capital cities, according to RP Data’s Australian Housing Market Update for September.

House values are up 9.7 percent over the past year, while the growth in unit values was lower but still significant at 6.1 percent.

Accompanying the lift in values has been a monumental jump in the number of properties sold. In the 3 months to June 2013, there were 23.2 more sales than over the same period last year.

Rents in Perth have also increased, with house rents growing by 5.6 percent over the past year and unit rents growing by 6.5 percent.

However, with many renters taking advantage of cheap credit to buy their first home, the pressure on the rental market has now eased and the vacancy rate has increased.

Properties in Perth are selling much quicker than they were last year with the average time on the market falling from 64 days to just 34 days.

The big story for investors is that despite very strong growth in values, the rental yield remains above the average for all capital cities. The average rental yield for a house is 4.4 percent and 5.0 percent for a unit