Mercia | Taxation, Business & Finance Advisers

8 Tips for Picking a Winner in a Rising Market

The prospect of capital growth in the Perth property market certainly looks very good at the moment, which is why many investors are eagerly entering the market. But with the lure of potential gains, there is an added risk of complacency.

Investors need to be vigilant with their investment decisions, particularly when it comes to choosing where in Perth to invest, as some areas will inevitably perform better than others.

Pick the right areas and you could accelerate your path to financial freedom; make the wrong decisions however and you may find the market runs away from you. So, how do you pick the areas that will lead the way in a rising market? Here are 8 valuable tips:

#1 – Ask this powerful question
While property investing may at times seem complicated, asking yourself this one simple question will go a long way to helping you pick a winner. When evaluating an area, ask yourself what will cause demand for this area to increase relative to supply. If there is a clear answer, you are on your way to uncovering a potential hotspot.

#2 – Look for signs of gentrification
Look for areas with signs of positive change, such as people spending money on renovating and extending their homes, or the emergence of fashionable new shops. These can indicate that the demographics of an area are changing, which could signal imminent growth.

#3 – Avoid the population growth trap
While Perth’s strong population growth is one of the main drivers for the rising real estate market, don’t fall into the trap of thinking areas with high population growth automatically make good investments. In reality, most areas with high population growth are on the edges of the metropolitan area and have an abundance of free land, which will constrain capital appreciation.

#4 – Infrastructure equals growth
Infrastructure is always a major driver for price growth because it increases the attractiveness and amenities of particular areas. The benefits of infrastructure, however, are generally only recognised after the new infrastructure is in place, which means buying before this happens can generate excellent returns.

#5 – The location
Location should always be an important factor when choosing where to invest, and it’s wise to look for areas with more than one location advantage. Consider the area’s proximity to the city, major employment areas, the water, and key amenities. Is the area within a sought-after school zone? Is it adjacent to a prime suburb and likely to benefit from the ripple effect? Does the area have good transport options?

#6 – The land
It’s important to choose a property with a high proportion of value in the land, which is the part of the property that will appreciate. Properties with the majority of their value tied up in the building are destined to underperform as the building depreciates.

#7 – Follow the money
One way to locate an emerging hotspot is to follow Government spending. When Governments are spending money beautifying main streets and installing new infrastructure it can give an area that additional boost. Similarly, spending by the private sector on things like shopping centre extensions can also cause demand for an area to increase.

#8 – Zoning changes
Finding areas that are being rezoned can prove extremely profitable for investors. When areas are zoned for higher density it creates opportunities to develop property and subsequently increases the value of the land.

Conclusion
Buying an investment property is a big step and not one to be taken lightly. As the market heats up in 2013, it’s important that you avoid the trap of thinking that “any property will do”. By understanding the various factors that drive property values, and getting professional advice, you can make the most of the rising market and set yourself up for the future.

Rental Returns on the Increase
Low interest rates, strong demand by tenants and higher rents mean that rental yields are now more attractive to investors. The median rent for houses has risen by $10 to $470 per week in the 3 months to January, according to the latest rental data from the Real Estate Institute of Western Australia. Median rents for units, apartments, villas and townhouses however were unchanged at $420 per week, meaning Perth’s overall median rent remains stable at $450 per week. The data also shows that there was a 13 per cent climb in the number of new leases from the December quarter, though the vacancy rate remains stable at around 1.9 per cent.  REIWA President David Airey says the large number of people leaving the rental system to buy their first home might be a contributing factor. “It may also be due to the return of some investors who are adding stock to the rental supply,” Mr Airey said. Mr Airey said that low interest rates and the strong demand by tenants meant that rental yields were now more attractive to investors who had been absent from the market in recent years.

Working with a Buyers Agent – Part 1
Here’s a step by step look at what’s involved when you employ the services of a professional buyer’s agent for the purchase of an investment property.

Most people would be familiar with the fundamental role of a buyer’s agent – to help a buyer find, research and acquire a property – but few know the specific steps involved in the process.

In this series, you’ll get a step by step look at what’s involved when you employ the services of a professional buyer’s agent for the purchase of an investment property.

Once you have appointed a buyer’s agent to work on your behalf, there is an important first step which involves discussing and establishing your requirements. This must happen before any property research is undertaken.

For a buyer’s agent to find you the right property, he or she needs to fully understand a number of important things including your current financial position, preferences and plans for the future.

A good buyer’s agent will ask the right questions to help flesh out the main reasons for investing and what you are looking to achieve with the purchase. This is important as any purchase must fit into your long term plan.

Also, he or she will require information regarding your financial situation, other properties or major assets you currently own, how much you are willing to invest and what types of properties you are looking to purchase.

You may have a clear idea of what type of property you want, or preferred locations, however many investors leave this to the suggestions of the buyer’s agent.

The decision of which type of property to search for is influenced by a number of factors, including your budget, goals, risk tolerance and the degree of involvement you want with the property. For instance, some types of property have better prospects for growth but they may also have higher holding costs. Similarly, some properties may offer the potential to add value quickly through renovations and development, while others are more set and forget.

At this initial stage of information gathering, the buyer’s agent may bring in the expertise of a finance broker who will discuss your preferences for finance and offer advice on which structure will suit your plans moving forward.

The success of an investment purchase is not just in the research but also the planning, which is why this first stage is so critical. Only with this direction and foundation can you realistically expect to meet your investment goals within the time-frame you desire.

In the next article we will look at what happens during the property search.

Please Mum and Dad, Can I Borrow Some Equity
There is a loan feature that allows a buyer’s family member to guarantee a portion of the loan, reducing the deposit needed or even eliminating the need for a deposit entirely.

For first time home buyers and investors, one of the biggest obstacles to buying a property is saving for a deposit.

There is however a way for buyers to get into their first property without a deposit by using what is called a family equity loan. In fact, it’s not technically a type of loan but rather a feature that can be added to most regular home loans.

This feature allows the buyer’s family member to guarantee a portion of the loan using existing property as security, reducing the deposit needed or even eliminating the need for a deposit entirely. The guarantor can be a parent, parent-in-law, step-parent or in some case even a grandparent or sibling.

The guarantor can determine what portion of the loan he or she will secure, but it’s normally in the realm of 20 per cent. The guarantor doesn’t need to actually provide the buyer with any cash or make any repayments on the loan.

It’s easy to see how this loan feature can help someone buy a home or invest in residential property sooner, because the buyer can effectively borrow the entire purchase price and costs. Plus, with the added security being provided, the lender may not require Lenders Mortgage Insurance (LMI), which can be costly for a borrower.

Some borrowers have used this feature not just to make a purchase but also to maximise the amount they can borrow and purchase a more expensive property.

Despite the lender having the extra security, the borrower will still need to meet the lender’s borrowing criteria, which may include having stable employment, a clear credit history, and an ability to service the debt.

In rare cases where the borrower defaults on the loan and the newly purchased property gets repossessed, there is a risk to the guarantor. If the sale of the property doesn’t generate enough money to repay the loan, the lender could demand the guarantor pay the shortfall up to the amount that was guaranteed. The good news is that once the borrower has built up enough equity in the property, the guarantor can be removed from the loan.

Garden Maintenance can be a Thorny Issue
Garden maintenance can often lead to issues between a landlord and tenant. So, what exactly is a tenant’s responsibility when it comes to maintaining the garden, and what is the landlord’s responsibility?

Living in a property with a beautiful garden can be a treat, especially in the spring and summer months when the weather is great and we are entertaining outdoors.

The problem with gardens is that they require maintenance. And although some people are happy to spend weekends exercising their green thumbs, for most people garden maintenance is a chore, which is why gardens are so often neglected.

Inevitably, garden maintenance, or the lack thereof, can often lead to issues between a landlord and tenant. So, what exactly is a tenant’s responsibility when it comes to maintaining the garden, and what is the landlord’s responsibility?

Unless the tenancy agreement says otherwise, the tenant is generally responsible for mowing and edging lawns, watering, weeding, pruning, and fertilising. These responsibilities could easily be termed ‘general maintenance’. Ultimately, the tenant is responsible for ensuring the garden is maintained to a standard set at the beginning of the tenancy.

Generally, the landlord is responsible for things such as providing hoses and sprinklers, maintaining the reticulation system, cleaning gutters and tree lopping. However, in some tenancy agreements it is the tenant’s responsibility to replace broken sprinkler heads.

It’s easy to see how uncertainty and issues may arise. For instance, at what point does a tree or shrub require lopping instead of pruning? And although the landlord is generally responsible for keeping gutters clean, it is the tenant’s responsibility to advise the property manager of any potential blockages or water leaks. If an issue is fairly obvious and the tenant fails to report it, the tenant may be liable for any damage caused.

A good property manager will make sure all parties clearly understand their responsibilities, and with the help of a comprehensive Property Condition Report and regular inspections, ensure these responsibilities are met.

Protecting Yourself When Acquiring Your Development Opportunity
You’ve done your research and now you are ready to put an offer in for your development property. It sounds straight forward, but there are some potential traps that you need to avoid.

Although you may have conducted substantial research prior to placing your offer, it’s unlikely that you would have had the time or the opportunity to cover all your bases. With that in mind, it’s an absolute necessity to have a ‘due diligence’ clause in your contract of purchase. This gives you the ability to walk away if you are not satisfied for any reason with the outcome. Despite what some people may believe, a finance clause is not adequate!

You must also remember that sales agents work for the seller, and for that reason their contracts are skewed to suit the seller’s needs and not necessarily yours. A properly written due diligence clause is essential; a poorly written one could cost you tens or even hundreds of thousands of dollars. Using a buyer’s agent is a good way to manage this process as they should have the appropriate clauses to insert into the contract and can also protect your identity and motives for purchasing to give you leverage.

Where possible you should aim to negotiate a reasonable period for due diligence, enough for you to undertake all the extra checks you need to. And also, a longer settlement is also advisable.

Once your offer and all terms and conditions have been accepted, then it’s time for you to get started on your post-acquisition feasibility study. Start by refining your numbers (particularly in light of any new information you acquire), and begin conducting your due diligence. This is your opportunity to look at the property in more depth, find out if there are any nasty surprises, and walk away from the deal if you’re no longer comfortable.

Your due diligence can encompass a number of things. Start by talking more freely with sales agents about realistic sale prices and get the builders on site to ensure your costing estimates are valid. Consider undertaking a soil analysis to ascertain what sort of foundations might be required (amongst other things), investigate the services available and where they are located (such as sewerage lines), and check the title for any restrictive covenants or easements. Talk with surrounding property owners about the site and your plans – this will give you an indication if you’re in for a battle! And don’t forget to liaise with the local council about your plans and their requirements to make sure your proposed development has a strong chance of approval.

There is lots of work to be done once you decide you’re ready to place an offer, it’s definitely not the time to rest on your laurels. But know that if you go into it with your eyes open, you can rest assured that you’ve done all you can to protect yourself and make your development a success

5 Signs the Market is Looking Up

Since the GFC, the Perth property market has been somewhat sluggish with brief glimpses of what may lay ahead. But now there are very strong signs that the next 12 months will see solid growth in property values. So, why are so many people convinced that 2013 will be a good year for property prices?

For those with their ears close to the ground, it has been coming for quite a while – a gathering of economic forces and market trends that all point to a near certain future.

In fact, there are already signs of growth in some parts of our city and according to recent figures from RP Data-Rismark the Perth market grow strongly in the 3 months to December of last year. In some suburbs, prices are back to pre-GFC levels.

Some commentators believe property prices in Perth could increase between 5 and 7 percent over 2013, and we believe certain areas could achieve even stronger growth.

So, why are we convinced that 2013 will be a good year for property prices? Here are 5 reasons:

1. Population growth

Population growth in WA, and specifically Perth, has been happening at a phenomenal rate. It has been massive not just by Australian standards but also on a global scale. Currently, around 1500 people are entering the state each week.

The growth has been driven by an influx of new arrivals, mainly from overseas, as a consequence of the economic opportunities in the state. With many parts of the world struggling economically, people are coming over for high paying jobs and to build a better future for their family. And, of course, these people need somewhere to live.

2. Rental market

When the supply of new housing can’t keep up with the rate of population growth, there is increased pressure on the housing market. It first affects the rental market, as many new arrivals choose to rent when they first arrive, then the sales market.

The rental market in Perth has been extremely tight in recent years, which has put upward pressure on rents. In 2012, Perth recorded a 17.5% growth in median house rents and 14% growth in unit rents. We’re currently seeing situations where applicants are offering above asking prices in a bid to secure a rental property. This trend is expected to continue into 2013.

It is widely accepted that rental growth is a leading indicator for price growth. As rents increase, there is simply a greater incentive for renters to buy.

3. The Economy

What can you say about the WA economy that hasn’t already been said? It’s the nation’s powerhouse.

Of the eight key indicators typically used to analyse the economy of the states and territories, WA typically leads the way on most of them – economic growth, construction work, unemployment, retail trade, population growth and equipment investment.

A strong economy means money is flowing into the state, businesses are investing and hiring, there are opportunities being created, and consumers are confident in their ability to take on and service housing debt.

4. Development and Infrastructure

Perth is developing rapidly as a city. Not only is the city centre being totally transformed, but there are various strategic centres being enhanced thanks in part to an increased shift towards suburban infill.

All of these developments are creating new opportunities for work and living, and helping to attract people from overseas and interstate.

Importantly, there is massive investment in transport infrastructure, including roads, hard rail and light rail, which is literally changing suburbs and laying the foundations for future property hotspots.

5. Interest Rates

Interest rates are currently very low, making housing debt more affordable, and therefore increasing demand for property. The expectation is that rates may decrease further in 2013 in a bid to help stimulate struggling parts of the national economy. This will add more fuel to the fire of the booming WA economy, putting even more pressure on the housing market.

Conclusion

If you are investing in property right now or already own property in Perth, these are just 5 reasons why you should be excited about the prospect of capital growth in 2013. There are, in truth, many other positive signs as well, such as the current low stock of properties for sale and historically good levels of affordability.

While the upcoming federal and state elections may result in some uncertainty amongst homebuyers and sellers, I expect this to be only a temporary glitch.

With first home buyers, investors and change-up buyers all expected to be active in the market, 2013 is shaping up to be a year of opportunities. For some it will be opportunities maximised, and for others it will be opportunities lost.

Early Signs Perth is on the Way Up

Perth’s median house price grew by around 3% in the December quarter, according to preliminary figures by the Real Estate Institute of Western Australia (REIWA).

It grew from $480,000 in the September quarter to $495,000 by December, a period that also saw sales activity grow by 4%.

While a higher median price could indicate that property values are increasing, it could also be distorted by strong activity at the more expensive end of the market.

“We have recorded more activity in the $600,000 to $700,000 range, as well as with homes over $800,000,” says REIWA president, David Airey.

In another positive sign for the market, only 55% of sellers discounted their price to achieve a sale in the December quarter compared to 60% in the September quarter.

“Now that buyers have more confidence and sellers are meeting the market with better pricing, the number of selling days has dropped from 71 to 62 for the quarter and this figure has been trending down for a while,” says Mr Airey.

The Road to Property Riches

Why is transport infrastructure so important for property investors? And what type of projects can typically impact on property prices the most?

In recent months, the Western Australian Government has announced a number of significant investments in transport infrastructure. This may have pricked the ears of some property investors who recognise the importance of these projects in determining future property hotspots.
These developments generate demand for housing and can cause price rises in adjacent suburbs. Sometimes the benefit to an area is obvious, other times only the truly astute investors will recognise the flow-on effects.

So why is transport infrastructure so important? And what type of projects can typically impact on property prices?

An area’s “value” is based on many things including its proximity to major centres, lifestyle attributes, beauty, and safety. If new transport infrastructure improves an area in one of more of these factors, the value of the area should increase.

New infrastructure, such as major connecting roads, can greatly affect people’s perception of distance. In some instances, a suburb may have better access to the CBD than suburbs closer to the city because of better roads. But it’s not just distance that can be impacted. New infrastructure can also improve an area’s beauty and safety.

What types of infrastructure projects have the biggest impact? In Perth, projects involving the rail network (including the proposed light rail system), new major roads, or significant improvements to existing roads have the potential to impact on property values.

Extensions to the existing rail line can certainly improve the prospects of outlying suburbs by providing better access to the city. Similarly, the proposed light rail system will provide some suburbs that previously relied on buses with direct rail links to the CBD and other major centres.

It’s not just new roads that can make a different but even widening of roads can impact areas by reducing congestion and reducing travel times. Reconfiguring of roads and new bridges can also make a significant change.

How do investors take advantage of transport infrastructure developments? By investing in the relevant areas before buyers realise the full benefit of the projects.

Good transport infrastructure is vital for a thriving economy, and public transport in particular, is becoming increasingly important as our population swells and the price of petrol increases.

Next time you hear an announcement of a new transport infrastructure plan, think about how it will affect surrounding suburbs. Which areas will become more appealing as a result? Or better yet, start digging for yourself and find out those plans and projects that other investors won’t know about.

Have You Had Your Yearly Check-Up?

For anyone who owns a property with a mortgage, now is a fantastic time to get a financial check up, which could save you money or help you to reach your goals sooner.

It’s that time of the year when many of us are trying to make improvements in our lives and planning for the months ahead. High on the list may be a fitter lifestyle and getting that long overdue check-up at the doctor.

For anyone who owns a property with a mortgage, now is also a fantastic time to get a financial check up. This type of review is completely pain-free and doesn’t require you to wear a funny gown. But it can uncover some excellent opportunities that could save you money or help you to reach your goals sooner.

Reviewing your loans will help determine whether they are suited to your current circumstance, which may have changed since you first obtained the loans. A change in jobs, the arrival of children or a new wealth creation plan may all warrant an adjustment.

Even if your circumstances haven’t changed, there is a good chance that new products have become available that could save you thousands of dollars. The home loan market is very competitive and so lenders regularly try to outbid each other with various discounts and incentives.
Reviewing your mortgages can often result in lower interest repayments, higher borrowing capacity or more financing options. It is a vital exercise for both home owners and investors, but particularly the latter who may want to unlock equity for another investment.

Even if nothing changes at the end of the review, at least you have the peace of mind knowing your loans are giving you the best chance of financial success.

A lot of work goes into signing up for a mortgage, so it’s understandable why many people do not review their position regularly. But a financial health check is a simple process with enormous potential for financial gain. And it begins with a quick call to your trusted finance broker.

Choosing Between Different Rental Applications

For a landlord, it’s a nice problem to have. Your vacant property has been advertised, there have been countless inspections and now you have received numerous applications. So how do you pick the right applicant?

Screening rental applications is a crucial process. Choosing the right tenant can mean fewer issues and a better maintained property.

While every landlord has a different situation, here are some general tips on choosing between different applications.

It sounds obvious, but consider what you really want in a tenant. At a basic level, you might want a tenant who pays their rent on time and takes good care of the premises. But you may also want a tenant who is going to stay put for a number of years, and this may affect your choice of applicant. In this case, you may place increased importance on the applicant’s previous rental history and the reasons for the applicant leaving their current property.

What if one applicant is offering to pay above the asking price? While the possibility of extra income may be alluring, selecting on this basis alone can lead to disastrous consequences. While a tight rental market might be encouraging applicants to offer more than the asking price, some tenants are forced to offer more because of a poor history or references.

Checking references is very important and one of the time-consuming jobs typically performed by a property manager. Reference checking generally involves obtaining feedback from the tenant’s previous property managers or landlords regarding the tenant’s tenure, payments, and cleanliness.
A reference check may also involve calling the applicant’s employer to confirm they have a job, can pay the rent, are a good employee, and likely to continue working.

Checking personal references may also uncover information that is useful in screening applicants, though it’s important to allow for a certain degree of bias with references from friends and family.
Above all, when deciding between different applications, discuss this with your property manager. In most cases, your property manager would have met the applicants and this will reveal a great deal of information.

Ask your property manager what their impression was of the various applicants. Good property managers have an instinct for knowing which tenants would best suit a particular property and can therefore save landlords a lot of time and money over the long term.

Suburb Snapshot: Yokine

Yokine definitely has strong fundamentals and with the prospect of the new light rail system, it has strong potential for capital growth.

Yokine is an established residential suburb around 6km from the Perth CBD and part of the City of Stirling. It neighbours Nollamara to the north, Dianella to the east, Inglewood and Menora/Coolbinia to the south, and Tuart Hill and Joondanna to the west.

The suburb was mostly established during the post-war years, particularly from the 1950s to the 1970s.

Today, it’s made up of a range of property types including new homes, medium-density duplexes and villas, older detached housing, entry level units and development sites, with a median house price of around $600,000. Compared to the Perth average, it has a high proportion of renters.

The suburb provides families with plenty of education options, both public and private, and there are numerous shopping precincts including the strangely-named Dog Swamp Shopping Centre, and Flinders Square Shopping Centre. The Mount Lawley coffee strip is also close by.

Yokine is a very green suburb with many parks and a fantastic golf course. The largest park is the popular Yokine Reserve, which incorporates lawn bowling greens, sports ovals, tennis courts and a community recreation centre. The playground within the reserve recently received a major multi-million-dollar upgrade making it one of the best in Perth.

Yokine offers investors development options due to favourable zoning. It is common for older houses to be knocked down and the land subdivided to accommodate new villas and townhouses. These sites typically sell in the high $600,000s.

Yokine is serviced by many bus routes but it has no connection to the rail network. However, this may change with plans for Perth’s first light rail system, called MAX, which will provide residents of Yokine with direct rail access to the CBD. This massive project could benefit the suburb greatly.

Another positive development is the City of Stirling’s plans to develop the Stirling City Centre and make it a large employment area within Perth, which will benefit surrounding areas.

Yokine definitely has strong fundamentals and with the prospect of the new light rail system and the gradual rejuvenation of the suburb, it has strong potential for capital growth, particularly at the cheaper end of the property market.

Growth rate (1 year average) 0.0%
Growth rate (5 year average) 1.0%
Growth rate (10 year average) 9.5%
Population 10613
Median age of residents 37
Median weekly household income 1206
Percentage of rentals 42%
Source: REIWA.com.au, January 2013

Capital Gains Tax (CGT): Main Residence Exemption

One of the few times you can get a tax break is with your main or principal residence which is exempt from Capital Gains Tax (CGT). So what really is a main residence and what rules do you need to be aware of?

The concept of your ‘main’ or ‘principal’ residence is an important one due to its significant influence on your future financial situation. When it comes time to sell your home, it is one of the few windfalls you can receive (assuming you make a profit when you sell) that is not subject to tax. Your main residence is exempt from tax on any capital gains provided it meets a few criteria.

For most people, figuring out what is your main residence is pretty straightforward. But for others, it is not so simple due to their circumstances. In some cases, you may even have a choice as to what property you claim. For these situations it’s important to understand a few key rules:

It must be a dwelling
A dwelling is considered a building or part of a building consisting mainly of residential accommodation with land under the accommodation. Therefore it could be a caravan or mobile home, but cannot be vacant land.

You must reside in the property
Definitions are not explained in the tax legislation; however the Australian Tax Office (ATO) has listed a number of factors that are taken into account to determine whether they would allow your claim for main residence exemption. These include:
• Length of time you lived in the property (it’s often assumed this should be at least 3 months but it’s not stipulated by law)
• Where the rest of your immediate family live
• Whether you keep your personal belongings at the property
• The address where your mail is actually delivered
• Whether your address on the electoral roll matches that of the property
• Connection of services such as gas, telephone and electricity
• Your intention of occupying the premises

Other considerations
One main residence at a time
You can only claim one residence as your ‘main’ residence at any one time. However, you are allowed a six-month overlap of main residences when you are changing homes (between the time of acquisition of the new and disposal of the old).

Temporary absence
If you choose to move elsewhere and rent out your home at some stage, you can continue to claim the main residence status on the property for up to 6 years even though you don’t actually live there. This will not impact on your ability to claim deductions on your now investment property, it will only impact on CGT. The catch is that you will not be able to claim the other property you are now living in as your main residence during this time, if you claim your former home as your main residence.

Partial exemption
There are times when a property can only receive a partial exemption. One of those is when you move house, your new home becomes your main residence, and you then rent out your old home. During the time in which your old property is rented and no longer considered your main residence, it will be subject to CGT. However CGT will not be calculated during the period you lived there and claimed it as your main residence. The other time your main residence will receive a partial exemption is when a part of it is used for business and other such income producing purposes (e.g. a beautician servicing customers in a spare bedroom). In these circumstances, the proportion of the dwelling used for such purposes will be subject to CGT for that period, while the rest of the dwelling will continue to be exempt. This area can be tricky to interpret so do seek professional advice if you have concerns.

Pre-occupation period
If you are building a home on vacant land or substantially renovating a property and therefore cannot live at the property, you can still claim main residency in both examples under a “pre-occupation exemption”. Under this exemption you can treat the property as your main residence for up to 4 years before you actually occupy it provided you occupy it as soon as practicable and live there for at least 3 months after doing so. Naturally, you must not claim any other property as your main residence during this time.

Property in individual names
With a few minor exemptions, property can only be claimed as a main residence if held in individual names. Property held in a company or trust therefore cannot claim the CGT break. Because of this significant tax implication, most people hold their home in their personal names. If asset protection is an issue, best to consider holding it in just one partner’s name which still allows you to access the CGT benefits while affording some asset protection.

Taxation is not always a straightforward area and many rules are subject to interpretation so I encourage you to seek professional advice from your accountant if you have any questions or concerns.

Beware the Hype: 6 Marketing Traps Investors Get Sucked Into

When it comes to deciding how to spend your property investment dollar, there are many options from which to choose, from established houses to off the plan apartments and everything in between.

As if the decision wasn’t difficult enough, there are also many people and organisations out there trying to sway your decision in their favour with an avalanche of marketing messages competing for your attention and ultimately your wallet.

The major problem is that many of the products these people are selling are fundamentally flawed and will ultimately underperform, as many investors have unfortunately discovered. So how do you avoid being sucked into acquiring a dud investment? Here are 6 of the main marketing traps you should look out for:

1. The big budget campaign Property marketers are typically smart people. They know how to grab the attention of buyers and are prepared to spend big money to make whatever they are selling seem very appealing.

Anyone who has ever bought an apartment off the plan will be familiar with the glossy brochures, artist impressions, detailed research reports, full page advertisements and 3D models that often accompany a sales campaign. And these tools can be very impressive. Quite often they will tell you what a great investment the property will be.

The key thing for astute investors to realise is that the more money spent on a slick marketing campaign, the more developers need to charge to recover all the expenses. Just because there is a big budget marketing campaign doesn’t mean it’s a good investment.

2. Incentives and kickbacks An incentive is a great way to encourage people to commit to a property purchase, whether it is a rebate, brand new car or furniture package. The thing to remember with any incentive is that the value of the incentive has already been factored into the price of the property. If you’re getting a $30,000 rebate on a house and land package, you’re likely paying at least $30,000 too much for the property, even if you think you’ve negotiated a good deal.

Property investors need to remember that quality investment properties, i.e. those for which there is a genuine demand, don’t need incentives to sell.

Kickbacks work in the same way but are not as obvious. A developer or building company will often pay a salesperson, which could be an advisor or marketing company, a commission of up to $40,000 per sale. As with incentives, kickbacks artificially increase the price you pay for the property and should set off alarm bells for investors. Nothing is free. If anyone says they are helping you build your wealth and there is no charge, you can be almost certain they are getting paid by the seller and working for them not you.

3. Guarantees and big claims Any guarantees that promise a particular investment outcome or that are designed to reduce the perceived risk of an investment should be clear warning signs for investors.

The classic example is the rental guarantee. Although a guaranteed rental income (for a short period of time) may seem enticing, it probably masks the fact that there isn’t a strong rental demand for the property. Worst still, the total amount of rent that is “guaranteed” is often built into the price of the property anyway.

Similarly, promises of extremely high rental returns could be designed to distract investors from the fact that the property has little potential for capital growth. These claims generally have little substance to them and almost always fail to mention the high risk that may come with the high returns. Investors should always ask why the developer needs to offer this guarantee.

4. The location trap A lot of products targeted to naive investors and first home buyers are located in parts of the country with little potential for upside. These are often areas with abundant supply of land, poor economic drivers and a lack of infrastructure, which hold back capital growth.

Many first homebuyers buy a house and land package on the outskirts of the city with a plan to get their foot on the property ladder and later upgrade to a better location. The problem is that because these locations have abundant free land and a constant flow of newer properties coming to market, the capital growth rate underperforms the market.

Property is about demand and supply. If there is lots of potential supply then the growth rate may suffer and it means there are better property investment options available.

5. Too much in the building 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.

The 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.

6. Buying for tax reasons Some products, such as properties sold under the National Rental Affordability Scheme (NRAS), are often promoted for their tax advantages. This marketing approach is ultimately designed to distract investors from less favourable aspects of the investment, such as its location or potential for capital growth.

Investors should never base an investment decision solely on the impact it will have on their tax return. Tax deductions should be considered a welcome bonus of investing but tax is one of a number of factors investors to consider, not the main factor.

Conclusion Property investors should always bear in mind that the more marketing activity surrounding a particular product, the more red flags should go up. It’s always wise to ask the question ‘how hard is the seller or developer trying to convince me to buy?’ I’m not saying that all heavily marketed investments are automatically bad. However, noticing these marketing techniques should at least drive you to do your own independent investigations. Slick marketing is no substitute for quality research. Just because the sellers and selling agents tell you it’s a great investment doesn’t mean it is.

Perth Gains Best in the Country Perth house prices have increased more in the last year and quarter than in any other Australian city, according to data from Residex. The market could also be heating up further with September figures showing growth in Perth is ahead of Sydney, Brisbane, Melbourne and Adelaide. House prices have increased 6.63% over the year, with a 13.41% jump in the number of sales to 24,707. Rents for houses have also increased dramatically, up 21.52% for the year to $480 per week, which is double anywhere else in the country. REIWA president David Airey believes higher rents, a low rental vacancy rate and strong population growth will continue to put pressure on property prices. He also sees positive signs in the first home buyer market, which tends to underpin the rest of the market. “First-home buyer grants for the September quarter were at their highest level since 2009, before the first-home owner grant boost ended, and now account for around 30% of sales,” says Airey.

Acquisitions: Location or Type of Property – Which Should you Choose First? Two of the most important decisions you can make when buying an investment property are (1) where to buy, and (2) what type of property to choose. But which decision should come first?

Some investors choose a specific location and then find a property in that location that meets their budget and criteria. Others will have a specific property type in mind and will be far more flexible with regard to the location. Let’s have a look at whether any of these approaches is better than the other.

There are many types of property an investor can choose including houses, villas, townhouses, and apartments. Plus, you could easily divide each of those categories further,  such as new houses and old houses, which can offer very different things to an investor.

It’s understandable why an investor might decide on a property type before choosing a location because of the inherent benefits and burdens associated with each type. Certain types of property, such as apartments for instance, can provide excellent rental returns but they may also come with additional costs (e.g. strata fees). Houses, on the other hand, might cost more to buy and hold but could provide better capital appreciation.

Similarly, new property can provide impressive depreciation allowances, but buying this type of property can mean choosing locations on the outskirts of the city that are likely to offer less in terms of capital growth potential.

Buying an established villa might be a great option for an investor as it offers a good balance between land value and rental return. But a villa might not be a good choice in certain suburbs where the demand heavily favours another type of property.

It would seem therefore that a location should be chosen first. However, choosing a location first could also be problematic. For example, an investor might not be able to afford the right type of property in a chosen location and end up buying a sub-standard asset that is either inappropriate for the market or that has fundamental issues associated with it (e.g. being on a main road).

In the end, the choice of location is arguably more important in determining the long term success of an investment, though it’s difficult to separate it entirely from the decision of property type. Both decisions need to happen in unison and ultimately be based on the investors goals, budget and appetite for risk.

Property Management: A Risky Friendship There may be times as a landlord when you personally meet and directly converse with your tenants. You may even get to know them quite well and start forming a friendship, or perhaps you were even friends before they became your tenant. But is it a good idea to be friends with your tenant? Some would say it’s a good thing as there will be mutual trust and better communication and understanding. Plus, it may even encourage the tenant to stay in the property long term.

However, there are very good reasons why it isn’t advisable to get too friendly with your tenants. For instance, tenants may get too comfortable and start asking for favours, such as delaying their rental payments or bringing a pet into the property. And you as the landlord may find yourself being easier on them with some matters such as how they are maintaining the property.

When the boundaries between landlord and friend become blurred, it could easily open a can of worms, especially if something goes wrong. What will you do when the neighbours complain about loud parties at the property? How will you handle a serious breach of the lease agreement? It might be tough to evict a friend.  It’s absolutely a good idea to be courteous and treat your tenants with respect, but being friendly is very different from being friends. So by all means, feel free to send your tenant a Christmas card but perhaps don’t invite them over for Christmas dinner.

Always keep in mind that owning an investment property is a business, and it’s rarely a good idea to mix business with pleasure. The tenant-owner relationship should almost always remain at arm’s length. That’s where a professional property manager is essential, to help keep your business on track, remove the emotional component in decision making and act as the ideal intermediary when handling issues.

Wealth Protection: I’m Ok, I Don’t Need Insurance

Many people think ‘It’s ok I’ve got Workers comp… I don’t need any more insurance!’ or ‘I pay enough taxes, the government can pay for me if something happens.’ Well do you think if these people really knew how much they would get this will still be their response?

As at September 2012 the payments from Centrelink would be the following;

Compare that with what you could insure yourself for in the domestic market:

I am sure if asked yourself would you CHOOSE to live on $492.60 per fortnight your answer would be probably be no…

How much do you need to service lifestyle expenses, living expenses, debt expenses, medical expenses and how much would you receive right now if something happened?

If you don’t know or are concerned about the answer then come in and have a chat as to what insurance can provide a better alternative to the above.

Justin McManus is a Corporate Authorised Representative of Marsh Pty Ltd Australian Financial Services Licensee No. 238983. This information has been prepared without taking account of your objectives, financial situation or needs. Before acting on this information you should consider its appropriateness, having regard to your objectives, financial situation and needs

Development: The Pay Off for Converting to Strata-Title Have you driven past one of those old run down blocks of flats recently and thought “what an eyesore?” Getting council approval and converting old flats over to strata title could make you a tidy profit, meaning that “eyesore” could in fact be a goldmine.

Strata titling of old units is a unique strategy used by some savvy developers to make great gains. And although the likelihood of finding these opportunities is becoming slimmer as the years go by, they are still available with some shrewd investigative work (and a bit of luck!).

Strata titling was first introduced in the 1960s. Before then, it was virtually impossible to own a portion of a property. Most blocks of units or flats were effectively owned in full by one entity, with the individual units leased out. Strata titling enables you to subdivide the units, meaning each can then be owned by individual persons or entities immediately adding value (and flexibility) to the property. Despite strata titling being introduced in the 1960s, it’s quite typical to find opportunities even in property built around the 1970s or thereabouts.

Of course, as with every development, there is an element of risk to this strategy. You need to be confident that you’ll be able to get the necessary approval from council to make it all worthwhile. The first obstacle is making sure the property was originally built as a block of flats, or converted with approval. You’ll also need to make sure the current zoning will allow for strata titling. If the area has been down zoned it may mean that you can’t strata title the property and you will have to keep it on one title.

Adhering to current building practices and codes is the other major and costly hurdle. You may need to comply with a range of council requirements which could include things like firewalls, visitor parking, private open space for residents, and meters for services like electricity and water housed in a common area with each property being on an individual meter. Even just getting the necessary access to address any of these potential requirements can be one of the biggest risks of all.

Finding one of these gems and successfully navigating the approvals process can potentially reap financial rewards. But finding these types of properties is certainly not easy. Often they are silent sales so it pays to get a buyers agent with good connections and let them know what you’re looking for.

Finance: Comparing Loans Beyond the Interest Rate With all the news about interest rates recently, it’s not surprising that many borrowers seem obsessed with them. There are the people that typically choose a loan on the interest rate alone. This can be a costly mistake. You’re not necessarily better off by going for the lender with the cheapest rate. Even if two loan products seem very similar on the surface, they may in fact be very different.

It’s important to not just look at the interest rate as the deciding factor between various loan options – differences in the small print can mean thousands of dollars difference between two loan products.

First, the interest rate quoted may be similar or may be the same. If you will be selling the property rather quickly, you should investigate paying higher interest rates with lower application costs and exit costs. There are other costs that may be added on but may not be immediately noticeable. You need to read the fine print and determine exactly how much you are paying and see if you can convert application costs to interest rates and vice versa. Once you understand these components, you need to compare the interest rate using the Comparison Rate. The Comparison Rate gives a clearer idea of the true interest costs after taking into account all the fees and charges involved in establishing the loan. The term of the loan is also very important. You also need to be aware of any early repayment penalties that are associated with the loan.

At the end of the day you will have to make a decision on what you consider is the best loan for you. If you are able to obtain some of the features that are important to you then the fact that the interest rates is a little bit higher shouldn’t scare you off. For instance, if you got a higher loan to value ratio, it may be worth an additional half a percent interest rate. A good finance broker will be able to steer you through all the alternative options and help you find the most suitable loan for you.

Why I’m not Worried About the End of the Mining Boom

The more I investigate the bigger picture of what is happening in Australia’s resources industry and the impact it will have on the economy (and property markets), the more I am convinced the naysayers will ultimately be proven wrong.

I don’t have to tell you that there has been a fair amount of talk recently about the supposed end of the resources boom, which has some property investors worried.

While I am not involved directly in the resources industry, I do invest a lot of time into researching issues that could potentially affect our clients and this always involves looking beyond the mainstream headlines.

Most of the negativity in the media has focused on the recent cancelling or postponing of a number of projects by major mining companies, falling commodity prices and waning demand from China. But the more I investigate the bigger picture of what is happening in Australia’s resources industry and the impact it will have on the economy (and property markets), the more I am convinced the naysayers will ultimately be proven wrong. Here are some of my reasons:

Plenty of investment ahead
BHP Billiton’s decision to shelve $US50 billion ($A47.89 billion) of major projects, including an expansion of its massive Olympic Dam uranium mine in South Australia, made for some big headlines. But such announcements need to be put into perspective.

Firstly, they relate to planned projects not started or completed ones. Secondly, recent postponements or cancellations make up a very small component of the total planned investment pipeline. Data suggest the value of all projects deleted over the past 13 months (including Olympic Dam and Outer Harbour) total $51bn or 11% of all advanced and less advanced projects.

In WA alone, the investment pipeline is extremely healthy. According to the WA Department of Mines and Petroleum, more than $180bn of projects are committed or under consideration in the state. This includes the $43bn Gorgon LNG project, the $29bn Wheatstone LNG project, Hancock Prospecting’s $9.5bn Roy Hill iron ore mine and Citic Pacific’s $8bn Sino Iron project.

The consensus seems to be that based on the active projects yet to be completed, iron ore-related capital spending is likely to peak this financial year, and coal and liquid natural gas related investment is likely to peak in 2014-15. But even if the peak is a few years away, many experts expect investment to remain high beyond that time-frame.

The Chinese juggernaut will continue

China’s economic growth over the past 10 years has been nothing short of staggering. And while the growth rate has recently decelerated, it still remains at an impressive level. Based on some people’s reactions you would think that China’s economy is contracting, which it certainly isn’t.

The rise in demand for our resources from China over recent years is not a short term phenomenon; it reflects a structural change in the world economy driven by China’s long term goal of lifting the living standards of a very large population.

It is premature to suggest that demand for our resources from China and increasingly India is going to cease anytime soon. China and India remain, on the whole, very poor countries with a per capita income of just $US8,400 and $US3,700 respectively, so there is clearly a lot of catch-up potential ahead. The amount of iron ore, coal and energy needed to power the industrialisation machines of these mega-nations is truly immense.

High costs will not send work overseas
Some commentators have claimed that labour costs are too high in Australia and mining companies will outsource work overseas. While our labour costs are high by international standards, recent decisions by some companies to outsource particular work to overseas companies, in my opinion, is more likely to do with the shortage of labour. In WA alone, there were recently more than 5000 job vacancies in the sector and interestingly almost half of the jobs were based in Perth.

Australia isn’t reliant on iron ore alone

With all the media coverage about the iron ore mines, it’s easy to forget that Australia mines and produces more than just iron ore. Significantly, LNG is becoming an increasingly important commodity. According to some reports, of the resource projects currently under development in Australia, around two-thirds are represented by very major LNG projects.

Has the real boom even happened yet?
Whether or not we’re nearing peak levels of mining investment, the fact remains that the important export boom has much further to run. Waning mining investment will definitely reduce future GDP growth but this will be more than offset by the ramp-up in output and exports. Once all the current major projects are completed and fully operational, I think we’ll start a whole new phase of prosperity that will last decades not years.

There will always be volatility in the short term but I am very optimistic about the long term prospects of our resources industry and the economy it will help support.

Rents Continue to Rise in Perth
Property investors will be happy to hear that the extraordinary growth in Perth rental prices over the past year seems to be continuing.

Data from the Real Estate Institute of Western Australia (REIWA) released recently show median rents for house rose by $10 a week between May and August and $20 a week for units, apartments and villas.

REIWA president David Airey said the vacancy rate has also tightened in the three months to August, to just 1.8 per cent across the city.

Mr. Airey believes strong population growth, first home buyer activity and weak investor interest have all contributed to put immense pressure on the rental market.

“Our state has the highest rate of population growth in the country and this is placing increasing demand on the rental system,” he said.

“The number of properties listed for rent has fallen by 15 per cent from almost 2700 properties in early July to 2300 by the end of August.

“In addition to this, first home buyer activity is strong and this means that a lot of the stock for sale at the more affordable end of the price range is being snapped up by young buyers rather than investors, who remain scarce in the current market.

“Investors are not replenishing the housing system with much needed rental stock as dwellings are being removed from the market by owner-occupiers.”

“I can’t see any signs on the horizon that will reduce the demand for rentals,” he added.

“It appears Perth is a popular place to live, we’ve got an ongoing shortage of rental supply, so it’s likely that rents at the very least will remain stable but are likely to have increases.”

Suburb Snapshot: Victoria Park
Plans for development over the coming years by the local and state government are likely to enhance the potential of the area and see a solid rebound in capital growth.

Victoria Park is an inner-city suburb developed in the late 1800’s and situated approximately 3km south east of the Perth CBD. It fronts the Swan River and consists mainly of residential properties but also some commercial.

Being just minutes from the Perth CBD and with easy access to Canning Highway, Great Eastern Highway and Albany Highway, Victoria Park is ideally positioned. It makes transportation to and from key destinations such as the Perth CBD, South Perth, Fremantle and the airport a breeze.

It is also well placed to take advantage of many local and nearby amenities including, but not limited to, a train station; parks; the Swan River; four schools; numerous cafes, restaurants and retail shops (on Albany Highway); Centro Victoria Park shopping centre; and Crown Resort and Casino.

Victoria Park is an old suburb and as such it is home to a variety of housing types that have emerged over the years including turn-of-the-century cottages, modern houses, small groups of villas and townhouses, as well as apartment complexes. Some parts of the suburb even offer views of the city.

Prices start from around $250,000 for a 1-bed apartment, the mid $400’s for a villa, and houses from $600,000. Rents typically range from $250 – $750 per week on average. There is a good level of turnover of properties in the area and the average days on market is currently around 88 days, similar to the Perth average (Source: Australian Property Monitors, to May 2012).

For investors, Victoria Park offers an opportunity for those wanting to get close to Perth city at an affordable price. It also has parcels of land available for development, old character homes waiting to be renovated and is a highly desirable area for people to rent, including students, because of its proximity to Curtin University in Bentley.

Although the area has not performed as strongly in recent times, plans for development over the coming years by the local and state government are likely to enhance the potential of the area and see a solid rebound in capital growth. Such projects to keep an eye on include the light rail network, the new Perth Stadium earmarked for construction on the Burswood Peninsula, and urban infill developments as part of the state government’s ‘Directions 2031’ strategic plan.

The unique combination of Victoria Park’s proximity to the city, lifestyle amenities and suburban feel should underpin and protect the long-term investment prospects of the suburb.

Source: REIWA.com.au, September 2012

Property Management: Fixing Problems Before they Happen
Unexpected repairs can really put a dent in the bank balance. But there is a way to eliminate, or at least lessen, the blow of these costs by thinking ahead.

The phone rings and it’s your property manager with the news you’ve been dreading: something needs fixing at your property and it’s going to cost serious money.

This is a situation most property investors would be familiar with. Owning an investment property can bring enormous rewards, but like any other business, it also has its associated costs and some of these can be unexpected. The nature of these unexpected repairs or replacement costs can really put a dent in the bank balance.

But there is a way to eliminate, or at least lessen, the blow of unexpected costs through a program of preventative maintenance. It’s not a new idea but many investors have yet to fully appreciate the importance of investing in the ongoing maintenance of their property. A small investment in the right areas can go a long way to avoiding massive problems later on.

Some owners would rather just wait and see, hoping they’ll be lucky and not have to spend a cent on their property. But inevitably something happens to shatter that dream. And the feeling gets worse when they discover the major unexpected costs could have easily been avoided with some minor maintenance.

As a property manager, I can’t stress enough the importance of developing a maintenance plan and budgeting for it. Areas of potential concern should be identified as early as possible and a program of maintenance should be put in place. Maintenance costs should be considered even before agreeing to purchase a property because if you can’t afford the maintenance you can’t afford the property.

The amount of preventative maintenance that you should do varies from property to property, but I am yet to see a property that wouldn’t benefit from basic maintenance, such as the clearing of gutters before winter.

Have you ever heard a selling agent use the phrase “set and forget” to describe a property that is for sale? While you might be able to “forget” about some properties for a short while, this never lasts long.

Despite the best efforts of a diligent property manager, properties inevitably change over time through natural wear and tear. Even a brand new property will need some care after 5 years, whether the carpets need replacing or the walls need painting.

Investors can often be shocked to visit a property after 5 or 10 years to find their memory of it is no longer accurate. Photos can certainly help inform investors but they never truly give the full impression. This is why we recommend our owners attend at least one inspection per year, to get an up-to-date picture of their property.

Finance: The Lure of the Fixed Rate Returns
Lenders are once again trying to lure borrowers to their fixed-rate loans by slashing rates – sometimes up to half a per cent lower than variable loans. And some borrowers are definitely taking notice of the low advertised rates.

Is it a good time to choose a fixed-rate loan? While every borrower is different and will have unique circumstances that determine the suitability of a fixed-rate loan, it pays to have a general understanding of what you get (and what you don’t get) when you choose one of these products.

It’s worth noting that although exit fees have now been abolished, borrowers will still face break costs should they exit a fixed-term loan to get a lower interest rate. These costs are designed to cover the lender for the money they are foregoing and could add up to tens of thousands of dollars depending on the situation.

Other drawbacks of fixed-rate loans worth considering are that they often have restrictions on making extra repayments and usually have no features such as offset accounts or redraw. When considering a fixed-rate loan you should also be clear on what happens after the fixed rate period expires, as some loans may revert to an uncompetitive variable rate.

If you are thinking about choosing a fixed-rate loan, you should talk at lengths with your broker about the pros and cons in relation to your own circumstance and perhaps consider fixing a portion of the loan or fixing for less than 3 years to minimise the risk. While we think the low rates make consideration of fixing your rates worth giving serious thought to, there’s more to consider than just the rate.

Property Acquisitions: Doing the Research is Only Part of the Challenge
One of the obstacles to good research is the fact that it requires considerable time and effort. But another challenge for investors is making sense of all the detailed information that is uncovered.

We all know research is important when buying an investment property. It can help identify the areas with the best drivers for growth and shed light on which parts of a suburb offer the best investment options. Research can also play a part in helping investors compare one property with another.

One of the obstacles to good research is the fact that it requires considerable time and effort. But another, often overlooked challenge for investors is making sense of all the detailed information that is uncovered. Ironically, the more research that is done, the more difficult it can be to know which pieces of information you should base your decision on. This is where an expert buyer’s agent can help.

We recently had an investor approach us looking for advice and assistance with regard to locating and purchasing an investment property with high-growth potential. After an extensive search we located 3 viable options and subsequently presented them to the investor with corresponding market evidence and detailed analysis weighing up the advantages and disadvantages of each option. The information was thorough to say the least.

The problem was that the investor could not decide between the 3 excellent options, which were all located in one suburb. However, we were able to offer some useful suggestions to help the investor to make a decision.

Firstly, we suggested that we try to determine which of the 3 sellers was more motivated to sell. This could potentially save the investor thousands of dollars and sway the decision towards a particular property.

Secondly, we suggested the investor focus on the micro-locations of each of the properties, as this can make an enormous difference to the ultimate long term performance of the property.

These suggestions ultimately helped the investor to make a decision to choose one property, which had a location slightly better than the others. This property was not only in a popular school zone but it was also near the proposed light rail route, which could help boost the property’s appeal over time. The investor then confidently proceeded with purchasing the property.

Finding a property that outperforms the rest of the market requires a lot of leg work, but you also need to be able to interpret the information you find to make an informed decision. This is why more and more investors are relying on our established expertise in this area.

What is MySuper?
MySuper is a new low cost and simple superannuation product that will potentially replace many existing default fundswhich has been developed as part of the Super Reforms. MySuper is not a new or separate superannuation fund in and of itself – instead it is a framework and a set of requirements for low-fee, low-frills superannuation products. Retail and Corporate superannuation funds can develop a superannuation “product” to meet the MySuper requirements.

How will it affect me?
If you are going to be moving your existing superannuation fund/s over to a MySuper qualified product you need to be aware of a few important issues such as:

MySuper is an Opt-Out system. This means that your superannuation, and the insurance it contains, will change across to a MySuper account unless you actively choose otherwise.

What does it have to do with my Wealth Protection insurance?
Many Australians have some insurance and don’t even know it – it’s held “out of sight” in their superannuation fund. If your funds in superannuation are moved to a My Super account, the insurance, however, will not be moved automatically– instead, the policy will be closed and a new policy will be started in the MySuper account.

You might be thinking, “Can’t I just reapply for the insurance if I want it?” Risk insurance is very different to insuring your house or your car – simply because your personal circumstances and your health change so much over time. If you lose insurance you took out at 25, and reapply now that you’re over 40, you’re likely to face more obstacles and costs to getting insurance this time around. Health conditions like diabetes, high cholesterol, high blood pressure or even being overweight can either disqualify you from obtaining insurance or can drastically increase your premiums. Once an insurance company has issued insurance they can’t cancel it while you (or your super fund) continue to pay the premium (only you, the customer can, however, Life companies can cancel your cover only once the term has expired).So, if you have develop a health condition that an insurer typically won’t cover, exclude certain events or charge you more to cover you may be better off maintaining any existing cover you may already hold via your current Super.

So, what do I do?
A review of your current insurances (inside and outside of superannuation) will help you assess which policies you’d like to keep in place, and which you’d like to change. For those policies held in an old superannuation fund, you can in some cases move them to your chosen superannuation fund – so that you don’t lose the benefits when you consolidate your funds and close down the redundant superannuation accounts.

If you do nothing, you could be losing benefits you didn’t even know you had! So it’s important to take an active role in protecting your assets for yourself and for your family.

Wealth Protection is a complex area, with detailed policies and loopholes which can trip you up if you’re not careful. It’s best to seek the advice of an insurance specialist to make sure that the cover you receive is what you intended and expected. After all, if you are in the unfortunate position of making a claim in the future, you don’t want to add to an already stressful situation by finding out that your insurance doesn’t pay out like you thought it would.

Justin McManus is a Corporate Authorised Representative of Marsh Pty Ltd Australian Financial Services Licensee No. 238983. This information has been prepared without taking account of your objectives, financial situation or needs. Before acting on this information you should consider its appropriateness, having regard to your objectives, financial situation and needs

Property Section – September 2012

• What Investors need to know about Online Loans
• Median Price on the Way Up
• The Other Important ‘L’ Word in Real Estate
• Understanding the Power of Offset Accounts
• Should a Tenant be Compensated for Urgent Repairs?
• Suburb Snapshot: Craigie

What Investors need to know about Online Loans

Online home loans seem to have many of the features of regular home loans, but there are a number of potential drawbacks that borrowers – especially investors – need to be aware of.

These days it seems you can get almost anything online, from the latest gadgets to this season’s must-have fashion accessory. And now you can even pick yourself up a home loan.

Online home loans have been around for a few years now but it’s only recently that borrowers have started  to take notice of them. With low rates, minimal fees and the apparent convenience of an online application process, it’s easy to see how these products could be so eye-catching.

Online home loans seem to have many of the features of regular home loans, such as the ability to make additional repayments or pay interest only, but there are a number of potential drawbacks that borrowers – especially investors – need to aware of.

Let’s start off with a biggie. The reason some people have been attracted to these loans is because of the cheap rate offered. Often when businesses try to build market share they offer discounts for a while. However when you read the fine print of most lender loan contracts, the lenders can effectively change interest rates to whatever they want when they want. You might put in a lot of work and effort only to find that your rate ends up being the same as everyone else’s. Unless a on-line lender is willing to put in writing a guarantee to you that they will always be cheaper than everyone else and will compensate you if they aren’t then the allure of the cheap rate may fade quickly.

To build a property portfolio requires proper credit advice on how to structure your loans and which lenders are most suitable to help you achieve your goals. An on-line lender will only be offering their own products which means the products from other lenders in the market won’t be considered. Also its likely that on-line lenders will not tell you how to structure loans which is the advice an investor needs to build their property portfolio. A professional Broker who is experienced in dealing with investors is able to access a wide variety of lenders and give you the structuring advice you need to build your property portfolio.

Online home loans typically don’t offer offset accounts, which are one of my favourite loan features. Offset accounts allow you to use any cash you have available to offset the interest on your loan, while giving you easy access to your money. Disciplined borrowers who funnel all their money, such as their wages and rental income, into an offset account can end up saving tens of thousands of dollars of interest over the period of the loan (you can read more about offset accounts later in our newsletter).  

Many online home loans do offer a redraw facility, allowing you to redraw any additional repayments you have made. However, a redraw facility, unlike an offset account can cause problems when it comes time to submit a tax return. If you are redrawing money from an investment loan and using it for personal use (e.g. paying your phone or credit card bill, buying a car) you can jeopardise the deductibility of your interest payments. With regular use of a redraw facility, you could find that a large amount of interest you are paying on your investment loan is no longer tax deductible.

An offset account offers a much cleaner solution for investors who use their money for both investment and personal use. The money in an offset account can be used for any purpose without affecting the deductibility of the interest paid on the investment loan it is attached to.

With redraw facilities it can take 2-3 days for money to be made available, whereas an offset account is like an everyday transaction account with instant access to your money via an ATM card or the web.

Another drawback of online home loans is that you have to do a lot of the research yourself. Home loans are complex products and, although there is an abundance of information out there, few people would be confident to do their own detailed comparison. Some online home loans do offer telephone hotlines and access to online manuals and FAQ pages, but these can only be of certain help and don’t provide a comparison between different lenders.

Using the services of an experienced finance broker will not only help to make sure you are choosing the best product for your needs, but the broker will also lead you step-by-step through the application maze. Even more importantly, a broker will be able to consider your long terms plans. An online lender is not going to review your loans and goal regularly. The wrong loan could severely hinder your future investment plans or prove costly should your circumstances change. While Brokers aren’t tax advisers, a good Broker will be aware of the tax implications of your transaction. An online lender is not likely to consider that when providing a loan.

The idea of completing a home loan application online and alone could also be very intimidating. Think about all the paperwork that would be required, such as pay slips, proof of rental income, bank statements, details of other loans, tax assessments, and credit card statements just to name a few. Any mistake in the application could prove costly, including missing the loan settlement date which could mean penalties or worse still forfeiting your deposit and losing the property! First home owners would also need to handle their own FHOG application with an online home loan which most would not know how to complete.

A few other things to consider about online home loans is that most only go up to 80% LVR, so borrowers will need at least a 20% deposit. They can also be quite inflexible making it difficult to change products or switch the security in the case when you are buying and selling.

Choosing a home loan or investment loan could be one of the biggest financial decisions of your life. For people who have a lot of time on their hands and a very simple structure, on-line loans may be of use. However for a person looking to build a property portfolio, a specialist Broker is a vital part of your team that you can’t do without.

Median Price on the Way Up

Preliminary data from the Real Estate Institute of WA confirm what many people already suspect, that Perth property prices may be on the way up.

The metropolitan median price has increased by 3.2% this year to $480,000, but is still below the June 2010 peak of $505,000.

REIWA president David Airey said the market was showing signs of normalising and that the industry was heartened by a 20% jump in sales over the past 12 months.

“There is no question that the market has bottomed out,” Mr Airey said.

“People who were looking to pick the bottom have missed it.”

There has been a recent drop in the number of homes on the market, from 12,000 at the end of June to below 11,500. And the average time on the market has also fallen from 79 days to 73 days in the June quarter. 

The Other Important ‘L’ Word in Real Estate

The layout of a property plays an enormous role in determining demand from renters and buyers, and therefore the value of your investment. Just think about how much effort people put into designing a floor plan for a new home.

Buying real estate is all about location, right? If you choose the right location, you’re well on your way to success. But while location is an important consideration, there is another ‘L’ word that can also affect the success of your investment: layout.

The layout of a property plays an enormous role in determining demand from renters and buyers, and therefore the value of your investment. Just think about how much effort people put into designing a floor plan for a new home and it’s easy to see why layout is such an important consideration. 

A property’s layout involves the size and positioning of rooms, and the overall flow of the property. A good layout makes living more convenient and enjoyable, and a bad one can easily make a property feel cramped and uninviting. Have you ever heard someone walk into a property and say “It doesn’t feel right”? While they might not always be able to put their finger on what’s wrong, chances are they are talking about the layout.

It can be very difficult and expensive to correct a poor layout, especially when it involves moving load-bearing walls, so it’s important to carefully consider layout when buying a property. So what makes a good or bad layout? A lot of it comes down to fashion trends and personal tastes, but some preferences are pretty universal.   

For instance, a lot of people prefer an open-plan layout where the kitchen, dining and living rooms are combined or at least very close together. People like to be able to be in the kitchen and still be connected to what’s happening in the rest of the house.

Something most people don’t typically like is where there is a bathroom or bedroom coming directly off a main living area, without some sort of privacy screening or corridor. Similarly, people don’t like it when the front entrance of a property opens directly into a living area, without some sort of buffer zone.

For some layout options, preferences are more split. For instance, some people prefer the master bedroom to be separated from the other bedrooms, but families with young children may prefer the alternative. In this case, the best layout depends on the particular market for the property.

No property has a perfect layout so when searching for a property there will always be compromises to be made. The key is to try to choose properties with layouts that appeal to a wide range of potential tenants and buyers.

When it comes to evaluating layouts, be aware that internet listings can be very misleading, even when you have the benefit of a floor plan. They don’t give you an accurate indication of size, space and flow. There is really no substitute for walking through a property with an expert eye for what to look for and what to avoid. That’s where a skilled buyer’s agent becomes invaluable. 

Understanding the Power of Offset Accounts

An offset account looks like a regular everyday bank account and even operates like one, but there is one massive difference.

Most people would have heard of offset accounts, but only a few fully understand how valuable they can be. An offset account looks like a regular everyday bank account and even operates like one, but there is one significant difference. It is linked to a home or investment loan and any money in the account will automatically reduce the amount of interest payable on the loan and therefore help the borrower to potentially pay off the loan and build equity quicker.   

It may help to look at a simplified example. Let’s say you have a loan of $350,000 and $50,000 sitting in an offset account. The interest on your loan would be calculated on $300,000 not $350,000, just as if you had deposited the money directly in the loan. If you are paying principal and interest on the loan, your repayments would stay the same, but a greater proportion of your repayments would go towards paying down the loan principal. If you are paying only interest on the loan, your interest payments would be calculated on $300,000, the difference between your loan balance and the balance of your offset account.  

Here’s another way to think about it. Whatever interest rate you are paying on your loan, you are essentially earning that same rate of interest on the money in your offset account. If you had put that money in a regular savings account rather than an offset account, not only would your interest rate be lower but any interest earned on your savings would most likely be taxed. Savings made from an offset account are not considered interest and therefore aren’t taxed.

It’s clear that an offset can help you to pay off your loan much faster, especially when you deposit any available cash into the account and leave it there as long as possible (remember interest is generally calculated daily, so every dollar and every day counts).

Some people will have all their income (wages, rental income) paid into the offset account and use a credit card to cover all their living expenses. They will then pay off the credit card at the end of the interest free period, to ensure their cash is working for them as much as possible. Strategies like this can end up knocking ten years off the term of a loan and save the borrower tens of thousands of dollars, if not hundreds of thousands.

On the surface, it might seem that a free redraw facility on a loan is just as good as an offset account, but there are key differences. If the loan is for investment purposes and the interest is tax deductible, withdrawing money from the loan using a redraw facility can cause tax problems, especially when the money is used for personal use. If you make extra repayments into the loan and then redraw the funds at a later date, that portion of the loan may no longer be tax deductible and the problem can get worse with every redraw.

With an offset account, which is separate from the loan, you can use funds freely for personal or investment use without worrying about the tax deductibility of the interest payments. Another disadvantage of a redraw facility is that it can take 2-3 days for the money to be made available, whereas an offset account is just like a regular bank account with instant access via an ATM card, cheque book or online banking.

It’s true that lenders generally charge a monthly or annual fee for the privilege of an offset account, but, if the account is used properly, any fees are likely to be insignificant compared to the massive benefits that can be gained.

Should a Tenant be Compensated for Urgent Repairs?

Dealing with repairs is a regular part of owning an investment property. But the issue of urgent repairs is an area that is often misunderstood by both owners and tenants, potentially leading to messy disputes. One of the most common disputes involves whether or not a tenant can receive compensation for urgent repairs performed without the owner’s knowledge.

Urgent repairs tend to be more expensive than regular repairs due to  the after-hours call-out rates charged by most tradespeople and the lack of time to shop around for the best quote. The main problem with urgent repairs arises from the fact that people have different definitions of what is “urgent” and so conflicts can easily arise and even end up in court.

Certain circumstances are clearly more urgent than others, like a leaking sewerage system or major electricity concern that could cause serious injury. Generally, if the problem is likely to cause major injury, property damage or real inconvenience to the tenant then an urgent repair is warranted.

But other situations are not so clear cut. For example, does a broken hot water system require an urgent repair? Some may think so, others may not. Let’s say it is a chilly winter’s evening and a tenant arrives home cold and damp after getting caught in the rain. Looking forward to a nice hot shower the tenant discovers that the hot water system isn’t working and so decides to call for an after-hours repair and subsequently pays the bill. The tenant, who didn’t cause the problem, believes the owner should reimburse the expense, but the owner isn’t happy about paying the inflated cost of the after-hour repair when it could have easily been performed more cheaply the following day.    

What the tenant should have done in this situation is call the managing agent to seek clarification about the matter of compensation before ordering the repair. However, it might not always be possible to reach the managing agent, so it’s easy to see how conflicts can arise.

Another reason disputes arise is that there may be differences between what it says in a particular Tenancy Agreement compared to the Residential Tenancies Act 1987. A tenant who is seeking compensation for an urgent repair may turn to the Act which does in fact state that the owner must compensate the tenant for reasonable expenses under certain urgent circumstances.

However, this part of the Act is often legally modified in many tenancy agreements, including the standard one prepared by REIWA, so that tenants must first receive permission by the owner or managing agent before any repair can be ordered.

It’s easy to see that if urgent repairs are not dealt with in a proper fashion, the relationship between tenant and owner can become severely strained. This is where using a professional property manager will help avoid these situations arising by ensuring all parties understand their responsibilities at the beginning of the tenancy, and also by having good relationships with various tradespeople. And if disputes do occur, a property manager is in a better position to liaise with both the tenant and owner and try and mediate a suitable outcome.

It’s worth noting that the Residential Tenancies Act in WA and supporting regulations are to be changed in late 2012 or early 2013 to give clarity to what is an urgent repair and what isn’t.

Suburb Snapshot: Craigie

Craigie has generally outperformed the wider Perth market, with an annual average growth of 12% over the past 10 years (compared to 10.2% for Perth), and it should continue to deliver above average returns to investors.

Developed in the 1970s, Craigie is a northern coastal suburb situated 22km from the Perth CBD and around 4km from the Joondalup City Centre. It neighbours the premium suburb of Kallaroo to the west, Beldon to the north, Woodvale to the east and Padbury to the south.

Craigie has an abundance of parks & reserves and offers residents easy access to a major shopping centre (Whitford City), and a popular leisure centre within the suburb. The suburb also has its own shopping and medical plaza, as well as a popular tavern. Transport in and out of the suburb is a breeze with direct access to the Mitchell Freeway and 2 train stations.

The suburb is predominantly made up of old 3 bedroom houses on large blocks, which typically sell in the low to mid $400,000’s depending on condition and location. Vacancy rates are generally very low with a 3 bedroom house renting for around $380 per week.

A few years ago, the City of Joondalup prepared a draft Local Housing Strategy, in which a large part of Craigie, the entire western side of Eddystone Avenue, was identified as being suitable for higher residential densities. The strategy could see most of the area obtain a dual zoning of R20/R30, except the southern end closest to Whitford City Shopping centre which could obtain a dual zoning of R20/R40.

In February of 2011, Council resolved to adopt the strategy and forward it to the Western Australian Planning Commission (WAPC) for endorsement. It is anticipated that the endorsement of the strategy by the WAPC will be finalised sometime between 2013 and 2016. It is only then can landowners apply for development or subdivision approval.

There is also a development in the later stages of planning for the former site of Craigie High School. It’s an urban renewal project covering over 10 hectares and could see the development of up to 132 dwellings. It will also include public open space and an associated road network.

The WAPC and City of Joondalup have both approved the structure plan and in April of this year, a Subdivision Plan was submitted to WAPC for approval. Civil works are expected to commence in early 2013 and the first round of lots should go on sale in late 2013 with lot sizes ranging from 250 to 500 square metres.

Craigie has generally outperformed the wider Perth market, with an annual average growth of 12% over the past 10 years (compared to 10.2% for Perth), and it should continue to deliver above average returns to investors. This is helped by the fact that it is one of the few remaining affordable suburbs within 2km of pristine beaches, included the popular Mullaloo Beach.   

With an older housing stock that is being renovated or rebuilt, the proposed rezoning, and a massive new residential development in final stages of planning, the area will see significant revitalisation over the coming years. This should further increase its appeal to buyers and renters.

Growth rate (1 year average)           -3.5%

Growth rate (5 year average)             1.8%

Growth rate (10 year average)            12%

Population                                      5,602

Median age of residents                      34

Median weekly household income $1,316

Percentage of rentals                      24.2%

Source: REIWA.com.au, July 2012; ABS, July 2012