The WA Investor’s Guide to the Latest Census Data

What does the latest census tell us about growth in WA and how the state has performed compared to the rest of the country? Are the foundations set for future price growth?    

The first round of data has recently been released from the 2011 census and we now better understand who we are, how we have changed since the last census in 2006 and how we compare to the rest of the country. For property investors focused on the WA market, the figures make very interesting reading.

Most property investors understand the importance of population growth for driving the demand for housing, and, in this area, WA is in a league of its own. The resident population of WA is now 2,239,169 – up from 1,959,086 in 2006. This is an increase of 14.3 per cent, the same growth recorded for the Perth metropolitan area.

The rate of WA’s population growth is particularly large when you consider that it seems to be accelerating.  After growth of 2.1 per cent in 2010, the 2011 calendar year saw the population grow by a whopping 2.9 per cent. This is more than twice the national average of 1.4 per cent and miles ahead of Queensland (1.5 per cent), another resource-rich state. What’s incredible is that despite Queensland having a population almost twice that of WA, our population increased by more people – the first time in history this has happened.

In fact, of the 20 fastest growing local government areas (with more than 1,000 people) in Australia, 17 of them are in WA including 9 out of the top 10!

The major areas of population growth are concentrated on the fringes of the city and rural areas of Western Australia, where there is plenty of land to develop. According to the latest census data, the local government area with the biggest growth in WA is the City of Wanneroo, which has seen an increase of 41,136 people or 37.1 per cent.

Property investors should be aware that while population growth is important for capital growth, population hotspots don’t necessarily make good investment candidates. The reason is that these areas tend to have a ready supply of available land, which has the effect of containing prices. We almost always invest in established areas of Perth for our clients that have a very limited potential supply of new properties.

Along with our incredible population growth, rents have also soared in WA.  Over the past five years, the median weekly rent has increased to $300 from $170 in 2006, a jump of 76.5 per cent. Compare this to the national growth of 49.2 per cent and it gives you some idea of the pressures on the WA market.

Some might assume that the colossal rental growth in WA was due to the extraordinary rents for property in the north-west of our state. However, it’s easy to dismiss this idea when you look at what has happened in Perth. The median weekly rent in Perth has increased over the past five years to $320 from $180 in 2006, which is an increase of 77.8 per cent.

Incomes, which also play a role in the demand for property, have grown as well since the last census. Median total family income has increased from $1,290 per week to $1,781, equal to 38 per cent growth.

The figures from the latest census definitely make encouraging reading for any investors focused on the WA and particularly the Perth market. While many were expecting WA to lead the nation in a number of key indicators, few anticipated just how much the disparity would be with the rest of the country.

I believe the future definitely looks bright for the real estate market. With our accelerating population growth, improving affordability, an undersupply of new housing and an extremely tight rental market, it won’t be long before we lead the nation in another area – growth in property prices.

Perth Set to Become the Leading Property Market in Australia

The report ‘Residential Property Prospects 2012-2015’ released by BIS Shrapnel at the end of June is forecasting Perth to experience 22 per cent growth in the median house price by 2015 to become the strongest performing capital city in Australia.

WA is set to record the strongest growth in property prices over coming years, ahead of all other states and territories. The latest report released by BIS Shrapnel, Residential Property Prospects 2012-2015, reports that properties in the resource-rich states of Western Australia, Queensland and the Northern Territory are already showing signs of recovery and are set to improve further over the next three years.

Perth is predicted to experience the strongest growth in median house prices of 22 per cent by 2015, about 7 per cent growth each year with compound increases. Brisbane is forecast to closely follow at 20 per cent, Sydney at 17 per cent and Darwin at 15 per cent. Lower interest rates and accelerated population growth are indicators that conditions are starting to improve in these capital cities. 

Western Australia’s strong fundamentals will underpin the growth phase, according to BIS Shrapnel senior manager and author of the report, Angie Zigomanis.

“With unemployment in the state already leading the nation at 3.8 per cent in March 2012 and economic and income growth to continue to strengthen, the first stages of a turnaround should appear in 2012/13 before stronger price growth emerges in 2013/14 and 2014/15 as economic growth approaches a peak”, he said. 

“If you’re in a position to get into the market, the next 12 months presents a period where buyers will still be in a better negotiating position, after this it will then become more difficult for buyers,” he said.

The report, however, predicts a two-tiered national market with the remaining states and territories lagging behind with only minor growth due to underperforming economies and excess supply.   

Property Management – Cheap is Not Always Cheerful

Many agencies are offering cut-price property management fees and some investors are being tempted. But be warned; choosing a property manager based on the lowest fees comes with risks and, for many, may end up being a costly mistake. 

Property management is an important part of keeping your investment property safe and secure, so it pays to choose your property manager carefully. But with a number of agencies trying to lure investors with ultra-cheap management rates, some investors are basing their decision on fees alone, which could end up proving costly.

When it comes to property management, as with a lot of things in life, you often get what you pay for. While a very low management rate may seem attractive, most investors soon learn that it costs them more in the long run.

Agencies that offer discount rates usually use these rates as bait to attract new business, then sting investors with many extra and overpriced services. Once you add these additional items into the mix, the cheap rate isn’t so cheap anymore and owners end up paying the same price for a budget agency than they would have with a superior one. Worse still, if owners don’t opt for the extra services, such as regular inspections, the condition of the property may suffer.

Agencies that offer cheap rates have to make many sacrifices to make the business profitable. One area where this is often apparent is in the number of properties serviced by each property manager. Property managers in these agencies are often inundated looking after hundreds of properties and are too busy to properly service any individual property. This leads to high staff turnover.

The other area sacrificed is in staff training. With profitability wafer-thin, these agencies cannot provide their staff with the ongoing training and education needed to keep them up-to-date with legislation and changing market conditions. This too can contribute to higher staff turnover and the staff’s lack of knowledge can leave owners out of pocket.

At the end of the day, it is not feasible to expect a high quality service with all the necessary inclusions for next to nothing. Owners need to ask themselves, are we willing to risk the security and performance of one of our most valuable assets for the sake of potentially saving a couple of hundred dollars a year?

Property Tax Tips: Calculating Depreciation

When you purchase a property, how do you figure out what price you paid for the depreciable items (e.g. carpet, appliances etc)? There are a number of options.

Firstly you can specify it in the contract (for example, the purchase price of $450,000 includes $1,000 for appliances, $3,000 for carpets etc). You cannot dramatically over inflate the figures (e.g. say $20,000 for appliances and $30,000 for carpets) as this will not be accepted. In addition, the seller may have negative tax consequences from including these figures in the contract, so normally prices for depreciable items are not included in the contract. Also, a buyer may not be aware of all the items they can depreciate.

Secondly you can make your own reasonable estimate of the value of the assets included in the purchase price. The ATO says that any reasonable value should reflect the age and condition of the asset (i.e. if the stove was 15 years old, you cannot use a brand new replacement value as the estimate). The difficulty for most people is that they wouldn’t know everything that is available for depreciation and would miss some items if they did it themselves. Also if you are audited you run the risk that your own estimates will be highly scrutinised.

The third and most common option is to obtain an independent valuer to value the items purchased for the purposes of depreciation. The ATO has said they will accept reports from Quantity Surveyors as being satisfactory evidence for valuations. Depreciation is a complicated area and most people need the help of their accountant or a depreciation consultant to claim the correct amounts.

Finance: Getting Past 1 Investment Property

Many people ask us why the average investor doesn’t get past 1 investment property. 

Research done some time ago by the Australian Bureau of Statistics shows that most investors only purchase one.

• 93.5 % of people do not own any investment property;
• 4.0% own one investment property;
• 1.49% own 2-4 investment properties; and
• Only 0.1% own 5 or more properties.

In recent years, these figures have changed, but still the vast majority of people do not own a substantial number of investment properties and very few own 5 or more investment properties.

If you understand the mindset and strategy of the average investor, then you will know why.

The average investor will usually put down 20% as a deposit on a property.  They decide to start saving for an investment property and this may take many years of saving (we will assume 5 years in this example).  In addition, they will also require funds for stamp duty, which can be as high as 5% of the purchase price, and also borrowing expenses, (fees and charges, and stamp duty on the mortgage).

That purchaser will usually pay market value for the property, then rent the property out and wait for capital growth to generate equity.  Typical investors don’t understand what drives capital growth and property profits, and they will usually select properties with average capital growth rates.

In the first year, the purchaser may only just break even, as the price of the property may rise enough to cover the stamp duty on purchase.  In many cases where capital growth is moderate, it may be 2 years before a property has increased enough in value for the purchaser to cover the costs of stamp duty and other settlement and borrowing costs.

In the third year the purchaser finally starts to make some profit.  The average investor has waited 7 years from the time of deciding to purchase an investment property to actually generating any profit!

In order to buy another property, the purchaser normally needs to generate another 20% equity.  In a moderate growth area, this may take another 5 years or more.  They will only be in a position to buy a second investment property 12 years after first making that decision to invest.

In a large percentage of cases, the average investor will get dissatisfied with the returns on the property and not even get to the stage of considering a second property investment.  Many will sell within the first 5 years and re-join the ranks of people who own no investment property.

Smart investors understand that there are ways to speed up the process. If you understand how to access your equity to purchase more property and purchase high growth properties, you can build a substantial property portfolio much more quickly than you think.

Property Acquisitions: Stale Property

When a property has been sitting on the market for over a month it begins to go ‘stale’. Once this occurs people will start to think that there may be problems with the property. Eventually the property will be classed as a lemon and it will become more difficult to sell, but it could be a great time to buy.

There are 15 strategies to purchase property below market value. One of these is purchasing stale properties.

In many cases this happens because the owner has listed the property for more than it is worth. Even as the owner drops the price, the perception that there are problems with the property will still remain.

After 3 months on the market the property is now considered stale. The agent would have likely lost enthusiasm and the owner will have become despondent.

The three month mark is a good time for the bargain hunter to get to work. If you have a stale property and a highly motivated vendor, these are the perfect components to get you a property at a significant discount to market value. It’s one of the many methodologies we use to find great properties at good prices.

5 Signs that a Suburb is Hot

Everyone wants to know which suburbs will be the next hotspots. But would you be able to recognise one if you saw it? How can you tell when a suburb is booming or, more importantly, ready to boom? Here are 5 signs to look out for.

Wise property investors know that regardless of how the overall capital city market is performing at any given time, there will always be some suburbs that will be performing better than others.

When deciding to make an investment purchase, it’s important to have an understanding of what is happening at a suburb level. It’s especially important to be able to identify which suburbs are booming or ready to boom – those with a high level of sales activity, strong competition amongst buyers, and a high likelihood of price increases.

Here are 5 signs that could indicate a suburb is red hot.

1. Days on market (DOM)

The average time it takes to sell a property in a suburb will tell you a lot about the state of the market in that suburb. When the figure is smaller than the overall city average it means that demand for property is relatively strong in that area and properties are selling quickly.

The lower the number, the hotter the market is. For instance, if the overall city has an average of, say, 80 days, then a suburb with a 30 day average is clearly in high demand from buyers. Bear in mind however that a short average days on market doesn’t necessarily make a suburb a good area to invest in as the market may have already peaked. Similarly, a suburb with long average days on market could still offer great options for long term investment. 

Investors should note that average days on market figures can be misleading as some suburbs contain sub-markets in them that may be performing quite differently.

2. Vendor discounting

Knowing how much vendors are discounting their properties can be very revealing and indicate whether a suburb is booming. This discount refers to the difference between the asking price and the final sale price and it is typically provided as an average across all sales in a given time-frame.  

If the discount is quite large, say above 8%, than it’s safe to assume that buyers hold the majority of power, given that sellers are willing to accept a lower price in order to secure a sale. This might sound like a positive situation for buyers but it could indicate that the market is falling.

A small discount, say less than 4%, indicates that there could be strong demand for properties and that it’s essentially a seller’s market, which could indicate that prices could be on the way up.

3. Percentage of stock on the market

Looking at the number of properties currently for sale in a suburb as a percentage of the total number can offer some important clues as to the state of the market. A low figure, say less than 2%, could indicate that property is tightly held in that suburb and that supply is generally low, which can easily lead to price increases if demand outweighs supply. A high figure of more than 3% could indicate that supply is plentiful in the suburb and price rises are unlikely in the immediate future. 

4. Tightening rental market

Investigating the rental market of a particular suburb can offer some important insights into determining what’s happening in the market.

As renters are often more mobile than buyers they tend to respond more quickly to changes in the dynamics of the market. As an area becomes more desirable, renters will move into the area before buyers catch on and start pushing up prices.

A low rental vacancy rate means that there is high demand for rental properties relative to supply and is a sign the suburb may be hot or heating up. Bear in mind though that a low vacancy rate could mean that people would rather rent than buy in a suburb as is the case with some mining towns.

5. Expert opinion

The people working in the industry every day, such as buyers agents and sales agents, can provide great information about what’s happening in specific suburbs and identifying hotspots. So, it’s worthwhile listening to what they have to say.

These industry professionals often have access to more up-to-date information than what is published in the media and will often have first hand evidence that a market is hot before others find out.

When talking to experts however, it’s important to consider any potential bias with the opinions you receive. For instance, it is in a sales agent’s best interest to tell buyers that the market is hot and prices look set to rise.

Conclusion

While it’s important to be able to evaluate the current state of a market within a particular suburb, you should remember that investing for capital growth is about identifying future prospects. If a suburb is already red hot it may be too late to invest. On the other hand, a hot market may indicate that a suburb has fundamental advantages and is ripe for consistent price growth.

Before investing in any suburb you need to understand what that suburb has to offer compared to others, and what’s likely to change in the market to make it more desirable in the future. It’s also important to know exactly where within a particular suburb you should invest as this can make an enormous difference to your capital growth.  

How to Calculate Your Break-Even Point

Some people, can be hesitant to invest in property as they often perceive the risk to be high. Whilst every investment carries an element of risk, investors can calculate the property’s break-even point of capital growth to assess the risk of a potential property investment before making the purchase. This is the point at which the capital gains equal the cash shortfall of holding the property (assuming that the property is negatively geared).

Let’s look at a simple example. Assume you purchase a $400,000 property (worth $400,000). When you subtract all the expenses (including interest on the loan, management fees etc) from the rent and take into account depreciation and tax benefits, this property has a negative cash flow of $10,000 pa, which is fairly typical. So, in other words it costs you $10,000 out of your pocket to hold this property. In this example, what is the break-even point? It’s easy to calculate. By simply dividing 10,000 (the cash shortfall) by 400,000 (the value of the property) and multiplying the figure by 100 (to make it a percentage) we obtain an answer of 2.5%. Therefore, if the property grows 2.5% in that year, your investment has broken even. 

Obviously you would want more than 2.5% growth to justify the risk, especially when long term growth rates are generally much higher than that. But it shows nonetheless how little capital growth you actually need on an investment to break even.

For the sake of this example let’s assume that the property does grow by only 2.5% in the first year you own the property. What happens to the break-even point in the second year when you take into account that rent on this property has now increased. Let’s say that your out of pocket expenses are now $8000 pa rather than $10,000. With a quick calculation you can work out that your break even point is now only 1.95%. Anything above that figure and you’re ahead.

Here’s an interesting question, what happens to the break even point when you buy a property below market value? It involves the same calculation but brings up a strange result. Let’s go back to the earlier example where you bought the $400,000 property but let’s say the property is actually worth $450,000 when you buy it. All of your costs are the same and so is the rent, which means your out-of-pocket costs are still $10,000 pa. So what’s the break-even point? You might be thinking to yourself that you’re already $50,000 ahead so isn’t the break even point negative? You would be right. It is now -8.9%. This means that even if through some shock and highly unlikely occurrence, the property value falls by 8.9% you would have still broken even. Clearly, if you manage to buy a property below market value you give yourself a great head-start.

While I would always recommend hunting for the best capital growth opportunities, it’s still important to consider your out of pocket expenses so that you can work out your break even rate of capital growth. If you’re unsure how to work out your out-of-pocket expenses, your Momentum Wealth consultant will be able to assist you. It’s important to remember that property is a medium to long term investment. Focus on choosing the property that will generate the best returns over time and try not to focus on the short term fluctuations.

Home Buyers and Investors Causing a Flurry of Activity in Perth

First-home buyers and investors are driving a recovery in the Perth housing market, with latest figures from REIWA showing the volume of Perth property sales in the March quarter reached its highest level in two years.

First-home buyers are driving a recovery in the Perth housing market, with latest figures from REIWA showing the volume of Perth property sales in the March quarter reached its highest level in two years.

The data shows there has been a surge in the number of first home buyers, with 8 out of 10 buying established houses rather than building.

REIWA’s president David Airey says first home buyers are choosing to buy near established infrastructure such as shopping facilities and good transport links rather than in newer areas, which is good news for the overall market.

“The strong activity from first- homebuyers has been a tonic to the market and we can see from current figures that as a result of this activity, trade-up purchases also improved during the March quarter for many properties above the current median of $465,000,” he said.

REIWA has also seen a rush of investors, attracted by recent rental growth. Preliminary data for the March quarter show that rents have increased by around 10% since the same time last year. The overall median rent for Perth is now $420 per week.

The influx of investors is a trend that should grow as the end of the financial year approaches.

Insurance – Can You Afford Not To?

I remember reading an article which had some worrying facts and figures regarding Life Insurance. One of these was a report from the Australian Bureau of Statistics which revealed that, on average, 12 parents of dependent children die each day in Australia. And of these, only 4% will have sufficient life insurance to assist their families. This means that, each year in Australia, roughly 4,200 parents leave their families exposed to financial hardship or even ruin.

One of the reasons behind the low uptake of life insurance protection in Australia is thought to be the confidence that employees place in the life insurance component of their superannuation fund. However, the same article points out that estimates show that the average worker would not have much more than $70,000 life insurance cover via their superannuation fund – a figure which represents only about 20% of estimated average needs.

The article also indicates that another apparent reason for the low uptake in term life insurance is the general perception that it’s just too hard to obtain protection. And even if it’s not too hard, it’s just too much work, not just to apply, but to try to understand the subtle differences between the various life insurance products.

The good news is that an increasing number of Life Insurance Companies are developing simpler products which are not just easier to understand, but which also require less ‘hoops’ to be jumped by the applicant.

These life insurance products are also available through Momentum Wealth Risk Services, so now there’s no excuse: will you fall into the 4% that have sufficient life insurance cover, or will you be one of the remaining 96% that leaves their dependents to cope with the situation?

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

Cross-Collateralisation

Cross-collateralisation can greatly jeopardise investors’ property plans. But what exactly does it mean and how can it affect your investing potential?

Lenders generally want to get their hands on everything you have.  You will find out that they will want security not only on the property you are purchasing, but also on your own home, your car, your first born child and your dog.  Well, they won’t really ask for your first born child and dog, but they might take them if you offered.

Cross-collateralisation is where more than one property is used as security for a loan.  Cross-collateralisation should be avoided as much as possible as it will limit your ability to borrow further funds if another financial institution has some type of security over the property you are trying to borrow against.  Unfortunately most novice investors do not understand the restrictions cross-collateralisation puts on your wealth creation strategy.

For example, let’s assume you own your own home worth $600,000 and you have a $200,000 mortgage.  You have no free cash available.  You decide to purchase an investment property for $400,000.  You would go to your current lender and say, “please lend me the entire $400,000”.  Given the amount of equity you have in your home, they should loan you the entire amount, and they will take first mortgage security against both properties.  You have purchased an investment property.  You now have both your properties tied up to the one financial institution.  You also have $1,000,000 worth of property and $600,000 worth of debt.  You have at least another $200,000 of equity in those properties you could obtain for further use (based on an 80% loan to value ratio LVR).

If you were to ask for a loan for the additional $200,000, who do you think will lend you the money?  Probably you’re current lender, but perhaps not many other financial institutions.  Financial institutions hate second mortgages.  They aren’t in control and don’t get to keep the property title as security. This is held by the first mortgage holder.  Therefore in this scenario your best chance to get another loan is with your current lender.  The trouble is that they now have already lent you $600,000.  If they say “no more money” you have to accept that or refinance that financial institution out of all the property you hold with them and start the search for finance from scratch.

Successful investors know that it is wise to spread your borrowings around amongst different lenders.  In this example we just reviewed there would have been a better way to get all the finance you needed.  Firstly you should go to your current lender (or find another) and say “Mr Lender I have a property worth $600,000, my mortgage is $200,000, I want a home equity loan with redraw for another $280,000”.  If you have good credit there is no reason why you should not get this money.  Suddenly you have a $280,000 facility available.  You purchase the $400,000 property.  You come up with a $80,000 deposit from your redraw account and go to another financial institution.  You say “Mr Lender, I have purchased a property for $400,000.  I want a loan for $320,000.  Please give it to me now”.  Assuming your credit is fine there should be no reason why you wouldn’t get this loan.  You now have $1,000,000 worth of property.  You have two lenders who both only control one of your properties.  You also still have $200,000 left in your redraw account with which you can purchase more properties or other investments.  You could buy another $800,000 worth of properties with that $200,000 redraw account, or you could invest it into the share market or any other investment you decide.

Having different mortgages and different lenders on each individual property also gives you many more options should you choose to refinance.  For example, if you have all your loans with one institution and they reject a new loan application, you are going to have to refinance all your properties with someone else.  If it relates to one property only, you can just refinance the one property and keep all your other loans in place.

Each property you purchase should be assessed on a stand-alone basis only.  You should only offer as security the property you are purchasing.  If another property is cross collateralised it will limit your borrowing ability. 

The Lowdown on Tenant Databases

Most landlords would have heard of a tenant database. But how much do they actually know about them? What information do they store? Who can access them? When can a tenant be listed?

A tenant database is typically run by a private company and contains details about the problems landlords and property managers have had with tenants. This information is made available to property managers, and licensed agents for a fee, who use the information to assess risk by checking whether an applicant has an unfavourable rental history. 

A tenant can only be listed on a database under certain circumstances. Normally it is for a serious breach that has resulted in a lease being terminated, such as unpaid rent, intentional damage or a failure to make payments directed by a court. Generally, the amount of money owed to the landlord has to be greater than than the bond amount recouped. 

There are strict rules with regard to submitting any person’s name to a tenant database, mostly around providing full disclosure.

It is also important that, before even signing a lease, applicants are informed that a breach of the lease agreement may result in a listing on a tenant database, normally done on the application form. Please note that the legislation surrounding tenancy databases varies from state to state. Therefore the terms of their use and how informationis recorded needs to be within the guidelines and legislation of that state.     

As property managers, we use these databases as part of the process in screening prospective tenants. Whist a very useful source of information, tenancy databases contain limited data and therefore do not replace vigilant reference checking and other criteria in reviewing a tenant’s application.  

Hot Property

In this month’s Hot Property section, we take a look at a purchase made recently in Victoria Park by one of our buyers’ agents, Yanti Sujatna. This one ticked all the boxes with strong growth potential and high rental yields.

Victoria Park is one of the few suburbs that meets Momentum Wealth’s strict investment criteria. With its proximity to the CBD, access to key transport nodes and burgeoning café/shopping strip, the suburb offers both strong growth potential and high rental demand.

After a thorough search and selection process, a double storey 3 bedroom 2 bathroom terrace-style townhouse was purchased. The property is positioned at the end of a small row of four and located very close to the desirable ‘Raphael Park’ precinct of Victoria Park.  

A townhouse was selected as this style of housing is popular with the key demographic of Victoria Park, namely young professionals. Townhouses offer a low maintenance lifestyle but with most of the benefits of a free standing house.

The property features off street parking for two cars and a good sized outdoor entertaining area, making it very appealing to prospective tenants. An added benefit is that the property has a bathroom on each floor which allows someone to live upstairs and another to live downstairs quite independently. At the time of purchase, it was already rented to 3 young adults so rental income was already guaranteed.

The internal condition of the property was quite run down, which provided the clients with the opportunity to consider cosmetic renovations to add value and help maximise tax deductions. With the clients eager to leverage this opportunity, Momentum Wealth introduced a suitable company to help plan and manage the $15k worth of renovations.

The property was purchased for $490,000 even though there is strong evidence to suggest that the market value is around $520,000, giving the clients equity from day one. The financing was structured in such a way that the client could capitalise most of the renovation costs and therefore minimise the cash outlay.

At the time of purchase, the property was rented at $435/pk but Momentum Wealth’s property management team successfully increased the rent to $525/wk. This represents an impressive gross yield of 5.6% even before any renovations, which will likely increase the rent even further and also boost the capital value (without overcapitalising).

After purchasing an excellent property at below market value and with extraordinary rental yields and enormous potential for growth, the clients are justifiably excited with the outcome.

Do Families that Invest Together Stay Together?

Is investing with family members a good idea or a ticking time bomb waiting to go off? Co-ownership arrangements can actually work very well provided you follow our six golden rules to keep your family more ‘The Brady Bunch’ than ‘Malcolm in the Middle’.  

With the median house price in Perth nudging the half a million dollar mark, some would-be investors might be considering the possibility of joining forces with other family members in order to buy. While pooling resources with family members has many advantages, it’s also a path that is fraught with danger for the uninitiated

Here are our top 6 golden rules for entering into co-ownership arrangements with family members:

DO make sure you’re doing it for the right reasons

Perhaps you can’t afford to buy on your own? Maybe you’ve got the money but not the time to develop property? Or perhaps you would prefer to have a diverse portfolio across a number of properties in different areas than putting all your eggs in one basket? These are all potentially valid reasons to consider teaming up with family members. But what if you’re really only doing it to help someone out? Maybe it’s to get your son or daughter on the property ladder, or to help a sibling put their income towards something useful instead of squandering it like they normally do? These kinds of reasons are dangerous when the other family members are not as committed or interested in investing in property as you are. Chances are you could end up carrying the whole burden on your own.

DO team up with those who share the same vision

Buying property is one of the biggest purchases you’ll ever make, so make sure you choose your co-owners carefully. Select family members that wish to follow the same property strategies as you, share the same kinds of goals, and have a similar appetite for risk. This should help to avoid family squabbles and make decision making far quicker and simpler.

DO treat it like a business decision

Don’t be afraid to speak openly about each other’s financial situation as well as future plans (starting a family or relocating could throw a real spanner in the works). You should even check their credit report to verify their true financial position because there are serious consequences for you if they default. Of utmost importance is having an agreement drawn up by a lawyer to specify the rights and obligations of each party and how a variety of potential situations will be dealt with. For example, what happens if one of you wants to sell? What if one of you can’t meet their repayments? How will maintenance work be handled? These are just some of a multitude of questions that should be answered at the onset.

DON’T ignore the fact that money can affect relationships

Let’s face it; money can be an area of great stress for us all, particularly when times are a bit tough. It will almost certainly cause disagreements, some minor while others much more serious with the potential to ruin what was once a great relationship. With so much on the line, arguments could emerge over selection of a tenant, getting quotes for repair work, choosing to renovate or not, or buying out someone’s share. Thinking that money will never get in the way of your family bonds, even if you are an incredibly close-knit family, is naïve.

DON’T underestimate the risks

Although you will only have a share in the total loan taken out on the property, you will have full liability for the loan. This means that if a family member can’t meet their repayments, you will be held liable to make those repayments or risk losing the property and having your personal credit rating damaged. Remember, buying property is often over long periods of time and a lot can change. Someone could fall seriously ill, get divorced, or have trouble finding a job and be unable to meet their repayments. You will also be stuck with carrying the load for any short-term costs like insurance and maintenance. It’s also worth mentioning that your future borrowing capacity will also be severely restricted even though you only have a part-share. If you go out to buy another property down the track, most lenders will take into account the full mortgage of your shared arrangement because you are ultimately responsible for that if another party defaults.

DO establish a fund to cover ongoing and unexpected costs

It seems like commonsense but many people will just wait until costs arise and then try and sort out retrieving money from co-owners then. You may be a saver, but many people aren’t, meaning they may not have the money available at the time leaving you to front the bill. Instead, arrange for each person to contribute to a fund both initially and regularly that can be used to pay bills, maintenance costs, and other unforeseen events. 

In summary, entering into a co-ownership arrangement can work well for many investors, especially those who would otherwise not be able to enter the market at all. If you follow these rules, you should be well on your way to creating a successful partnership with your family. It’s also worth mentioning, that the same rules apply even if you’re thinking about a similar arrangement with friends.

All Eyes on Perth in 2012

A number of property experts are tipping better times ahead for the Perth property market for a variety of reasons. 

Perth is the city to watch this year, according to Tim Lawless, research director at RP Data.

He pointed to the fact that, despite the city’s property market underperforming since 2008, there had been recent improvements in key indicators. Specifically, he highlighted the increase in the number of transactions and less discounting by vendors as reasons for his confidence the market is heading up. 

“That’s quite a ray of hope,” Mr Lawless said.

“All the indicators are looking positive. We’re actually seeing some evidence that the market is turning around. Perth is going to be the market to watch this year (although) I’m not saying it’s going to boom.”

Lawless isn’t alone in his prediction. Peet property group managing director, Brendan Gore, who joined Lawless on a panel of four at the Urban Development Institute of Australia national conference, is also optimistic about the Perth property market.

He pointed to the tightening rental market, which will entice more people to buy, and the emergence of investors from the East Coast as clear signs of better times ahead.

Terry Ryder also recently wrote an article in Property Observer citing that  “Perth is where investors should focus their attention” and that “the impact the resources revolution will have on Perth’s property market is unprecedented”.

Offset vs Redraw Account

If you’re interested in saving more interest on your loans, it would be wise to consider the use of an offset or redraw account. While many think they are virtually the same, there are key differences so you must choose wisely. 

If you’ve got a home loan as well as a chunk of spare cash sitting in your everyday bank account, you’re losing hundreds if not thousands of dollars every year. While you may earn interest on these savings, it’s often meager and is also taxable. Instead, put your savings to much better use by utilising an offset account or redraw facility with your home loan which will save you more and also save you tax. 

What is a redraw facility?

This facility allows you to pay extra onto your home loan to reduce your loan balance and the amount of interest you owe, while still being able to redraw this excess when you need it.

What is an offset account?

An offset account is a separate savings or transaction account that is linked to your home loan. The money you deposit in this account is offset against the loan balance, meaning the interest on your home loan is calculated based on the net balance.  Most lenders offer 100% offset accounts.

What are the key points of difference between them?

• Essentially, both alternatives offer the same outcomes in terms of interest savings (assuming a 100% offset account).
• The redraw is more direct in that the money goes straight onto the loan reducing both the loan balance and interest owing, while the offset is indirect. Having said that, if paying principal and interest, your repayments will stay the same meaning more money goes towards the principal each time so the loan balance will also be effectively reduced with an offset account.
• Offset accounts are more flexible and convenient in that they act like a regular savings or transaction account, allowing you to withdraw as often and as much as you please including at ATM’s. Redraw facilities are usually more restrictive allowing only a limited number of redraws or a minimum amount for redrawing, take longer to transfer the funds and often there are fees applied for each withdrawal. These drawbacks can be beneficial, however, for those who like to eliminate the temptation of withdrawing the excess funds.
• Some lenders loan products may have a higher interest rate if you want an offset account linked or may only offer a partially offset account. With these lenders, you will need to do the sums to work out if the additional cost is worth it as you may need to have a large sum of cash regularly offsetting the loan to make it worthwhile. 

As an investor, is one better than the other?

It depends on your circumstances however many would say an offset account is better suited for investors. The reason for this is the tax implications. If you were to place a sum of money onto an investment loan and then redraw it later on for personal purposes (e.g. buying a car), you will reduce your ability to claim the full interest expenses on that loan as a tax deduction for the life of the loan. You will also encounter a similar problem if you have a redraw sum available on your principal place of residence, redraw the funds as a deposit for another family home down the track, and then turn your old home into an investment. You therefore need to consider if, and how, you may use any excess funds in future to determine which option is right for you.  Speak with a Momentum Wealth Finance specialist who will set you up with the right structure for you in conjunction with your Accountant or Financial Advisor.

Suburb Snapshot:Maylands

Our bi-monthly Suburb Snapshot section shares our tips on the best suburbs to keep a watchful eye on for your next investment purchase. In this month’s issue, we profile the north-eastern suburb of Maylands. 

Maylands is an inner-city heritage suburb located approximately 5km north-east of the Perth CBD.

It sits along the Swan River and is bordered by the suburbs of Mount Lawley, Inglewood and Bayswater. It enjoys excellent transport infrastructure with several bus routes, a train station, and key arterial roads such as Guildford Road and nearby Tonkin Highway. Both the Mitchell and Kwinana Freeway are also just minutes away via the Graham Farmer Tunnel.

Maylands has one primary school; a public golf course on the river; a yacht club; a new library, community and sporting centre; and a rejuvenated café and shopping strip amongst other things. Maylands also enjoys a number of parks, beautiful lakes, children’s playgrounds, and walking and bike trails that follow the Swan River through East Perth and into the CBD. It is closely situated to utilise the amenities of Belmont, Morley and East Perth.

Once quite working class and run-down, the suburb has already seen immense change over the past decade. New housing estates have been built, streetscapes have been transformed, and heritage buildings restored into funky cafes and apartment complexes. The West Australian Ballet will also be calling Maylands home in 2012, basing its headquarters in a $12 million newly restored heritage building.  However, the suburb still has much more room for improvement. Identified as a key district town centre in the state government’s Directions 2031 framework, it is set to benefit from a revitalisation of the town centre, increasing levels of private development, and an influx of young professionals into the area.

Housing in the suburb is varied and interesting with everything from old and new apartments, villas and units, development plots, and multi-million dollar family homes. Prices are still affordable but have been steadily increasing in recent years and are set to rise even further. Housing is most popular in the south-east of the suburb close to the Swan River and at the opposite end nearer to Beaufort Street, with lock-up and leave properties in demand near the town centre. 

Entry level into the suburb is around $200,000 which will fetch a small one bedroom apartment. Villas and townhouses start from the low-mid $300’000’s through to high $600,000’s. Land can be found from as little as $275,000 although rises to as much as $900,000 for premium plots with more generous sizes and river, lake or city views. Development projects are priced from $600,000 upwards. Houses are quite varied depending on their condition, size, and particular location. Those on small lots typically start from around $500,000, while those brand new or situated in the newer estates from around $800,000. Prices, however, do go for as much as $2.5 million in some parts. Rents are equally diverse due the varied housing available, thus range on average from around $250 to $950 per week.

Key Statistics

Source: REIWA.com.au, January 2012

Selecting a Suitable Renovation Candidate – Part Two

In our last newsletter we discussed what characteristics make a suitable renovation candidate. In this month’s newsletter, we focus on what features are generally not desired and as such may signal a poor renovation prospect. 

Some properties to avoid include those that:

Do not meet market demands

The lifestyle and expectation of people twenty years ago is vastly different to that of today. Some people may make sacrifices for some styles of home (eg a period home), but most want a property that doesn’t constrain their lifestyle. They like big bedrooms, ensuites, and large open-plan dining areas for entertaining. Unfortunately properties that require major floor plan changes to make them suitable for today, require renovations that are usually prohibitively expensive.  And although the new purchaser or tenant may thank you for the works done, your ability to easily add value relative to the expense is dubious (particularly for a novice renovator).

Are not consistent with surrounding properties

If the neighbourhood has been compromised by ugly infill construction you should think carefully before committing to a purchase in that area. The best prices are obtained when people feel they “must have” a property. A compromised neighbourhood usually turns a “must have” property in a “settle for” property regardless of the quality of the individual property. When this happens, the emotional attachment to a property is diminished and they are less likely to pay good prices. 

Have an alternative highest and best use

If the property is in a high density zoned area and is in need of renovation, you may find that any renovations you undertake add little value to the property. That is because the development value may continue to be higher than as a single residence into the future, thus negating the renovations you may undertake (eg it would be better to demolish and build townhouses or units). If you own a property in a high density zoned area, it is probably unwise to spend too much upgrading the property as it may still simply be worth its land value regardless of the improvements undertaken.

Are over capitalised

One of the biggest mistakes renovators make is not knowing the market area and market limits. Most localities have a price limit where it will be difficult to sell a property at that level or above regardless of the quality of the property being offered. This is because people prefer to substitute an inferior quality of home for a better location, thus if the property was over the price limit they would likely choose the alternative entry-level home in the better suburb. You may find that the property you are considering is already close to that limit and therefore any renovations may not add much value.

With council or heritage problems

In many areas, councils have strict development control policies and heritage precincts that severely curtail alterations and renovations to property. You will need to check the Town Planning Scheme and the zoning in the area you are considering. You will also need to check council policies and design guidelines. This is most important if you are intending to make major alternations or make changes to the front of the property. It is best to discuss your proposed alterations and additions with the council before proceeding with purchase to reveal any possible issues.

The lesson here is to carefully evaluate the properties you have identified and avoid rushing into a project. While most renovations can significantly improve a property, there are some that should not be considered if the aim is to come out with a profit. 

The 6 Year Rule

It’s a common question asked by property investors. If someone decides to move out of their home, can they still claim it as their primary residence and therefore obtain the capital gains tax exemption? The answer is yes with some limitations. 

The temporary absence rule states that where a dwelling ceases to be an individual’s main residence, the individual can choose to treat the dwelling as their main residence for all or part of the period they are not living in the property.

If the property is NOT used for income producing purposes after the person moves out, then the taxpayer can treat the dwelling as their main residence indefinitely. But if the dwelling IS used for income producing purposes (i.e. it is rented out) the dwelling can be treated as the person’s main residence for up to six years after they move out.

The good news is that if the property is rented for longer than six years in one continuous period, than the exemption still applies for the six years. It is not lost entirely. But you can only have one primary residence at a time. You cannot purchase another property and rent the old property out and claim both properties as your primary residence for capital gains purposes.

What happens if someone moves out of the property, rents it out then later moves back in, then later moves out again and rents the property? Does the 6 year rule apply to the total of the two periods?

No. The ATO has said in TD 95/9 that the six year rule applies to each period of absence. That means you can access the six year rule more than once for the same property. For the new six year period to start, you must move back into the property.

Momentum Wealth and its affiliated entities are not Accountants or Financial Planners. While all information is provided in good faith, you should seek your own independent advice in relation to all tax matters.

Paid on Time

Managing a property is like running a business and like any business; all landlords would like to receive their payments on time. In an ideal world, landlords would like to receive the rent from the tenant when it is due at all times, however all experienced landlords will agree that things don’t always go to plan.

When realising the rent is late, it is common for most landlords to experience 2 emotions – anger and fear. The landlord is often angry because it effects his/her ability to meet mortgage repayments and afraid because this one late payment may be the beginning of a string of late payments.

Like a business, remember that for each day of unpaid rent that goes by, your financial security is threatened. Late rent must be appropriately dealt with quickly. By taking the correct action immediately, you will redeem your rent and will ensure your tenant does not get into the habit of breaching the terms of their lease agreement in future. There are a number of legal matters you must consider in order to ensure you collect your rent on time and a good Property Manager will be on top of the process and make sure that tenants are followed up as soon as the rent is late.

What is Life Insurance?

Planning is the essence of any financial strategy. If you’ve planned properly, then you’ve left nothing to chance. Effective planning also means having a strategy in place to deal with life’s unexpected events. One of the best forms of protection against these circumstances is adequate insurance. There are several forms of insurance available to protect you and your family’s financial security against life’s misfortunes, the most common being life insurance.

What is life insurance? A life insurance policy provides financial assistance in the form of a lump sum to your family or other dependants in the event of your death. At a time when your family won’t want to be worrying about money, this lump sum can be used to meet their ongoing financial commitments, such as the mortgage, and to maintain their standard of living.

You may be thinking ‘who needs life insurance?’ Simply, if you have a family who is financially dependent on you and/or have debts that are serviced from your income alone, you should look at taking out life insurance. Obviously, the greater your financial obligations and the more dependants you have, the more life insurance you’ll need to protect your assets and your family’s financial security.

There are different types of life insurance available to you. For example, term life insurance only provides death cover and has no real investment value, but life insurance is a cumulative investment that has a monetary value at the end of the policy. You’ll need to explore your options to make sure you have the type of life insurance cover, which best suits your needs and personal situation.

Most superannuation funds also offer some form of life insurance protection if you invest your retirement savings with them. However, don’t assume this cover alone will be adequate. It will be entirely dependent upon your current needs, debts, and other obligations such as your own business, as well as the number of family members financially dependent on you.

Ensuring you have adequate life insurance given your individual circumstances can be a difficult task. We can sit down with you and discuss your current financial situation to ensure that in the unfortunate event of your death, the last thing your family will have to worry about is their financial security. 

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.