Which way are rates heading in 2016?

After 18 consecutive months of leaving rates on hold, the Reserve Bank of Australia slashed the official cash rate twice in 2015. So what can we expect for the year ahead?

The two rate cuts that we saw in 2015, the first in February and the second in May, were largely expected for the year, it was just a matter of when.

At the time, there were two key reasons for the RBA to drop rates.

Firstly, the national economy had remained stuck in a sluggish mode despite the cash rate sitting at a record low of 2.5% for 18 consecutive months.

Another reason was the stubbornly-high Australian dollar, which was still trading above US$0.80 at the start of 2015.

Now that we’re 12 months on, and the official cash rate sits at 2%, what can we expect in 2016?

Following its December board meeting, the Reserve Bank of Australia said that it was happy to leave rates unchanged because the prospects for an improvement in economic conditions had firmed in recent months.

It also noted that the national economy continued to grow at a moderate pace, and that an improvement in business conditions had flowed through to stronger growth in employment.

This more upbeat outlook would suggest that, should the economic environment continue to improve, the RBA is likely to leave rates on hold for the short term.

This decision would also be supported by the lower Australian dollar, which has been trading just below US$0.70 for the majority of January.

However, the RBA also left the door open for a possible rate cut. During its December board meeting it said that it was comfortable with the current rate of inflation, which would allow it to drop rates if necessary.

By present indications, though, we’re likely to see rates remain on hold.

However, should growth begin to slow, or the RBA feels it necessary to give the national economy a shot in the arm, then we could be in for a drop in rates in 2016 – possibly to 1.75% or even 1.5%.

Either way, the current financial environment provides property investors with access to cheap finance, and presents an opportune time to build their portfolios.

Furthermore, it’s also a good time for property owners with established mortgages to consider refinancing to secure a better deal.

For more information or a review of your current mortgage, please contact out finance team today.

Don’t become another statistic in 2016

Although it’s widely known that building a large property portfolio can create significant personal wealth, a staggering 3 out of 4 investors only own 1 investment property.

Whatever your reasons for becoming a property investor, be it to retire earlier or provide a more financially secure future for your family, simply buying just 1 property will unlikely be enough to achieve your goals.

The truth is that investors will generally have to build a portfolio of at least 3 – 5 properties to generate sufficient wealth – that’s provided these are high-performing properties as well.

To some, this might sound like a big undertaking but with the correct strategy, financial structures and by acquiring the right properties, it’s within reach of most investors over the longer term.

Despite this, statistics from the Australian Taxation Office show that 72% of property investors own just 1 investment property.

The reasons why investors never go on to acquire successive properties vary significantly.

Some lose sight of the big picture, they might become distracted by particular life circumstances or they may choose to go on an overseas holiday or buy a new car instead of investing.

Others may even believe that they’ll be okay owning just 1 investment property because they’ll also have superannuation as well as the government pension to live off.

However, for many people superannuation alone will not provide them with the lifestyle they want.

Furthermore, your government pension starts reducing when you reach specific income or asset thresholds.

For singles, the pension will start reducing when your annual income is greater than $4,212, while couples can only earn $7,488 annually before their pension is affected.

Alternatively, your pension begins reducing when you have assets over $205,500 for singles, and $291,500 for couples.

Whichever test results in the lowest pension payable is the one that the government will apply.

In 2016, don’t become another statistic. If your property portfolio is still relatively small, start taking the necessary steps needed to build a larger property portfolio that will allow you to retire comfortably.

Property development: selling vs holding

It’s a question that’s hotly debated among property investors – should I sell or hold my residential property development? So what is the best strategy to take?

Unfortunately, the answer isn’t always straightforward. The decision whether to sell or hold a development is dependent on a number of factors, such as market conditions, type of development, your financial position as well as your goals.

Your goals for undertaking the development in the first place should play a big part in determining your decision.

Do you want to increase rental returns? Maybe you want to make a cash profit? Or perhaps you want to refinance the development and utilise the equity in the property?

It’s important to be clear on your goals from the outset as this can have a major influence on many aspects of the development.

In most cases in smaller developments, it’s best to hold some or all of the development, provided it’s financially feasible for you to do so and the development is in a good location with long-term growth fundamentals.

This is because when you sell a development, you automatically lose a large portion of the profits through sales agent fees, marketing, income tax (from the cash profit you’ve made) and GST.

Alternatively, investors may be able to develop and sell a portion of the project. For example, in a 6-unit development, the investor may sell 3 units and hold the other 3.

If you do decide to sell, it’s important to hold a good understanding of the market. Selling in a downturn may significantly reduce your profits and it might be better to hold the development until the next upswing in the cycle.

The number 1 rule for a successful leasing

Regardless of rental market conditions, all property investors should follow this 1 rule to ensure they can successfully lease their property.

When it comes time to finding a new tenant for your investment property, there are a number of jobs you and your property manager will need to take care of.

This includes creating a holistic marketing strategy, tending to any maintenance issues, ensuring you comply with the necessary legal requirements and presenting the property in an appealing manner, among others.

However, there is one rule that, if not followed, will make it difficult for you to lease your property – even if you engage the best property manager in Australia.

That is to be realistic about the weekly rental rate that your property can achieve.

While we would all like to receive more rental income, the reality is that your property will only achieve what the market is prepared to pay.

Before you set the rent, ask yourself the following questions:

1) What’s the level of demand for rental properties in the market at present? Is it high or low?

2) How much rental income are comparable properties in the area achieving?

3) What’s the vacancy rate in the area?

4) What’s the length of time that properties are remaining on the market?

A good property manager will complete this research for you to determine a realistic rental price.

Remember, if your asking price is too high, your property may sit vacant for an extended period of time and you’ll end up losing more money than if you’d initially set the rent at a more realistic price.

Riverside suburb boasts premium appeal

This tightly-held suburb borders the Swan River, is in close proximity to major employment hubs and will greatly benefit from a soon-to-be completed makeover of its local activity centre.

East Fremantle comprises a population of about 7,000 residents with a median age of 42 years.

73.1% of the properties in the suburb are fully owned or being purchased with just 24.2% of the stock available for rent, which is below the Perth average of 29.2%.

One of the suburb’s main drawcards is its large frontage on the Swan River and adjoining parks and facilities along the foreshore.

Its local activity centre, Richmond Quarter, has been undergoing a major redevelopment and will feature a new vibrant, mixed-use hub including residential apartments, office space and restaurants.

The state government recently announced that it planned to sell the Leeuwin Barracks site, which sits on the riverfront in East Fremantle.

The land is expected to fetch up to $100 million and be redeveloped by real estate developers for premium housing.

East Fremantle is also conveniently located just 2 kilometres from Fremantle and 17km from the Perth CBD.

With 71% of dwellings listed as houses, the suburb comprises a blend of property, from houses built in the early 1900s to modern new constructions.

The average house price sits at $1.2 million and the area is zoned mostly low density residential (R12.5 to R20) with higher zoning along Canning Highway.

37.1% of the population also identify as working professionals, which is almost twice the Perth average of 19.9%, and is reflective of the affluent residential population.

There are two primary schools in the suburb – Richmond Primary and East Fremantle Primary.

What are the top investment destinations for 2016?

Momentum Wealth kicks off its 2016 seminar series later this month with a look at what’s in store for property investors in the year ahead.

Our first seminar for the year, ‘National Property Market 2016’, will explain the best investment destinations, how to find an investment property that will outperform the market and the danger spots to avoid, among other investment strategies.

Following the seminar, attendees will also have the opportunity to speak with our consultants over drinks and canapes.

More than 180 property enthusiasts attended last year’s event and we’re expecting another big crowd in 2016.

The seminar comes at a time when a number of property markets around Australia are nearing significant turning points, with some coming off the boil while others are expected to experience an upswing.

In the midst of these shifting markets, it’s crucial for investors to stay informed and understand the various factors that will influence these markets in the year ahead.

To secure your seat for the evening, simply follow this link. Tickets are only $29 per person or $39 for a pair.

We look forward to seeing you there!

Property syndicates: Why join forces?

It might seem unusual to pool your money with a group of people you’ve never met, but there are a number of advantages to joining forces to invest in property.

Whether it be a residential property development or the acquisition of a commercial property, both investment vehicles can deliver great returns to investors.

However, both of these options also share a common problem – they’re both highly capital intensive.

The reality is that many investors simply don’t have the financial capacity to pursue these investment options by themselves.

For example, a good-quality commercial property would typically cost at least $2 million to purchase and usually require a loan-to-value ratio of 65-70%.

Likewise, while small-scale residential developments are typically feasible, most investors wouldn’t be able to finance a boutique apartment development, which could cost anywhere from $2 million – $7 million to complete.

However, a property syndicate is a practical option that allows investors to gain exposure to these larger assets but at a fraction of the cost.

The advantage of these larger assets, such as residential developments and commercial property, is that they typically provide investors with higher returns or profits and access to better quality investments than they could achieve on their own.

By investing in these assets via a syndicate, you’ll also have peace of mind that the investments are managed/developed by an experienced team, provided you engage a reputable company with a good track record.

When investing in a commercial property trust, another advantage for investors is that they’re generally not liable for the trusts’ loans and won’t be subject to commercial loan reviews or personal guarantees.

While property syndicates aren’t suited to every investor, they should be at least considered to determine if they fit into your property investment plan and are aligned with your investment goals.

Momentum Wealth regularly offers opportunities to investors to participate in property syndicates. Find out more by contacting our corporate property services team.

Are you suited to commercial investments?

Acquiring the right commercial property will prove to be a great investment asset, however what type of investors are suited to commercial and why?

Despite much of the media coverage focusing on the residential market, commercial property can play an important role in anyone’s property portfolio.

However, it’s typically only suited to investors who have reached a certain point in their investment journey.

So who are these investors?

To put it simply, commercial property is usually suited to investors who want more cash flow.

Generally, commercial property offers net yields of between 7-9%, compared to residential property of between 3-4%, and therefore provides investors with a handy stream of income.

Those about to retire should consider investing in commercial property as a means of substituting their salary once they’ve finished work.

However, you don’t necessarily need to be nearing retirement to consider commercial.

Investors who have already built a sizeable portfolio of residential properties should also consider commercial as a means of diversification.

As a general rule of thumb, investors should hold at least 4-5 residential properties before buying commercial assets. However, each investors’ situation is unique and advice should be taken from a reputable property investment advisor.

Investors considering investing in commercial property should also possess the following:

• Hold substantial equity as commercial property is a higher price point
• Understand the risks and returns as these are different from residential property
• Is comfortable with longer vacancy periods, which is typical in the commercial market
• Has the time to do significant research to find a good commercial property (or willing to appoint a buyer’s agent to do the work for them)

An alternative to direct investment is to consider investing via a syndicate or unit trust, where you own a smaller piece of the property but you have the ability to diversify and spread your risk through a wider number of properties.

3 financial structures that can limit your borrowing capacity

Don’t let your financial structure hold you back from achieving your property goals in 2016 – here are 3 common finance mistakes that can limit an investor’s borrowing capacity.

When seeking to build a sizeable portfolio, many investors focus on the need to find properties that will grow in significant value.

However, investors also need to be aware of their financial structures because the wrong arrangements can severely constrain one’s borrowing capacity, and subsequently their ability to build a large property portfolio.

Here are 3 finance structures that investors should typically avoid.

Cross Collateralisation
Cross collateralisation is when a lender uses two or more of your properties as security to issue you a loan. This effectively keeps you tied to the one lender and can reduce your ability to borrow – in some instances, your lender may stop lending to you altogether. It’s best to secure each loan with one property only to maximise your lending capacity.

Ownership structures
Some accountants or financial planners may suggest you buy property via a trust. While a trust ownership may help with asset protection, this type of ownership structure can also limit an investor’s borrowing capacity. Some lenders will not allow the negative gearing claims for loan serviceability where the property is owned in a trust. Before establishing a trust to buy an investment property, it’s best to engage the advice of a mortgage broker who specialises in investor loans to assess your borrowing capacity.

Joint and several liability loans
When borrowing jointly with another person, you are each individually responsible for the entire debt but only entitled to half the rental income. This can adversely affect your borrowing capacity outside of the joint purchase, particularly if you’re buying with someone other than your partner.

Easing affordability provides bargain buys for investors

Housing affordability in two capital cities across Australia has improved making it a great time for investors to find some bargain buys and build their portfolios.

Both Perth and Brisbane currently represent great value for money for property investors.

Housing affordability has improved in both cities over the past year, according to credit rating agency Moodys.

In Perth, the average household spends about 21% of their income on mortgage repayments, down from 23.9% a year earlier.

This is the lowest level since 2004, and is a result of the low interest rate environment, migration easing from its recent peak and moderating prices over the past year.

Similarly, conditions have also eased in Brisbane where households spend about 23% of their income on mortgage repayments.

The improvement in the housing market in the Queensland capital can be attributed to many of the same reasons seen in Perth.

As both of these cities continue to transition from the resources boom to develop strong and diversified economies, investors are presented with a window of opportunity to acquire high-performing properties at reasonable prices.

Both cities represent great value for money, particularly when compared to Sydney and Melbourne, where households spend 39% and 32%, respectively, of their income on mortgage repayments.

Given the strong, long-term fundamentals of both Perth and Brisbane, it’s a great time for savvy investors to take advantage of the improved buying conditions.

Take action to achieve your development goals

If you’ve always wanted to become a property developer, make 2016 the year that you realise your dreams.

For those who have never done it before, the thought of developing your own property can be a daunting, yet highly exciting prospect.

However, property development doesn’t have to be scary or a highly onerous process. You just have to align yourself with the right people who hold the right skills to get the job done.

Engaging a company to manage the development of your property can be one of the easiest and most financially rewarding ways of developing a property.

Essentially, a lot of the leg work, that is researching and finding the best designers, builders and trades people has already been completed for you.

Furthermore, a development manager will also have a comprehensive understanding of the required processes and procedures, including when to gain council approvals, liaising with utilities providers and suppliers, insurance coverage and contract negotiations and terms, among other issues.

Whether it’s completing a retain and build or the construction of a boutique apartment complex, a development manager will work with you to obtain the most cost effective outcomes, by minimising delays and costs and maximising profits.

A good development manager will have a good track record of delivering a variety of projects. Ask to see or inspect some of their existing projects under construction and even speak with previous clients.

Property development doesn’t necessarily mean having to get your hands dirty or completing physical labour on the weekends.

Additionally, given the efficiencies that a good development manager can deliver, it’s easy to see the value in paying a professional to oversee a development for you.

So if you’ve always aspired to complete a property development, make 2016 the year to fulfil your goals.

Mark the start of 2016 with a cosmetic facelift

With the advent of a new year it can be a great opportunity for investors to complete some minor cosmetic upgrades to keep your properties looking modern and tenants happy.

Part and parcel of owning a property portfolio is the need to complete maintenance and upgrades to prevent properties from becoming run down and looking tired.

While it’s easy to see this as a cost, a better way of looking at this is the upgrades will help to maximise rents – some of these costs can also be claimed as a tax deduction. Furthermore, all savvy property investors should have a specific budget set a side each year for completing such cosmetic works.

In the spirit of a fresh year, New Year’s resolutions and so forth, it can be a great time to complete any necessary cosmetic upgrades your properties might need.

This could include laying new carpet, applying a fresh coat of paint and changing fixtures and fittings, such as taps, door handles and light switches.

Property investors should also consider completing cosmetic upgrades to the exterior as well.

Cleaning outside walls, painting or replacing rusting gutters and completing landscaping can significantly lift the appearance of a property.

Sometimes just focusing on 1 or 2 bigger tasks, such a landscaping or painting internal walls, can make a big difference for the tenant, particularly if the garden is overgrown or paint job is over a decade old.

If you’re using a good property manager, they’ll be able to provide you with a list of recommendations as to the best and most cost effective upgrades to complete.

Syndicates prove popular with investors

Momentum Wealth’s most recent residential development syndicate proved highly popular with investors after closing fully subscribed last month.

The Momentum Wealth Prime Property Development Fund (PPDF), which was launched in November last year, received commitments totalling $4 million and was closed in early December.

The PPDF comes on the back of our highly successful Carine Rise development syndicate, and will target the acquisition of a development site and subsequent construction of a boutique apartment complex.

The PPDF also follows the successful launch of the MPS Diversified Property Trust in July 2015 by our affiliated company, Mair Property Funds.

Following its launch, the MPS Diversified Trusts completed two successful raisings totalling over $6 million.

The funds were used to acquire high-quality commercial properties in Victoria and Western Australia, which will provide robust returns to investors.

Keep an eye out for further syndicates and trusts from Momentum Wealth and Mair Property Funds in the forthcoming year.

SMSF loans caught in APRA crackdown

As Australia’s banking regulator continues to force finance lenders to tighten their lending standards, we take a look at how SMSF loans have been affected.

Lending via self-managed super funds (SMSF) began in 2007 after regulations where changed to allow SMSF’s to borrow money for investment purposes.

However, under the Australian Prudential Regulation Authority’s (APRA) recent crackdown on investor loans, borrowing via SMSFs to purchase an investment property has become much harder.

APRA’s changes to investor loans are designed to cool the residential property markets in Sydney and Melbourne, where house values have skyrocketed on the back of record-low interest rates and high demand from property investors.

As part of the changes, finance lenders are required to adhere to a limit of 10% growth in investor loans as well as hold more capital on their books.

The latter has led to many lenders completing billion-dollar capital raisings in recent months and, more recently, raising interest rates on some loan products, including SMSF loans.

Following APRA’s changes, some lenders have withdrawn SMSF products altogether.

Those lenders that have remained in the space, though, have been forced to tighten their loan requirements, meaning applicants must meet much stricter criteria.

The changes differ from company to company, however, most lenders have reduced their loan-to-value ratio (LVR) from 80% down to 70% for SMSF loans.

Lenders that have left their LVRs at 80%, though, have stopped offering interest-only loans, and applicants must make principle and interest repayments.

Some lenders are also requiring a minimum starting balance in the fund before a property can be purchased.

Additionally, some lenders are demanding SMSFs have some capital invested in different assets other than the property being acquired. For example, a $400,000 property purchase at a 70% LVR with a $280,000 loan amount would require the fund to have a minimum of $28,000 left over after all purchase costs.

Amid these changes, it’s important for investors considering purchasing property through an SMSF to seek advice from brokers and financial planners who specialise in this area.

5 tips for investing in a buyer’s market

Purchasing an investment property in a buyer’s market can be a spring board to significantly growing your wealth. Here are 5 tips to help investors make the most of favourable market conditions.

Buyer’s markets are an opportune time for investors to start or build their property portfolios.

Typically, in a buyer’s market there will be more properties for sale, fewer buyers and values may have softened.

While these factors provide favourable market conditions for property investors, to fully leverage these benefits here are 5 tips you must remember.

1) Secure finance pre-approval before starting your search for a property. Although there are generally fewer buyer’s in a buyer’s market, competition can remain tight in some segments of the property market or for some property types. By organising finance pre-approval, you’ll be in a much stronger position to beat any other buyers.

2) Don’t necessarily jump at the first property you find. As stock levels increase in a buyer’s market, investors will inevitably have more choice. To help you secure the best deal, determine the type of property you want to acquire (i.e. development site, established house etc) and compare similar properties before making an offer on a property.

3) Don’t rely on the whole market to rise. Never assume you’ll make a profit by simply acquiring a property in a buyer’s market and selling it during the next upswing. Make sure to complete sufficient research and purchase an investment property in an area that has strong growth fundamentals.

4) If you’re ready to buy, don’t delay. Many investors, too often, sit on their hands and wait for the property market to start rising again. However, by that time investors would have missed out on capital gains and may have to pay more for a property.

5) Weigh contracts in your favour. Property investors will have greater negotiation power in a buyer’s market, and should demand favourable contract terms and conditions, such as longer due diligence periods.

3 ways to become a developer

Do you want to become a property developer but aren’t sure where to start? Here are 3 ways to fulfil your goal, regardless of your level of knowledge, expertise or time constraints.

If you want to try your hand at property development, there are 3 options you can take, each distinctly different and requiring varying levels of involvement.

These 3 options allow anyone to become a successful property developer, irrespective of their experience, knowledge or time limitations.

1. Do it yourself Developing property by yourself is by far the hardest and most time consuming of the 3 options. This requires you to complete a large amount of research and due diligence to ensure you’re finding the right site and completing the right type of development. You’ll also have to deal with the extensive red tape associated with councils and builders. Developing property by yourself is generally completed by seasoned investors who’ve a thorough understanding of the property and building industries.
2. Appoint a development manager By appointing a good development manager you’ll be working alongside industry specialists who’ll be able to guide you through the entire process. A development manager will provide you with valuable advice as how to mitigate the risks and maximise profits. You maintain control over the project and your level of involvement can be as high or low as you prefer. You won’t have to dedicate as much time to the development because the development manager will take care of a lot of the research and red tape for you.
3. Invest in a development syndicate Development syndicates provide exposure to much larger opportunities that may not have been an option as a sole investor. Syndicates also require less capital investment from each individual participant. They are ideal for more passive investors who are either time poor or don’t have extensive knowledge about property development. As an investor in a development syndicate, you can simply sit back and let industry specialists complete all the work on your behalf.

Dealing with late rental payments

In an ideal world, tenants would pay their rent on time. Unfortunately, this is not always the case, so how should you broach the issue of late payments with your tenants?

For the majority of property investors, rental income is relied upon to repay their loan on the property.

So when a tenant fails to pay their rent on time, the ramifications can be far greater than simply being out-of-pocket for a short period.

Conversations about money can be uncomfortable at the best of times, so if you’re managing your own property, late payments can put you in an awkward situation.

However, it’s critical to take the correct action immediately, otherwise, it sets a bad precedent and the tenant may believe that it’s okay to pay their rent late.

If you’ve engaged the services of a property manager, you won’t have to worry about the hassle of dealing with late payments, though, because the property manager will take care of this for you.

To help mitigate the risk of late rent, payment periods should be agreed upon with the tenant prior to signing a lease agreement – this information should also be included in the lease contract.

Tenants should also be encouraged to set up direct debit payments, so rent is automatically transferred to coincide with the due date.

It can be a good idea to have the transfer set up 2 or 3 days prior to the due date to take into consideration transfer delays between different banks.

If a tenant fails to pay their rent on time, it’s important not to jump to assumptions and conclude that they haven’t paid deliberately.

The tenant may have simply forgotten and needs reminding. Perhaps they’ve transferred the rent but there have been technical issues between banks.

Alternatively, the case could be much more serious and they may have been injured at work or lost their job. In these instances, it’s important to take a sensitive approach to the situation.

Of course, if a tenant continues to fail to pay their rent, there are a number of legal avenues to take.

Investor acquires 3 properties in 18 months

After experiencing some “ups and downs” in the property market, this investor decided to engage professional help. The result was 3 properties purchased in 18 months, and there’s more to come.

Andy Harrison started investing in property in 2003 and said he’d had a mixed experience going it alone, choosing “some good areas and some bad areas”.

“I soon realised that it’s not just about investing anywhere, you have to find the rights pockets within the right suburbs,” he said, also noting that individual property selection was key as well.

Based in Boddington, Western Australia, Andy decided to seek professional advice and engaged Momentum Wealth in 2013 after booking a free consultation with one of the company’s consultants.

At the time he wasn’t sure how many properties he wanted to acquire or how fast he wanted to grow his portfolio.

Andy said he just wanted to “go for it”, so he enlisted the help of Momentum Wealth’s buyer’s agents to find him his next investment property.

Subsequently, he bought a 3-bedroom, 1-bathroom villa in Dianella in May 2013.

“Using the buyer’s agency service takes the headache out of doing your own research, because its hours and hours of time that I just don’t have,” Andy, who is a small business owner, said.

Highly impressed with the outcome, Andy purchased two more investment properties in 2014, again using Momentum Wealth’s buyer’s agency service.

This time he bought a 4-bedroom, 1-bathroom house in Forrestfield and a 3-bedroom, 1-bathroom house in Thornlie.

“I wasn’t scared to max myself out and see how far I could go,” he said.

Since then, Andy has built an ancillary dwelling, commonly known as a granny flat, at the back of his Thornlie investment property.

The ancillary dwelling allows Andy to receive two rental incomes from one property (one from the main residence and one from the ancillary dwelling), which significantly boosts the rental yields.

While he utilised Momentum Wealth’s planning and development team to oversee the construction of the ancillary dwelling, Andy wasn’t scared of doing some of the heavy lifting himself, including renovation works to the main residence and landscaping on the property.

As the owner of a painting business, Andy was also looking for various ways to reduce his taxable income.

Property investment proved to be an effective solution, according to Andy.

He said since purchasing the properties he has cut his tax rate to close to one-fifth of what he was previously paying.

In addition to using the buyer’s agency and planning and development services, Andy also utilised Momentum Wealth’s finance brokers to adequately structure his loans.

“The finance team went over and above what they were supposed to do,” he said.

“If we had any issues with the bank or we were not quite sure, they sorted it out for us, which was brilliant.”

Looking ahead, Andy said he wanted to continue to purchase as many investment properties as he could.

“I’d like to have 10 properties within the next 6 years,” he said.

After purchasing 3 properties through Momentum Wealth, in addition to two other investment properties he already owns, he’s now at the halfway mark to achieving that goal.

Andy said he’d be referring to his Property Wealth Plan to help him along the way.

“That’s basically our bible,” he said, referring to the Property Wealth Plan, which was prepared by a Momentum Wealth property strategist.

“We quite often pull it out and have a good read. Even now when we’re looking forward to the next stage it helps us know exactly where we’re going.”

If Andy’s recent investment history is anything to go by, his next purchase shouldn’t be too far away.

What drives wealth in commercial property?

Those who aren’t attune to commercial property may assume that wealth is created in the same method as residential property. However, this isn’t necessarily the case.

When it comes to commercial and residential property, both asset classes share similar macro-economic drivers, including population, income and economic growth as well as supply and demand factors.

However, the means in which wealth is created through commercial and residential property generally varies.

For example, commercial property typically generates net rental income of about 7-9%, while residential property typically generates net rental income of 3-4%.

On the other hand, residential property has historically recorded higher growth rates compared to commercial property.

Wealth is created in different methods dependent upon if you own commercial or residential property.

Below are the main points associated with residential and commercial property that typically affect wealth creation.

Generally, residential property is the best option as a starting point in property and during an investor’s accumulation phase (i.e. when they’re building their property portfolio) so they can continually leverage their equity to make their next acquisition.

Conversely, commercial property is the best option, generally, when investors are nearing retirement and need a source of income (i.e. they retire and use the rental yields as their disposable income).

Ideally an investor will retire with a balance of residential and commercial property and a sold income stream to set them up for life.

Property trusts: listed vs unlisted

Property trusts are generally offered in two forms – listed or unlisted. But what’s the difference and the pros and cons of each?

Property trusts allow investors to gain access to larger, higher yielding investment opportunities at significantly lower price points than they could buying directly on their own.

Typically, trusts are either listed, in which they’re traded on a stock market (such as the Australian Securities Exchange), or unlisted, in which they’re privately held and there is no public market.

Investors in listed trusts can buy or sell at any time – the same as they would trade shares on the stock market.

While this may have its advantages, it can also mean that the unit price can be more volatile as it imitates the share market rather than the property market.

Conversely, investments in unlisted trusts are usually locked in for the duration of the trust. The duration of an unlisted trust depends on its type, for example commercial acquisition or development.

An unlisted trust may only hold a single or a small number of specific assets.

Asset can only be bought or sold in the parameters set out in the trust constitution, and some decisions require a vote by unit holders (i.e. the investors) with voting rights in proportion to each investor’s interest.

There are pros and cons to each form of trust and individual investors must determine what the best fit is for them.

How delays can cost your development

If you’re completing a project that’s being bankrolled with development finance, you’ll want to avoid delays in your project.

One of the most important points that novice developers often forget is the issue of interest costs. Typically, a development loan is a 2-year term and once the term is exceeded the loan is supposed to be repaid in full. However, if it’s not repaid, then the developer will continue to incur interest on the outstanding loan and potentially at higher rates than during the term of the loan.

While most residential developments take up to 18 months to complete, if you don’t have the right builders and contractors working for you, you’re likely to face time blowouts. Delays of a few months can leave developers with little time to sell their finished products and repay the debt before the loan term finishes.

In one instance, a developer engaged Momentum Wealth after failing to repay their loan by the end of the term because their project had suffered major delays. The developer was paying penalty interest of 13%, or about $14,000 per month. Our finance brokers were able to refinance the developer’s loan with a specialist private lender at 9% for an extended term. This significantly reduced the developer’s repayments and provided them with additional time to complete and sell the finished project.

Interest expenses can turn a highly profitable project into a potential loss. Therefore, it’s important to avoid excessive interest costs by using reliable builders and contractors with a good track record of completing projects on time and on budget.

Many investors who want to develop but don’t have the time to manage the project often appoint a development manager, who will manage the entire project and keep the builder to their time frames. Momentum Wealth is managing over $170 million in projects for our clients. If you’d like to speak to one of our development specialists, please call us on 9221 6399 to see how we can help you with your project.

Demand not the only equation

Many investors place a large focus on the future demand of properties when searching for their next acquisition. However, there is another equally important factor that must be taken into consideration. Although robust demand for property is important to help ensure values rise, many investors don’t consider the supply side of the equation.

Oversupply of property in your investment area has the potential to significantly restrain the capital growth of your assets. Quite simply, investors need to look at their properties and consider how easy it is for others to build additional dwellings of the same type in the same location. In other words, how much competition will your property have and could this increase significantly?

In any market that has a high supply of a specific asset, including housing, consumers of that product will have more choice, which subsequently reduces your ability to demand a higher price. A good example of this is residential estates on the urban fringe of metropolitan cities, where large areas of land can be readily developed for new housing. Another example is apartment buildings in central business districts, where new, large-scale apartment complexes can be easily built.

Typically, it’s best suited to acquire investment properties in established areas with high demand and limited availability for new stock to be added. This can help contribute to higher capital growth from your investment properties.

How to build your way to wealth – part 3

Property development is regarded by many investors as the Holy Grail because of the huge profits on offer. So what does it take to be a doyen of development?

In Part 2 of this article series we outlined steps four to six to becoming a successful property developer. This included the necessity to complete a feasibility study, identifying your tax status and buying your development site wisely. In the final part of this three-part series we explain steps seven to 10 – the need to structure your finances correctly, choosing the right designer and builder and deciding whether to hold or sell your development.

Adequately structure your finances
Just about every developer will have to take out a loan to finance their project. For development loans, it’s best to engage a finance broker who specialises in this segment as the terms and conditions can vary significantly, compared to a normal home loan. Loan-to-value ratios, term periods, interest rates and others important issues are vastly different for development finance so it’s best to utilise a broker that has a firm understanding and proven track record of securing loans for development projects.

Choosing the right designer
Typically, it’s best to engage a building designer or architect as opposed to a builder direct. Using a builder direct will mean they own the copyright to the plans and if, for any reason, you don’t want to use that company, you’ll have to restart the planning process, or pay a hefty fee for the copyright. By engaging a building designer or architect, you’ll own the copyright and will be able to tender the plans to builders and choose the company that offers the best deal. Ensure you designer or architect has completed similar projects in the past. Designing a duplex in a middle-class area on a tight budget is significantly different to designing a boutique apartment complex with premium features in an upper class location. Make sure to see examples of the previous work they’ve completed.

Picking the correct builder
With your plans complete you can tender your project to various building companies. Approach builders who have a proven track record of delivering similar projects. When it comes time to selecting a builder, it’s not always best to select the one with the cheapest quote. Also consider the builders quality, reliability and construction time. It’s important to thoroughly compare quotes as some may include items which other builders consider optional extras. It can also be useful to include penalty clauses in the contract, which means the builder will receive a smaller fee if they don’t finish the project in the agreed timeframe.

Develop and hold or develop and sell
Generally it’s best to hold your property and use the equity to finance your next project. By holding, you’ll avoid having to pay income tax, selling agents fees and services tax, which reduce your profit margin. If you decide to sell, make sure the timing is right and there is sufficient demand from buyers.

It’s evident that property development can deliver massive financial windfalls, however there are a myriad of risks that have to be considered and mitigated. To optimise returns and minimise risks, it’s wise to engage independent professional help, such as development finance specialists, buyer’s agent and project manager.

Property management: balancing price with performance

It might be tempting to engage the cheapest property manager you can find, but it could prove to be one of the most costly decisions you’ll ever make. For serious property investors, choosing a property manager based purely on their fees carries significant risk. You wouldn’t choose the cheapest stock broker to manage your shares, so why would you choose the cheapest property manager?

At the end of the day, if you engage a cut-price property manager you’re likely to receive a significantly lower standard of service. This is because the property managers at these agencies are forced to oversee a higher number of properties – sometimes hundreds of properties for each manager. Consequently, these property managers are swamped with work and can’t provide an adequate level of service to each customer.

With cheaper agencies you’re also likely to encounter a higher turnover of property managers. This is because they simply can’t cope with the huge workloads, become burnt out and have to change employees. In other cases, some agencies might offer a cheaper upfront fee, but then charge for additional services.

Eventually, the fees with the budget agency start to add up and might be the same, or more, than with a premium property management firm. Even worse, if owners don’t opt for these additional services, such as property inspections, the condition of the property may suffer and rents won’t be optimised.

Another area that suffers is staff training. If profits are marginal, there is no budget to provide adequate education and keep staff up-to-date with legislation.

As a property investor, you need to weigh up the importance of potentially saving a few hundred dollars each year at the risk of harming the performance of one of your most valuable assets.

Remember, property management fees are a tax write off meaning you’ll pay less tax and recoup some of the cost.

Not your typical investment suburb

Offering good schooling, parks and amenities, this affluent beachside suburb is one of the most expensive in Perth with a median house price of $1.7 million.

City Beach, located in the Town of Cambridge, is one of Perth’s most sought-after suburbs. It boasts a long stretch of beach down its western border, is just 10 kilometres to the Perth central business district and comprises many parks and ovals, including Bold Park and Wembley Golf Course.

The suburb has a population of about 6,400 residents with a median age of 44 years. About 40% of the population are in professional employment, which is double the average.

There is a low concentration of state housing, with the area mostly zoned low density residential (R20 and under) with about 88% of dwellings listed as houses.

About 80% of properties are either fully owned or being purchased while just 13% are being rented – the Perth average is more than double that at 29%.

There are multiple primary schools within the suburb as well as the International School of Western Australia and many prestigious private schools, including Hale College.

City Beach is the fourth most expensive suburb in the Perth metropolitan area with the median house price of $1.7 million.

Neighbouring suburbs include Swanbourne, Scarborough, Floreat, Churchlands and Mount Claremont.

The suburb’s main shopping centres are City Beach Boulevard, Ocean Village and the major shopping centre in neighbouring Floreat, Floreat Forum.

5 features to look for when acquiring a commercial property

If you’re seeking to purchase a commercial investment property, here are five features you need to consider to help attract your future tenant.

When purchasing a commercial investment property there are a number of macro and micro economic factors you need to examine to ensure you acquire a high-quality asset.

These include the area’s future demand and supply for similar properties, major infrastructure initiatives and broader economic activity, among others. However, it’s also crucial to consider some specific aspects of the property itself, particularly tangible features that a future tenant will look for and find appealing. These features generally differ depending upon the type of commercial property, such as industrial, retail or office, because tenants in different properties demand different amenities.

Here are five features you need to consider in your next commercial property to help you attract your future tenant.

Industrial/warehouse

1. Truck turning circles.
2. Truss heights – standard heights are typically about 7-8 metres.
3. Office component – typically about 25%-30% of floor space needed for offices.
4. Overhead crane facilities.
5. Door access – is this big enough for bulky goods?

Retail

1. Foot/car traffic – is the shop frontage in view of a highly-used footpath or road?
2. Accessibility – is there good public transport or major roads nearby?
3. Locus of activity around the property.
4. Car parking – is there sufficient parking facilities and are these paid parking or free?
5. Signage rights – what are you and your tenants entitled to?

Office

1. Employee accessibility – are there sufficient parking facilities or is it close to public transport?
2. Telecommunication – is this sufficient for tenant needs?
3. Sufficient useable floor plate.
4. NABERS/Green Star rating – is it a high-performing building?
5. Air conditioning facilities.

While these are not the only aspects you need to consider when searching for a commercial investment property, they’re a good start and are features that are generally demanded by tenants.

What is a property trust?

You may have heard about property trusts, but what are they and what benefits do they offer investors?

Property trusts are a great way for investors to access property assets, either commercial or residential, but in a different structure from direct property ownership.

Property trusts can either be listed, meaning they are traded as shares on the Australian Securities Exchange, or unlisted, meaning they are held by investors and there is no public market.

Property trusts are generally offered in two forms, either wholesale or retail, with the latter being offered less frequently because these demand more onerous compliance requirements.

Typically, investors will buy units in a trust with the number of units they hold proportional to their interest in the property. For example, if the trust had 5 million units at $1 each and you owned 250,000 units you effectively own 5% of the property.

However, investors are not on the property title – the trustee of the trust holds the property on behalf of the unit holders.

Investors can buy their units in their choice of tax vehicle (i.e. under their own name, self-managed super fund, discretionary trust or company).

Commercial property trusts generally pay distributions to investors on a quarterly basis while the property is held and then a final payout of the gain once the property is sold. For example, if you own 5% of the units on offer, as in the example above, you would receive a 5% share of the rent returns and 5% on the sales proceeds when the property is sold.

Issues relating to a trust can be voted on by investors as provided for in its constitution and voting rights will be proportional to the amount of each investor’s interest.

Property trusts are a great way for investors to gain exposure to high-quality property assets which they may not be able to afford on their own.

Investor loan changes continue to unfold

Australia’s finance watchdog, the Australian Prudential Regulation Authority (APRA), has continued to increase pressure on the country’s lenders in a bid to restrict further growth in investor loans.

Since the June edition of Property Wealth News, when we first reported APRA’s intentions to implement tougher lending criteria for investor loans, Australian lenders have moved to meet the new requirements.

This entails lenders observing a speed limit of 10% annual growth in investor loans, which is designed to cool the overheated property markets in Sydney and Melbourne, which have been driven largely by investor activity.

Effectively, there’s no silver bullet for lenders to meet the new requirements and as such these institutions are changing any, or all, or the following to meet the 10% target:

• Acceptable loan-to-value ratios
• Serviceability requirements
• Interest-rate buffers
• Negative gearing allowances
• Rent allowances
• Rate adjustments

To ensure lenders are taking the necessary steps to increase scrutiny of investor-loans, APRA has begun auditing these financial institutions on a weekly basis.

Amid these changes to assessing investor-loans, property investors should seek advice from brokers that specialise in investment finance.

This is particularly pertinent for investors who are considering purchasing a property within the next 12 months, but also applies to any other property investors to ensure their loans remain the most suited to their long-term circumstances.

Why property selection is critical to creating wealth

Not all properties in one single city or suburb record the same growth rates and the cost of buying the wrong property could be higher than you think.

While anyone with a deposit or enough equity in their home can become a property investor, buying a high-performing investment property is a totally different ball game.

It requires a comprehensive understanding of the property market, a firm knowledge of the underlying economic drivers that will lead to higher capital growth and literally hundreds of hours of research and monitoring the market to find the right property.

Quite simply, finding the right property is hard work, and then you have to make sure your finances are structured effectively as well as negotiating the purchase to ensure you secure the best price and contract terms.

However, when it comes to property investment, the hard work is generally worth the reward.

For example, if an investor purchases an investment property for $500,000, the capital gains will be substantially different depending on the growth rate.

At a compounded growth rate at a moderate 5%, the capital gains on the property will be about $140,000 after 5 years and about $320,000 after 10 years.

While these returns might seem sufficient, the capital gains are significantly more if the compounded growth rate is only slightly higher at 8%.

At this rate, the capital gains on the property will be about $235,000 after 5 years and about $580,000 after 10 years.

Given this, it’s easy to see why property selection is critical to optimising your wealth.

The performance of your first investment property will also have a large impact on how soon you can purchase subsequent investment properties.

Indeed, the sooner you can purchase another high-performing investment property the quicker you can build your wealth, so it pays to select the right property the first time.

How to build your way to wealth – part 2

Property development is regarded by many investors as the Holy Grail because of the huge profits on offer. So what does it take to be a doyen of development?

In Part 1 of this article series we outlined the first 3 steps to becoming a successful property developer.

This included the necessity to know the intricacies of the property development industry, to hold a firm understanding of the property market and the essential considerations when searching for a development site.

In the second part of this three-part series we explain steps four to six – the need to complete a feasibility study, determining if you’re an investor or a developer (as this will impact your tax bill) and how to buy your site wisely.

1. Complete a feasibility study

After you’ve located a potential site that you believe meets your criteria, you’ll need to complete a feasibility study to ensure it does. Unless you’ve done this before, you’ll need to engage professional assistance to compile a feasibility study. The aim of this is to determine the size of the profit, or loss, that you would make should you proceed with the development.

The following information should be detailed in a feasibility study:

• All easements or covenants on the land title and any impact on development
• Analysis of soil to determine engineering and drainage requirements
• Position of utilities and services, such as power poles and sewerage drains
• A calculation of building and subdivision costs
• A detailed timeframe of the project

At this stage you would have invested a considerable amount of time into the project, however if it doesn’t pass a feasibility study you’ll need to consider a different site.

5. What’s your tax status?

Whether you’re considered a developer or an investor can determine the amount of tax you’ll have to pay on the development.

For example, as an investor you will pay tax on any profits from your development but if you hold onto the property for more than 1 year you may be entitled to a 50% discount.

Conversely, as a developer you may not be eligible for a tax discount and you may have other tax obligations.

To provide peace of mind, you should seek advice from tax accountants to determine your likely tax status.

Your accountant should also be able to advise as to the best type of structure to acquire the development, whether it’s an individual name, joint ownership, as a company or in a trust. Each has its own financial and legal pros and cons.

1. Be an intelligent buyer

The amount you pay for your development site is one of the few factors that is within your control and this will have a considerable impact on the profitability of your project.

It’s also important to secure favourable contract clauses. Ensure an adequate due diligence period is included in the contract so you can conduct thorough research into the site’s profitability as well as walk-away clauses that allow you to cancel the acquisition if you’re not fully satisfied.

Keep in mind, sales agents work for the seller so it can be wise to engage the services of a buyer’s agent to oversee negotiations and ensure contracts are weigh in your benefit. A buyer’s agent can also keep your identity and motives confidential.

The third and final part of this article series, to be published in the October edition of Property Wealth News, we will explain how to properly structure your finances, how to choose the best designers and builders and whether to sell or hold your final product.

What your property manager needs to do at the end of a tenancy

While landlords fear vacancy periods in between tenants, there are certain matters your property manager needs to attend to before a new tenant can move in.

It might seem ideal for a tenant to move into your property the day after another vacates, thereby ensuring no disruption to your rental income.

However, this rarely occurs and in the large majority of situations, this is not entirely practical.

Generally, there has to be at least a few days when the property is empty so the property manager can conduct the necessary tenant-vacate checks.

One of the most important tasks to complete when at the end of a tenancy is the final inspection and the completion of a property condition report.

This is necessary to ensure the property has been adequately cleaned and prepared to a suitable condition for the new tenant.

It’s also a chance to identify any excessive wear and tear to the property, if any items have been wrongly removed or left at the property or if there is any damage to the property.

In some instances, the outgoing tenant may be required to revisit the property to amend any issues and, subsequently, the property manager will have to reinspect the property to ensure the problems have been addressed.

Provided these processes have been followed, the bond can be finalised and the appropriate amount returned to the tenant before the property condition report is updated.

While a brief vacancy period allows the property manager time to complete the necessary processes, it’s also a good time for the landlord to consider any maintenance issues.

Ideally it’s better to complete larger jobs when the property is vacant, such as painting, flooring or minor renovations, which will help to optimise rents.

Although landlords do lose rental income during vacancy periods, these times should be used to ones’ advantage because completing tenant-vacate checks and maintenance jobs will ultimately

Buzzing inner-city suburb highly sought after

This affluent suburb is located in the hustle and bustle of inner metropolitan Perth making it a highly sought-after area for many younger people.

Highgate is situated just 2 kilometres from the Perth central business district and has a population of nearly 2,000 residents with a median age of 33 years.

As well as being located close to the Perth CBD, Highgate’s other major drawcard is the Beaufort Street café strip, which features a variety of cafes, restaurants, retail and nightlife offerings.

Given these highly appealing aspects, Highgate’s average house price is considerably high at $840,000.

About two-thirds (61%) of dwellings are rented in the area, which is more than double the Perth average of about 29%.

Highgate comprises a mix of residential zoning ranging from R30 through to R80, however the City of Vincent has released a draft town planning scheme that incorporates rezoning throughout much of the suburb.

In addition to the slated zoning changes, revised criteria for development has also been proposed.

The suburb has many parks, including the well-known Hyde Park, and multiple primary schools which service the area.