Case study: The dangers of poor mortgage advice

Seeking the advice of a finance specialist with a strong understanding of investment finance can be critical for property investors looking to progress in their investment journey. For active investors who have capital spread across multiple assets, in particular, ensuring the right loan structures and features are in place is essential to the expansion and success of their investment portfolio. Poorly structured loans can not only be detrimental to an investor’s long-term investment plan, but could also have critical implications on the management of their finances come tax time.

In our latest case study, we look at how the specialist mortgage brokers at Momentum Wealth helped an active investor who had received poor lending advice from a finance broker with a lack of experience in property investment.

The problem

Prior to enlisting the services of Momentum Wealth, the client had approached another finance broker to set up a loan that would be utilised for multiple investments. The client was an active investor in property, syndicates and other asset classes, and was looking for a lending solution that would allow for ease of management as well as flexibility should he wish to invest in further assets.

After briefing the finance broker on his needs, the broker set up a $500,000 loan against the investor’s home, with the loan amount to be used for multiple different investment assets. In doing so, however, the broker created a complex loan structure that would pose a number of difficulties for the investor and his accountant further down the line. Since the loan was not split into separate loans, this made it extremely difficult for the investor’s accountant to determine the proportion of interest and deductible debt associated with each investment, creating an unnecessarily lengthy process come tax time. This structure would also create additional complications should the investor wish to sell or add another investment to his portfolio, as this would require a further re-proportioning of interest and deductible debt.

The solution

Due to the difficulties encountered with the loan provided by his previous broker, the client approached Momentum Wealth’s finance team seeking an alternative lending solution. After speaking to the client about his financial situation and long-term investment plans, our mortgage broker advised that the client opt for an alternative loan structure that would allow him to create separate loan splits for each of his investments under one overarching limit.

As well as enabling the investor’s accountant to easily identify the interest purpose for each split, this structure granted the investor considerably more flexibility when it came to expanding his investment portfolio. Rather than reapplying to add a new investment to the loan each time he purchased an asset, the revised structure enabled the client to create a new split for additional investments, which he could do either online or by contacting our mortgage brokers. If the client now decides to sell an asset further down the line, he will also be able to amalgamate the remaining splits automatically rather than re-calculating the new proportions through a lengthy administrative process.

The importance of specialist mortgage advice

As an investor seeking to build your property portfolio, it’s important to find a mortgage broker that understands the right solutions to support your long-term investment goals. Unfortunately, not all lenders and brokers have the understanding and experience of the property market to do this, which can result in investor’s missing out on lending solutions that are better suited to their needs. In today’s volatile lending market, seeking the advice of a mortgage broker with an expert understanding in investment finance can be critical to maximising your success and wealth creation.

If you are seeking lending advice for a new investment venture or would like to organise a review of your current lending solutions, Momentum Wealth’s finance team would be happy to discuss your needs in an obligation-free consultation.

Investing interstate: 6 essential tips for interstate investors

Whilst diversification has long been considered a strong strategy for property investors looking to mitigate the financial risk of investing in a single market, expanding your property portfolio into different locations can be a great way to take advantage of wider capital growth opportunities, especially when your home market isn’t performing strongly.

With the Melbourne and Sydney markets cooling down, a rising number of east coast investors are beginning to look towards alternative property markets in Australia for investment opportunities. If you are considering investing interstate yourself, here are a few simple ways to limit your risk and maximise the success of your investment.

Do your research

Before you invest interstate, you will need to compare different locations to identify a property market that fits your buying strategy. Property markets in Australia differ vastly in terms of price range, housing stock, and stage in the property cycle, so it’s important to ensure your market of choice matches your expectations in terms of rental yield and capital growth. Researching local property statistics as well as wider economic factors that influence the performance of the property market such as population growth, job opportunities, and public & private investment will be key to informing your understanding of where the market is in the property cycle, which is an important factor in determining the market’s long-term potential for growth.

Identify any warning signs

Whilst understanding the general state of the market is a vital element of investing interstate, it’s equally important not to stop your research at this broader market level. In a single city, the performance of the property market can differ considerably between different suburbs and locations – something we’ve seen recently in Perth with the emergence of the two-speed market. However, this can also be the case with individual streets and properties, which can pose a particular problem for interstate investors who aren’t familiar with the local area.

Whilst a suburb might look great on the surface in terms of location and nearby infrastructure, there are a number of additional factors that can influence a property’s value, many of which are difficult to identify without an in-depth knowledge of the area.  For example, are there high crime levels in the suburb? Is the property situated under a flight path? Is there a busy road nearby? If you don’t have a chance to visit the property yourself to gain this level of insight, you may need to consider engaging someone who is familiar with the local market to ensure you’re making an informed purchase decision.

Get to grips with planning policies

Australian states, and even suburbs within those states, each have their own local planning policies and processes in place when it comes to property. As an interstate investor, and particularly if you are seeking a property for development, it’s really important that you familiarise yourself with the zoning of your prospective property, as well as any additional Council policies that apply to the asset. This can have a huge impact on the long-term potential of your property as well as your immediate development plans, so you may want to speak to a local buyer’s agent or property developer prior to purchasing a site to ensure your plans are feasible.

Understand local legal requirements

As well as individual zoning policies, it’s important to be aware of any local variances in the legal requirements and processes involved in the property investment process. Documents such as sales contracts and strata reports often differ between states, so it’s really important that you understand these differences before you sign the dotted line. In addition, costs such as stamp duty costs, land taxes and transfer fees will vary in different locations, so make sure you research these costs and factor them into your budget when planning your investment.

Enlist a good property manager

A good property manager is a valuable asset for any investor, but even more so for interstate investors who don’t have the time and ability to self-manage their property. As an interstate investor, it’s important to find a property manager you can trust to carry out regular inspections and maintain your investment property whilst you’re away. Ideally, however, you also want a property management team who will be proactive in helping you identify opportunities to add value to your property and further the success of your overall investment strategy.

Consider using a buyer’s agent

Expanding your search to different property markets can significantly broaden your investment opportunities, but one of the biggest downfalls of investing interstate is not having the local knowledge to make informed investment decisions. If you don’t have the time to research the market and compare different properties yourself, consider enlisting a local buyer’s agent to identify and secure a property on your behalf. In addition to ‘insider’ knowledge of the local property market, a good buyer’s agent will have an in-depth understanding of investment policies and an established network of real estate professionals within the local area, which can be invaluable when it comes to negotiating a great deal on a property with high potential for growth.

If you are looking to invest in Perth property and would like to speak to our buyer’s agents about potential investment opportunities, our team would be happy to discuss your investment needs in an obligation-free consultation.

Alternatively, if you would like to find out more about the Perth property market, download our latest research report, Residential Property Spotlight: Perth.

Five key factors to consider before subdividing

Subdividing an existing block to develop or sell can be an incredibly lucrative strategy for investors seeking to extract more value from their investment property, but property subdivision isn’t always as simple as dividing a site in two and selling each lot for a profit. Whilst it can hold significant benefits for investors looking to add value to their property or create an additional income stream, the reality of subdivision is far more complex, and there are a number of requirements and risks that need to be taken into consideration before you commit to a project.

Does the site meet zoning requirements?

The first step towards subdividing a property is to understand the zoning requirements that apply to your site. In addition to the Residential Design Codes of Western Australia, lots of land in Australia are subject to the individual policies of local councils. These set out standards such as minimum lot sizes, and are therefore critical in determining the scope and subdivision potential of your property. As an investor, it’s important to bear in mind that these individual policies can vary considerably between different councils.  In some cases, as little as one clause can dramatically impact your site’s development potential, so familiarising yourself with the specific requirements that apply to your site is crucial.

As well as setting out zoning restrictions, local council policies can also contain clauses that could significantly increase your site’s development potential, many of which can be easily missed by investors who don’t have a full understanding of these documents. Depending on the location and proposed lot configuration, for example, councils are willing to apply a 5% variation to lot sizes subject to the approval of the Western Australian Planning Commission (WAPC). It may not sound significant, but this additional 5% could mean the difference between building two blocks and not being able to subdivide at all.

Is there enough demand for the subdivision?

Many investors assume that subdividing a property will always lead to profit. However, just because you can divide a site into multiple blocks, doesn’t mean you should. Before you get started on your subdivision, it’s important to research the local market to assess whether there is enough demand for the project you have in mind. If, for instance, there is already an oversupply of duplex properties in the area, or there is a premium on larger properties within that particular suburb, you may want to re-consider your subdivision plans. When you’re carrying out your research, consider what’s selling well in the area, and compare similar properties to find out what profit margin you can expect. This will be critical in determining the budget you are working with, and ultimately in assessing whether the project is feasible in the first place. If you are looking for a site with the specific intention of subdividing, you may want to consider enlisting a property buyer’s agent to help you identify a site with strong growth drivers in place.

Are there any additional restrictions that could hinder the subdivision?

As part of the planning process, you or your development team will need to carry out detailed due diligence to check for any issues that could impact your subdivision. In some cases, these feasibility checks can uncover issues that could have serious implications on future development plans, such as nearby sewerage systems that prevent you from building in a specific area.

As part of this feasibility check, you will also need to identify whether any site-specific restrictions apply that could prevent the site from being subdivided or dictate the manner of the subdivision itself. For instance, if the site is located in a bushfire prone area, this may change the specifications required when redeveloping the site (if you choose to do so). Similarly, many councils also have their own requirements relating to aspects such as restricting additional driveways or upgrading an existing dwelling, which could impact the required specifications of the subdivision and increase the construction costs involved in the project.

Are there any easements that affect your subdivision plans?

An easement is a property right that that allows someone to cross or use your land for a specific purpose. For example, if you have a gas or electricity line running under your land, it’s likely that the relevant utility company will have an easement in place to guarantee access to these lines. If you’re planning a subdivision, this is something you need to be aware of, as it will be your responsibility as landowner to ensure this access isn’t hampered by the development works. Whilst an easy way to do this would be to alter the setbacks of the property, this isn’t always possible with properties on smaller lots, which means you could be facing significantly higher expenses to build over the top of the easement in a way that still allows access. This is something you will need to factor into your overall costs when assessing your projected profit margin to determine whether the project is worth your while.

Have you factored in head works and council contributions?

In addition to standard expenses such as construction costs, building permits and planning application fees, there are a number of additional costs many investors fail to factor into their subdivision plans. When you subdivide a lot into multiple dwellings, Western Power and Water Corporation will often need to upgrade their existing infrastructure to support the increased demand for their services, the cost of which lies with you as the developer. Depending on the number of new lots being created, the local council may also ask for a development contribution to support the increased demand for amenity and community infrastructure created by the additional dwellings. These costs can vary from $50,000 to $400,000 per additional lot depending on the individual council, and can therefore have critical implications on your profit margin if you have failed to factor them into your budget beforehand.

Property subdivision can be a considerably profitable investment strategy with the right research and planning in place, but it also carries a significant amount of risk for investors who don’t have the time and expertise to commit to the project. In these circumstances, having the expert advice and support of a professional property development team can be crucial to avoiding key mistakes and ensuring you don’t miss out on opportunities to further the value of your property.

How much cash buffer do you need for your investment property?

A successful property investment strategy requires careful planning and preparation, and this sometimes means planning for the unexpected.  Whilst the long-term benefits of property investment should far outweigh short-term costs, property investors are sometimes faced with unplanned situations that impact their immediate cash flow, which is why smart investors will always set aside a cash buffer to cover unexpected expenses.

If you own multiple investment properties, in particular, saving up an emergency buffer is a vital step in ensuring your investment portfolio remains protected through changes in cash flow or income, and could ultimately mean the difference between leading a comfortable investment journey and being stretched beyond your financial limits.

Why do you need a cash buffer?

Cash buffers are crucial to investors for a number of reasons. Even if your investment property is positively geared, there’s always the possibility your cash flow situation could change should your tenants decide to vacate or unexpected costs arise. In these cases, a property investment buffer will ensure you can continue to make your mortgage repayments and cover additional advertising costs until a replacement tenant is found. This emergency buffer will also serve as a contingency plan should you be faced with repairs that aren’t factored into your ongoing maintenance expenses such as broken hot water systems or water leaks.

In addition to a property investment buffer, you should also aim to set aside a personal income buffer to cover you through changes of income or loss of salary. This will ensure you can continue to make repayments in cases such as loss of employment or loss of income due to extended illness. Failure to plan ahead for these unexpected expenses can put investors under substantial financial pressure, and in some cases lead to serious consequences such as forced sales.

How much cash buffer do you need?

As a guide, you should look to have two to four months of rental income on hand as a property investment buffer, as well as two to four months of personal income set aside as a personal income buffer.

However, this will also depend on individual factors such as your job security, your risk profile, and the age of your investment property. Older properties, for example, will often require more maintenance, and may therefore justify a higher cash buffer. This is ideally something you should be factoring into your initial investment decision, which is why it’s important to speak to an experienced property buyer’s agent to ensure you’re not purchasing a property outside of your means and financial capacity.

If possible, your cash buffer should be held in an offset account against your mortgage, as this will help you reduce the amount of principal on your loan (and hence the interest charged) whilst the buffer isn’t in use. If you have multiple investments but still have debt in your own home, it’s better to set this account up against your owner-occupier property as the interest repayments on this are non-tax-deductible.

Making smart investment decisions

Whilst the risk of unexpected expenses can never be fully mitigated, property investors can deal with this risk by planning ahead and making smarter investment decisions. As well as setting aside an emergency buffer, this means having the right professionals on hand to manage your property and take care of situations that put your rental income at risk. Most importantly, however, it means making the right decision when selecting a suitable property in the first place.

If you are purchasing an investment property or looking to expand your current portfolio and would like to speak to a professional property advisor about your investment needs, book an obligation-free consultation with one of our Perth buyer’s agents today.