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Following APRA’s changes, some lenders have withdrawn SMSF products altogether.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