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The biggest finance mistakes made by first-time buyers

Many first-time buyers underestimate the fundamental role finance plays in property investment. Getting the right financial structures and lending solutions in place when purchasing a property can be crucial to your long-term success, and could mean the difference between achieving and missing your financial goals. Our Beginner’s Guide to Property Finance covers the essential aspects of securing and maximising lending opportunities as a buyer or investor, but here is a small insight into the finance mistakes to avoid when securing a loan.

Not preparing early

Whilst securing finance is the first step towards getting your foot on the property ladder, this step should start long before you apply for your first loan. As a property buyer, preparing your finances early is essential to maximising your finance opportunities, and failure to do so could leave you with limited lending options. Whilst budgeting to save up for that all-important deposit and keeping a record of your finances are vital steps in preparing for a loan, it’s also important to understand how your credit score, repayment history and existing debts could influence your borrowing capacity. This is especially the case with Australia’s recent move towards comprehensive credit reporting, which will see more financial information recorded in a borrower’s credit history.

Limiting your research to one lender

As a borrower, it’s important to understand that each lender and bank has their own policies and methods when it comes to calculating serviceability, meaning your eligibility for lending products will vary considerably between different lenders. In today’s volatile lending environment, it’s vital to research and compare loans from different lenders to ensure you’re selecting the best product and rates for your circumstances. As well as broadening your lending options, comparing different loans could help you make significant savings in interest, putting you in a better financial position to progress with your financial goals.

Choosing the wrong broker

Whilst many buyers recognise the benefits of using a mortgage broker to secure a loan, it’s also important to understand that not all brokers are equal. Mortgage brokers who lack training or experience in property can still structure your loan unfavourably or recommend a lending solution that doesn’t fully support your objectives. If you want to make the most out of your lending solution, it’s important to select a broker who has a strong understanding of property investment finance and the structures that support this. A good mortgage broker will take both your immediate situation and long-term property goals into account before recommending a lending solution to suit your needs.

Not understanding holding costs

Holding costs are a key financial obligation that many first-time buyers overlook when researching properties and lending solutions. As well as monthly mortgage repayments, buyers also need to consider additional expenses when it comes to assessing their financial limits, including costs such as property maintenance, land tax, energy bills and property insurance. Underestimating or failing to account for these holding costs before securing a loan is one of the most common factors that leads first-home buyers into debt, in many cases preventing them from moving forwards with their investment goals – or worse, forcing them into early sale.

As a buyer, it’s important to understand the difference between what you can borrow and what you can afford when selecting potential properties. By understanding your financial situation and the demands a specific property will place on this, you can ensure you’re not overextending yourself financially or researching properties outside your means.

Not reviewing your loan

Whilst you may have chosen the right loan for your circumstances when investing in your first property, this doesn’t necessarily mean this will always be the best lending solution available to you. In reality, your objectives, situation and (depending on your lending solution) the interest rates you receive will likely change over time. To ensure you’re still receiving the best rates and products for your circumstances, it’s really important to review your loan on a regular basis (preferably yearly) to ensure your lending solution continues to support your financial needs.

Download our Beginner’s Guide to Property Finance

If you would like to learn more about the steps and processes involved in securing property finance, our Beginner’s Guide to Property Finance covers a comprehensive range of topics and tips on how to maximise your finance opportunities as a property buyer. To find out more, fill out a form to receive your free guide today.

What type of property investor are you?

Every property investor is different, and it’s important to recognise that there is no single property investment strategy or investment type suited to everyone.

When building and expanding your property portfolio, you need to establish what it is you are aiming to achieve, and what it is you can feasibly achieve, to understand the right strategy and investment types to support this. Knowing your risk profile and understanding the limitations that accompany this is crucial to determining what type of investment suits you, as well as the results you can expect from your investment strategy. Here are a few essential points to consider to when determining the right type of investment for you.

Defining your risk profile

What are your property investment goals?

Before choosing the right type of investment for you, you first need to consider what it is you want to achieve from investing in property. In other words, what are you short and long-term goals? Are you hoping to get a steady income stream from your portfolio, or are you looking to achieve long-term growth? Outlining your objectives will help you build a clearer picture of the long-term plan you need to achieve your goals, helping to inform your investment decisions along the way.

Bear in mind that your property investment goals, and implicitly your risk profile, will likely depend on your financial situation and where you are in your investment journey. For instance, an investor who is at the beginning or peak of their investment journey is likely to have different goals than someone who is nearing retirement and perhaps seeking a steadier source of income to align with their cash flow needs.

How secure is your financial situation?

Your tolerance for risk and your ability to handle fluctuations in market conditions will depend heavily on your cash flow security and your financial situation. For example, an investor with a strong and stable source of income may be able to tolerate more risk and short-term losses than someone who has a more volatile source of income with low security. Similarly, an investor with low levels of debt and fewer obligations is likely to be able to cope with more risk (and have more borrowing power) than an investor with high levels of debt and multiple dependants.

How do you handle risk?

As well as outlining your investment goals, it’s also important to consider your tolerance for risk when determining the type of properties you’re suited to as an investor. Whilst high returns might be your ideal goal, you also need to consider whether you are willing to take on the risks that might accompany this investment strategy.

For instance, how would you react if your investments dropped in value? Are you willing to incur (and can you afford to take on) short-term losses for the prospect of high long-term returns? Or are you looking for reliable income, but willing to accept lower growth over time? By understanding your view on the relationship between risk and return, you can start to form a strategy that balances both your objectives and your needs as an investor.

Understanding your risk profile

• Conservative – Investors with a lower risk tolerance are more likely to take a conservative approach and invest in assets with lower volatility. These assets are more likely to maintain a steady value, but may not offer the same long-term prospects as higher growth options such as value add strategies.
• Balanced – Investors with a more moderate tolerance for risk are likely to invest in more growth options with moderate income potential. Investors adopting this strategy might take a more balanced approach to investment, offsetting the risk of high growth properties by maintaining some funds in income-producing assets.
• Aggressive – Those with a higher risk tolerance will generally take a more aggressive approach to property investment, focusing on high growth and value add strategies. This may include strategies such as property development and renovations, which focus on building equity and improving yields to allow for further investment. These strategies may present greater risk, but often with the potential for higher returns.

Getting professional advice

There are many different factors to take into consideration when developing an investment strategy, and whilst the above may give you an idea as to the strategy that might suit you, it’s important to seek professional advice when determining the right type of investment to fit your unique situation and goals. A professional buyer’s agent will be able to assess your personal circumstances, financial situation and long-term goals to help you identify a property investment strategy that supports your property objectives, whilst also aligning with your financial needs and tolerance for risk

If you would like to discuss your property needs with one of our experienced property experts, our Perth buyer’s agents at Momentum wealth would be happy to discuss your situation in an obligation-free consultation.

New strata laws passed through WA parliament

In the biggest reforms to WA’s strata legislation in over twenty years, new strata laws have been introduced that will impact the rules governing the termination of strata schemes in WA.

The Strata Titles Amendment Bill 2018 and the Community Titles Bill 2018 were passed through WA parliament in early November, and include a number of reforms aimed at improving the management and development of strata schemes. But what do the changes mean, and why are they being implemented?

What are the new strata reforms?

The new laws introduced under the Strata Titles Amendment Bill and the Community Titles Bill include a number of key reforms, including changes to legislation surrounding scheme management, rules to allow for faster and more flexible staged subdivisions, and the introduction of two new types of strata. However, the biggest reform to emerge from these reforms relates to the rules surrounding the termination of strata schemes.

Previously, a strata scheme could only be terminated and redeveloped with unanimous agreement from all owners within the scheme. However, under new legislation, a majority termination process has been implemented, whereby a scheme of five units or more can be terminated with the agreement of 80% of owners.

In order to safeguard owners and ensure all owners’ rights are taken into consideration, all termination proposals need to undergo a full review process by the State Administrative Tribunal (SAT), which will assess the benefits and drawbacks for related parties and ensure the termination process is correctly followed.

Why are the new strata rules being implemented?

There are a number of reasons driving the reforms to WA’s strata laws, but the overarching aim of the changes is to ensure strata laws remain aligned with the modern needs of WA communities and the State’s growing population.

In addition to providing better outcomes for property owners by implementing improved dispute resolution processes within strata schemes and setting out clearer obligations for strata managers, the reforms are intended to deliver new land development options to drive economic growth and facilitate WA’s expected population growth.

Given that the first strata schemes in WA were created over 50 years ago, the termination and redevelopment of these schemes is expected to become more commonplace. The new laws are designed to set out clearer and more transparent processes for the termination of these schemes, allowing for more straightforward redevelopment of aging strata properties. These changes could prove fundamental in supporting the gentrification of local areas and helping to facilitate better outcomes for future developments.

Momentum Wealth is a Perth-based property investment consultancy dedicated to helping investors accelerate their wealth through property. We have served investors for over 12 years, assisting clients in the research, financing, acquisition, development and management of their investment properties.

Five factors to consider when choosing a builder for your property development

Surrounding yourself with the right team is an important aspect of any property development, especially when it comes to selecting a builder for your project. Delays in construction timeframes, poor communication and low quality workmanship can all impact the profitability of your development, so it’s really important that you put careful consideration into the experts you choose to support your development strategy. Here are five key due diligence questions to ask when choosing a builder for your next development.

What projects does the builder specialise in?

The type of project you’re developing should be one of the main factors you take into account when choosing a builder. When it comes to selecting a company, make sure they have experience constructing similar property types to the development you have in mind. If you’re developing a single-storey house in a lower socio-economic area, for example, you will likely be choosing a different builder than if you were developing luxury apartments above 3 or 4 storeys in a high-end suburb. It’s really important that you choose the right builder for the type of project you’re developing, as this can have a huge implication on the quality and suitability of your end product.

What is the financial standing of the builder? 

Before contracting any builders, it’s important to check that your chosen company is financially viable. Selecting a builder with a poor financial standing could leave you in hot water should the company go into administration mid-way through a project, leading to delays in construction and potential loss of income.

To ensure the builder you select has a strong financial standing, get an insight into their financial position by asking for financial statements and researching independent credit reports. You may also want to visit their current building sites to speak to sub-contractors and ensure their current developments are well run. If a builder is consistently late in paying other contractors, this may be a sign that they are unreliable or in a poor position financially, which could lead to a compromise in the quality of your development.

How high is the quality of their finished projects?

Whilst experience can tell you a lot about a builder, nothing will tell you more about their commitment to quality than viewing one of their projects in person. As you progress through discussions with a potential builder, it’s always a good idea to conduct a walk-through of one of their recently completed projects to assess the quality of their workmanship and the level of finish. If the builder is confident in their previous work, they should be happy to show you around a completed development. This is also a good occasion to ask the builder any additional questions regarding build contract price and project timeframe to help you reach a decision.

What are their contractual conditions?

Whilst price will inevitably be a key consideration when selecting and negotiating your contract with a builder, it’s also important to consider the clauses contained in the contract itself. There are various different contracts that builders and developers use in Australia, and you need to ensure that these conditions are favourable to you as a developer. For instance, will the builder allow you to include clauses for penalties should they not complete construction on time? And what are the specific conditions surrounding the calculations of time extensions? Remember – the cheapest builder doesn’t always translate into the highest quality work, so it’s important to take all aspects of the contract into consideration.

What do previous clients say about them?

As well as speaking to sub-contractors involved in existing projects, a great way to gain insight into the reliability and quality of a builder is by speaking to clients who have dealt with them directly in the past. Delays in communication could set your project back considerably and cause delays in construction timeframes, so speaking to previous clients is a good way to find out how effective the builder is at communicating and keeping to project deadlines. If this option isn’t available, ask whether your chosen builder has any client reviews or testimonials from clients they have worked for in the past.

Mitigate risks with professional project management

Choosing a builder is just one of the many factors you will need to consider when completing a property development project. In reality, a huge amount of due diligence, research and planning goes into a successful property development, and even a small oversight during these stages could have a detrimental impact on your bottom line. In these cases, having an experienced development management team to oversee your project and identify the right professionals on your behalf could be fundamental in helping you mitigate risk and capitalise on the potential profit of your development.

If you would like to speak to our Perth development team about an upcoming project, contact our team today to organise an obligation-free consultation.