Mercia | Taxation, Business & Finance Advisers

Case study: Managing cash flow amid life changes

Optimising your cash flow is crucial to reaching your investment goals, so as your circumstances change, such as marriage, children or a new job, investors need to ensure their loans suit their specific situation.

This was evident for a couple who contacted Momentum Wealth with some concerns about their cash flow.

The clients were expecting their first child and the mother-to-be was planning to take at least 12-18 months of maternity leave.

Given the associated costs of having a baby as well as the upcoming reduction in their household income, the couple were concerned that they wouldn’t be able to meet their repayments for their investment property and their home loan.

They were unsure if they should sell their investment property to cut their overall debt position and reduce their monthly loan repayments.

On review of their situation, our mortgage and finance specialist found that they had previously fixed their investment property loan for 3 years at a relatively high rate.

If the client sold their investment property, they would be up for approximately $25,000 in early repayment penalties for breaking their fixed rate loan prematurely.

This made the sale of their investment property far less attractive. It also prevented them from refinancing their investment loan to a lower rate, for the time being.

When it came to their home loan, the clients were paying principle and interest.

We advised them to change this to interest only at a lower fixed rate for 2 years.

This would give the clients a more predictable repayment schedule while their household income was reduced, and cut their repayment bill by $500 per month.

Our mortgage and finance specialist also talked with the clients’ accountant to discuss a PAYG Tax Variation for their investment property in which they could claim their tax rebate monthly instead of annually.

This would further help the clients by effectively smoothing out their cash flow.

In addition to taking these measures to optimise the clients’ cash flow, our broker helped them create a savings plan based on their budget, to set aside funds for expenses once their household income had reduced.

As a result, they started putting aside a large portion of their income as savings. On top of their existing $20,000 savings, they had aimed to save a further $15,000 by the time the expecting mum would take maternity leave.

By restructuring their loans to suit their personal circumstances and undertaking savings measures, the clients were able to hold their investment property despite the additional cost of starting a family and reducing their household income.

6 questions to ask a sales agent before placing an offer

About to place an offer on an investment property? Here are 6 questions you need to ask the sales agent before submitting your bid.

Before placing an offer to buy your next investment property there is some specific information you need to consider to ensure you’re positioning yourself to secure the best deal.

To gather this information, here are 6 questions you should ask the sales agent.

1) What’s the seller’s problem (i.e. reason for selling) All sellers will have a problem they need solved. As a buyer, you’re more likely to secure the property if you can help solve the seller’s problem. Properties are sold for many reasons, such as divorce or a job transfer. To understand the best solution to the seller’s problem you need to know as much as possible about why they’re selling. For example, if the seller has purchased another house and is close to settlement, they may be under time pressure to sell their old property. If they don’t sell their old property they may face financial stress and therefore are more likely to accept a lower offer if you offer a shorter settlement.

2) How was the asking price determined? The sales agent will mostly tell you that the price is based on comparable sales. If this is the case, ask the sales agent for which sales specifically so you can compare these yourself. If the sales agent has a justifiable case for comparable sales, then there should be no reason why they wouldn’t provide this information. In some circumstances, the sales agent might tell you it’s the seller’s price. It’s important to note their body language, mannerisms and comments as to whether they think it’s overpriced.

3) How long has the property been on the market? If the property has been on the market for a long time, other buyers will automatically think that there’s something wrong with it and immediately discount it. Often the only reason the property hasn’t sold is because it’s overpriced. In these circumstances, the seller’s motivation level may change and drop their price if they haven’t received any offers. In these circumstances, you can place an offer on the property but if it’s rejected, tell the sales agent you’re interested and to keep you in mind should the seller change their price expectations.

4) Have any offers been made already and when? This will help you form a price range that the seller may accept. For example, if the property is listed for $530,000 and the seller last rejected an offer of $500,000, then they’re not likely to accept a lower offer today. This is unless the offer was made some time ago, and the seller’s motivation levels may have changed.

5) Why do you think the property hasn’t sold? If the property has been on the market for some time, ask the sales agent why they think it hasn’t sold. The selling agent may indicate that the property is overvalued, it isn’t presented well or there is a flaw with the property. The answer will most likely imply that the asking price is too high which will play into your hands when placing an offer.

6) What’s the lowest price that you think the seller will take? Many sales agents will respond by quoting the advertised asking price however some may reveal that the seller is prepared to go lower. It will largely depend on the sales agent as well as the circumstances, i.e. if the property has been on the market for a long time and hasn’t received any offers.

These 6 questions will help you to gain a clearer understanding of the seller’s motivations, your potential competition and the property’s market history, which you can take into account when determining your offer.

By understanding these factors, you can place yourself in a much stronger position to secure a much more favourable deal and potentially save yourself thousands of dollars.

Making sense (and dollars) of split coding

Split coding can be a cash cow for developers. However, given each council controls their own planning policy, investors must be aware of the differing criteria needed to attain the higher coding.

When purchasing a property in Perth with plans for future development, it’s important to hold a comprehensive understanding of the local council planning policy and scheme to ensure the property meets the necessary criteria.

The most common form of strategic planning used to help guide development is through the use of split-density ‘dual coding’ (for example R20/40).

This split coding is then coupled with criteria that has to be met in order to obtain the higher coding. If this criteria is not met then property developers can only attain the lower code.

Because each council is in charge of their own planning policy, the zonings and associated criteria needed to meet the higher codes vary significantly from council to council.

For example, below are several Perth councils that have introduced split coding in the past 5 years. From these examples it’s easy to see the vast differences in local council planning policies.

City of Joondalup – Allows for the higher of the dual-density coding to apply when the lot/development meets 4 specific points. A major point that influences property investment selection is the requirement of a minimum 20-metre frontage for multiple dwelling developments and a minimum lot width of 10m for all lots, with the exception of battle axe sites.

City of Belmont – Allows for the higher of the dual-density coding to apply when the lot/development meets 13 criteria. The 2 major points that influence property investment selection include the requirement of a 16-m frontage or greater, and a minimum of 50% of the dwellings constructed must be double storey to achieve the higher coding in the zones R40 and above.

City of Wanneroo – Allows for the higher of the dual-density coding to apply when the lot/development meets 2 criteria. These points aren’t overly influential in site identification as they orientate around the planning of the development lay out with the requirement of only a singular crossover.

It’s not uncommon that investors purchase a property with split coding to find out later that it doesn’t meet the dual-density criteria needed to gain the higher coding.

This can severally affect an investor’s strategy and may set them back significantly in their financial goals.

Therefore, when considering buying a development site with split coding, it’s important to understand the criteria needed to meet the higher coding and apply this to the proposed property when completing feasibility studies.

Success is the sum of details: Property condition reports

Property condition reports are designed to protect the landlord and their investment as well as the tenant. But what exactly should be included in the report?

A property condition report should be completed at the start of every tenancy to record the condition of the premises, and signed by both the tenant and landlord (or the property manager if one has been engaged).

While it might not be the most exciting part of property investment, it’s important to conduct a thorough inspection to ensure you have proof of the state of the property as well as a full list of the inventory included in the lease.

So what exactly should the property condition report include?

• A full description of the window treatments (i.e. wooden venetians, vertical blinds etc) in every room
• A full description of the light fittings in every room
• The colour of carpets and walls, outlining any marks or damage
• A list of appliances included in the lease as well as the make and model and their working order
• Any furniture included and its condition
• General condition of each room
• Any noticeable damage inside and outside the house

When it comes to property condition reports, the more detail the better as this will help to avoid or overcome any disputes.

It’s also advised to take plenty of photographs as these can be used as evidence.

Failing to adequately describe the inclusions, fixtures and fittings can cause unnecessary disputes at the end of the tenancy or lead to a possible financial loss for the property owner.

As well as detailing the condition of the property, it’s important that the premise is presented in a clean and safe condition from the outset.

At the end of the lease when the tenant is vacating, they are required to leave the premise in the same condition as it was found, allowing for fair wear and tear.

If the property was not initially presented well then the tenant can leave the property in the same state and condition.

If you’ve engaged a property manager they will take care of the property condition report on your behalf, and a good property management firm will have thorough processes in place to protect the landlord.

Suburb snapshot: Edgewater

About 94% of housing stock in this Perth suburb is low-density dwellings, however that’s set to change following the recent introduction of higher-density zoning.

Edgewater is located in the City of Joondalup, approximately 23 kilometres north of the Perth CBD.

Development of the area dates back primarily from the early 1970s with significant residential development occurring during the 1970s and 1980s.

The area is majority low density with about 94% of stock identified as houses.

However, this is set to change following recent rezoning around the suburb’s train station to R20/40, which will allow for more medium density housing stock.

The area features very high amenity being close to Lakeside Joondalup Shopping Centre (2.5km), Joondalup Health Campus (3km) and high liveability being 5km from the beach and bordering Lake Joondalup with plenty of walking and cycling trails.

About 4,500 people live in Edgewater with a median age of 41 years, and the suburb’s median house price is $560,000.

Edgewater Primary School and Mater Dei College are located in the suburb, while Edith Cowan University Joondalup Campus is located immediately north.

Residents in the area will benefit from the new $29.5 million multi-story car park being built at Edgewater Train Station, which is due later this year.

There are also plans for longer term redevelopment of Edgewater Quarry, including botanical gardens, adventure playground, picnic and BBQ areas, amphitheatre and associated commercial uses, such as cafes.

About 82% of properties are either fully owned or being purchased, with 16% of properties being rented.

About 22% of the suburb’s residents identify as professionals (WA 19.9%), 18% as clerical and administrative workers and 18% as technicians and trade workers.

The suburb is bound by Lakeside Drive in the north, Lake Joondalup in the east, Ocean Reef Road in the south and the Mitchell Freeway in the west.

The main arterial roads include the Mitchell Freeway, Ocean Reef Road and Joondalup Drive, and neighbouring suburbs include Joondalup (north), Woodvale (south) and Heathridge (west).

Seminars prove popular with investors

More than 100 eager property investors and enthusiasts turned-out for Momentum Wealth’s latest seminar, ‘The changing face of property investing’. If you couldn’t make it, we’ll be holding our final seminar for 2016 in the coming weeks!

The latest seminar, which was held last week in West Perth, explained the benefits and setbacks of various property investment strategies and how to apply these in today’s property market.

The seminar also provided insights into the differences when investing in hot and cool markets and why it’s important for investors to understand the cyclical nature of property markets.

With more than 100 guests, the seminar received highly positive reviews scoring an average 9.1/10 from attendees.

Momentum Wealth launches new syndicates

Momentum Wealth has launched its latest residential development syndicates, which comprise two boutique apartment projects.

The first syndicate, the Momentum Wealth Red Gum Fund, is a develop-and-hold investment in which investors can acquire a finished apartment at wholesale prices – circa 15% under market value.

Investors in the Red Gum Fund can choose to sell their apartment at completion to realise the returns, or hold the dwelling to lease and receive strong rental yields as well as long-term capital growth prospects.

The minimum investment for the Red Gum Fund is $150,000 and the fund is forecast to have a term of investment of between 16-24 months.

The second syndicate, the Momentum Wealth Golden Wattle Fund, is a develop-and-sell investment, in which the apartments are constructed and sold with funds returned to investors at completion.

Target returns for investors are between 15-20% per annum and the fund is expected to have a term of investment of between 24-36 months.

The minimum investment for the Golden Wattle Fund is $100,000.

For more information on the Golden Wattle Fund, or to register your interest, follow this link.

These latest syndicates are part of the Momentum Wealth Growth Series of Syndicates, which also feature the Silver Bark Fund – a 16 apartment, 3 townhouse development which is expected to be completed later in 2016.

The Momentum Wealth Growth Series of Syndicates also includes the Silk Oak Fund – a 40-unit apartment project which was launched earlier in 2016 and raised more than $4 million.

If you couldn’t make the event, the next Momentum Wealth seminar for 2016 will be held on October 18 and those interested are encouraged to register their interest.

The next seminar will focus specifically on property development and feature a panel of experts from a range of industries, including architecture, accounting, law and property.

The panel will cover a number of issues related to property development, including managing cash flow and financing during development, what’s ahead for Perth’s multi-residential market, what impact councils are having and if there is an oversupply of apartments in Perth, among many other issues.

There will also be dedicated time for a Q&A session in which members of the audience can ask the panel their own questions.

Keep an eye out for more information on this upcoming seminar or you can register your interest by emailing info@momentumwealth.com.au

New breed of industrial tenants bring different demands

Perth’s burgeoning logistics industries are benefiting from a raft of major road upgrades, which is having flow-on effects for the city’s industrial property market.

In a bid to accommodate Perth’s forecast population of 3.5 million people, the state government has been proactive with infrastructure improvements that will help make the city a more efficient place to work and live.

The state has identified infrastructure spending to be a priority in its 2016/17 budget released in May.

Approximately $1.8 billion in 2016/17 will be spent on upgrading road infrastructure with an estimated $5.9 billion for the 3 years to follow.

Many of these road infrastructure projects are designed to support key industrial areas, making industry more cost competitive.

Such projects include the recently completed $1 billion Gateway WA development and the future construction of the $1.6 billion Perth Freight Link and the $1.1 billion North Link.

Together, these projects will create greater accessibility for many prime industrial zones linking the Fremantle Port, the Perth Airport and key metropolitan and regional markets to the city’s north and east.

The burgeoning transport and logistics industries, which are continuing to grow on the back of e-commerce, will benefit most from this improved road infrastructure.

These industries are helping to fill part of the gap in the industrial property market left by mining services firms, who have downsized or closed in the aftermath of the state’s mining boom.

The rise of the transport and logistics industries is good news for investors as this increased activity is helping buoy the industrial property markets.

However, as the state’s economy continues to transition away from the resources sector, these new industrial tenants require different property specifications.

This includes changes in truss heights and office/warehouse proportions that are more conducive to warehousing operations over engineering type uses that were required by mining services firms.

This has promoted a form of ‘design and construct’ investment where tenants are dictating the building configurations to landlords/investors so properties are built to their needs.

Investors with existing industrial properties need to be aware of the requirements of this new breed of tenant or face long vacancy periods because of outdated fitouts and property specifications.

Deal makers and deal breakers

Here we take a look at some of the different properties on the market and explain why they’re either deals (that represent a good investment) or don’ts (that should be carefully avoided by investors).

Deals

Bibra Lake Purchase price: $485,000 Purchase date: June 2016 Block size: 718sqm Specification: 3 bedroom, 2 bathroom, 2 car bay house built in 1979 zoned R20

Deal: This property makes a good investment because it was purchased under market value, was in good condition and holds future development potential. The property is currently zoned R20 but is subject to rezoning as a draft R40, which would provide significant development upside and high capital growth prospects. The interior has also been recently renovated meaning the buyer wouldn’t have to spend much, if any, money to be able to rent the property. It would also allow the buyer to rent the property until the rezoning is gazetted, at which time redevelopment could be completed. At $485,000, the property also represents good value given Bibra Lake has a median house price of $556,000.

Mount Lawley Purchase price: $1,635,000 Purchase date: July 2016 Block size: 1,181sqm Specification: 4 bedroom, 3 bathroom, 2 car garage character house built in 1927 zoned R12.5

Deal: This property represents a good investment because it was purchased under market value and features a high land component in close proximity to the Perth CBD. The property also features high nearby amenity, such as Beaufort Street café strip and local parks. The house has been renovated to a high specification and features a below ground pool and rear building with a workshop, pool room and bathroom.

Bassendean Purchase price: $520,000 Purchase date: June 2016 Block size: 809sqm Specification: 4 bedroom, 1 bathroom, 2 car carport house built in 1925 zoned R20/40

Deal: This property makes a good investment because it was purchased for under market value, holds a large land component that can be developed and is in walking distance to the Bassendean train station. The property is also in good condition allowing the buyer to rent the property until such time that they’re ready to redevelop.

Don’ts

Cloverdale For sale price: $495,000 Block size: 387sqm Specification: 4 bedroom, 2 bathroom, 2 car garage front duplex

Don’t: This property doesn’t represent a good investment because it’s located under the Perth Airport flight path, it is surrounded by state housing and is in an area with a high supply of similar product, which would contain future capital growth. The property is also brand new meaning much of the value of the purchase price is in the dwelling, which is a depreciating asset.