Your Real Estate Questions Answered

Our panel of real estate experts answers more questions from API Readers for the February 2007 edition.

Is it too late to invest in real estate?

Question: I’m 64 and have $320,000 equity in my house. I’m thinking of selling the house, renting and investing this amount in a real estate property. Unfortunately, I’ve moved too early from some previous properties and missed out on lots of money. I’m planning to work for another two years full-time and then work as a consultant. Is it too late for me to do anything in the real estate property market?

Answer: As you suspected, the key issue here is your age, which affects your investment real estate horizon, risk tolerance, and cash flow requirements. Investing in residential properties requires a long-term view; at least seven to ten years to give compound capital growth ample opportunity to do its work. Every time you buy real estate property, you incur entry costs including stamp duty and conveyancing. When you sell the real estate proerpty that’s generated rental income, you’ll pay capital gains tax as well as the usual agent’s commission and advertising fees. If you buy and then sell within a few years because you need cash to fund your retirement, entry and exit costs will chew up a substantial proportion of any capital growth the property has achieved. Additionally, because property real estate isn’t a liquid asset, it can take months to find a buyer and complete settlement. If you do need cash quickly, the ball is in the buyer’s court and you may be forced into selling for less than fair real estate market value. This may sound strange coming from a property adviser, but in your situation it may be better to consider investing in superannuation. I suggest you speak to a financial advisor about your options. – Mark Armstrong

After a big loan

Question: I’m a real estate investor in Perth. I want to take my investments to the next stage but the banks say my salary isn’t enough to give large equity loans. I want to borrow $1.5 million to $2 million to buy a house. I have equity on my present house as a deposit (20 per cent) and the remaining 80 per cent loan would be on the house I’m buying. My salary level is $100,000. How can I address this problem?

Answer: Despite your considerable equity, your problem is your income, which isn’t high enough to sustain the repayments required for such a large loan. The interest on a $1.5 million loan is more than $100,000 per year. This is more than you earn, so I can’t see how you would be able to meet you repayment commitments. And although you’ll receive rental income from the new real estate property, lenders generally only take around 75 per cent of the gross rent into account when determining ability to pay back the loan. I suggest you consider real estate investment properties in a more modest price range. If you buy several modestly priced properties over a period of time, you’ll build a portfolio that generates enough rent to boost your working income substantially and puts you in a much better position to pay back a $1.5 million to $2 million loan. Then you’ll find the banks will be more willing to come to the party – Mark Armstrong.

Making a joint real estate purchase

Question: My brother, his friend and I are looking to buy a real estate property in Cairns. We won’t be suing the first homebuyers grant as there are three of us, and we were wondering what we should do about the free stamp duty etc. for first homebuyers. As we’ll be getting the real estate property contract in all of our names we weren’t sure whether to take advantage of the first homebuyer perks or save them for when we buy our own properties separately. We were also wondering if a solicitor would be the best professional to write out the joint contract. We were also going to apply for a 100 per cent capital loan as we were looking at renting the real estate property out to start with. Is this wise?

Answer: You’re probably right to be cautious about using your first homebuyers concessions. If you receive the Federal Governments $7000 first Home Owner Grant for this particular puchase, none of you will be able to claim the grant for any real estate properties you may buy individually, further down the road. The same applies to the Queensland Government’s first homebuyer stamp duty rebate, which is available for real estate properties purchased fro less than $500,000. To get the stamp duty rebate, none of you must have owned property at any time previously, in Queensland or elsewhere. You must also be living in the real estate property as your principal residence, not renting it out. The rebate is calculated according to the value of the real estate property you purchase. The more your property is worth, the lower the rebate. For example, if you buy a property for $300,000 to $309.999, you’ll receive a stamp duty rebate of $2000. If you purchase for $410,000 to $419,999, you’ll receive $900.

If the three of you can afford to purchase without the first Home Owner Grant and the stamp duty rebate, it might be an idea to save these in case any of you decide to purchase a principal home of residence individually in the future.

Yes, it’s a wise idea to have a solicitor draw up a joint venture agreement so that all three of you understand your financial commitments. The joint venture agreement should also specify how long you will hold the property real estate, and spell out a contingency plan in the event that one of you decides to sell your share.

Regarding your questions about borrowing 100 per cent of the property’s value, I don’t know all the particulars of your situation, so I can’t advise on particular loan options. However, you should keep in mind that the more you borrow relative to the real estate property’s value, the greater your risk in the lender’s eyes, so they may charge a higher interest rate – Mark Armstrong.

For more Bricks & Mortar Q&As, go to www.apimagazine.com.au. If you have a question for our experts, you can send it to: editor@apimagazine.com.au.

This information is of a general nature only and does not constitute professional advice. You must seek professional advice in relation to your particular circumstances before acting.