Finding the perfect property

A good buyers agent can take the pressure off time-poor real estate investors, but is it true they can also save you bundles of money? Bronwyn Davis examines these issues in the API Magazine April 2007 edition.

Most of us wouldn’t buy a used car without having a qualified mechanic check it out first to ensure it’s not a lemon, so should the same rule apply when you’re purchasing an investment real estate property that costs hundreds of thousands of dollars?

Buyers agent are an evolving breed in this country, whereas in the United States they’re commonly employed. Patrick Bright, buyers agent for EPS Property Search in Sydney, observes, “The real estate industry only really started there in the 1980s. So in only 25 years it went from where Australia is today to almost two out of three transactions involving a buyers agent acting for the purchaser.”

Although the residential property market is only really now being introduced to the concept of buyers agent, Angus Raine, CEO of Raine and Horne, suggests, “I’m originally from a commercial background and the phenomena of using a buyers agent consultant in commercial property was quite common about 15 years ago.”

Buyers agents in real estate investments are partaking in more real estate transactions every day, particularly for investments. In fact, there’ snow a governing body for buyers agents to regulate the industry. The Real Estate Buyers Agent Association of Australia (REBAA) was founded in 2000 to raise the profile of the industry and establish guidelines for the professional conduct of agents.

What is a buyers agent?
Queensland based buyers agent Scott McGeever fro Property Searchers says, “A buyers agent works wholly and soley on behalf of the buyer. They’re engaged to find specific properties for buyers and negotiate the best price and terms for them.”

A good buyers agent in real estate will listen to their clients’ needs before scouring the market for the perfect property. David Devenish, secretary of REBAA and Perth-based buyers agent, explains, “A buyers agent can provide a potential purchaser with advice about tips and traps, what to look out for and possible areas that might suit their requirements for either property investments or owner-occupation.”

Devenish says the primary benefit of employing a real estate buyers agent is that there’s no conflict of interest, “which is rampant in the real estate industry.” He says, “Purchasers seek advice from people who really don’t have their interests at heart because they’re receiving commissions from vendors or developers.”

Buyers agents in real estate property investing not only research the market an investor is interested in, they can also arrange inspections, deal with the selling agent on the buyers’ behalf, organise necessary building and pest inspections, bid at auction or negotiate a private treaty sale and generally attempt to secure their client a deal that will be profitable in the long term.

Because you’re relying on them to find and obtain the best possible deal on your behalf, buyers agents need to have a thorough knowledge of not only the local property market, but also how sales agents work, how vendors think and how to negotiate effectively.

At present, obtaining the qualifications to become a real estate buyers agent is simply a matter of undertaking a sub agents or full licence course, depending on the state. McGeever claims this is worrying because real estate property investors, whose financial commitment to the property they buy can make or break their portfolio, are making decisions based on information from their buyers agents.

He says, “It’s different to a real estate agent who relies ont eh market to determine the best price for a property they’re selling. A buyers agent has to have a really good idea about the market real estate and if you get it wrong you can cost someone thousands.”

Bright recommends you look for someone with at least two years’ experience as a successful selling agent and proven negotiation skills. He explains,`if you want to outsmart a selling agent you need to have walked in their shoes to know what really presses their buttons.`

The Cost
Fees for employing the services of a property buyers agent vary depending on the exact nature of the assistance you require. If you`re simply seeking advice you`ll often pay a small upfront fee, however if you want the buyers agent to research the real estate market, find your ideal property and negotiate the contract price and terms (including bidding at auction where necessary), you will generally pay a buyers agent commission fee.

This can be anywhere between 1.5 to 2.5 per cent of the final purchase price for the property, plus GST. Some buyers agents prefer calculating their fees and charges in this manner, while some prefer an upfront fee. Bright breaks down the costs for a buyers agent a little more specifically: If you want to find the property yourself and have a buyers agent research and negotiate the purchase for ou, you`ll be up around 1 per cent of the estimated purchase price. For bidding at auction you`re likely to pay anything from a flat fee of $500 up to 1 per centof the purchase price upon success. Essentially, as with any industry, you get what you pay for.

And if you`re still not convinced that a buyers agent might just make good investment, McGeever notes: The fee for a buyers agent can be used to reduce capital gains tax on the asset as it is considered a capital cost in the acquisition of the property.

8 Top Tips for New Real Estate Investors

As a relatively stable interest rates outlook and tight rental markets begin to tempt more real estate investors into the market, broker Mortgage Choice has released the following tips for would-be investors in the Australian Property Investor magazine April 2007 edition.

1. Create a long-term property portfolio plan
Understand that property investing is a long-term strategy and that property cycles generally involve highs, lows, and steady patches over seven to ten years. Consider your real estate investing goals and all possible outcomes.

2. Consider all costs and tax implications
The interest and related expenses you incur on your property investment (such as repairs and maintenance) are tax deductible. Some properties may be negatively geared (where your loan repayments, fees and other costs exceed your rental income), meaning the net loss can be offset against your other income. Others may be positively geared, meaning the rental income is higher than the costs. Also think about the capital gains tax you’ll have to pay if you decide to sell the property.

3. Research, research, research
Read articles, use reputable property research companies, and the Real Estate Institute of Australia, search the internet and talk to people to research the areas you’re interested in buying in. Invest the time to fully understand the real estate market – it could save you thousands.

4. Consider using your equity
You can tap into your home equity or equity in another investment property as a launching pad into more property, so long as you can afford the extra repayments.

5. Think about buying with others
More and more Australians grappling with affordability issues are pooling their resources with friends, family or work colleagues to break into the property market or increase their property ‘wealth’. There are a myriad of home loan options now available for such situations, though you’ll also need to get legal advice to set up a contract with your co-buyers.

6. Choose a loan to meet your current needs
Apply for a loan that suits your current needs and lifestyle, as you can refinance down the track.

7. Use a buyers agent
A buyers agent or property finder can provide advice about the best property real estate for you. Buyer agents know the real estate market better than most and can help you choose and buy your property.

8. Visit a financial adviser or accountant
You need to discuss your full monetary situation with an experienced adviser to be sure an investment property is right for your situation.

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.

Don’t make the same mistake in property investing in real estate!

Lawyer Rob Balanda pulls more property investment warning stories from his filing cabinet, so you can learn from the mistakes of others. This was published for the Australian Property Investor magazine in February 2007 (apimagazine.com.au)

Trading Properties

I received a call from a real estate investor who had been sitting on an old fibro cottage in an areas which he though would be a prime redevelopment real estate site. He had been watching real estate prices rise and rise but in the past year or two they’d slipped back.

He didn’t find this out until he put the real estate property on the market at what he thought would be a record price, only to find out that the real estate market hadn’t rung a bell when it hit the top, and he’d missed the upswing. Keen to see the real estate property investment, but with unrealistic expectations about its value in the market, he placed an ad in the exchanges and trades section in the real estate part of his local newspaper.

As luck would have it he found someone with a similar problem and he agreed to exchange his real estate property for another person’s expensive unit. The exchange got him out of a property investment that he no longer wanted but he didn’t have the cash fro the sale to, for example, pay his capital gains tax.

I also gave him a fright when I told him the amount of stamp duty he’d have to pay on the expensive unit that he was trading for. He then suggested to me that we should “write down” purchases prices of both real estate properties to save him and his co-investor a bit of stamp duty and a lot of tax. Wrong.

My advice to him was this was a definite no-no and I strongly urged him not to do it. The reasons I gave him were as follows:

1. Firstly, writing down the real estate purchase prices deprives the Australian Tax Office of revenue and this is considered fraud.

2. Secondly, the Office of State Revenue is entitled to stamp duty on the real estate purchase price of the traded property investment or its value, whichever is greater, and by writing down the purchase prices he will deprive them of revenue.

3. Thirdly, as he was transferring a loan from the fibro dwelling to the real estate unit this created all sorts of problems for him and his lender. Lenders base the amount they’re advancing on the value of the real estate property or the purchase price – whichever is lesser. If he wrote down the value, the lender wouldn’t be able to transfer the full amount of the loan that he had on the fibro cottage over to the new unit.

4. Finally, and worst of all, you artificially create a lower cost base for capital gains tax purposes which could come back to haunt you in the future. For example, if you wrote down the value of the real estate property which was valued at $600,000 to a $400,000 sale price and you later sold the property after it had gained $200,000 (making it now worth $800,000), tax would be payable on the amount of $400,000 ($800,000 less $400,000). This is a huge mistake and the real estate investor wanted to do it to save himself a miserable amount of stamp duty. Forget it!

Option or first right of refusal on real estate property investments

A real estate property investor advised me that he and the owner of the property had agreed that he would have first option to buy this property in the next six months and asked me if I could do something simple to document this agreement. I asked him:

What was the purchase price for the real estate property investment should the first option be exercised?

When would the settlement take place?

What was the amount of the deposit?

I also asked some other questions about details that are normally included in a formal contract of sale for real estate property.

It was clear to me that he hadn’t agreed to take an option to buy the property investment, but had simply been given a right of first refusal. There’s a fundamental difference between these two concepts.

An option to purchase real estate gives the buyer of the property the right, but not the obligation, to buy the real estate property within, say, a six-month period. It allows the investor of real estate to put the property on lay-by and during the next six months make up their mind about whether they wish to purchase the property or not.

It’s essential however that the exact terms of the contract that comes into existence if the option is exercised are finalised at the same time the option is granted for that real estate property specifically, for example the purchase price, settlement date, deposit, etc.

A right of first refusal has been described by the High Court of Australia as “worthless”. It means that if the real estate owner of the property at some time in the future decides to sell the property – and they don’t have to – they agree to first advise you that it’s now available for purchase.

That purchase will be on whatever terms and price they determine and once they’ve made you aware that it’s for sale, then you’ve discharged their obligations to you. It’s for this reason the High Court says it’s worthless.

For more practical point of view, and not the lofty heights of the highest court in the land, the right of first refusal does have some value. It’s worth something to be the first person to know that a real estate property is for sale, as you can then at least take the initiative and attempt to buy it.

Rob Balanda is a partner of MBA Lawyers at Surfers Paradise and the author of the “Made Simple” series of publications available from Business Mall. Please note that 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.

Real Estate Renovation Rumbles

Written by Michaela Ryan for the API Magazine in Australia, Jan 2007

How can you renovate a real estate property and keep your relationship intact?

First a confession. I find renovating real estate properties stressful. Sometimes it makes me lash out at my husband when really, we’re but just doing our best to work through what seems like the world’s longest “to do” list. But apparently we’re not alone. A survey by AAMI in 2005 showed 58 per cent of people find their real estate renovation projects stressful. Thirty per cent find the renovation real estate projects to be a source of tension with the people they live with.

For information regarding why you should purchase pre-construction condos in Vancouver real estate versus buying old properties, click here.

So how can you minimise that tension? As a real estate property investor, this is important to address, because if one bad experience puts you off renovating for life, you could miss out on some great opportunities.

Katrina Spyrides, executive officer of the Conflict Resolution Services to the ACT, suggests that before real estate renos, couples should consider the problems they’re likely to face and discuss how they’ll deal with situations if they arise.

“If the couple is anticipating (various issues) then they can be on the same wavelength, rather than all of these dramas being a shock to them,” Spyrides says.

Possible Real Estate Reno Problems

1. Feeling exhausted
It can be exhausting working full-time and then coming home to do physical work on a renovation of a real estate investment property. It can also be mentally taxing to coordinate tradespeople.

2. Inequality of effort
Resentment can grow if one partner puts more time and effort into the real estate reno than the other.

3. Kids
“(Your kids) are at a school during the week and they want mom and dad’s attention if they’re being shipped off at the weekends then they might start acting up as well,” Spyrides says.

4. Lower quality of life in the short term
During a real estate property renovation, time and money can be scarce. your lifestyle accordingly suffers.

5. Disagreements about the details
How much to spend on a bench top? Which colour? Whether to bring in a tradesperson or do it yourself? There are plenty of little decisions that can potentially lead to disagreements between partners.

6. Living in mess
If you live in the house you’re renovating, there could be tools everywhere. And there will be rooms out of action for periods of time. comfort levels can suffer.

Coping Strategies of Renovation or Real Estate Property

1. The pre-reno discussion
Before your renovation project, it helps to talk about the issues we’ve just mentioned and how you might be able to (a) avoid them, and (b) deal with them if they arise. It’s also worth creating a ‘to do’ list (which will be a work in progress). Delegate all the tasks and establish a realistic timeline. Budget carefully for your investment property renovation project. Factor in a buffer for unexpected expenses – every reno has them!

2. Choose a good time to talk
Conversations can be counter-productive if you’re angry or tired. If you have a problem you need to discuss, Spyride says, “Set aside time when neither of you are tired and talk about it.”

3. Switch off
“Sometimes within a renovation of real estate property couples start to see each other as sub-contractors and every bit of their conversation is about the renovation. It’s about putting that line in and saying, “okay after eight o’clock we won’t talk about the renovation,” Spyride suggests.

4. Outsource
If the DIY jobs are causing too much stress, investigate the cost of outsourcing. If a tradesperson can complete the job within a day that would take you a couple of weekends to do, they might pay for themselves because you can tenant the property a week earlier.

5. Keep an eye on your tradies
Try to check on your tradies’ work every day if possible. It’s amazing what you discover when you drop in for a chat! If you pick mistakes up straight away, you can avoid big headaches down the track.

6. One step at a time
If you keep thinking about how much there is to be done, it can feel overwhelming. Sometimes you need to keep your focus on the next task or two in your real estate property renovation project in order to keep stress levels under control.

7. Just deal with it
“not all problems can be resolved. But they can be managed,” says Spyride. “It doesn’t mean that you have to have a bed of roses at the end of the day. Sometimes things will just be the way they are and there is not resolution. It’s probably just about working through them until they subside.”

Take heart – the real estate renovation won’t last forever!

For more real estate renovation tips and pre-construction condo purchasing opportunities, please click on this URL.

Real Estate: Adding Value and Subtracting Value

Taken from the Australian Property Investor Magazine January 2007 edition ‘From Little Things Big Things Grow’ article.

Intense competition between bank lenders means you don’t have to feel the full pinch of recent interest rate rises. There are at least nine techniques you can use to secure a lower rate on real estate investment interest rates. By Matthew Liddy for the API Magazine January 2007 edition.

1. Just Ask

Securing a lower rate can be as simple as asking if you’re getting the best deal, says mortgage broker Glen Spratt. If your total borrowings are greater than $250,000, there’s a good chance you can get a discount off the standard variable rate.

“The discounts are generally tiered,” says Spratt, director of Mortgageport. “The bigger the loan, the larger the discount. Generally speaking on any loan these days over $250,000 you can negotiate a discount of anywhere from 0.5 per cent off the bank’s standard interest variable rate. I’ve seen discounts as high as 1.2 per cent.”

The real estate loans attracting discounts at the upper end of that range would total well over $1 million, he adds. Usually these discounts come under the guise of a professional package, which will roll in other services, such as free transaction banking accounts, gold credit cards and real estate mortgage facilities such as offset accounts. For the home borrowing package, borrowers pay an annual fee in the order of $300 to $400. Despite this approach of giving with one hand and taking with the other, Spratt says real estate borrowers can save thousands of dollars a year.

“If you’ve got a $500,000 loan and you’re getting a 0.7 per cent discount that’s $3500 a year. If they’re charging you $300 in fees, you’re still $3200 a year better off.”

David Johnston of Real Estate Property Planning Australia says a few lenders will even negotiate on the package’s annual fee as well as the interest rate.

If you don’t like the look of the professional packages, don’t despair.

CANNEX mortgage expert Harry Senlitonga says that’s not the end of the negotiation. “With the lender’s discretion, they may offer you a special deal, especially if you borrow above $500,000,” he advises.

2. Shop Around

If your bank lender doesn’t appear too keen to negotiate, look elsewhere. Competitors may be more willing to win your business. Watch out for the extra costs associated with refinancing, though there are ways to beat those as well. For instance, some real estate mortgage brokers will pay the costs associated with switching loans in certain circumstances. Or just use the better offer as a negotiating tool, suggests Johnston.

“If you prefer to stay with your existing bank real estate lender, but just want to try to get a sharper interest rate, you can just talk to your existing lender and say, ‘here’s this offer over here and you’re only giving me this – can you match that?”

3. Consolidate Your Loans

Since interest rate discounts are largely determined by your total borrowings, shifting all your loans to one bank lender could help. “The more facilities or more borrowings you have with them, the more negotiating power you have,” says Johnston.

“If it’s someone who might have loans spread across two or three different bank lenders, by bringing all those loans together with one lender, it’ll certainly allow them to negotiate more fiercely with the bank mortgage lender to get the best interest rate for themselves.”

4. Establish a Line of Credit

Borrowers who are comfortable with doing so can essentially beat the banks at their own game by setting up a line of credit.

A line of credit is a type of personal overdraft, explains Johnston. In the bank lender’s eyes, even if you don’t use the money, your total borrowing facilities are at a higher level. “Even if you don’t plan to use it in the future, you can set it up (and it) can help you to get onto a better professional package and negotiate better real estate mortgage interest rates,” Johnston reveals.

He says a line of credit, or LOC as it’s commonly known, doesn’t necessarily involve higher fees either, since many professional packages allow for a number of different borrowing facilities.

5. Fix your Rates

A lot of borrowers have switched their bank mortgage loans to fixed-rate products in recent months, Spratt says. “There are mortgage real estate products available today where the fixed rates have a lot of flexibility, such as having an offset account attached to a fixed rate loan,” he says. “Three-year fixed rates now are lower than even the discounted variable rates and when you can have something like a 100 per cent offset account attached to it, it still gives a client the flexibility of making additional payments to the bank loan.”

However, Senlitonga notes there’s no guarantee you’ll save money on a fixed rate since you’ll be tied to it even if the variabl rates come down. Johnston adds that bank mortgage lenders aren’t as negotiable on their advertised fixed mortgage rates as they are on their variable mortgage rates. “most lenders with fixed rates, you can negotiate a discount but it’s more around 0.15 per cent or 0.25 per cent at the higher end,” he says.

6. Accept Fewer Features

Johnston says real estate borrowers who don’t qualify for a professional package could opt for a discounted variable mortgage rate. “The discounted variable loans are the ones that don’t have quite as many bells and whistles, so they don’t have the 100 per cent offset account but they give you a lower interest rate,“ he explains.

The difference between standard variable and discounted variable rates is often around the 0.7 per cent mark. Senlitonga says a recent CANNEX study found more than 60 per cent of offset accounts had a balance of less than $5000, meaning real estate borrowers were paying to have access to a feature they weren’t really using.

However, Spratt, warns real estate mortgage borrowers to think twice before giving up certain extras, such as redraw facilities. “(It) can have consequences that might not be apparent now but may come to a head down the track,” he says.

7. Try a Non-Bank Lender

Non bank real estate lenders can often help borrowers save, Spratt says. “My experience is you can get the same sort of discounts you’d get from the real estate mortgage banks but you don’t generally have to pay the ongoing fee that y ou’d pay with the bank,” he explains.

“You might get the equivalent of a 0.5 to 0.7 per cent discount off the standard variable mortgage rate but you the ndon’t have to pay the $300 a year fee.” Senlitonga warns, however, that simply switching to a certain type of bank lender won’t guarantee you get the best loan. He says it’s important to match the right product ot an individual borrower’s needs.

8. Go Online

Bank lenders with online only products often offer good interest rates, though borrowers will sacrifice any loan extras and access to in-branch real estate services, Johnston says. He says online bank loans for real estate investments are probably the best suited to borrowers who have a good understanding of the mortgage real estate industry and who only need straightforward loans.

“They’re probably not set up for more complex loan structures for people with a number of investment real estate properties etc.,” he says.

9. Use a Broker

If you don’t feel comfortable negotiating with various real estate lenders, a mortgage broker can do this for you – usually at no cost to you. In addition, mortgage broker’s inside knowledge and access to 30-plus lenders can help secure a discount for your real estate investment.

“Mortgage real estate brokers are often able to fins epical deals or special offers that aren’t generally published to the real estate market,” Spratt says.

Johnston adds, “A good broker can shop around on your behalf and can know which lenders are offering the best pricing at a particular time. That’s something that is constantly evolving and moving and changing.

Choosing the Right Real Estate Assets

Part 4 of the ‘Take Control: How Home Equity puts you in the driver’s seat’ by Monique Wakelin for the API Magazine, Dec 2006 magazine issue that focuses on being smart with your home equity and investment property strategy.

As mentioned earlier, choosing the right type and location of real estate property is crucial to achieving the desired outcome. If we look at the demographics, homeowners account for about 70 per cent of the Australian population, leaving a consistent 30 per cent pool of renters. Rental demand remains particularly strong in the locations and for the types of real estate property that enjoy the highest levels of underlying growth – and growth is all about buying real estate property that’s in high demand and limited supply.

Real estate investors will never get the type of capital growth required in oversupplied sectors of the real estate market. The target properties are generally 2 to 10 km from the central business district of major capital cities and a key feature is scarcity. This can only be found in architectural styles – for example, Victorian, Edwardian and art deco styles are irreplaceable and limited in supply. Access to schools, and other amenities are vital in these areas. Specific streets and locations also need to be taken into account.

The aim is to hold on to real estate and properties, that’s subject to greater demand than supply for the long term. Even when other sectors of the housing market are showing price stagnation or decreases, these prime real estate assets will remain relatively stable. In the case of apartments, the prime holdings are in smaller blocks in the right locations and always with car parking. Such properties are hard to find and the investor real estate must know at the outset what price to pay for them.

An apartment condominium purchased in the Melbourne suburb of Armadale is a case in point. A one-bedroom apartment condo in a small block built in the mid-1960s with its own car parking space sold for $25,000 at the time. The same apartment is worth about $250,000 on today’s market. It has demonstrated 10 per cent annual compound growth since it was built and is in high demand on the rental market. Or, a single fronted Victorian, one of a pair, in a very consistent streetscape that was renovated in the 1970s and is still in good condition, was purchased by an investor in real estate in 1997 for $236,000 and sold for $437,000 in 2001. Its current estimated value in the real estate market is $540,000.

Assessing the Capital Growth of your Real Estate Investment

Written by Monique Wakelin for the ‘Take Control: How Home Equity puts you in the driver’s seat’ article published in API magazine – December 2006 issue and this features the third part of this useful article.

Investors often ask how to measure the growth in the equity they control and how to access the capital growth achieved. Firstly, find out how much your property is worth on today’s real estate market, and you can calculate the increase on the original purchase price.

A simple model is to look at a real estate property purchased for $200,000 that’s now worth $240,000. The property investment has had a capital gain of $40,000 or 20 per cent.

Another method is to establish the rate of return on equity or the percentage by which your home equity has increased beyond the cash amount that was initially put into the property real estate investment. In the case of the $200,000 property there would have been a 10 per cent deposit of $20,000. If the property shows capital growth of 10 per cent in the first year, then there’s a $20,000 return on that equity or 100 per cent. This real estate capital growth will compound in subsequent years as seen in the following table at the end of this part of the article.

To suggest this specific level of home equity growth will happen every year is unrealistic. This is where the long-term view comes into play because of the wide range of factors that we know are going to affect real estate property. These are the “real life” situations ranging from rising interest rates to general national and state based economic conditions to changes in rental levels. Property real estate moves in cycles with periods of upturn and downturn and more stable, even price flows. Focused and disciplined investors in real estate pay little attention to the “bad news” and realise that their investment in real estate will increase exponentially as future property cycles move through upturn phases. Time evens out the highs and lows – as long as you get your asset selection right.

First time real estate home investors need to realise the first year or two of holding property will be the most challenging. It requires the mindset that there will be “glitches” until they see the pattern beginning to emerge. At this stage, they should also be exploring the options that provide some buffers against occurrences such as interest rate rises. For example, fixing all or part of their loan when rates are low can be a good insurance policy.

Return on Equity in home investments
This table outlines the return of an investment property purchased for $200,000 with an initial deposit of $20,000 and showing average compound annual growth of 10 per cent.

Year Capital Value Return(s) Return on Initial Equity (%)
Year 1 $220,000 $20,000 100%
Year 2 $242,000 $42,000 210%
Year 3 $266,200 $66,200 331%
Year 4 $292,820 $92,820 464%
Year 5 $322,102 $122,102 611%
Year 7 $389,743 $189,743 949%
Year 10 $518,748 $318,748 1,594%
Year 15 $835,449 $635,449 3,177%
Year 20 $1,345,498 $1,145,498 5,727%

For some more real estate resources on pre-construction condos and Whistler real estate and condo developments, click here.

Take Control: How Home Equity puts you in the driver’s seat

Real Estate Capital Growth is the sure-fire route to financial freedom through real estate property writes Monique Wakelin, but it all comes down to choosing the right assets. Part 1 published in the API magazine December 2006 issue.

If a potential real estate investor were to ask what the single most important factor was when selecting residential real estate there could be only one answer – a home property’s potential for excellent long-term capital growth.

The consistent and compounding effect of real estate capital growth is the golden goose because compounding growth produces equity in your real estate assets. It’s the ability to control more and more equity that can produce an income – the key to financial independence. Not only does capital growth, over time, provide the leverage for further investments, whether it be real estate or other, it’s locked away tax-free for as long as you own the property. Understanding the whys and wherefores of home equity and real estate capital growth are crucial if a prospective investor is to achieve the ultimate aim – financial independence through real estate investments.

Many residential property investors take the view that this asset class should be income driven. However, a higher growth property will actually deliver the better income stream over time. It’s more a question of balancing the growth potential and achieving a steady rental income rather than looking for high rental returns at the expense of the growth of the real estate investment property. During the actual years of the investment strategy, the role of rental income is to meet holding costs such as loan repayments, maintenance, insurances, rates and other outgoings.

Choosing high growth property real estate allows the investor to build equity quickly, which means they don’t need to rely on saving for another deposit from after-tax income. Compounding capital growth produces an exponential increase in value over time. If, for example, you buy a $300,000 investment property real estate that increases by an average of 10 per cent a year, then the compounding factor doubles its value every seven years, and you’ll create $1.9 million in equity over 21 years.

There can’t be too much emphasis on the fact that residential real estate property investment is a slow path to financial security and not a “get rich quick” scheme. It must be based on correct asset selection to produce consistent capital growth. But time and again, we see real estate investors making the same basic mistake, hinging on the belief that all property is good real estate property and that it must at some point increase in value. Instead, real estate investors end up with a capital loss or price stagnation and no equity to show for the years of repaying loans and funding maintenance expenses.

Only correct and specific real estate asset selection will ride out any property cycle downturns and even out the returns. Provided you’re at least five to ten years away from retirement, focusing on capital growth of real estate will allow you to accumulate some serious net home equity and built on it relatively quickly.

If we take a specific example of a well-selected property investment bought in 1980 for about $50,000 and look at its current estimated value we start to get the picture. In today’s market real estate, its value would be around $500,000. Back in 1980 that amount of money would have bought a house in the top-drawer areas of most major capital cities.

We know that over the past 26 years a number of major economic, real estate investment and political cycles have transpired and real estate property values have increased strongly in spite of booms and recessions. Anyone can purchase a real estate property that looks like it might perform well but the real aim is to purchase the ones that perform no matter the prevailing market conditions.

At its simplest level, capital growth on a property increases your equity or net worth. In other words, it’s what you actually own rather than what you owe. Good capital growth will increase equity at a faster rate than an individual could achieve simply through loan repayments or by saving cash in after-tax dollars. Top-performing residential investment property doubles in value every seven to ten years and grows in capital value by an average of 5 to 8 per cent a year ahead of prevailing inflation.

The scenario of applying for a bank loan gives us a good snapshot of how home equity in real estate is viewed from a purely financial perspective. Lenders seek security on their home loans and number one on the list is property. The highest loan to value ratio (LVR) is given against real estate property. Lenders will offer up to 100 per cent (or even more) of the purchase price against real estate properties, whereas shares will attract a maximum LVR of 80 per cent if you’re lucky.

Therefore, the higher the rate of capital growth on the home property, the greater the owner’s ability to use the accumulating equity to purchase further income-producing real estate assets. A real estate property that returns low capital growth rates makes the owner much more reliant on having to actively reduce the debt in order to create more equity. This can only be done through extra repayments off the principal mortgage out of after-tax wages or by paying off lump sums when funds become available. Home equity in real estate build-up from properly selected property will outstrip the rate at which most people can find extra dollars regularly from their own pocket.

For more information, please visit the API Magazine website or Urban Living tips and checklists for condominium living here.

Preparing your condo or real estate property for an earthquake and other condominium apartment tips

Originally published in the January 19 – February 02, 2007 Home Renters Guide in Vancouver, Canada by www.homebase.ca.

You can’t prevent an earthquake, but you can be prepared to avoid injury and be prepared to minimize the damage to your home. Go through your home, imagining what could happen to each part of it if it were shaken violently. For those living in a condo or apartment building, you may experience more sway and less vibration than in a single-storey building.

Work with your building or strata corporation manager to help quake-proof your home. Seek advice from professionals (insurance, engineers, and architects) if you are unsure what to do.

Previous earthquakes have proven that these items need attention:

- Tie down your water heater and other appliances that could break gas or water lines if they topple
- Secure top-heavy furniture like shelving units and armoires to prevent tipping. Keep heavy items on lower shelves.
- Fix mirrors and other hanging objects so they won’t fall off hooks.
- Located beds away from chimneys, windows, heavy pictures etc. Closed curtains will help keep broken window glass off nearby occupied beds.
- Put anti-skid pads (eg. Velcro) under TVs, VCRs, computers, and small appliances.
- Store valuable documents and special small keep sakes in a fire-resistant place.
- Keep sturdy shoes and outdoor clothing handy.
- Use child-proof or safety latches on cupboards to stop contents from spilling out.

Real Estate Apartment Safety

1. Never leave your apartment real estate property door unlocked, even while taking out the trash. You may find someone waiting inside when you get back!

2. If required to give the super-intendent a key to your real estate apartment or condo for emergency use, seal it in an envelope and sign your name across the flap with your signature overlapping onto the body of the envelope. This will deter against tampering. Periodically ask to see the envelope.

3. Make an effort to meet your neighbours. Learn to look out for each other’s interests. Know who “belongs.”

4. Don’t get on an elevator with a stranger. In an elevator, stand beside the control panel to have direct access to the alarm button.

5. Never isolate yourself in a basement laundry room. If possible, arrange to do laundry with a neighbour.

6. Never open your door to a stranger. Utility company employees can slip their IDs under the door. If in doubt, look up the company, telephone number yourself (don’t rely on a number they give you), and call to verify the information.

7. Do not prop outside doors open for any reason. If you find one propped open, close and secure it.

8. Use only your first initial on your doorbell and mailbox, and in the phone book for your real estate apartment address.

9. Immediately report any real estate building security problems to the super-intendent. Follow up to be sure the problem is corrected.

10. When your real estate apartment is unoccupied for a long period of time, leave a radio or television playing to give the impression that somebody is home.

Important tips for apartment condo finding

1. Get yourself in a gung-ho apartment condominium search frame of mind. You will be making dozens of phone calls and leaving many messages. If your messages aren’t returned the next day, you should call again, of course doing so with the utmost tact. If you don’t have a local phone number, get one. Apartment condos unlimited rents out very inexpensive voice mail boxes.

2. Keep your chequebook with you. When you see an apartment condo which looks good to you, you are going to have to decide and act upon it quickly. Good places do not stay on the real estate market long! People constantly lose good places due to indecision.

3. Collect all of your rental information before you visit your first vacancy.

4. Have a credit report with you and give yourself an edge over the next guy. Landlords will be impressed by your organization and preparedness. As well, you’ll save money by not having to shell out for each and every landlord who requires one.

5. Dress and groom as though you are going to a job interview. In many respects it is the same. Landlords for apartment condominiums of really good condo units usually have to pick of several applicants. They are looking for:

- Someone both able and responsible enough to pay rent on time.
- People who will treat them and their real estate property with care and respect.
- Quiet tenants who will not be disturbing to other tenants and neighbours.

6. Always keep your appointments and always show up on time. No-shows are a major source of frustration for building managers and condo landlords.

7. Don’t get discouraged! Finding a great real estate condominium apartment is not easy, but it is well worth the effort. Keep your chin up, get back on the phone and remember to always sound cheerful!

This is courtesy of www.homestore.com.

It’s time to pack up for your first apartment condo.

Here’s a helpful list of 10+ items to pack last and keep handy when you move to your new condo home … they’re things you’ll need to get to first and frequently.

1. Extension cords, batteries. Everything’s electric these days it seems. Computers, CD players, your Walkman, all those little gizmos you just can’t seem to live without. So it just makes sense to keep that extension cord or pack of new batteries right on top and within easy reach.

2. Tools. We’re talking hammers and screwdrivers, nails and screws, scotch tape, duct tape and especially, a tape measure.

3. A bottle opener and glasses. Thirst always seems to come first, particularly if you have to lug that stuff by yourself. Dehydration is a sneaky beast, so be prepared.

4. Snack, pizza and fast food coupons. You’re going to work up a hunger so think about treating yourself to a quick bite or a night out at Mickey D’s.

5. Address book or PDA. Keep those important telephone numbers handy.

6. Cell phone or regular telephone with plug – put these within easy reach. There’s always potential for an emergency.

7. Sufficient cash. Duh … but if you’re opening a new bank account you may have to wait for your first cheque to clear. Traveler’s cheques wouldn’t hurt either.

8. A copy of your real estate lease and personal ID such as a driver’s license. A speaking of banking, if you’re starting a new chequing account (or applying for utilities service) you’ll need proof of your new address too.

9. Cleaning materials. Especially paper towers – accidents do happen.

10. Light bulbs, a small lamp (perhaps a flashlight). It may be dark when you finally move in.

11. Alarm clock. You don’t want to miss your first day at school, right?

12. Box cutter. Don’t pack this puppy at all! It’s the first thing you’ll need to open your packages.

You can visit the following condo websites for more information about US and Canadian condo real estate development properties that are either under construction or during the planning and design stage.

Excuses, excuses when it comes to real estate investing …

When it comes to property real estate investment, it really is true that “anyone can do it”. Is it time to challenge some of your erroneous beliefs? Story by Michaela Ryan written for the December edition of the Australian real estate magazine called API.

I can’t afford to invest in a real estate property at the moment. Because I’m a single parent. A student. A low income earner. I’m single. I have four kids. Do any of these sound familiar? For just about every excusive you might think of, API has at one stage or another profiled a real estate investor to prove you wrong. Whether it’s your first property or your fifth, there are practical ways to overcome any obstacles you think are standing in your way. API regularly presents techniques for investing when you mightn’t have much home equity, cash flow or time. The scope of this article isn’t the practical things you can do, but the mental shift you need to make in order to succeed in property real estate investing.

Last month, we looked at some positive beliefs that tend to lead to success. Now it’s time to consider whether there are any negative beliefs standing in your way.

What is a belief?

Behavioural science expert Philippa Bond, CEO of Inform Training and Research, says beliefs aren’t substantial facts, although people mistakenly think they are.

“A belief is usually formed by anywhere between one or three experiences that occur, that the individual looks back on retrospectively and then formulates a belief based on (those incidences),” she explains. For example, Bond suggests a person might hear that everyone else is getting a much better return on their real estate property investment. Then they might have a bad experience with tenants. And they might go on to purchase another dud property or real estate investment. So any or all of these incidents might lead them to form a belief that they’re no good at property investing. Making a link between the events, they think that their belief is a fact.

The belief is not a fact, as it would be easy to do some learning and research and become quite good at property investments and real estate. But they never find this out, because their beliefs puts an end to their property investing. Alternatively, they keep investing, but all the time they’re telling themselves that they’re no good at it. “The pre-disposition of that belief being validated increases enormously,” Bond says.

How can you change a belief?

Bond says in order to change a belief, you need to think through its consequences. If the consequences are unsatisfactory enough, you might be prompted to change the belief.

So if you currently believe “I won’t ever be wealthy”, what are the consequences of that belief going to be? Perhaps you won’t ever develop a savings or investment plan. That might mean in 10 years’ time you’ll still be living in your current apartment or home. It might mean yuou’ll never get to take your family overseas. And in 30 years’ time you might be retiring to live on the pension – without a great quality of life.

If you’re spooked by any of the consequences, you’ll probably change your mindset. You might start to believe that you actually can be wealthy. There are plenty of practical things you can do to build your wealth. But until you alter that limiting belief, you’re never going to get off the ground. Now let’s look at some other examples of beliefs you might need to challenge when it comes to investing in property and real estate.

1. I can’t afford to invest“Some people say, ‘I can’t really afford it.” Says John McGrath. CEO of McGrath Estate Agents and author of You Inc. “The reality is you could have a lot more home equity than you think in your first property, and you might be able to borrow against it.” He adds, “Funnily enough, I think it’s as much about your belief and your strategy as it is about your financial capacity. I know people that are earning $50,000 or $60,000 a year that have bought two properties and real estate investments over the last six or seven years. And I know people that are earning $250,000 and they still have no assets or real estate investments.

“It’s not necessarily about how much you earn, it’s about how much you have the ability to save and how disciplined you are in your approach to your financial affairs.”

2. Property real estate is so unaffordable these days
If you listen to certain sections of the media on real estate and property, you’ll believe that property ownership is out of reach for most Australians and North Americans.

“it’s a very interesting psychological barrier – this ridiculous word called ‘affordability’,” says Bond. She suggests that affordability doesn’t actually mean anything; it’s only relative to your net worth, and your ability to access money. So the first thing you might need to do is define what affordable means to you. “Something that’s affordable has nothing to do with the price. Whether something is affordable or not has got everything to do with a cost benefit analysis,” Bond argues.

In other words, you don’t need to get a ‘bargain’ in order for a real estate property to be affordable. “If the return on the investment real estate property is going to be strong enough, and you have access to the funds for that property, then it’s affordable to you.”

3. Property homes can’t go up any more
McGrath regularly hears people say they don’t believe property real estate prices can go up any more. He recalls hearing the same thing 20 years ago when he was starting out in the real estate business. At an open inspection for a studio apartment in Centennial Park, he overheard someone say, “This is like a tiny room. How in the future will anyone pay more than $15,000 or $20,000 for a studio apartment?”

“Of course today that’s probably worth $220,000 or $240,000 for the same apartment. And someone walking in there today might be inclined to say the same thing,” he says. “I think you’ve just got to follow the trends, see that there are certain real estate assets – predominantly I think it’s real estate property and blue chip shares – that over a period of time have had a very consistent growth cycle that is dependable. There are some things that have faltered – I think you can buy risky shares. I think you can buy risky property. But if you stick with well located property and blue chip stocks, I thin you’re guaranteed the same cycle that generations before have enjoyed.”

4. Property’s too difficult to liquidate
Bond says many people believe that real estate property investments takes much more time and money to sell than other types of investments. She challenges this belief by saying, “(If) the contacts are in place, you can turn over a real estate property at a party! You get an exchange (of contracts) the next day. You then demand a 10 per cent release on the deposit … which gives you instant cash there and then.

“But if you have a managed fund, it can take anywhere between 14 days and 21 days to be able to get your money out.” “The shortest property settlement in real estate is going to be 30 days. But even it if goes up to 60 days, you’ve got it locked in by a legal contract real estate which is very difficult to get out of.”

This is only hypothetical, of course, and Bond isn’t arguing that real estate property is any better or worse than a managed fund. However, she makes the point that property investments can be liquidated (turned into money) a lot faster than many people would imagine. If a vendor is ambitious about getting a high price, then it might take a long time to sell a property or real estate investment home. But that’s a problem that’s easily avoided by keeping realistic price expectations from the start.

5. I don’t pick the best properties or real estate
Bond is impatient with people who believe that they aren’t good at choosing decent real estate. “If you don’t pick the best properties, it’s because you’re lazy,” she says. “There are so many magazines, so many reports. It’s so easy to pick the right properties and investments in real estate markets. You’ve just got to do your research. “(Someone might argue) ‘Yes but I don’t want to pay for the median price reports’. Well-pick the wrong properties then!”

Where to from here?

If you think through the consequences of any of these beliefs, they don’t auger well for your success in property investments in real estate. However, you can turn them around whenever you like. John McGrath suggests, “Use (your limiting beliefs) as a catalyst for developing specific solutions that help you move forward.”

“So if something concerns me or I don’t get a great feeling about it, it doesn’t always mean I won’t go forward on it. It often means, I’ll just ask myself the question, ‘what is it about this particular strategy or transaction that I’m uncomfortable with?’ And (I’ll” sit down on my own or with my advisors and say, ‘how can I get beyond this?’ “Sometimes there’s no solution and you’re better to not go ahead. But a lot of the time you’ll find there is (a solution),” McGrath says.

For example, if you believe you couldn’t cope with an interest rate rise in real estate, the solution would be to lock into a fixed rate home mortgage. Or if you believe you can’t afford another real estate property investment, you might resolve to see a lender to find out how much you can borrow. That way you can act based on the facts, not beliefs.

The Home Buying Process

Frequently asked questions about buying a new home from the New Home Buyer’s Guide BC Homes & Resorts from August 25 – September 22, 2006 edition with permission from the Canadian Home Builder’s Association (Visit CHBA at www.chba.com and HomeBase.ca for more information).

The home buying process should begin with questions – lots of questions to help you to make the right decisions about the builder you choose and the home you buy. Asking questions helps you to understand the buying process and eliminate any uncertainty you may have about it. Here are some of the common questions that home buyers ask in consumer seminars, in calls to local Home Buyers’ Association offices and in builders’ sales centres.

How do I make sure that I choose the right new home builder?

Talk with several new home builders first. Check out each company and the quality of their homes. Visit model homes or sales offices. Get facts and figures about every builder: How long have you been in business? Where have you built real estate before? Where are you building now? Can I visit one of your construction sites? Are you a member of the Canadian Home Builders’ Association? And so on. Ask about their customer service and third party warranty. Ask for references from past customers and follow up with them.

What kind of products will my builder use?

Professional builders use only products with a good reputation and a proven track record, products that are made by established manufacturers, meet Canadian standards and come with a warranty. The use of brand-name products in new homes offers a double benefit – you know what you are getting and so does your builder. I am not sure about my builder’s construction methods and technologies. How do I know they really work? Home building has advanced tremendously even over the last ten years, and technically, new homes are more sophisticated than they used to be. If you have questions about any aspect of how your home is built or how any of the systems or products work, such as the furnace or ventilation equipment, don’t hesitate to ask. Professional builders will be happy to explain things in detail. They often have cutaways or examples in their model homes or offices, or they can give you manufacturer’s information or third-party (such as government) reference materials.

What if there is a delay in finishing the home?

Both you and the builder want to see your home completed on time, and in the vast majority of cases, your home will be ready as scheduled. Occasionally, a delay may happen as a result of the unforeseeable – most often, sudden shortages of materials or labour. When a delay in unavoidable, your builder will work hard to minimize any inconvenience to you and your family. Ask your real estate builder to explain in detail what you can expect in case of delay.

Can I visit the construction site to watch the progress of my home?

Seeing your home take shape can be an exciting aspect of buying a new home. Ask your builder about the company’s policy on site visits and how to make arrangements. Can you tour your home while it is in progress and when? During construction hours, or in the evening and on weekends? Keep in mind that, for safety reasons, you should not enter the construction site for an unscheduled visit.

I have heard about the “other costs” of buying a home. What are they?

By far, the largest cost of home buying is the price of the house. However, there are some accompanying costs that you should be aware of. These costs vary from one region to another, but typically include lawyer’s fees, an appraisal fee (for mortgage purposes), fire insurance, and adjustments if you are selling your current home. Ask your builder or lender to give you a list of items and an estimate of costs. (Home buyers are often encouraged to set aside between 1.5% and 2.5% of the rice of the house for additional costs). At the same time, make sure to ask about the projected taxes for the new home, and the builder’s estimate for utility bills.

How long will it take to build my home?

The time required to build a new home can vary considerably, depending on development of the land, availability of labour, size and design of the home and a number of other factors. In larger developments, construction of your home may no begin until a certain percentage of the homes have been pre-sold to ensure an efficient and cost effective real estate construction process. Your builder will provide you with a detailed schedule of events and milestones, so you’ll know exactly what to expect and when.

Can I make changes to the design?

Today, customizing is the norm, not the exception. Often, your chosen plan can be modified, before the foundation is built, to suit your own needs and desires – eg. Moving walls, wxpanding closets, adding windows. However, each builder has a different approach, so ask about flexibility and limitations in the design. Do I have choices? Can I make changes and when? In larger real estate developments, the exterior style elements and colour scheme may be architecturally determined, so there are fewer opportunities to accommodate personal preference.

What is warranted and for how long?

Professional real estate builders provide third-party warranty on their homes to protect purchasers against faulty materials or workmanship, usually for one year, and against major structural faults for up to five years (up to ten under extended warranty options). The warranty also protects deposits up to a certain amount. Warranty programs vary from one province to another, so make sure to have your builder explain exactly what’s covered or call your program office for more information.

What else should I know about?

How buyers ask many other questions, depending on the specific circumstances. For instance, when you are buying from a model home or from a drawing, you want to know if there are any differences between what you see and what you get. You also want to know about your choice of features, if you can supply your own fixtures or materials, and if you get a credit or refund when eliminating items included with the home. In large developments, ask to see the utility plan: Where are the electrical boxes or panels placed? Streetlights and postal boxes? Where is the bus stop? Also find out about the landscaping plan and when the roads will be paved.

Professional home builders welcome your questions. They know that a well informed customer is most often a satisfied customer – the greater your confidence in them, the more satisfying the process for both you and your builder.

Home Financing Fundamentals

Written by Kelly Wharton for the Dec 08, 2006 – Jan 05, 2007 edition of the New Home Buyers Guide for Vancouver. The real estate market is hot and so is the competition for your home mortgage business. “The past six months have seen an incredible increase in the new products and options that lenders offer,” says Joanne Thomas, a mortgage broker with Centum Capital Group Inc.

There is so much information swirling around on home financing that the thrill of buying your new house – especially your first one – can quickly be replaced with a money headache. This article will help you focus on the fundamentals of financing your new home purchase and explore some of the newest products out there.

Don’t let the down payment get you down

Issue number one on your mind will probably be the down payment. A bank or other financial institution will lend you a significant portion of the purchase price of your real estate deal. The lender secures this loan by registering a mortgage against the title of your house. “The down payment amount is calculated on the purchase price of the house only, so the home mortgage does not usually cover closing costs like taxes and survey, appraisal and lawyer’s fees,” cautions Sheree Rankin, a Royal Bank mortgage specialist. So don’t forget these additional transaction costs in your savings plan, especially Goods and Services Tax if the house or real estate property is a new or substantially renovated, and the provincial property transfer tax or PTT calculated on the value of the house. First time home buyers may be exempt from the PTT if the value of the house is under $325,000.

In a normal or conventional home mortgage loan, you will need to save 25% of the purchase price. If you have less than the 25% down payment, you may qualify for a high ratio mortgage. These home mortgage loans require as little as 5% of the purchase price down since the lender is insured against the risk of default by mortgage insurers like the Canada Mortgage and Housing Corporation (CMHC). The premium for this home insurance – which is a percentage of the amount financed – is usually added to the home mortgage amount.

Whether you are getting a conventional or high ratio house mortgage, first time real estate home buyers can use up to $20,000 of their registered retirement savings plans (RRSPs) toward the down payment. This is a Canada Revenue Agency program called the Home Buyers’ Plan or HBP. It allows withdrawals from your RRSP to buy or build your home by October of the year following the year you withdraw the money. The withdrawn amount is not taxed and if you are buying with your spouse or partner, each of you can withdraw up to the $20,000. You can use RRSP contributions made up to 89 days before the withdrawal and still claim your current RRSP contribution as a deduction. You have to repay the withdrawn amount over a period of 15 years beginning two years after withdrawal. To find out if you qualify for the HBP, visit the website at www.cra.arc.gc.ca/tax/individuals.topics/rrsp/hbp.

In this new competitive world it is possible to finance 100% of your new house price with no down payment. First National offers this type of insured mortgage. Joanne Thomas reminds us that good things come at a cost, “The insurance rates associated with these types of home mortgages are higher than for other high ratio loans.”

Freedom 25…Or 35… Or 40

Once your real estate down payment is settled, you will know how much you need to borrow or the principal amount of your house mortgage. Your focus can turn to establishing a repayment schedule that is comfortable for you. The factors that determine the monthly payment amounts are the amortization period, interest rate and principal amount. The amortization period is the number of years it will take to actually repay the mortgage loan plus interest. The common length of time was 25 years but some lenders are now using 30, 35 and even 40 year amortization periods to calculate repayment amounts. The greater the amortization period, the smaller the monthly payments, but the longer you have the debt.

The total length of a home mortgage loan on your real estate property will be made up of several terms, the period of time the lenders will agree to lend you the principal with interest. Once the term is up, you can renegotiate your home mortgage for a renewal term or repay the loan.

Cracking the Nut

The annual cost of borrowing the principal or the interest rate will also affect your monthly payments. Each of the different real estate mortgage terms – usually between six months and five years – will carry with it an applicable interest rate and certain restrictions. Depending on your taste for risk, or your ability to read crystal balls, you can chose a mortgage loan that is variable (the interest rate changes with a lender’s prime rate) or fixed (the rate stays the same for the term), open (you can prepay the loan during the term without penalty) or closed (no prepayments or with a penalty).

Some new options may help you cope with the monthly mortgage nut for your real estate property. First National has an interest only mortgage which means you pay only the interest on the principal for a period of up to 10 years. The cost for this product is a higher insurance premium and you need a 10% down payment.

Lenders also advertise cash back mortgages which give you a percentage of the loan back in cash. A higher interest rate is the price tag for these types or mortgages. Planning the financing of your new home or real estate investment ahead of time by focusing on essential issues will mean exchanging headaches for homeowner bliss.

Bricks and Mortar Real Estate Investment Tips

Welcome to another instalment of Bricks & Mortar, where our panel of experts answers real estate property investment questions from API readers. Published in the December Australian Property Investor real estate magazine.

When to sell real estate?

Question: My husband and I are both working at the moment, however, I’m going to be starting 12 months’ maternity leave in January. We think we might need to sell one of our investment real estate properties (we have six) to help ease the financial load during this time. My question is, from a CGT perspective, would we be better off selling the property while we’re both earning an income or should we do it when I’m at home with the baby? The property is in both our names, 50/50.

Answer: Congratulations on your pregnancy. I hope everything goes smoothly for you. From a CGT perspective, it’s best to wait and sign the contracts in a financial year where you have a lower income so that any gains made on the sale of a property are added to a lower base income and not a higher base income. By the way, and for what it’s worth, another option instead of selling an investment real estate property is to use a line of credit (LOC) to help with the cash flow. This LOC will mean that your debt will increase over this time but twhere the funds are used to pay for property-related expenses and mortgage repayments, the interest should still be tax deductible.

This real estate investment strategy enables people to keep their properties at times like this instead of triggering the enormous costs of selling and seeing their portfolio decrease, and allos them to keep all future gains in real estate value on the properties in question.

Dale Gatherum-Goss

Can I claim the interest on a real estate investment property

Question: I have an investment property in real estate with about $68,000 left on the loan. Long story short, the interest I currently incur isn’t deductible against income against the property. If I were to “refinance” this real estate property loan as part of opening a new loan which I require for the explicit purposes of buying another investment property, will the interest earned on the sum total of the loan (i.e. the $68,000 plus the amount of the new property) now be deductible against income from the new and/or both properties?

Answer: No unfortunately the Tax Office follows the money in cases like this to see the purpose of the new home loan and how the funds were used. So, any new house loan would be apportioned between tax-deductible debt and non-tax-deductible debt I’m afraid.

Dale Gatherum-Goss

Is it too late to invest in real estate?

Question: I am a 53 year old nurse who works full-time and I’m concerned my superannuation won’t provide me with enough money to enjoy my retirement years. I currently earn $55,000 per annum and have almost paid off my home which is worth about $300,000. My question is, is it too late for me to invest in real estate or property to help secure my financial future? If it isn’t too late, what should my real estate strategy be going forward?

Answer: No, it’s not too late. Yours is a common scenario where an individual realises that relying on superannuation alone isn’t going to deliver the retirement lifestyle they were hoping for. Provided you are five to ten years away from retirement, you can still capitalise on your income and home equity in your existing real estate property to build wealth.

To maximise that wealth creation through real estate property investment at this point in your life will require a very unemotional and businesslike approach in order to maximise your capital gains. Your selection of the right real estate property asset is crucial and you should be concentrating on only one area – the high-growth inner urban areas 2 to 12 km from a major CBD – where scarcity value, high demand and low supply will underpin your real estate investment. By focusing your property strategy on capital growth you will build and control home equity. And it’s controlling equity that’s the key to attaining financial independence.

Don’t be daunted by the higher prices in these areas. One very well chosen, more modest real estate asset – such as an apartment – can outperform the wider marketplace and inflation, not to mention larger, lower growth properties in middle to outer suburbs. Seek independent financial advice on the best loan package for your circumstances.

Next, seek truly independent real estate property investment advice to ensure you do get the maximum capital gain and good, long-term rental income. These two advisory areas should be kept separate. Don’t waste any time before seeking the appropriate advice. Steer totally clear of any “get rich quick” property real estate investment schemes. Many people seeking to rapidly top up inadequate superannuation have been tempted by these to their financial detriment.

The safest way to invest in this real estate asset class ist o take an unemotional, longer-term very well advised view.

Monique Wakelin

Real Estate Valuation discrepancy

Question: Why is there such a big difference between a real estate agent’s appraisal and a valuer’s valuation of a property or home, particularly when it’s for the bank? I had an agent give me an assessment of the value of my home before getting my loan but the bank valuer said it was worth a lot less.

Answer: It probably comes down to a question of the instructions and motivations of the valuer and the real estate agent. The valuer is instructed by the lenders to provide a realistic assessment of the real estate market value of the property as they find it on the day of inspection. They can’t take into account future improvements or presentation issues you may attend to if you were to place it on the real estate market. The lenders simply want to know a “safe” amount they should use as security, so in the unlikely event they have to take over the property, they’re covered.

The real estate agent’s appraisal isn’t bound by these instructions. Often the reason for providing a free appraisal is as a marketing tool to try to gain your favour and ultimately a listing. Therefore, it’s in their best interests to be “bullish” about their opinion of the market value so that you’re more positive and inclined to list it with them. Remember that real estate valuers are totally independent and have no vested interest in your real estate property or home.

Phil Grahame

Buying a new home or real estate investment