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.

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.

Top 10 Home Cover-Ups and Renovations

Originally published in the Australian Property Investor magazine (API) and story written by Matthew Liddy, there are some very useful tips on how to spot cover-ups and what to do about it if you are either purchasing or selling a home that requires renovations.

Homebuyers must be on the lookout for sellers who’ve found problems with their home, moved to cover it up and then put it on the real estate market. Here are the top 10 cover-ups that can cost the unwary. Story by Matthew Liddy. Please visit www.apimagazine.com.au for more useful information.

Building advisory service Archicentre warns that buyers must beware the touch-up job, the quick cover-up that conceals a problem with a house but does nothing to fix it. “People who are buying properties may trip up over the situation where the seller has really just done a quick cover-up in order to move the property and get out of the problem,” says Archicentre Queensland manager Ron Tanton. “The new buyer is then saddled with the hidden defects and the hideous further costs involved.”

Cover-ups can prove effective because buyers don’t know what to look for and don’t always get a building inspection, Tanton says. “Typical weapons of mass deception include the use of gap filling products, wall panelling, strategically placed furniture, pot plants or rugs, or newly painted surfaces,” he reveals. Tanton says the top 10 cover-ups can be expensive to fix.

#1. Illegal Building
Typical example are low ceiling heights in habitable areas, dodgy extensions and alterations, and small boundary clearances. Tanton says these issues often don’t’ take too much covering up because many people aren’t aware of the regulations.
The Cost to Repair: Up to $100,000

#2. Cracking
Archicentre says it has seen internal cracking filled and painted and external cracking being hidden behind plants and trellises. Tanton says if a crack has been filled, plastered over and painted, it can even be difficult for a professional to detect.
The Cost to Repair: Up to $50,000

#3. Termites, borers and timber rot
Termites themselves try to conceal their activities but sometimes homeowners help uot by patching up floor damage or concealing it under carpets, Tanton says. “Cover-up merchants are the ones that generally deny access to the underfloor or the roof space,” he says.
The Cost to Repair: Up to $20,000

#4. Roof problems“Quite often the cover-up merchants will simply paint over the top with some sort of gooey stickey stuff and then paint it all in and make it look nice, only to find within two or three months or six months or twelve months, we’re back to where we were, wheras it should have been replaced in the first place,” Tanton says. With tile roofs, silicone is increasingly being used to stick tiles back together in an effort to get a house sold.
The Cost to Repair: Up to $20,000

#5. Rotten weatherboards and windows
Home real estate inspectors have seen rot patched with filler or covered with tin and painted. “It’s a small, inexpensive leap to spend a bit of spare time bogging up a few holes so that people don’t see it but what unfortunately can happen is the timber rot continues even through the paintwork over the top is quite good.”
The Cost to Repair: Up to $10,000

#6. Rotten stumps
One of the telltale signs of rotting timber stumps is a white, salty look to the bottom of the timber. “To cover up those sorts of things, people quite often paint the stumps and make them look nice,” Tanton says, adding that access is also often denied to underfloor areas with problem stumps.
The Cost to Repair: Up to $8,000

#7. Faulty or illegal wiring
Tanton says this is an area where cover-ups get downright dangerous. Cover-ups involve putting furniture in front of problematic power points or painting over them. “Bodgy do-it-yourself wiring”, especially in roof spaces, is also a problem.
The Cost to Repair: Up to $6,000

#8. Faulty or illegal plumbing
Cover-ups include painting or panelling over rusty plumbing that’s visible and homeowners carrying out their own illegal plubming connections and extensions.
The Cost to Repair: Up to $6,000

#9. Damp
Walls and ceilings are at times simply painted or panelled over, concealing the effects of dampness. “They’re very hard to see, particularly if the weather’s not raining a lot. If it is raining a lot then uite often the dampness will manifest itself as a smell.”
The Cost to Repair: Up to $5,000

#10. Guttering and downpipes
Archicentre inspectors see guttering and downpipes bogged up to hide rust. “We see that particularly with people selling homes – a bit of bog and spit and paint, and she’ll be right mate, nobody will get up there and have a look.” And they often get away with it. Some new homes also have secondhand guttering, he adds, an issues impossible to detect from the ground.
The Cost to Repair: Up to $3,000

A Pep Talk for First-Time Buyers

Another great article written by the RBC Royal Bank for the Westcoast Homes & Design November 2006 magazine for real estate, mortgages and pre-construction condo developments in the Pacific Northwest and Lower Mainland.

The Royal Bank answers some questions about how to qualify for that first mortgage. Think that buying a home is out of your reach? Think again! Stop talking yourself out of becoming a homebuyer and consider your options. There are many common concerns plaguing the minds of first-time homebuyers – and solutions to these that may surprise you.

“I’ll never save enough money to make that 25 per cent down payment.”

You could be right, but you may not need that 25 per cent nest egg. Special mortgage insurance is now available to allow for a down payment of as little as five per cent of the cost of a first home. There are even No Down Payment mortgages available. These mortgages are insured against default by either Canada Mortgage and Housing Corp. (CMHC) or Genworth Financial Canada.

“Most of my savings are currently tied-up in RRSPs.”

As a first-time homebuyer you can actually borrow up to $20,000 from your RRSP (up to $40,000 per couple) to help buy and build a qualifying first home. You can repay your RRSP in annual instalments over 15 years. Contact your local taxation office or mortgage specialists about this Home Buyers Plan sponsored by the federal government.

“What about all the extra costs of buying a home?”

Up-front cash requirements can be a particular concern to first-time home buyers. Most mortgage lenders now offer valuable features such as a cash bonus to help with closing costs or access to additional credit to help with your decorating and furnishing expenses.

“It’s a big financial commitment. What if my circumstances change?”

You can choose a mortgage lender that gives you the flexibility to adapt to changing situations. When you talk to a lender, discuss the ability to skip mortgage payments during a rough period an dthe flexibility to increase or pay down your mortgage as your priorities change.

Consult with your lender to arrange a pre-approved mortgage that takes into account your lifestyle and spending priorities. To crunch the numbers on your own, check out the mortgage calculators and tips from first-time buyers on the RBC Financial Group website at www.rbc.com.

For helpful advice and to arrange for a mortgage specialist to visit you at your convenience visit www.rbc.com or phone Royal Direct at 1-800 ROYAL 9-9 (1-800-769-2599).