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.

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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!

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Real Estate Mortgages: To fix or not to fix?

How do you find your way through the mortgage real estate lenders maze to arrive at offers that are worth following up? By Harry Senlitonga for the Australian Property Investor – Jan 2007.

To fix or not to fix? This is a common question, and one which is difficult to answer because it involves accurately predicting the value of cash on the money market at any given time.

As with all betting ventures, there’s a 50 per cent chance of getting it right, as well as a 50 per cent chance of getting it wrong. However, once you understand the way bank lenders work, it will help you evaluate special offers on fixed real estate mortgages.

Basically, the money market rate for the fixed period of time of your loan will reflect how much the money market values its cash over the same period. The lending institution ‘buys’ the money on the money market and then ‘sells’ it to you. Daily fluctuations in money market transactions will often occur because of this. However, the natural process of supply and demand also affects the rate offered. for instance, if no one is fixing their real estate property mortgages, institutions will offer a low interest rate to try to generate business. Conversely, if everyone is fixing their bank loans, there’s not as much incentive for the money lenders to keep interest rates temptingly low.

When is the best time to fix your property mortgage?
Unfortunately there’s not best time to gain any advantage in fixing your mortgage for your real estate investment or home property, or part of it. There’s no evidence in the past five years to suggest a particular week is the one to garget for the best deal.

CANNEX’s historical statistics on a three-year fixed rate loan shows the average margin was 1 per cent. We’ve seen figures as high as 1.85 per cent and as low as 0.43 per cent above the money market rate. The graph in the API Magazine shows the average margins taken over a 52 week period. When timing your move to a fixed rate, it’s essential to monitor the money market rate. This is available as a table in the finance section of most newspapers.

Is it a good deal?
A little research is always wise before you sign on the dotted line and CANNEX has created simple methodology that allows you to determine if an offer by your bank lender is right for you. Simply check the interest rate percentage offered by your bank lender against the current money market rate for the same period of time as the fixed term in question.

The closer the gap between the two, the better the deal and the more confident you can be in signing up for the fixed real estate property mortgage product in question.

Henry Senlitonga is a sector manager with financial services research group CANNEX.

Question and Answer: Which one is best?

Question: I’m looking for a fixed rate real estate home loan but am becoming increasingly confused about the so-called ‘good deals’ on offer. Is there a benchmark I can use to compare fixed rate loans before I decide on the best deal for me?

Answer: Fixed home property loans fluctuate on a day-to-day basis and the reason for this is largely due to the price the lenders pays for the finance you’re accessing. For example, the rate the lender pays for a three-year fixed property home loan on the money market will determine the rate at which that three-year fixed loan is offered to you. To ascertain whether or not this is a good deal, simply compare interest percentage offered with the money market rate. The closer the gap between the two, the better the deal for you.

For more information, please visit the API Magazine web site.

Understanding Mortgages

One of the first steps in buying a new home or real estate property is to take a realistic look at what you can afford and how you are going to pay for it. If you are like most people, you will probably have to finance your home purchase with a mortgage loan.

What is a Mortgage?

A mortgage is a loan that uses the home you buy as security. This loan is registered as a legal document against the title of your real estate property. Here’s a quick overview of some of the most common aspects of a home mortgage that you need to understand.
- The principal is the amount of the home loan, or the cash actually borrowed.
- The interest is the amount the lender bank charges for the use of the funds, or principal. Interest rates vary according to many factors including terms and conditions of the real estate mortgage. Mortgage payments are applied towards both principal and interest.
- The amortization period is the actual number of years that it will take to repay the entire mortgage loan in full. This normally ranges from 15 to 25 years.
- The term is the length of time for which a mortgage real estate agreement exists between you and the bank lender. Typically, terms range between six months and seven years.
- The maturity date marks the end of the term, when you can either repay the balance of the principal or renegotiate the mortgage at the current interest rates.
- Options let you tailor the real estate mortgage to fit your personal needs and circumstances. Open or closed mortgages, pre-payment options, fixed or variable rates or home portable mortgages are just a few of the available options.

Types of Mortgages

There are two basic types of home mortgages:
- Conventional Mortgage: The loan amount does not exceed 75% of the real estate property value, defined as the lesser of the purchase price or the appraised value.
- High-Ratio Mortgage, or National Housing Act Mortgage: The amount is more than 75% of the real estate property value (up to 95%). By law, a high-ratio real estate home mortgage must be insured against borrower default. The home borrower pays a mortgage insurance premium (a percentage of the total loan amount) which can be added to the mortgage loan or paid in a lump sum in advance. The borrower must also pay an insurance application fee.

How much can you afford to spend on a new home?

The amount of money you can afford to spend for a new home is determined by two factors:
- Your Downpayment. This is the amount of money you have available from your own assets. You need a minimum of 5% of the total purchase price as a downpayment for your real estate property.

A larger downpayment means lower mortgage payments or, even better, that you can pay off the mortgage faster, thereby saving thousands of dollars in interest payments. Or you may be able to buy in a higher price range, if you qualify. (Be careful, though, not to stretch your budget to the limit, and to set enough money aside to cover the other expenses of buying a home or property investment).

First time home buyers can use their RRSPs towards a downpayment and closing costs. Under the federal government’s Home Buyer’s Plan, first-time buyers can borrow up to $20,000 tax-free ($40,000 for couples) from their RRSP savings. The funds must be repaid within 15 years, but you don’t have to begin repayments for two years.

- Your ability to carry mortgage debt. Bank lenders use a simple two-step method to determine the real estate mortgage amount that you can comfortably pay back on your income. As a rule, you can usen o more than 32$ of gross income on monthly paymnents to cover principal, interest, property taxes and heating (PITH) and possibly condominium fees, or 40% of your gross income on all financial obligations. The latter could include car payments, credit card instalments and other payments in addition to the “shelter” costs listed earlier.

Once your maximum monthly payment towards “shelter costs” has been established, it is easy to determine the size of loan you can handle, depending on interest rates and amortization periods.

Be Aware of the Total Costs

When you calculate how much it will cost to buy a home or property and how much you can afford, don’t forget to consider the additional costs that you may encounter. Ask your real estate builder and the sales representative for detailed estimates, and consult with your lender and lawyer for further information.

Get Pre-Approval

It is a good idea to have your bank financing in place before you begin looking for your real estate property or home. That way you can negotiate arrangements with your real estate builder in full confidence and without delay.

A pre-approved mortgage is preliminary approval by the bank lender for a mortgage up to a certain amount, usually with a guaranteed rate for a specified number of days (90 days and sometimes longer). If interest rates go down during that period, you will get the benefit of the lower rate. If they go up, your rate stays locked in.

Pre-approved mortgage financing is simple to arrange, costs nothing and does not obligate you to go ahead with the bank loan, if you choose not to. The final mortgage amount and terms will be determined once you have reached a final agreement with your real estate builder.

Information provided courtesy of the Canadian Home Builders’ Association. For more information, visit CHBA online at www.chba.ca.

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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%

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Some things never change when it comes to real estate investment opportunities, selling your home, mortgage financing and more.

No matter how much things change in the real estate world, there are at least four rules you can count on, writes Tim O’Dwyer for the Australian Property Investor magazine. Although we clearly live in a rapidly changing world, as a conveyancing solicitor I’ve long recognised and remarked on the “Immutable Laws of Real Estate”.

They’re not really laws but are certainly seemingly unchangeable rules of conduct. Or maybe they’re just ever-present facts of real estate life. There used to be three. Now there are probably four.

1. Real Estate agents move quickly
You can’t really blame them for this. Selling real estate successfully for seller clients is mostly all about timing. So real estate agents, by nature or training or experience, know they should move quickly in response to buyer’s enquiries. More significantly, agents usually move like greased lightning when it comes to sealing deals. In those parts of Australia where real estate agents are permitted by law to prepare sales contracts, sellers and buyers alike often find themselves under more than a little real estate agent pressure to sign up to binding contracts super-fast. Real estate agents seem to believe that if they hesitate in this regard, they’ll lose sales and miss out on commissions.

2. Solicitors move slowly
Or so it seems. Rather, we try to act cautiously. We’re primarily concerned for our clients’ interests and these are often best served by our not rushing in. Hence we usually take our time – to carefully read real estate contracts, check documents and consider the many troublesome issues that can often arise in even the most apparently simple conveyancing transaction. But we often do need to move quickly, especially when it comes to ensuring seller’s documentation is ready for settlement or critical searches are sent and received for real estate home buyers. Why? Because often we find our clients have already signed contracts, usually under speedy agent influence, with dangerously short time limits.

3. People change their minds
This is one of the prime reasons for the first two rules. Real estate agents invariably, and understandably, want consumers locked into legally enforceable contracts before they have time for second thoughts. Competent conveyancing solicitors know from experience how they must always be prepared for their own clients and the other parties getting cold feet and wanting out of apparently done deals. Sometimes when people do change their minds, solicitors have to become “contract killers” on behalf of their cold-footed clients.

4. Holidays happen
We all know that all sorts of things can happen to cause problems and put real estate sales at risk when you’re buying or selling but, for some strange reason, an awful lot of buyers and sellers seem to go on holidays after they’ve entered into serious contracts. They then return home only a week or so before settlement is due. Solicitors by and large have learned to cope with this but, gosh, it can often make things trickier, such as getting essential real estate legal documents prepared, signed and sent where they have to go on time.

The moral
Anyhow, the moral of this story is obviously not to sign anything without first getting sound, independent legal advice and possibly an independent valuation – no matter whether you’re buying or selling real estate. You simply must not let yourself by rushed. Try to be as certain as you can before you commit yourself and, if possible, try to keep your holiday arrangements flexible. After all, your solicitors should be just a quick protective phone call away – except when they’re on holidays. Then you’ll have to hope a legal locum is in place.

Tim O’Dwyer is a Queensland solicitor. Email: todwyer@westnet.com.au

Going behind the scenes for lenders on real estate property

Published in the API Magazine – December 2006 issue on Pages 75 – 76. Most borrowers like the reassurance of having detailed knowledge of their lending institution and its financial reputation. Taking one step back, you first need to determine your level of understanding of the business of money exchange. There’s a significant difference in the risks associated with borrowing and investing and the information you should be aware of in each case.

Mortgage Shopping
There’s a lot more involved in selecting a mortgage than merely enquiring about interest rate and product flexibilities. Past articles have covered the intricacies of these topics, but how important is it to understand your real estate lender’s business?

A real estate lender’s reputation is an important criterion you should consider when taking out a loan for a real estate investment property. If you’re using a broker, they’ll usually have an opinion on the real estate lender. This opinion will often cover such things as credit policy, processing efficiency and in some cases, effectiveness in resolving disputes.

Particularly in the case of a real estate lender, you know nothing about, a little research is needed on your part to determine how long the lender has been in business for real estate investment lending and their ability to provide a consistent product.

Ask about the interest rate offered. Is it a special rate or a standard rate? This is more relevant when you’re considering a fixed rate product. There are some real estate lenders who may have a special rate advertised at the time you’re looking for a loan on your property but this rate may change significantly afterwards. It may well be a good deal to start with but when the fixed rate period is over, it may be a different matter.

Variable rate interest for real estate properties isn’t totally reliable either. Most institutions move their variable rate in line with the Reserve Bank cash rate. However, it’s not a rule that’s set in concrete and your bank lender can certainly change the interest rate, even when there’s no official cash rate adjustment. Ask about their policy on this. Is the variable interest loan written with a specific margin to reference rate (such as a standard variable) or is it unlinked?

Service: Mild, Medium or Hot?
In many cases service is a major factor when shopping for the right loan. Matching your needs with a big institution practices can be relatively easy.

With an unknown lender, however, you simply need to be a little more inquisitive. Is the service they provide perfect? Before you make up your mind, look outside the square.

Ask yourself, will they continue to provide good service after the sale, or will it grind to a halt once you sign on the dotted line? And does the company employ enough people to answer your queries in the future? A small company previously unknown to you is not necessarily to be dismissed, particularly if it meets your loan criteria.

Investing: a different kettle of fish
Many of us invest cash in the forms of term deposits, online accounts, cash management trusts, shares or managed funds. Here, the fundamental rule of investing is king – risk-return equation.

It’s usually easy to see the trade-off between the interest rate paid and the company’s financial background, especially on term deposit and debenture products. You’ll quite often see a 3 or 4 per cent gap on interest rate paid on term deposits by major banks and debenture products from small investment companies.

When considering putting your hard-earned cash into an investment company, you need to be more astute about the institution and its financial reputation. Ask yourself about the company’s ability to pay interest promised, as well as the principal when needed by you.

The newspapers may report the current cash rate of 6.25 per cent (at the time of writing), yet your company can offer an attractive 9 or 10 per cent. You should expect a higher level of risk associated with this type of investment.

It may be that your money is invested into mezzanine funds which banks are unwilling to lend against. In the unfortunate event of the investment company going belly-up, you must realise that banks have first claim against the assets, with you, as a private investor, coming in on the secondary level.

Security versus Reputation
As we can see, different assessments are required when you’re investing your cash and borrowing some funds for your property. Most mortgage originators securitise their loans so most of their assets are transferable if the real estate lender goes out of business for whatever reason. They’ll simply sell off their loan portfolio to another lender or investor (such as an insurance company or mortgage trust) or secure their portfolio as a mortgage-backed security (MBS).

MBS is an asset-backed security whose cash flows are backed by the principal and interest payment of a set of mortgages. These payments are typically made monthly over the lifetime of the underlying loans.

When your loan is administered by a new lender, they may reconsider the products structure and may offer you a new product as a substitute for your current product. This can become a hassle for you if there are significant changes in pricing and flexibilities of the new product offered. However, the mortgage lending arena in Australia is highly regulated, with many areas of legislation ensuring the rights of the consumer are met.

As an overall, when we look at security versus reputation, we clearly see that major banks offer both. Even though you may not be sure about a lender’s security, you can’t afford not to research the lending institution’s reputation.