Sizing Up Your Property Investment

12 tips to get a great property valuation and appraisal by Ms. Ryan for Australia’s API Magazine.

Real estate investors periodically have their properties revalued in order to finance additional property investments. For example, just say your property’s value has gone up by $50,000. Most lenders will let you borrow around 80 per cent of that value ($40,000) which you can use as a deposit for another real estate investment purchase. In order to work out exactly how much they’ll lend you, lenders will often send a property valuer or appraiser around.

So we’ve asked a couple of industry experts for the insider’s word on property valuations also known as property appraisals. How can real estate investors get the highest figure possible?

Phillip Grahame from Herrron Todd White says, “The main things in a valuation [or appraisal] are the size and functionality of the dwelling and the size and location of the land.”

So obviously the chances of a favourable property appraisal or valuation mainly come down to your choice of property investment in the first place. And of course, it also depends on what the property market in general is doing at the time. However, according to our experts, there are a number of things you can do to make sure you pull off the best valuation or property appraisal on the day.

1 Presentation
Grahame says presentation is the most important thing to take care of when you have an upcoming valuation or property real estate appraisal. “(Make sure) the gardens are looking nice and the clutter throughout the hosue is cleaned up and all that sort of thing. Because first impressions, even with property valuers, do count,” he says. “If it’s freshly painted and really neat and tidy and presents well, as it would to a buyer, then we’re going to be more positive on that particular property.”

Mark Ruttner from First Valuation Group agrees, “The owner should provide a property in a state of repair similar to an open for inspection. There’s nothing worse than rolling up to value a house and all the clothes for the last two weeks are on the bedroom floor, the toilet seat is up, dishes from the last week are still sitting in the sink.” Ruttner suggests mowing the lawn and trimming the edges. He also says any external painting should be fully completed, as first impressions can be significantly dampened by incomplete paintwork.

2 Recent Sales Evidence
If you know the sales prices achieved at any recent property sales in your area, have that information available for the property valuer and property appraiser. Ruttner says “One of the best times to et a current valuation is when you have say two or three recent sales that are very similar to that of the property getting valued. Obviously such sales have a direct effect on the arrived value.”

The easiest way to keep tabs on sales in your area is to attend auctions nearby. Whether it’s an auction or a private sale, hold on to the sales brochure when you attend the open home so that your valuer and property appraiser will be able to track down the agent to confirm the selling price.

If you want to be really helpful, Ruttner says it’s great when a property owner puts together a written report detailing three or so comparable sales within about 500 m of the property over the past six months. Grahame agrees that recent sales information is very useful.

He explains, “In most cases we’ll probably be aware of (the sales data) but in some cases we won’t. So if the applicant knows of it, it pays to make the valuer aware of it.”

3 A Rates Notice
According to Ruttner, some valuers and property real estate appraisers like to see a copy of your municipal/council rates. They vary from one place to the next, but there will generally be a “site value” or “unimproved land value” figure reflecting the value of the land only. And sometimes, there will also be an “improved value” based on the land and building. “Those (values) are done on a statistical analysis. So it’s not accurate but it gives us a ball park,” Ruttner says. “It gives the valuer/appraiser a pretty good idea of where it’s sitting in the marketplace.”

4 Be Honest
Grahame says, “We’ve heard every story and trick in the book and we can see through that pretty quickly. I’ve always found in my experience the morehonest the people are, the more we look favourably on the property and the application. If someone’s telling fibs, immediately we see through that and get in a defensive mindset.” For example, Grahame says clients might claim that a neighborhouring property recently sold for $500,000 but the valuer or property appraisal might have evidence that it only sold for $450,000.

5 Make Your Improvements Prior
If you have improvements to make, make them before the valuer comes around. Grahame says there are plenty of people who fall into the category of “the gonnas”. “Next week we’re gonna fix up the bathroom; or next week we’re gonna put on that car port …. What people don’t’ understand is that we have to value it as we find it on that day. We can’t take into account any future improvements they may – or in a lot of cases they may not – do.”

6 Clear Instructions
Grahame says, “If you’ve got plans for future investments and quotes and costings, make sure if you’re going through a lender that the lender requests an ‘as if complete’ valuation. A lot of times (the valuer or property appraiser) goes there and it hasn’t been communicated that’s what’s required and we just value as is on the day.”

7 List of Recent Improvements
Ruttner says, “If improvements have been made to the property over recent times, provide a detailed and written list of works conducted and the cost of these. Even better would be project specs and a building contract, giving the valuer an idea of exactly what has been spent.” While this will often add weight to your application, “also bear in mind that cost does not equal value in all instances,” he cautions.

8 Don’t Overcapitalise
Grahame says, “Obviously improvements and renovations add value. But you’ve got to be careful about overcapitalising. So not spending more on a particular improvement than that particular area can cope with.” For example, “Putting on a large extension will obviously increase the value of the real estate property but it may not increase the value more than what it actually costs. That’s generally dependend on the quality of the area. So if people renovate and improve to put the property in a bracket higher than what most properties in that area sell for, then there’s a chance that they’re overcapitalising. If they’re in a really strong, well regarded area where people are looking to buy in high price brackets, then it’s harder to overcapitalise.”

9 Outdoor Living Areas
“Outdoor living areas are one thing which tend to add more value than cost. So if there’s a well presented and functional living space, that always reflects well on a valuation or appraisal of a real estate investment property,” Grahame says.

10 Kitchen and Bathroom
“Kitchen and bathroom facilities are an obvious one,” Grahame says. “If they’re well presented and don’t have a dated look about them, then that will obviously have a positive impact on the valuation [or property appraisal]”

11 Etiquette
“The inspection in a typical three-bedroom home would take a prudent valuer [or real estate appraiser] not much more than 10 minutes to inspect inside and out, so don’t feel that you have to speak to the valuer to make sure that they haven’t missed any part of the property,” Ruttner says. Some owners feel a need to follow the valuer or property appraiser around pointing out every feature of the dwelling, but Ruttner suggests “don’t try and sell the property to the valuer.”

While you may be pointing out features you feel add value to the property, it’s best to leave it up to the expert to decide which are the salient features. If you waste the valuer’s time or the property appraiser’s time with lots of chatter you may get in the way of them doing their job as thoroughly as possible.

If you want to make sure the valuer has all the information they need, Ruttner suggests that at the end of the visit, you can always ask whether there are any matters the valuer isn’t sure about.

12 Be Patient
“Lastly, don’t ask the valuer what they think it’s worth as they’re leaving,” Ruttner says. After visitng the property, the valuer or appraiser needs to go away and undertake at least two separate methods for determing the property’s value. Two of the most common methods for residential property are “direct comparison” and “summation.” Direct comparison involves analysis of recent sales of similar properties in the area. It may be a straight comparison or a comparison of the rate per square metre (which is the salesprice of each property divided by the land size). In this method the valuer or real estate appraiser takes into account factors which differentiate your property from those in the comparison sample, such as location, size, quality of the dwelling and views.

Using the summation approach, the valuer/property appraiser assesses the land value (sometimes based on a comparison of vacant land sales) and then includes the ‘added value’ of the improvements of the land (ie. buildings). The added value is based on market evidence and is sometimes analysed on a rate per square metre basis. The valuer probably won’t be comfortable giving you an answer until this analysis is complete.

In short
So for optimal results, keep your place neat and tidy, provide any information to the valuer which might support your case, and then leave them in peace to get on with their job.

Prestigious Real Estate Properties makes Real Estate Investment a Snap

Published in the Real Estate Business Edge newspaper Advertising Feature in February 2007. Generate cash flow while you watch property value increase.

Every would-be real estate investor is seeking the fiscal equivalent of the Holy Grail: a fully secured, no-risk deal with guaranteed and robust rates of return.

Unfortunately, the Holy Grail remains elusive. And experience home buyers and sellers realize it’s a rare investment that doesn’t entail at least a minor element of risk. But that’s the key to wise investment in real estate: you’ve got to tap into the highest possible returns while keeping risk as far out of the picture as possible.

At Prestigious Properties, President Thomas Beyer and the Chief Operating Officer Doug Thiessen have shown that the syndicated purchase of carefully selected rental properties can bring real estate investors reliable quarterly cash flow and significant equity appreciation, with moderate risk.

Beyer and Thiessen have developed a highly successful formula that has made money for hundreds of their associates, most of them “ordinary” real estate investors who have never regretted their decision to enter into a syndicated purchase agreement.

“Investors generally want three things: zero risk, regular income on a monthly basis and a 100-per-cent guaranteed chance to watch their equity grow at a substantial rate,” says Beyer, an MBA from the University of Alberta as well as a Gold member of the Alberta Real Estate Investment Network.

“While nobody in the real estate investment community is able to offer absolutely iron-clad guarantees, Prestigious Proeprties CAN enable you to share in the ownership of a revenue-producing apartment building that’s as close to bulletproof as it’s possible to be,” he adds.

Much of the beauty of the plan lies in its simplicity. Beyer urges you to become a landlord while leaving all the hassles to him and his team. His program works this way: real estate investors with a minimum of $25,000 come aboard as partners in a syndicate to purchase an under-managed, under-valued property in a well-regarded area of a promising city such as Edmonton, Powell River, B.C. or certain medium-sized towns in Saskatchewan, B.C. or Alberta.

Beyer likes to refer to his ideal target properties as Class C buildings situated in Class B urban neighbourhoods. These are choice if underrated districts, where property values seem destined to appreciate.

When a purchase syndicate is formed, such properties will be acquired, skilfully managed, appropriately renovated, and eventually re-financed after a lapse of time ranging from nine to 24 months. By that time, rents will have increased, with a commensurate rise in the value of the building in question.

Under the terms of a pre-arranged exit strategy, the syndicate will eventually sell the real estate asset for as much as 30 to 90 per cent more than the original purchase price.

“There will always be demand for residential tenants in dynamic provincial economies such as B.C.,, Alberta and Saskatchewan. Time and again, we have proven the rental market is a good growth area, whether the economy is strong or soft,” says Bayer.

Prestigious Properties expends enormous effort on due diligence, carefully and methodically identifying potential real estate asset able to combine positive cash flow with equity growth. Apartment or townhouse complexes full of renters tend to match this profile beautifully. Because, as Beyer points out, the more rental units in the building, the greater the cash flow – even after taking care of upfront expenses such as taxes, mortgage payments and rental management.

As an example, the president cites the company’s most recent investment opportuniy. It’s a 104-unit townhouse style complex in Wetaskiwin, not far southeast of Alberta’s capital city. Prestigious Properties is currently projecting combined cash flow (generally distributed on a quarterly basis) and equity growth of as much as 15 to 20 per cent a year on this complex. Beyer believes the value of this residential property could easily double within four to five years.

“And don’t forget, there are numerous tax advantages to our program, including flow-through of expenses via our LP. These real estate assets enjoy tax deferred status until such time as they are sold,” Beyer hastens to add.

In short, it’s the perfect way for a man or woman in the street to take advantage of Western Canada’s booming real estate market. Beyer believes mature real estate investors may be kidding themselves if they believe they can retire off a stock-market based investment, such as a mutual fund. They’d be wiser to put their money into a safe, inflation proof REAL estate investment that makes money as you sit back an watch its value appreciate.

Beyer has learned the real estate business from the ground up. An award winning Christian businessman with a glowing track record, he urges you to get smart and go with a winner.

That’s Prestigious Properties. It may not be the Holy Grail, but it’s as close as most investors in real estate are likely to come.

Check out the Prestigious Properties website: www.prestprop.com. Then contact the company at 403.678.3330 or email investor@prestprop.com.

For other joint venture Edmonton real estate property deals and investment opportunities, click here.

House Not For Sale – Should You Sell your Real Estate Property? - Part 1

API Magazine of Australia examines why some real estate investors try to trade their way to real estate riches… but is buying and selling property really the best investment strategy? This is what Terry Ryder explains in this article. Part 1 of 2.

Ever driven past a house you owned 15 years ago, knowing you sold for $150,000 and it’s now worth $500,000? If you have, you’ve experienced one of the reasons why most property analysts agree that if you own good real estate, you should never sell. There are other strong reasons to reject the trading method of wealth creation. The high cost of selling and buying real estate is one of them. So too is the power of equity in creating a real estate portfolio.

Sydney property buyers agent Patrick Bright applies the philosophy of American share market legend Warren Buffet to real estate investing. “Buffet’s approach is to buy something he would be happy to won forever. His fundamental question is, ‘if you could never sell it, would you be happy forever?’ “That’s become my focus with real estate. If you follow that approach, you’ll make sure you do proper research and look at areas with future prospects.”

Many real estate property analysts agree. Monique Wakelin of Wakelin Property Advisory in Melbourne says: “Trading is absolutely not the way to go.” And Perth analyst Gavin Hegney of Hegney Property Group says: “If you’ve done your research and bought the right property, you should never sell.”

Impatience and Imprudent Decisions in Real Estate Investing

Gold Coast solicitor Rob Balanda of MBA Lawyers sees many real estate investors make mistakes with their assets because they get bored with them. They sell property assets they should keep because they lack long-term vision. “Patience isn’t a virtue many investors have,” he says. “But it’s a virtue real estate investors need to have to be successful and create wealth.”

Balanda says some residential property investors get too caught up in problems with tenants. They make the mistake of trying to manage the property themselves. Hegney says too many investors in property apply a ‘get rich quick’ mentality and lack a long-term outlook.

He says, “People buy a property, it goes up in value by $50,000 or $100,000 and they think: that’s my vision. I’ll sell and take my profit. And typically they spend it on a car or an overseas trip. “People don’t see real estate investments as businesses. They see them with a terminal life: making a certain amount and then spending it. A good investment is like a business. If it’s a good business and continues to create wealth, why would you sell it?”

Hegney says some sell real estate and properties too soon because they don’t understand the impact of compound interest. “If you have a million dollar asset and it grows 10 per cent, its value is $1.1 million after one year. When it rises another 10 per cent, that’s 10 per cent on $1.1 million, not on the original rela estate property price. By the time you get to year 10, it’s $2.6 million. It’s that compounding effect of property investing that creates the wealth.

“The same thing happens with rental return. With the current rental rates and growth, within five to ten years your rents are well and truly servicing your repayments for a high-growth asset. “In 90 per cent of cases, the most an investment property will cost you is in the first couple of years. After that, your costs should decrease as your rents increase.”

Hegney says in an ideal real estate investment world the only asset people should trade is their principal place of residence. As they create wealth, they can buy a bigger and better home and not be liable for capital gains tax. “But all other real estate property assets you hold forever – unless some drastic change comes to your life.”

Brisbane buyers agent Scott McGeever agrees that the only time you should trade in real estate is to upgrade the family home. “You do that to give yourself a better standard of living and it’s a tax-free ride,” he says.

Real estate investment advisor and author Margaret Lomas says a lot of people trade property assets because they believe it’s the way to get ahead. “But I haven’t seen anyone make a lot of money doing that,” she adds. “And if you do it too often, the Taxation Office will conclude that your business is property trading, which has many implications.

“I knew people who used to do that. After doing it for 15 years, they weren’t very far ahead. All they had was a pretty good house in a good suburb but they hadn’t built up a great amount of equity. They would admit, I think, that it didn’t work for them.”

Real Estate Property Value Growth Does the Work For You.

Imagine if you’d bought the average Melbourne house in 1990 – and did nothing since. You would have paid around $150,000 for the property and by 2005 it would have been worth around $365,000 – providing enough equity to finance you into several investment properties (depending on your ability to service the loans). On the other hand, imagine if you’d sold it in 1992 for the then-average price of $144,000 because the real estate market was taking a caning and property values had fallen in the wake of the bust which followed the boom of the late 1980s. You’d cry every time you drove past it wouldn’t you?

Why hand your gains to the government?

Selling an investment property before buying another means you’re handing a big chunk of your capital gains to government, the legal profession and lenders. Taxes and fees eat a big share of the profits. Bright says buying costs are about 5 per cent of the price – and selling costs include 3 per cent to the marketing agents, 1 per cent in marketing costs, solicitor’s fees and mortgage discharge costs, as well as stamp duty and capital gains tax.

“if you sell and buy again, you’ll blow around 9 or 10 per cent on costs.” Bright says, “You’re just wasting money. It doesn’t make sense when you can save that money and borrow against the property you have to buy a second property. Rather than trading up you’re better off having multiple properties.”

Lomas says a property investor who’s made $300,000 in value growth is looking at $80,000 in capital gains tax if they sell. And Wakelin says: “the bottom line is that property real estate isn’t an inexpensive asset class to get into and out of. So it requires a long term strategy. It’s important to buy the best quality real estate property assets you can and hold them long term.” “When you buy and sell, you’re up for very hefty costs, not the least of which are stamp duty and capital gains tax. Why line someone’s pockets? Line your own.”

For more tips, please read through more articles on Condo Blogger or visit the API Magazine website.

Homeowners Happier than Renters | Real Estate Ownership

From the Feb 2007 edition of API Australia Magazine. Australian homeowners are more satisfied with life than renters, research suggests.

The Australian Unity Wellbeing Index found that people who were paying off a mortgage or owned their home outright consistently reported higher levels of well being than real estate renters. The results were consistent across different age groups and income levels. The Wellbeing Index results from a survey of 2000 people who answer questions about their satisfaction with different aspects of their lives.

Higher incomes did show a trend towards levels of wellbeing but renters earning $91,000 to $120,000 reported marginally higher well being that outright real estate home owners earning $15,000 to $30,000.

“It’s apparent that there are consistent differences between these three groups of people (real estate renters, mortgages, and outright homeowners) at each level of household income, and that the people who are renting real estate have the lowest wellbeing,” a report on the research concluded.

“The fact that this is so consistent across the demographic groups seems to suggest that it’s something intrinsic to the type of person who rents real estate that is causing this difference.

“One possibility is that people who are renting are more transitory. This may be because they have a job that causes them to relocate frequently, thereby making impractical for them to invest in their place of residence.”

Real estate renters also more likely to be single; people living with a partner reported higher levels of well being.

Treat ‘Main Residnece’ carefully

Tax | You can only have one ‘main residence’ at a time for tax purposes, professional services firm BDO Kendalls reminds real estate property investors in Australia.

Kendalls partner Eddie Chung said while profits from the sale of a ‘main residence’ are generally exempt from capital gains tax in Australia, this may not be the case if the real estate home owner had owned more than one residence at a time or has vacated the residence at any point before its sale.

“The ‘temporary absence rule’ mean that as long as you don’t own another main residence elsewhere in Australia and you temporarily leave your home, for example, on an extended sabbatical overseas, you may continue to treat your real estate property as your main residence, even though you may not actually be living in it,” Chung says.

“If you rent your home out during your absence, you can continue to treat the property as your main residence for up to six years.”

Chung said the key was to have lived in the property before first vacating it, otherwise the temporary absence rules wouldn’t apply. It wasn’t possible to own more than one main residence at any given time, even if you did live at both places, he said.

“You cannot argue that you and your spouse own a different main residence each, unless you’re genuinely separated. The sale of one of those residences will normally be subject to capital gains real estate tax.”

The only exemption was a six-month grace period between the purchase of a new home and the sale of your old main residence.

Discussion Corner – Finding the Right Key to Real Estate

From the March 2007 edition of the Australian Property Investor Magazine. Helpful hints on real estate investments to get you started on the right foot to success.

The Australian dream of working towards home ownership until the mortgage is paid off is all very noble, but often there are no extra lump sum savings factored in for other real estate property projects. That’s the traditional way many join the Equity Rich, Cash Poor Club.

There is, however, a pot of gold at the end of the rainbow. It’s called your home. If you’re an income earner, your home is something you can borrow against by perhaps taking out a standard mortgage or line of credit to free up cash you wish to use for other reasons. Perhaps, your financial situation has changed drastically, or your daily expenditure has soared, or you may want to invest in additional real estate properties.

There’s no doubt investments in real estate is the buzzword of the decade. Proeprty investing is certainly much more prevalent than it has ever been before. With home equity locked up in your real estate property house, real estate opportunities can pass you by unless you’re prepared. Other reasons for using the equity in your home are to improve cash flow and to cope with increased daily expenditure that may be partially due to a higher inflation rate.

For income earners, the answer to unlocking equity home built up in a property real estate is as simple as re-mortgaging. All lenders offer this facility but not all loans are suitable, so do your homework before deciding.

A revolving line of credit (RLOC) facility is something to consider. It’s a special kind of home loan that may be suitable for, say, a short term cash flow problem. In some ways, an RLOC operates more like a large overdraft. You’re given a credit limit which you can draw down at any time you like. Unlike a standard mortgage on a real estate property, however, a revolving line of credit doesn’t have a minimum repayment (with a credit card, for instance, it’s typically 2 to 3 per cent of the balance each month).

The only requirement with a revolving line of credit is to keep the level of debt below the loan’s maximum loan to value ratio (LVR) which is typically 80 to 95 per cent of the value of the real estate home property. This gives the borrower far more flexibility than with a traditional home loan that has set repayments.

With this flexibility comes the ability to pay off the loan faster than a traditional home loan. Alternatively, it gives you access to additional home real estate equity. Most lenders don’t insist that you pay as much as you can, so you can have an RLOC with no debt and available at any time you need it. There may be an ongoing fee to maintain this facility.

Access to home real estate equity is a good thing, except when the loan looks like it may never be repaid. And with a line of credit, this is a possibility!

Reverse Mortgages in Real Estate

Retirees can also be equity rich and cash poor, and a reverse mortgage is a way to access the home equity tied up in a family house. It means retirees don’t have to sell their property real estate and can unlock the equity in it by receiving a lump sum or regular instalment payments to support their lifestyle. It sounds good, so what are the catches?

Yes, a reverse mortgage does provide convenience in obtaining extra cash but it comes with a few potential hassles that everyone needs to consider thoroughly.

The first is long-term financial impact, especially on their inheritance. Perhaps the prospective home buyer borrower should discuss these plans with the family beforehand. This is a complicated issue and is one of the main reasons why financial advice should be sought from a real estate expert, before rushing in and signing on the dotted line.

Most reverse mortgage products require that you maintain the home property to a specified standard and may not allow you to make certain modifications to your real estate property. If you’re considering a reverse mortgage, make sure you plan ahead and know the real estate product with its risks as well as benefits because it’s not for everyone.

In the end, some people, whether income earners or retirees, just might opt ot go the old-fashioned and sometimes easier way – sell the real estate property and go back to renting!

For more information, please visit Australian Property Investor magazine online.

Should you rent or buy your next real estate property?

Stuart Wemyss of API Magazine (Feb 2007). Part 2 of 2 of this useful article that explains the differences in saving money for a real estate property purchase for primary residence versus one for investment purposes.

Cash flow and borrowing capacity difference

From a cash flow perspective, renting real estate may be a lot cheaper, especially for people with little equity or no deposit. Consider the example of two people who occupy a real estate property worth $500,000. The renter will probably pay a rental yield of say 3.5 per cent, depending on location. This amounts to an annual cash outflow of $17,500.

Assume the homeowner has a home loan of $400,000. Annual principal and interest repayments on this loan will be about $32,000. Therefore, the homeowner’s annual commitments are $14,500 higher than the renter ($32,000 less $17,500).

The renter can borrow over $220,000 more than the homebuyer because of this commitment difference (and also the fact that banks factor potential interest rate increases into their borrowing capacity calculations, which affects the homebuyer but not the renter). The homeowner’s loan would need to be less than $220,000 for the repayments to be less than the renter’s annual commitment of $17,500. The conclusion is, if you have little cash or equity, then you may be better off maximizing your borrowing capacity by renting rather than buying a home so that you can purchase more investment real estate properties.

Deposit Power

Real estate investors should understand that owning your home property may render some of your cash or equity to be unusable. Perhaps the best way to communicate this point is to consider an example. Consider two different investors in real estate property. One property investor has $200,000 in equity in his home (say a home worth $400,000 with an outstanding mortgage of $200,000) and another doesn’t own a home but has $200,000 in cash.

The real estate investor with $200,000 can buy about $800,000 of property (note, this figure will depend on the state the property is bought in as stamp duty charges vary), assuming a maximum loan to value ratio of 80 per cent is maintained (i.e. the $200,000 cash was used to pay for a 20 per cent deposit plus costs).

The real estate investor in property who owns his home can borrow up to 80 per cent of his home’s value in Australia (therefore, $320,000). He already has a $200,000 home loan secured by this property. Therefore, he can borrow an extra $120,000. This amount ($120,000) can be sued to pay for a 20 per cent deposit plus costs (eg. Stamp duty). Therfore, this investor in real estate can spend up to $480,000 on an investment property while maintaining a locan to value ratio of 80 per cent.

In these calculations, I’ve assumed that the investor in real estate borrows a maximum of 80 per cent of the property’s value. This is the maximum most lenders wil provide without charging Lender Mortgage Insurance, which can be a very costly upfront fee. However, it’s possible for the homeowner to bridge some of this gap between him and herself and the cash holder by borrowing more than 80 per cent (although as noted) this does come at a cost). This leads nicely into my next point about timing.

The Timing Issue

Most people intend to own a home or property some time in their life. Therefore, some investors in real estate are faced with the decision: “What do I buy first? A home or an investment property?” I would guess that there would be very few people who would decide never to purchase a home just because numbers don’t stack up.

Buying a Home and Then an Investment Property

The main advantage with this real estate investment strategy is that it allows you to balance your tax deductible and non-tax deductible debt more effectively. That is , you’re able to contribute all your cash towards your home purchase to minimize your non-tax deductible home loan. You can then utilize the home equity in your real estate property to borrow the total cost of your investment property, even if it means paying for mortgage insurance. The main practical downside to this strategy in real estate investing is that for many people, the subsequent investment property purchase may never eventuate. They may have every intention to purchase an investment property. However, due to constant distractions in life, time slips away and they may never actually complete the investment real estate property purchase. In this situation they would have been far better off purchasing the investment property before the home form a wealth building perspective. So, if you choose this strategy in real estate investments, make sure you follow through with your intentions and purchase investment properties.

Buying an Investment Property First and then a Home

Obviously the reverse of the pros and cons mentioned above apply to this strategy. Another benefit of this strategy is that buying an investment property a number of years before your buy a home may help you afford to purchase a more expensive home as you would have hopefully built up equity in your investment real estate portfolio.

Occupying an Investment Property

A really good “happy medium” is to purchase a property real estate purely on investment fundamentals (ie.e purchase the property as if you weren’t going to live in it) and then occupy the property as your home. Of course, this may involve you have to compromise on your personal lifestyle requirements. However, the main benefit in real estate is that you won’t compromise on the main reason for home investing in property. That is capital growth! You will, of course, be missing out on the income (i.e. rent). However, it’s capital growth that will increase your net wealth the most and allow you to continue to build your real estate property portfolio.

The biggest downside to buying a home is that home purchases are heavily influenced by personal, non-financial preferences (e.g. location, type of architecture etc.) This may result in someone purchasing a poor quality asset from an investment real estate perspective, whereas investment property purchases should be unemotional and only influenced by the question “which asset is going to perform the best?”.

Therefore, eliminating the “emotional” influences fro your home purchase in real estate should go a long way to helping you build wealth! This real estate strategy is particularly important for people who may only want to buy a home to occupy for a short period (say five years). Buying a good quality asset can help them tremendously after they decide not to occupy the home anymore and sell it or rent it out.

Buying: A Forced Savings Plan

One risk to taking the “rent a home and buy an investment property in real estate” option is procrastination. Buying a property, be it a home or an investment, is a bit like a forced savings plan. As discussed earlier, it’s cheaper to rent a property from a cash flow perspective (i.e. rent payments are lower than home loan repayments). That can be useful as long as you use the cash flow saving wisely (eg. Buying an investment property). However, some renters fall into the trap of spending the cash flow saving on their “lifestyle”. This is a common trap and is extremely “wealth destroying”.

By buying a real estate property, you’re essentially forced to contribute a greater proportion of your income towards buying an asset in real estate, rather than spending this money on your lifestyle. Therefore, if you’re not as disciplined with your money as you could be, make sure you have something in place to “force” you to buy an investment property (a good solution is to use a buyers agent to locate and purchase the investment property for you, because then you know it will definitely be done).

Focusing on Financials

I’ve written this article on the basis that people are focused solely on the financial pros and cons. I realize this isn’t realistic. I understand some people are mainly driven by personal preferences. For example, some people feel more secure if they own their home and would never want to rent. Some people prefer to rent near the city, because if they purchased, they could only afford to buy something in the outer suburbs and they aren’t prepared to compromise on location.

The only advice I have for people who are heavily influenced by their “personal preferences” is to be aware of the financial repercussions of your decisions and how they may affect your long-term wealth because they can be absolutely huge! The renting or buying real estate decision is not an easy choice to make.

Stuart Wemyss is a chartered accountant and director of mortgage broking firm ProSolution Private Clients. For more information, please contact API Magazine of Australia.

Real Estate: Rent or Buy your primary residence real estate?

An investor’s viewpoint on whether to buy or rent a property by Stuart Wemyss of API Magazine (Feb 2007). Which is better, renting your home or buying? It’s a topic that’s been discussed ad nauseam, but there are important considerations specific to real estate property investors which need to be considered.

I was recently asked for my views on the ‘rent versus buy’ question. I sat down and prepared a spreadsheet which compared the two options, like a typical accountant! There are some important assumptions used in this calculation including:

- I prepared the comparison over a five-year period. Holding a real estate property for less than five years isn’t generally viable, because of the large transactional costs such as stamp duty and selling costs.

- I assumed the real estate property mortgage interest rate was 7 per cent. According to the Reserve Bank of Australia, the standard variable rate over the past 10 years has fluctuated between 6 per cent and 8 per cent. Therefore, 7 per cent is the midpoint.

- The real estate buyer borrowed 80 per cent of the property’s purchase price to avoid the cost of mortgage insurance (therefore, they had a deposit of 20 per cent plus costs).

- The renter had to pay a rental yield of 3.6 per cent (therefore, the rent payable on the real estate home worth $400,000 is $14,400 per year, or $277 per week).

- The renter is able to earn an interest rate of 6 per cent on any savings deposited in a bank (i.e. the money they would have used as a deposit).

- The real estate renter saves the difference between the potential mortgage repayments (principal and interest) and the lower rental costs. For example, if the renter bought a $400,000 property, the monthly momrtgage repayments would be $2130. However, renting a $400,000 property real estate would cost $1215 a month. Therefore, I assumed that the renter saved $915 per month ($2130 less $1215). This is a really important assumption. More about this later.

The results

What my calculation revealed was that the key variable was capital growth, which is the amount of rate at which the real estate property’s value would increase. I worked out that if you’re buying a home and you expect the capital growth to exceed 6.4 per cent per annum (on average over a five year period), then you’ll be better off buying that home rather than renting it. Therefore, in my opinion, the key question to ask yourself if you’re thinking of buying real estate a home is what capital growth can I expect if I buy the type of property I want (i.e. house, apartment etc.) in the area I want to live in? If you think the average capital growth over the next five years will be less than 6.4 per cent per annum, then you’re better off renting in the same area and not buying real estate property.

I based my calculations on the assumption that the real estate buyer would borrow 80 per cent of the property’s value. However, if you need to borrow a higher percentage of the property’s value, say 95 per cent, then the capital growth rate needs to exceed 7.6 per cent for you to be better off buying real estate rather than renting a home.

The higher the purchase price, the higher the capital growth rate needs to be. I based my numbers on a purchase for $400,000. Howver, if you’re spending $800,000 on a property purchase, the capital growth rate needs to exceed 7.9 per cent for you to be better off buying. If you’re spending $1.2 million, the capital growth rate of the real estate property needs ot exceen 8.4 per cent and at $1.5 million, the rate needs to exceed 8.6 per cent.

Achieving capital graoth of real estate above 6.4 per cent to 8 per cent

Many people reading this article may think property prices will be pretty stable over the next few years. From that, they may deduce that they should rent and not buy. However, their opinions may have been incorrectly influenced by “average” property real estate price data and media hype. It’s important to understand that the property market is very fragmented.

While real estate property values overall remain steady, values in some suburbs will increase and values in other suburbs will decrease. In fact, certain streets within a suburb may outperform the suburb as a whole, and other streets will underperform the suburb. Therefore, condluing that “because property values are expected to be flat across the board it’s not a good time to buy property” is ill informed. You need to research the particular area where you’d like to live.

Monique Walkin, director of Wakelin Property Advisory, suggest real estate investors should aim to achieve long term average capital growth rate of 5 per cent to 8 per cent in excess of inflation. The inflation rate is currently around the 3 per cent mark. Therefore, Wakelin believes real estate purchasers should be able to achieve a nominal (long term) capital growth rate of 8 per cent to 11 per cent.

“Astute real estate purchasers should be able to generate strong capital growth by selecting a quality asset that exhibits scarcity value,” says Wakelin.

For more information, please visit apimagazine.com.au or read on to the next blog string for the second part of Rent or Buy Real Estate.

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.

Real Estate Buyers Fly Solo and No Relief in Sight for Real Estate Tenants

Australians are waiting longer to commit to a relationship but aren’t letting that stop them from buying property, a survey suggests. Published in the January edition of API Magazine in Australia on Page 11.

The number of Australians planning to buy real estate property on their own is on the rise, a Mortgage Choice survey of homebuyers found.

The survey found that people looking to buy their own home within two years were much more likely to buy on their own than those who bought within the past two years. Of the homebuyers-to-be, 36 per cent said they would buy on their won, compared to just 18 per cent of the recent real estate purchasers.

“These days it’s becoming more common for people to commit to another person later in life,” said Mortgage Choice national corporate affairs manager Warren O’Rourke. “But (Australians) aren’t letting that stop them from investing in the real estate property market.”

“Even low housing affordability is not a deterrent. They are empowering themselves as individuals and taking charge of a real estate property portfolio on their own,” O’Rourke said.

Mortgage Choice found that Western Australia had the highest proportion of buyers-to-be planning a solo real estate purchase (46 per cent) while New South Wales had the lowest (32 per cent).

No Relief in Sight for Real Estate Tenants: Published in Jan ’07 edition of Australian Property Investor magazine. A majority of Australians expect their rent bill to rise in the next few months and predict rents will continue to climb as occupancy rates tighten, according to a recent survey.

Website realestate.com.au surveyed 1480 Australians, with 83.4 per cent of the participants saying they planned to rent a home in the next six months. While 67.1 per cent of respondants believed rents would rise, 15.4 per cent believed they’d stay the same and 5 per cent believed they’d fall. 12.5 per cent had no answer.

It may get worse for tenants before it gets better, with 64 per cent of respondants saying occupancy rates were likely to go up in the next five years. Only 15 per cent believed they’d go down, and 21 per cent thought they’d stay the same. Of the respondants, 68 per cent were female and 32 per cent were male. The survey’s participants were spread around the country, living in New South Wales n (25.8 per cent), Victoria (27.3 per cent) South Australia (5.5 per cent), the Australian Capital Territory (1.3 per cent), Western Australia (9.4 per cent), queensland (27.7 per cent), Tasmania (1.7 per cent) and the Northern Territory (1.3 per cent).

“Given real estate rental vacancy rates are at the lowest level on record, it’s not surprising that most people believe it’s going to get even tougher to afford the rent on their home,” said realestate.com.au general manager Australia and New Zealand, Shaun Di Gregorio.

Di Gregoria offered some tips to renters in this competitive real estate renters market. “Don’t limit your search to just one area,” he suggested. “Cast the net a little wider to include surrounding neighbourhoods. “With so much competition, get your application in as soon as possible, even if you’re uncertain about the real estate property.”

“Many agents will take applications electronically and this is a really fast way to submit. Scan copies of references, identification, like your driver’s license and the application form itself into your computer and then email directly to the real estate agent.”

Don’t Blaim Real Estate Investors: Despite getting some bad press, property real estate investors aren’t to blame for low housing affordability, says analyst Michael Matusik. Published in the Australian Property Investor magazine Jan ’07 edition.

Recent reports on the housing affordability issue had wrongly place the blame at the feet of real estate investors and the negative gearing provisions that make real estate investment more attractive, Matusik said.

He said it was a myth that investors were driving house prices higher by outbidding potential first time home buyers.

“Real estate investors in residential property are in the business of supplying accommodation,” Matusik writes in a recent Snapshot report published by Matusik Property Insights.

“Orthodox economics says that a subsidy (negative gearing in this case) to suppliers (investors) – all things being equal – will result in an increase in supply and a fall in the price of the product (rental housing) supplied. A subsidy to residential real estate investors results in an increased suppy of rental accommodations, lower rents, and a reduction in the demand for, and prices of, owner-occupied housing too. Favourable tax treatment of residential real estate investors results in lower, not higher, house prices. One could argue, given the current shortage of rental accommodations across Australia, that the subsidy to residential real estate property owners is not generous enough. There should be more negative gearing, not less!

“The parable that investors elbow intending owner-residents to the back of the housing queue, hence forcing up the price of real estate housing, is nonsense. Extraordinary price growth, resulting from competition for housing, can only occur when there is a constraint on the long-term supply of dwellings.”

To back up this point, Matusik pointed out that while the real estate market for rented apartments had performed as a normal market – with rents and prices broadly rising in line with inflation – since the late 1980s, house prices had increased substantially.

He said this was because there had been few limitations on the supply of apartments across Australia over the past 20 years but the supply of land for new housing stock had been limited. Matusik said financial, policy, and social barriers were conspiring to reduce the level of home ownership among first homebuyers – not real estate investors squeezing homebuyers out of the market.

He also warned that any move to limit or remove negative gearing would see property investors in real estate shift their money to other real estate investments and rents would subsequently skyrocket.

Did you know?
28% of households in Australia’s capital cities are rented
40% could be rentals within two decades

Source: Matusik Property Insights

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.