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.

Real Estate: Adding Value and Subtracting Value

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

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

1. Just Ask

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

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

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

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

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

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

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

2. Shop Around

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

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

3. Consolidate Your Loans

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

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

4. Establish a Line of Credit

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

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

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

5. Fix your Rates

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

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

6. Accept Fewer Features

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

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

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

7. Try a Non-Bank Lender

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

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

8. Go Online

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

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

9. Use a Broker

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

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

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