+ About Margaret Lomas
Past chair of Property Investment Professionals of Australia (PIPA)
Author and Television Host
Tuesday, November 08, 2016
By Margaret Lomas
When you are share investing ‘Value investing’ is an investment strategy where stocks are selected that trade for less than their intrinsic values. Value investors actively seek stocks they believe the market has undervalued.
When it comes to property, many people think they are value investing when they get a bargain – they’ve either negotiated well, or found a seller who needs an urgent sale on a property and picked it up below what other properties around it may have recently sold for.
In my opinion, getting a bargain buy is not the same as value investing – if that bargain buy is on a property which exists in an area which has no intrinsic growth drivers, and therefore no capacity to deliver price growth and suitable rental yield over time, then the benefits of that bargain are extremely limited. Buying, say, $10,000 below the intrinsic value in a market which subsequently doesn’t grow, or does not even keep pace with inflation, only gains you that initial $10,000!
Value investing for a share investors involves the belief that the market overreacts to good and bad news, resulting in stock price movements that do not correspond with a company's long-term fundamentals, giving an opportunity to profit when the price is deflated.
Translate this into the property market and the same rationality can be used to find areas with good value, and equally, those which are overvalued with little to offer the future.
If you keep in mind that fact that property cannot be quickly traded, and therefore those short- term movements which typify a value share investor’s buy and sell decisions are not possible with property, there are certainly ways in which a property investor can tell if an area is undervalued, and likely to become more reasonably valued in the short to medium term.
The basic rules are simple:
A hot market, like Sydney, is clearly over valued and cannot, in the short to medium term, provide a return worth the risk involved. The yields are too low, driven down by the quickly rising values in the past year or so, to make holding anything other than a financial drain. The prices are too high to spread risk – one property in the Sydney market can cost many times that of several in more affordable markets, and so exposure to risk is high, all placed in a single asset, and
A cold market, such as a country town far from any city centre, a town with a single industry or an area with stagnant population may seem affordable, and the rental yields are often attractive, however the value is not there because there is little or nothing to drive possible growth.
And so, leaving out the two extremes, within the rest of the market lies undervalued property with the potential to quickly gain value and make the investment a better one than the average property investment.
Just as with share investing, to find these areas, you must examine the fundamentals, and then gauge these fundamentals against the chances of a change in the short to medium term. And this isn’t as hard as it may sound.
There are serval characteristics which an area can have which are sure signs that the future is promising, such as:
- A population growing faster than the national average
- An unemployment rate which is trending down, with jobs available across a diversified industry base
- A median household income which is growing faster than inflation
- A local government which is underpinning the population growth with strong, planned infrastructure, allowing communities to flourish and
- Little land available for additional development, and low developer activity.
Alongside those fundamentals there must exist affordable property which has not yet had any identifiable boom. Often such areas are found as fringe suburbs in capital cities or ripple areas next to those which have already shown significant price increases. They will be areas which are under the median price of those around them, where the greater proportion of residents are owner occupiers. Often they will be emerging suburbs, formerly less desirable, where demographics are changing, such as former state housing areas.
The value in these suburbs is in being able to see when the tide is turning. Not all affordable suburbs grow into great investments, but many do and the trick is in seeing the changes in neighbouring suburbs occurring, then buying close by to wait out the urban sprawl. When the up- and- coming suburbs inflate beyond affordability, the ripple occurs as those wanting to get into the area begin to buy close by instead.
A great example are the areas in Melbourne’s South East, in and around Carrum Downs and Cranbourne. Having seen nearby Paterson Lakes and Seaford experience significant recent values growth, these poor cousins can be bought for up to half the value, and provide higher relative yields. As the older homes are purchased, developed and even subdivided, the ‘creep’ will begin and the lines between the desired and the less desired suburbs will begin to blur.
The same effect is already starting in both the Logan Shire in Brisbane (growing fast in some areas and not so fast in the less desirable ones) and the Moreton Bay Shire in Brisbane, where a significant price differential exists between say, Kallangur (recently boomed) and Deception Bay and Rothwell (still low and not on many radars).
As the infrastructure continues to develop and housing becomes less affordable these suburbs will enjoy the ripple effect. And while you wait for that to occur, handsome 6% rental yields await!
Value lies in not getting a good price, but in buying at even the market value into an area which others haven’t yet picked as being desirable. It lies in being able to carry out a strong analysis of the fundamentals, and buying before the crowds realise the value was there all along.
Tuesday, September 13, 2016
The news is full of speculation about what might, or might not happen to the ‘property market’. These days, media reports of crashes or booms seem to be taken as gospel and have an impact on buyer behavior. If the media says it’s true, it is, isn’t it?
The issue I have is mainly about what constitutes a ‘property’ market. While it’s rarely defined in media articles, most of them refer to the Sydney and Melbourne market and use the activity in those markets as a barometer for all property, everywhere. And because of this, we see buyer behavior emulating what these reports say, in an almost self-fulfilling prophecy.
In truth, property behaves significantly differently in different parts of the country. Take the recent ‘Sydney’ boom for example. While journalists were shouting from the rooftops about how fabulously the property market was performing, those in Perth and, to a lesser degree, Adelaide, were looking at their own holdings and struggling to see much cheer.
Take it back 10 years, and everyone in Sydney was bemoaning their dreadful returns and blaming everything, including the state government, while Perth owners were jumping for joy at the speed at which their own market was doubling in value! Now, Sydney-centric reporters seem to have short memories, with many of them claiming it’s always an amazing market, to the point where buyers are still jumping in and often buying property with abysmal rental yields and limited growth prospects in the coming five years or so.
Markets within markets
The reason for such a disparity in the values of property in one country, and reportedly one economy, is that the overall economic situation of Australia is often not reflected within smaller markets. Take it down to a state level, and then, more importantly, a micro level, where individual local government areas are concerned, and it can be seen that areas can perform well even when a state, or the country as a whole, is not looking as robust. The reverse is also true.
Let’s look at Brisbane as an example. Within the inner ring, 5km from the CBD, property is subdued and buyers are few. Not that long ago, prices were increasing as the trend toward urban living became more and more attractive. Properties were snapped up, improving values, and new projects were developed to meet what appeared to be a creeping demand. Now, we see a potential oversupply of apartments, and a peak for prices of freestanding houses (in what are considered to be blue chip areas), precluding many buyers as the mortgage required to purchase such property begins to pass what the average income of a Brisbane resident can afford.
But go south to the suburbs where affordable housing with high relative yields exist, where the population is growing at a cracking pace, and where there’s diversified employment opportunities, and we see a burgeoning property market which shows no sign of abating. These are economically strong areas which have many reasons for the property to be growing, including an improvement in the overall relative wealth of the area. That doesn’t mean an area has to be ‘wealthy’ for it to provide exceptional yield and growth over time. It means that the community as a whole is becoming more affluent, often off a lower base. This is likely due to improving employment opportunity as businesses move into an area, increased local government employment incentives and commercial investments. All of these factors create a vibrancy which draws people in and keeps them there for the medium to long term – placing pressure on the price of housing.
If faced with a choice between buying one property in a ‘blue chip’ area with high buy-in prices (and positive media sentiment) and buying four properties in lower socio economic areas where relative yields are strong and the micro economy shows signs of growth both intrinsically (through lowering unemployment rates) and extrinsically (through external commercial investment), I know what I would prefer. Buying four allows me to buy into a number of economically vibrant areas, get a better overall yield and have diversification and a more robust portfolio which, if need be, can be liquidated slightly at a time.
The lesson here is, don’t pay any attention to media reports which exclaim or decry booms or busts. There is not ‘one’ property market, and believing there is a right time and a wrong time to buy property may lead to missed opportunity. Examining micro markets and looking for those smaller local economies which are in the midst of creating their own mini property boom will not only make you a better property investor, but a far more financially successful one too.
Tuesday, July 05, 2016
There’s still talk of property being ‘unaffordable’, and frankly, it’s a debate I’ve been hearing since it also looked unaffordable back when I was in my twenties. I recall being pressured into buying as soon as I could, since it was not going to be long before no one could afford to buy their own home. That was 1980, and fast forward to today and the rate of home ownership has not really changed to the degree that was expected. Between then and now, housing has come into, and gone out of, affordability more times than I can count. And no doubt this will continue for years to come. Let’s also not forget that the question of affordability is highly subjective – Sydney may be largely unaffordable now (depending upon where you want to live) but Adelaide and Brisbane remain highly affordable in much of the city.
I speak with a lot of young people and they seem less worried about this apparent lack of affordability than those of us who are already way down the path of home ownership. This is not because they don’t want to buy a home of their own, although for many this is the case with careers, travel and lifestyle becoming more and more a priority (not necessarily in that order). Actually owning a home seems further down their list than it ever was for us.
However, there is an emerging new category of property buyers, affectionately known as ‘rentvestors. These are people who understand that getting on the property ladder does not necessarily mean buying an owner-occupied property. They are often people who want to live in areas which are within their price range but have other reasons for wishing to live there. And very often they are people who build large and substantial portfolios without ever needing to actually live in any of their properties. If you have considered becoming a rentvestor, here are a few considerations to make before taking the plunge;
- Are you comfortable living in a property where you may have to move if the owner wants it back? While it is possible to obtain long leases, there is no surety in renting. At any time, the owner may sell to someone who no longer wishes to rent out the property, or they may want to move in themselves. Tenure cannot be assured when you are a renter.
- Are you prepared for the fact that the landlord can, and most probably will, increase the rent for the next consecutive lease period, particularly if the area suddenly comes under increased demand? Under these circumstances, you may find yourself on the move before you are ready to do so.
- Are you OK living in a property where you will be restricted as to what you can do with it? You may not be able to hang pictures or change the curtains, and needed renovations may not occur. Some landlords are often prepared for a tenant to carry out improvements at either a shared cost or their own cost, but often, it makes no sense to spend money on a property which you may not be able to stay in for the long term.
- When it comes to where you need to live, is it cheaper to rent, or to pay a mortgage? Establishing if you need to live in an area includes how far the commute to work will be (and how much it will cost), where your social networks live, schools for your children and other lifestyle needs. In some areas rental yields are very low in relation to purchase prices, sometimes lower than 3%, and this would mean it is cheaper to rent. In others, rental yields can be 5 and 6% and in these cases it may be more beneficial to purchase.
- Are you committed to still building an investment portfolio of your own, be it through property or through other forms of investment? Simply renting because you don’t want to save the deposit or commit to an investment plan isn’t the same as committing to being a rentvestor. Rentvestors have firm and committed plans and end up with a solid net worth. Renting long-term without putting in place a plan for the future often results in reaching retirement age ill- prepared to be self-supported.
Bear in mind that an owner-occupied home is capital gains tax free and owning an investment property is not. If you want to buy in an area that has not had substantial growth yet (usually affordable areas where the population is growing and infrastructure projects are in abundance) you may well buy a property which grows really well and you won’t have to pay CGT on that gain.
Alternatively, the area that you wish to live in may already have its greatest period of growth behind it (usually those well-established areas with high prices and low rental yields) and so that capital gains tax exemption doesn’t have such a big upside or value to you.
If you would like to start a property portfolio with properties that you don’t live in, you can still preserve the first home owner grant for a future time. The rules around that grant are simply that you don’t own and occupy a property – you can own as many investment properties as you like and still keep the grant for some time in the future. Building a portfolio of properties in this way, as long as you also put in place a savings plan alongside this strategy, can be a great way to boost your savings toward a deposit – you can have a tenant in place paying your mortgage while you save toward a future own home. After a few years, you will have not only your own savings, but also any growth in the property, which can then be used toward any home of your own you might like to buy.
Tuesday, May 17, 2016
When an investor first starts on the road to building a property portfolio, the default position seems to be to choose a property close to where they live. There is a misplaced feeling that they somehow ‘know’ their area better than they would some other, and a sense of comfort in knowing that the property is close by and that they can keep an eye on it.
It’s a fact that while most owner occupiers may know their area, the facts they know usually have little to do with ensuring that the investment is a sound one. Important facts like vacancy rates, population and demographic information and infrastructure planning are all important in the decision making process about where to buy, and few people know this kind of detailed information about their own area.
And so, whether it be because you would like to ensure that you have a wide and diversified portfolio of properties bought in areas that have the best chance of growth, or that your own area has become too pricey or too low yielding to make it a viable investment, the time should come in every investor’s life that they think about buying interstate. While doing so will probably bring the reward of a well performing investment, for most, the task seems both daunting and dangerous. It doesn’t need to be so, and here are some tips to help you along.
1. Know that each state has different conveyancing laws
From the complex NSW process of contract exchange, 10% deposit and 49 days till settlement, through to the relatively simple WA method of offer and acceptance (and as little as two weeks till settlement), there is a vast array of different legal systems in place for the conveying of property titles, and you need to be familiar with how it is done in the state you choose to buy.
To avoid finding yourself in a contract you cannot extricate yourself from, jump on google and find out how things are different from what you are used to.
2. ‘Knowing’ the area
Just because you don’t go there (and you should not be jumping on a plane to view every area you have an interest in) does not mean you cannot become fully informed about an area before you decide to buy. If you follow my 20 Must Ask Questions®, you will be sure to carry out the right kind of research and end up with a complete picture of the area and everything it has to offer from a future growth potential point of view. The best thing is that, by not visiting, you’ll protect yourself from falling in love with an area that actually has very little going for it from an investment point of view.
3. Choosing the right property
Once you’ve narrowed down the area, you want to be sure you don’t choose the lemon property. Those pictures on the internet can make any trash look like treasure, so you need some people on the ground to be sure you get a good buy, and not a money pit. Always get a pest and building inspector to carry out an inspection, but before spending your money on something which you end up not buying, contact a local property manager who has no present interest in the property and ask if they would mind checking it out with a view to getting the management contract if you buy. They should be able to give you a solid ‘habitability report’, which is a great start. Let’s face it, if they do this for you, they’re probably also a good property manager.
Not only is buying interstate easy, it’s imperative if you are going to have a diversified portfolio with strongly performing properties. Areas definitely grow in cycles, and different cycles all over Australia, and you want properties everywhere so that something in your portfolio is always on its upswing!
Tuesday, April 12, 2016
If you are a property investor, you may be unaware of the fact that anything you do to invest in property, any move you make, any advice you take may leave you at greater risk than you thought. This is because the property investment Industry remains, to this day, unregulated.
Yes, you heard correctly, and to put it into perspective, let’s think about this:
Imagine you had $250,000 to invest. Your visit to a financial planner will result in, firstly, a risk profile to determine just what asset class will be right for you. Next will be a financial plan, designed to take into account not only your present needs in terms of income and cash flow, but also your future financial needs, time till retirement and future expected net worth in terms of your assets. Then, a written recommendation, complete with projected outcomes, and a bold statement about risk is presented to you along with product disclosure statements about any chosen products. Since 1 July 2013, your adviser isn’t allowed to take any commissions on any of these products, and so you will pay a fee to the adviser which must also be clearly disclosed.
As you can see from this transparent approach, while it may seem a little onerous, protection for you is built in every step of the way. And, it’s unlikely that you will be recommended a product not right for you just because the adviser gets a better commission – the new laws stamped out the possibility of that behavior on all but life insurance products.
Let’s now project this same scenario onto a property investment, where you have that same $250,000 to invest, which, with leverage through borrowing, could provide over $1m to invest. The range of options for guidance are numerous – and include the straight mentor deal, where you purportedly just get training and education, the seminar where you are introduced to an actual product, or the marketer who you come across in some way (including via telemarketing) who is looking for buyers on specific developments.
You may think you are dealing with a property investment adviser, but the truth is nothing works as it does with other financial advice. You most likely won’t be provided with a risk analysis, and so the property which is ultimately spruiked to you will have no relationship to your own attitude to risk. Few actual property advisers provide any kind of financial plan – most who do are basing it on your purchase of their product only, with no comparisons to anything else. The recommendations are likely to be incredibly skewed – how is it possible that the single property the ‘adviser’ has available for you to buy is also the best possible one for you out of all properties available, one which also matches your risk profile and happens to be in the area that has the best opportunity for capital growth?
But the worst part about all of this is that, while you are being told that you pay nothing for this service, it’s likely you’re paying through the nose. This is because there is no law in Australia compelling ‘property advisers’ to disclose commissions to you, outside of that requiring mortgage brokers to tell you what they get from a lender. Yes, that’s right – NOTHING. This wonderful, free advice you are getting, which I have already shown is likely heavily skewed to the interests of the adviser, can net that adviser commissions upwards of $40,000 per property, including back door payments from developers, conveyancers, real estate agents, accountants, or middle men marketers employed by the developers to shift their product.
You won’t know about these payments, because there is no law in Australia covering property investment, and therefore no law requiring disclosure of them to you at any stage of the process. But you’ll be affected by them, because they must be paid, and the only place they can originate is from the money you pay for the property. It’s highly likely that, despite any protests from the seller to the contrary, the purchase price has been inflated to cover all commissions being paid. This means that you start well behind the eight-ball, and it’s a long climb back to ground zero, especially in a stagnating market.
Caveat Emptor is a well- known expression – ‘let the buyer beware’, and nowhere does it apply more than in the property investing industry. If you have decided to buy property as an investment, and you rightly also make the decision not to try a do-it-yourself approach (because despite how you may feel you really don’t have an instinct for knowing how to buy property well), be sure that:
1. The ‘Property Adviser’ is qualified. – The not-for-profit Property Investment Professionals of Australia have a great qualification process resulting in the post nominals QPIA (Qualified Property Investment Adviser). Be advised, though, that a company cannot be a QPIA – only individuals can, so be sure that the company you choose to help you is not only a member of PIPA, but the adviser you work with is a QPIA.
2. The course, mentoring or ‘advice’ is not disguising an ultimate property sale. If the ‘adviser’ is selling property too, then their advice cannot be independent. They either need to be up front about the fact that they sell property and therefore cannot comment on its appropriateness for you, or they advise you on how to best invest in property without being involved in any way in the subsequent property transaction.
3. If the company is involved in the transaction, they disclose all commissions, kickbacks or soft dollar rewards to you, including the dollar value, in a signed disclosure document. If the company or person is acting purely as an adviser, mentor or educator who charges you, then all of the fees to be paid at any time during the relationship should be disclosed to you, along with an outline of exactly what you’ll be getting for your money.
4. In the case of an independent adviser, you should also receive a personalised plan which outlines the strategy, the forecasted outcomes, your capacity to afford to undertake that strategy and the risks involved.
Until regulation is invoked, you need to be hyper-vigilant when engaging a professional property investing company, regardless of how they deliver their services. The present situation is highly dangerous and engaging a professional with no qualifications, experience or background in financial advising (which is the case with a good majority of self- styled property experts) may be just as unsuccessful in the end as trying to invest without professional help.
Tuesday, March 01, 2016
Negative gearing has ruled the airwaves over the past few weeks, with speculation rife that it’s removal, or at the very least, reduction, is on the top of the list for both the government and the opposition. The Labour party has already provided sketchy details of their intentions, with the government ‘not ruling out’ sweeping changes.
Being an outspoken property person, I’ve been drawn into this debate, and already I’ve been accused of not being impartial due to my own large property holdings. I’d like to think that I can still remain unbiased in any comment I make about property, but in this case let’s remember that any changes made are more than likely to be grandfathered, meaning they won’t affect me anyway.
But, what will they do? You’ve likely heard plenty of reasonable argument to date for the proposed changes – a boost to the new housing stock, a return to affordability, and a fairer tax system as the ‘rich’ are deprived of the tax breaks they don’t need because, well, they’re rich, aren’t they?
But, in my opinion (impartial I hope), there are just too many arguments against changing a system which presently provides many, many benefits outside of those enjoyed by the recipients of the benefits. Here are some:
1. For so many years there have been scare tactics around the fact that, once baby boomers retire, there may not be enough money to support them via welfare. I’ve been in this industry for a very long time, and so I can attest to the fact that the response to this scare tactic for many people was to become more educated about investing, choose a class that they felt comfortable with, and proceed headlong into that class. Many invested in residential property as it felt safe, created a suitable income and, as an aside rather than a motivating factor, it also carried tax benefits. Now, if it is removed, they will no longer be able to afford to do this – and so the savings the government makes today will only be lost in the future with an increased welfare bill.
2. It is not the wealthy who will be affected, it is every day mums and dads, who will not be able to afford to buy property without those tax breaks. These are people who do not have a lot of disposable income, and losing the tax breaks would make it impossible for them to support the expenses on the properties. Brand new properties come at a premium and usually have a low yield which, even with tax breaks, makes the shortfall impossible to manage, but existing property is affordable and achievable. To create just enough to cover what an aged pension otherwise would, these average mums and dads need to buy around 6 properties and keep them for 15 years. That’s hardly people getting rich off tax breaks!
3. Around 25% of housing is privately provided rental housing – and make no mistake, any altering of available tax breaks will most certainly result in less investment into rental housing. It’s not suitable to suggest that renters will now become home owners – many, many gen Y people do not want to own their own home as they are mobile, travel often, change jobs a lot and could not afford to buy where they really want to live, even if prices became more reasonable. Those same gen Y people do want to be investors though, and in my experience a lot of them build solid property portfolios with the aim of being self- funded retirees, and so they are hit with a double whammy if negative gearing benefits are altered.
4. It’s a fact that many property investors own property which is only negatively geared for the first few years, in a buy and hold strategy which is planned to span 15 – 20 years. Rent increases usually mean that, within 3 – 5 years, many properties become positively geared. This means the owners pay tax. I wonder whether either party has assessed how much future tax revenue will be lost if property investing is discouraged. Most property investors buy established property in affordable areas with solid yields and so a positively geared situation is more likely than not to occur early in the investing period.
5. Small businesses can claim their expenses against income. Share investors can negatively gear their share portfolios. It is complete discrimination to hit only those choosing to create retirement funds through property.
6. While the theory is that it will make housing more affordable, I believe that it will instead open the flood gates for more spruikers to sell over- priced property. If the decision to go forward with this plan becomes reality, then the government must also regulate the property industry to protect investors - which they have so far refused to do.
7. Despite all of the rubbish being written in the media, rents would absolutely increase as those who do invest attempt to get better cover for their expenses. Less people would own property to rent out, and this means that each property available would have more people vying for it, placing pressure on rents. Those saying there will be no related rent increase didn’t pay attention in their economics classes – decreased supply ALWAYS results in rising prices.
If the concern is that savings need to be made, and that housing needs to be made more affordable, there are many better ways to do this. Red tape and compliance in all areas currently cost the government many, many millions and streamlining in these areas would add to the right side of the ledger. Tightening rules around who may obtain welfare and for how long would also help. Housing incentives such as first home owner’s grants would encourage people to buy rather than rent and improve affordability. And, dare I say it, generous super schemes, travel allowances, and other fringe benefits for politicians could instead be brought into line with those in the corporate world - that should save a dollar or two!
For me, though the most alarming factor here is that no one seems to understand what negative gearing means!!! Negative gearing is not a strategy – it’s a tax outcome. Negative gearing is when your income is less than expenses and you claim a tax break equivalent to your marginal rate of tax on that loss. So, lose $3000 over a year and get $1000 of your tax back. That same tax outcome is just as easily transformed to mean that when you make $3,000, because your property’s income has had a natural market increase and your loan interest has decreased as you pay off the debt, you pay $1000 EXTRA tax. I have to ask – does the plan to remove negative gearing when you’re losing include a plan to remove the need to pay tax when you’re winning?
The whole argument needs to be thought through with the benefit of all of the information. Sadly, that won’t happen. Long term thinking has never been a feature of any political party’s modus operandi as long term thinking simply doesn’t win votes. Heaven help us if we finally had a party with a long term view. We just wouldn’t know what to do!!
Tuesday, December 15, 2015
My Christmas message for you this year includes my usual batch of warnings for the silly season. It’s at times like these that we tend to allow our focus to drift a little and it’s just after Christmas that I seem to get more than my fair share of tales of woe – hapless investors who are locked into investments made while they were at their most relaxed, which don’t seem to be as positive once the gloss of the holiday period wears off.
The recent property boom in some markets brought with it the usual batch of property opportunists – using the favourable circumstances as a way of marketing otherwise dodgy investments. So, before you spring into 2016 with perhaps misguided ideas about where to head next on your property investment journey, here is my list of the 5 hot dangerous things to avoid in 2016!
1. Off-the-plan. This has heated up again, and now is the worst time that you could be buying off-the-plan. Mostly these are being marketed in capital cities, but there are some regional areas on the list. Off-the-plan carries more than the usual degree of danger – just ask those poor people who bought years ago on the Gold Coast and were forced to settle on properties worth $100,000 less than they paid.
2. Inner city apartments. We are headed for another glut of these in the coming years and this will result in a lowering of yields, an increase in vacancy and stagnating values. The most important feature of house price growth in the next few years will be population growth, and one that is growing faster than the national average.
3. Holiday properties. With lending to investors having been sharply curbed through new APRA (Australian Prudential Regulation Authority) requirements, the resale market for such property is shrinking even further. Many lenders are refusing to lend on such securities too, further impacting this market.
4. Self managed superannuation fund investing. This is a big one and I want you to take care. Unless you have significant funds to roll over into super (in excess of around $300,000) then this one isn’t for you. Oh, you’ll hear about the upside – the ability to use super funds to buy property. But what is not outlined is the lengthy ATO compliance requirements, the costly maintenance of these funds, the fact that non-recourse borrowings severely limit the amount you can borrow and so the number of properties you can buy (being probably only one) and the fact that you can only secure each property once, which makes them unavailable for leverage. Lastly, many people have public super funds which are performing quite well and which they have little hope to be able to match, or beat, by setting up a self managed super fund for property investing
5. And of course the big one is those overseas properties. There’s not enough room here to list all of the reasons why you shouldn’t be buying an overseas property, even if it is cheap. Remember, when locals won’t buy their own property, there has to be something very wrong!
Instead of looking out for the next big chance, you’d be better served to use the next few weeks to get your head right, assess your current financial situation, and set some positive goals for property investing in 2016. There are some great opportunities right here in your own back yard, to buy basic residential property which has all the signs of some fantastic growth prospects in the many parts of Australia which have yet to experience boom condition, yet seem set to deliver great 2016 results.
Have a great Christmas and happy investing!
Tuesday, November 10, 2015
With the year drawing to a close, and Christmas now only weeks away, it’s time to reflect and consider some important points to help you along your property journey. I’ve been reviewing my books for reprint, and found some of these gems below to help you on your way:
1) Understand that property will provide a different return for you than other asset classes. In the end you are looking for cash flow to keep you in the market, and growth to get you out! Learn how to calculate property returns and establish the true return on any property, which is a combination of the rent return and the yearly growth.
2) The debate between cash flow investors and growth investors will rage eternally, but it’s largely baseless. I get callers on my show saying ‘I’d like to find a property which will have capital growth’. Of course they do! No one ever says ‘I’d like to find property which won’t grow! Growth and cash flow are equally important, and it’s simply not true that you have to forego one to get the other. Failure to consider cash flow can lead to an inability to stay in the market, just as failure to consider growth leads to an inability to create a strong net worth position.
3) Once you have put together a portfolio of properties, your work does not end. Your portfolio must be managed on an ongoing basis. Monitor your properties individually and your portfolio as a whole to be sure that it continues to meet your goals. Identify when a property has served its purpose and establish those properties which may need early liquidation. Be sure that eventual liquidation of your portfolio is managed to occur at a time most financially viable in terms of income and tax.
4) Don’t be afraid to set an upper limit which sits comfortably for you in terms of price. You do not have to spend a large amount of money on each purchase to obtain properties which will perform well for you. More important is your own comfort and willingness to continue to increase the number of properties you hold. There’s also no truth in the rumour that the more you pay for a property the better it performs – in fact the reverse can be true.
5) Successful property investing will only occur where the choosing of property has been carried out diligently. You have a responsibility to ensure you carry out your own research and increase the chance of successful investing. Know the questions to ask when buying any property and be sure they are asked of the right people. Explore any management arrangements and fully understand any agreements which may be attached to property. Research the area and the future plans of council. Know the population movements and the extent of demand for rentals and sales. At all times maintain a commercial approach to your investing—there is no place for emotions in this process.
6) Become smarter than your accountant when it comes to accessing your tax benefits. Use the tax benefits to help you minimise debt as quickly as you can, so that periods of slow capital gain will not impact so heavily on you. Remember that you are personally responsible for the preparation of your own tax return—even when you use a professional to assist you.
7) Be careful when you use any unusual or comprehensive purchasing structure. If your property investment involves a ‘buy and hold’ strategy, you cannot afford to put in place a structure which will not remain efficient for the term of your investment. Project ahead ten or twenty years and do the sums to be sure that any structure you choose continues to work for you.
8) Just because you choose to have a professional agent manage your property does not absolve you of your responsibility as a landlord. You remain responsible at all times and severe penalties can be applied if you do not carry out these responsibilities with care. Know what the state in which your property is situated will require of you, by visiting Fair Trading and Real Estate Institute websites. Be sure that your landlord’s insurance policy is adequate and current.
9) Be careful of undertaking any risky strategies which may be suggested at high priced seminars or by rags-to-riches gurus. There really is no such thing as a free lunch and most of these strategies may well have a very steep downside.
Sunday, October 18, 2015
By Margaret Lomas
I am continually surprised at just how often property investors get started on property investing prior to actually knowing more about the process and becoming suitably educated.
Imagine if you had to go to hospital for an operation, and the doctor who attended revealed that they had always wanted to be a doctor, and they were going to try the approach of jumping in the deep end and learning as they went along. They figured that if they got it wrong, they would learn from that, and if they just followed the crowd and performed operations as everyone else did, they had a pretty good chance of success.
Sounds mad, yes, but this is how most property investors get started. Either they have a notion that they would love to buy property, and away they go, or a property presents itself and so the decision is made to become a property investor, based on the opportunity which that one property presents. It’s little wonder that people make grave mistakes, often bad enough to turn them off property investing forever.
Get back to basics
Before any property is purchased, the basics must be in place. This includes a complete understanding of not only your current financial position, in terms of income, expenses, assets and liabilities, but also of the time you have available until retirement. This is a crucial element that most people miss – what you buy, and where you buy depends on many things, but one important consideration will always be the length of time you have available during which to hold the property.
If your time period is short, then you must buy the property with the greatest chance of growth in the shortest possible time. Cash flow, apart from ensuring that you can afford it on a day-to-day basis, becomes secondary to needing the property to grow and create equity for both further investing and for ultimate retirement income generation.
If you have a longer time period, then waiting for growth is more possible and achieving good cash flow (which allows you to wait for that growth) becomes more of a driving factor.
Beware the red flags
Even after you have considered your personal financial circumstances, you shouldn’t get started until the basic education has been obtained. I have to say that, on questioning every person who has ever told me about their failed property investment, I discovered that it was actually the person who failed the property, rather than vice versa. Usually I discover prudent facts, which were available at the time of purchase, which would have waved a bright red flag at me, telling me not to buy, but which the investor missed through lack of education.
There is no property purchase that must be made immediately, and the time will always be right to get started. Don’t be fooled into thinking that you might be missing the bargain of the century and make a purchase before you feel confident you have all the knowledge required to make a sound judgement as to its investment potential. The person selling the property to you, or anyone at all involved in the transaction, will not have your best interests at heart and will tell you what they need to help you over the line. Property bargains will always be there to find, and it may be better for you to wait and be sure, than to rush in without suitable knowledge.
Learning is an ongoing process
Finally, don’t fall into the trap of thinking that, once you have read a few books or attended a few seminars, your education is finished. Like the doctor who must remain at the top of their field through constant and ongoing education and through consistent fellowship with their peers, you must understand that property investing is a vastly changing landscape, which needs constant re-learning. It is ultimately linked to our economy, so we must constantly review not only what we are doing but also what we will do. We must respect and acknowledge the input that even those less experienced than us can provide, and consistently seek out opportunities to mix with others who are on a similar path to us.
Life is an ongoing learning experience, and so is property investing. Your work towards becoming a successful and savvy investor will never stop. Once it does, you can be guaranteed that you will lose your edge and start making mistakes. Open your mind, learn all you can when you can, and never stop seeking out the knowledge of others. It works for me!
Monday, October 12, 2015
By Margaret Lomas
I am often asked whether buying property with a friend, relative or other party is a sound idea. While clearly spousal relationships often result in joint buying of assets, there are many singles who are considering the option of being able to get into the market sooner by buying property jointly with someone else.
There may be a multitude of reasons for this. It could be that they cannot afford to go it alone, or can’t save enough of a deposit. Or, they might feel more confident buying with someone else than they would alone. Whatever the reason, it might seem like a good idea at the time, but like a lot of good ideas, it can all come apart later on.
If this is you, here are just a few of the things you must know:
1. You can trust yourself, but...
You know that you can afford to meet the repayments, and that in times of stress, such as those periods of vacancy, you have enough money to be able to meet the shortfall between what comes in and what goes out. You know that your job is secure, and so you will always have a steady income flow. But can you be as sure about the person you are planning to buy with?
When it comes to investing with someone else, you can never be sure how much of what they are telling you is actually true. It’s amazing how quickly someone’s circumstances can change, and the last thing you need is to be left holding all of the commitments on a property title you only half own.
2. Difficult financing arrangements
Where all parties are bringing in the same amount of money as a cash deposit, and a joint loan, secured by only the property in question (the one being purchased) is accessed, things are relatively simple. All parties pay their required portion of the debt, receive their share of the income and complete separate tax returns claiming their own tax deductions.
Where one party has their share of the deposit tied up as equity in other property, it will need to be released, probably in the form of another, separate debt. Most banks will not like to take cross- collateralised security against a property owned by one party to buy property for that party and additional people as well, and certainly the parties involved are cautioned against doing this anyway, as it indelibly ties you to other people in a way you may not like. Therefore a separate loan must be set up, or any existing borrowings on that party’s property would need to be extended to release the equity to use as a deposit.
It is useful to note here that, when you sign mortgage documents for a debt where another party is involved, you become jointly, and severally, responsible for the repayment of that debt. If the other party takes off to Rio, you can’t call your bank and offer to repay only your half, or to keep repayments on only your half going. You become responsible for the entire debt, while at law you still only own half (or your share) of the property.
3. What’s yours is mine – including all your debt!
Since you become jointly and severally responsible for any loan you take out with other people, the commitment for the entire loan, rather than half of it, may be considered when establishing your serviceability with a bank for future loans. You may have a loan of, say, $300,000 with two other people, with your share at just $100,000, but a bank may consider that you have a commitment to the entire $300,000. Conversely, that same lender will only consider the income on your third of the property, since you only own a one third share. This may limit your ability to borrow additional funds to undertake more borrowing to buy investments in your name only, and could hamper your ultimate progress.
4. Using the growing equity
Imagine if the equity in your shared property grew so quickly that you were ready to buy again soon – but you decided that you did not want to buy with those people again. Unless you are prepared to liquidate, lose a fair portion in capital gains tax and start again, unfortunately you may have difficulty using this equity to invest further.
5. Time to get out
Your life suddenly changes and you want out. If your timing doesn’t coincide exactly with that of your fellow property owners, you may not be able to exit when you want to. Owning property with others can often prevent us from taking on a great opportunity, which may come along out of the blue.
6. You’re doing all the work
Owning an investment property is not without its hard work. There is rent to acquit, leases and property managers to oversee, repairs to approve and accounting to do. If you suddenly find yourself doing all the work, it may seem like an unfair thing that you are only accessing your title’s share of any growing equity. You may believe you’re entitled to a greater share, but at law, this is not possible. You cannot really know the capacity of another person to do their bit until after the deed is done, and by then it may be too late.
In a nutshell
If there is absolutely no other way for you to get into the property market without another, non- spouse person, then at least sign a partnership agreement at the commencement of the deal in which you cover every possible eventuality and agree to a procedure to manage it. Going in with your eyes open may prevent a major disaster in the long term.