Luckorp Property

You only have to scan the rich lists from around the world to see the number of multi-billionaires who made their fortunes from property.

Australia is no exception, and many of our wealthiest people made their first million dollars using property.

More older Australians are expected to turn to property development and renovation following the recent cut to superannuation deposit limits.

According to the Australian Institute of Architects advice service, Archicentre, cutting the maximum $100,000 super contribution limit to $50,000 is likely to result in a surge in renovation and development activity by baby boomers.

Renovating the family home offers a trifecta benefit for these soon-to-be retirees, Archicentre managing director Robert Caulfield says.

Not only does it immediately offer them a better lifestyle and place to live, but investing in the family home is also exempt from capital gains tax.

"Homeowners need to recognise that renovating for profit is similar to running a business, where costs and profits need to be managed accurately and constantly monitored," Caulfield says.

One of the biggest problems is buying the wrong house or in the wrong location."

Buying a "lemon" can add tens of thousands of dollars to the redevelopment cost, which can quickly wipe out profits.

Buying in the wrong location can mean that no matter how good the redevelopment is, the number of buyers will be limited.

"Another problem is if the property, either structurally or by its design, is not suitable for renovation," Caulfield says.

This means checking with local governments to ensure the type of development you propose will be allowed.

The Mortgage and Finance Association of Australia says developing a long-term relationship with your lender is vital to keep operations going during buying, renovating, developing and selling.

"There’s nothing worse than a situation where you need money to renovate a property or purchase another one and you don’t have a lender who is the full bottle on your objectives," MFAA chief executive Phil Naylor says.

"Credit is definitely harder to get now, but if you develop a good relationship you are in a better position to explain why you want the funds and how you’re going to use them."

Most lenders do not lend anywhere near 80 or 90 per cent of the value for a residential development, as they do with a purchase.

Forty-year veteran property investor and Portfolio Management Services director Jock Bing says many would-be developers are priced out of the market by eager first-home buyers and investors.

‘‘The six-pack man, as we used to call them – people who go around looking for small blocks of units to do up – just can’t seem to get a look in. They’re being priced out by first-home buyers who are buying up almost everything they can get,’’ Bing says.

"The problem with developing is that you need to make a good profit margin for the extra risk and costs you have."

Property development is now becoming more accessible with research tools such as RP Data and education readily available, property developer, educator and founder of CCORP Carly Crutchfield says.

• Research – Get to know the area. It is important to know the current trends for the area, planned and future infrastructure, and also who is likely to buy in the area.

• Negotiating – Almost every cost involved in property development is negotiable and people often don’t understand the fact that negotiation can be what makes or breaks a deal.

• Create a winning situation – Create good relationships with the vendor of the property as well as other team members involved in the sale.

Knowing what the vendor’s requirements are puts you in a better position to negotiate a much better deal.

• Feasibility – Learn how to devise a professional feasibility, including all costs, so you can get an idea what the potential profits can be.

• Team work – Know what kind of professionals you might need and allow them to do their work.

Buying an investment property

The number of property renters in Australia is rising as homes become less affordable to buy. This is good news if you own an investment property because maintaining a good occupancy rate is crucial to your investment success.

During the property boom of the 1990s, investment properties were all about capital gains; properties often jumped in value whatever you bought. That’s no longer the case. Now that the boom has passed, investors need to be more selective about the properties they buy.

For a successful investment, you must acquire the right property in the right location at the keenest possible price and with its long-term viability in mind - in both terms of good rental potential and capital growth.

Check for proximity to transport facilities, schools, shopping centres, sports and entertainment facilities and areas of future jobs growth.

The property needs to be located in a safe, clean, attractive environment and the area will have an already established high rental demand.

The building must be appropriate for the market - for example, with at least three bedrooms if located in a family rental area, or with some security if inner-city high-rise.

It should be well-built (brick and tile is desirable) and have low maintenance buildings and external areas (check that the gardens and any other outdoor areas are in good order).

If it is an apartment, make sure it is large enough to meet the approval of your bank or lending institution.

You’ve collected your rents (the gross return or yield) and now it’s time to pay out all your investment expenses.

You are then left with the net return or yield. This net return is this figure you need to capture regularly in order to understand how your investment is travelling.

While rents may not rise so quickly, sometimes the cost of the investment fluctuates and it is this you must keep a close eye on.

A quick way to calculate the net return is to determine the gross rental and then deduct 25 per cent (for outgoings such as rates, insurance, maintenance and body corporate levies). This gives you a rough idea of the net return before tax.

Around 30 per cent of all Australians are renters, providing a huge pool of around 5.4 million people who are housed in or looking for rental accommodation.

Vacant properties can spell real trouble for the investor and are a security risk.

You should calculate on a loss of around 2 per cent of your gross possible returns for each vacant week.

However, a well kept, appealing property in good condition and in the right area should not be vacant for long periods.

If you are managing the property yourself and having difficulty finding tenants, you might want to approach some local property management agencies to see if they can help (for a fee, of course).

• The purchase price was too high.
• The property is in an area of low capital growth potential.
• The property is too high maintenance.
• The rent is too low.
• Vacancy periods are too long or too many.
• The loan taken out was structured wrongly.
• Some tax deductions are missed.

Because of depreciation entitlements on properties (including the purchase price, the construction price and the land value), units generally provide higher depreciation and can often provide a better return than houses.

Revalue your properties every year, so that you can use your additional equity to negotiate a larger loan which you can reinvest in another rental property.

If you find the right property, buy it. Don’t be put off by the economic cycle. Even in the worst recession, there is always a suburb growing in value and producing good rent.

Source – News Limited, August 10, 2009

Rates can't stay low forever, minister warns

Australia's Financial Services Minister has begun preparing the way for higher interest rates declaring that that the present low rates "can't stay that way forever" and expressing sympathy for banks such as Westpac that have already begun pushing up fixed-term mortgage rates.

With an announcement from the Reserve Bank this afternoon expected to signal that its next move is up, Chris Bowen said he understood Westpac's decision to push up its fixed-term rates by 0.10 points because those rates were "largely set by expectations" and there were "signs of increased interest rates and cost of capital around the world".

"As the world ... slowly edges towards a recovery then you are going to see a rising cost of capital, rising interest rates," Mr Bowen said in a television interview.

"Fixed term rates tend to reflect that." His remarks are in contrast to those of the Treasurer, Wayne Swan, who in June accused the Commonwealth Bank of "getting in the way of rate relief needed to stimulate our economy and to support jobs" when it lifted its variable rates by the same amount in order to match the competition.

"I think Australians rightly will be furious with the Commonwealth Bank for hindering the efforts of the Commonwealth Government, the Reserve Bank and the community to support our economy during this global recession," Mr Swan said at the time.

But in a signal the Government now believes that support will soon no longer be needed, Mr Bowen encouraged Australians to "build into their calculations the possibility of interest rate rises over the medium term, and particularly over the longer term because interest rates are at historically record lows, and they can't stay that way forever".

Financial markets expect the Reserve Bank to push up its cash rate from the present five-decade low of 3 per cent to 4.5 or 5 per cent before the end of next year, enough to lift standard variable mortgage rates to more than 7 per cent and to add $300 to the monthly cost of repaying a $300,000 mortgage.

Asked whether the Australians who have rushed into the mortgage market to take advantage of the First Home Owners Boost could afford such a jump, the minister replied he was confident most had made the right decision.

"At the end of the day you have to trust people to make those decisions, and I think the vast majority of people have been responsible, will be responsible, and have borne in mind the fact that these very low interest rates can't go on forever," he said.

This morning's meeting of the Reserve Bank board will be told the monthly ANZ job advertisement count shows newspaper ads stabilising after very sharp falls earlier in the year.

"We are increasingly optimistic that employment conditions will not be as severe as we envisaged six months ago," said the ANZ economist Warren Hogan.

Also released yesterday, the Australian Industry Group's Performance of Manufacturing Index showed manufacturing employers more optimistic than at any time in the last 10 months with new orders levelling out after months of falling.

LET'S make this crystal clear. The Reserve Bank sent out a warning this week. A shot across our bows if you like; that it will act sooner rather than later to stop the excesses of the last cycle.

It now believes we may be at risk of entering into a housing bubble. And after the latest Australian Property Monitors announcement on house price rises, the bank will be even more concerned with this risk.

The Reserve has argued that the risk is that we won't build homes fast enough to meet the new demand from would-be homeowners, and so, given how low interest rates are, it is possible that the cheap financing on offer will just lift the price of existing homes as buyers compete with each other with their borrowed money. What is otherwise known as a bubble, in that house prices rise only because of rising debt.

Now whether you believe there is a looming bubble or not does not matter. What matters is what the Reserve thinks, as it is the one that controls the interest rate levers. And if the bank believes there is a new risk of a bubble, you had better prepare.

This type of talk may seem harsh and premature. After all, we are only just seeing house prices rise again after a lengthy downturn. While it does seem early to contemplate a new bubble, even while it seems the market is just getting over the last one, central banks around the world have been heavily blamed for this downturn and for allowing asset bubbles to exist in the first place. So they may be more on the warpath this time round.

This could set the economy up for a choppy period of frequent booms and busts. You see, the problem is that many thousands of new-home owners have bought into the market at super low interest rates. If they made their purchase on a tight budget, then even slight interest rate increases are going to cause real problems for them, and so the economy.

What this means is that we need to be prepared for interest rate rises sooner rather than later, and that we should not overextend ourselves in the housing market. By all means buy a home. Invest in property. But do it conservatively and don't let the price of your new property give you future nightmares.

Property or Shares? How many times have we heard this question? Property Professor Peter Koulizos imparts his wisdom on why property is a good option.

This article highlights some of the advantages of investing in property and shares with you some reasons why investing in real estate can be worth it.

The main advantages gained from investing in property are:

Capital growth
Rental income
Degree of control
Lower volatility
Tax benefits
Hedge against inflation
Touch and feel it

Capital growth
Depositing your money in the bank or investing in fixed interest products does not provide you with any capital growth. If you buy property (or shares), however, you do so expecting that the property will grow in value over time.

Rental income
One of the advantages of owning investment property is that you can start to receive an income almost immediately. Once you have put a tenant into your property, you should receive a couple of weeks’ rent in advance upon signing the lease and then regular payments of rent into the future.

Degree of control
In my role as the Coordinator of the Property and Share Investment at TafeSA, I interact with many share and property investors on a daily basis. Without question, one of the main reasons people decide to invest in property rather than shares is that they have greater control over their asset.

For example, if they want to receive a higher rent, they can upgrade the property. If they want to increase the value of their property, they can renovate, landscape or possibly even sub-divide and create new allotments.

Lower volatility
The other main reason people will buy property instead of shares is that there is less risk in property. They understand that there is also a lower return in purchasing property but they are willing to forsake potential high returns from investing in shares for a stable return from property. They can sleep well at night knowing that the price of their property is very unlikely to plummet overnight, which can happen to the share market.

Tax benefits
Tax is very topical at this time of the financial year. There are several tax benefits available to property investors. Using property as security to borrow money to purchase other property allows you to leverage to a greater extent than if you were using a share portfolio as security.

Most lenders will lend up to 90 per cent (and sometimes 97 per cent) of the value of the property being purchased (mortgage insurance may be payable at this level of leveraging). However, if you are interested in buying shares, they will generally lend up to 70 per cent. One of the tax advantages with this greater leveraging is that you can claim a greater tax deduction on the interest charged on the loan.

Any legitimate expense incurred in running your investment property should also be tax deductible. These include travelling to your investment property to collect rent or money paid to a property manager to manage your property on your behalf.

Depreciation of the building may also be claimed as a tax deduction. Buying brand new or a relatively new property allows for the greatest amount of depreciation. Claiming building depreciation is a clever way to increase your cash flow.

You should never buy property (or any asset) just for the tax benefits. Getting a tax benefit should be a bonus, not the sole reason for purchasing.

Hedge against inflation
It has been shown historically in Australia and all over the world that property increases at a greater rate than inflation. Periods of growth can vary but generally speaking in real terms (without inflation) property growth outstrips increases in inflation.

Touch and feel it
I have already mentioned that some of the main reasons people invest in property is that property provides them with a greater degree of control and there is lower volatility in returns and capital growth compared to investing in shares. When you have a chance to speak to property investors at length, somewhere in the conversation they will state that they like to invest in property because they can see it, touch it, feel it and drive past it.

For many people, investing turns out to be an emotional decision rather than one based on pure numbers and these are the sorts of emotions that make people feel better about investing in property rather than shares.

I believe investors should have a diversified investment portfolio, which includes some property, some shares and some cash. The weighting of the portfolio will often be decided by the knowledge (or lack of it) in a particular asset class. If you want to earn more, you need to learn more!

Source - realestate.com.au