Investors – Peach Home Loans

Mining Towns and Bad Advice

Feb 17,2015 Leave a comment

The following is an extract of an email I recently sent to a client who had been convinced by someone that an investment in Karratha was a sound idea…

As for developers and real estate agents they have a clear interest in talking up the market. But many so-called “property investment mentors” also have direct financial interest. This is from an article in the Property Observer July last year titled “Port Hedland and Karratha “the best places to buy”? Don’t get roped into that one” read the full article here http://bit.ly/1vAaAex.

Another more recent article on what is happening in other mining ‘boom’ areas http://bit.ly/1v7OLID where he points out “The decline in these markets is not just about hard times in the iron ore and coal sectors. It’s also about over-building by developers and a failure to appreciate the full impact of the growing use of FIFO ( fly in fly out) workforces accommodated in temporary workers villages.”

We have many successful clients with strong property property portfolios and some of them did well out of the mining boom, buying ahead of the market. We also have some clients who didn’t – this is a recent example I came across:

I foolishly I bought in Blackwater and Mackay when rents were crazy and out look was bright. Now rents in Blackwater have gone from $950pw, purchase price $495k to now $350pw and an agent told me today if I sold now I would expect $200k as there is zero interest in a property like mine. Mackay is a similar story, rent $700pw, PP $485k to $300pw and a $380k expected sale price. I am currently on a fixed rate for the next few years of 4.89%.

This person has little choice other than to sell their family home in Sydney losing all of their equity.

So my negative attitude to your Karratha strategy comes from my experience over the last 15 years. Keep in mind that lenders also know about booms and bubbles – although they appear to have completely ignored that in the case of many mining areas. However for a lender the ideal property is a 3 bedroom brick & tile house within 20 kms of the CBD or a large regional centre. As you deviate from that either way, such as a one bedroom bet/sit or a $5 million harbour-side mansion the size of the market for these properties decline and that makes lenders nervous as when things go wrong they want to be able to sell easily and the bigger the market the easier the sale. As a result lenders will lower the equity share on property that has a restricted market by as much as 50% and in many cases lenders will decline to accept a security.

Typically regional areas offer higher rental return over metropolitan areas however the cities ( Melbourne & Sydney ) offer better capital growth. You have stated that you are looking for a positive geared strategy with good future income flow. In my experience any ‘residential’ property with a return in excess of say 6.50% starts to ring alarm bells. I am not saying they don’t exist but let’s look at some of the common scenarios:

serviced apartment or student accommodation – management or zoning restrictions limited market results in 60% LVR (loan valuation ratio) at best
studio apartment under 40 sq metres – again restricted market, LMI ( mortgage insurance) not available further restricting market expect 60% LVR
hobby farm > 5 ha – restricted market 60% LVR
retirement village – restricted market and management restrictions – unacceptable security
converted hotel/motel – unacceptable security
guest house / student housing where tenants share common areas – usually unacceptable
remote locations dependent on single industry – case by case
rural/ regional towns under 10,000 pop – case by case but typically 60% LVR
resorts / holiday letting – strictly speaking they are not ‘residential’ ie: people do not reside there, usually unacceptable
display homes – very restricted depending on agreement may get 70% LVR
property with rent guaranteed – these are usually a managed arrangement or an incentive from the developer, will be assessed at market rent and equity probably discounted

While all of the above (and many others) offer good rental yield you have to keep in mind that the equity restrictions mean that you have to use more of your money and this will ultimately reduce your ability to acquire more property.

While Melbourne struggles to make a 3% rental return, Sydney around 4% there are parts of Brisbane and I am sure other major centres where 6% on standard property is achievable. If you are looking for property that pays its way and makes a real profit, you will probably be forced to look at the higher risk options above. If you are looking for property that can start to pay itself off, gradually becoming more genuinely positively geared over the longer term and capital growth is not your focus then larger regional centres may be your best option.

Garages becoming a hot property commodity

Jul 13,2012 Leave a comment

New home buyers and potential property investors should think of ways on how they can make their properties turn into money making assets. News.com.au exposed a story about a garage in Sydney’s harbourside location which has listed with an asking price of $120,000 – to put that in perspective the garage is worth more than buying the latest BMW X5 and the garage doesn’t depreciate.

As cities become more and more crowded, parking becomes a rare commodity that’s why having one could potentially be an asset in its own right or increase the value of one’s property especially when it is in a good location.

Having an extra space in the lot and turning it into a rentable garage could also add more money to the owner’s pocket which could in turn help pay with the home loan. People still paying off their home loans were once advised to add extra rooms in their properties to be rented but for those who are not really into the idea of having someone they don’t know live in close proximity with them; a garage would be a great alternative.

In February, 2010 the most expensive parking spot, which was sold for $240,000 in Sydney, was for a garage in Bondi Beach. The sale proved that there is a market for parking areas, something people and real estate agents never expected. In the eastern suburbs, the going price of a garage on a separate title is said to be from $50,000 to $100,000. According to estate agents lock up garages on separate titles are rare and are highly sought by buyers, selling only in a matter of days.

Laing and Simmons Potts Point’s Nuri Shik on one property. “I sold a studio once which had a parking space and I listed it as a ‘lock up garage with apartment attached’. We’re currently selling a 14sq m car space on Bayswater Rd, Potts Point which is expected to fetch more than $49,000, but a lock up garage could sell for about $100,000.”

Before you run out and start making offers on parking spots talk to your mortgage broker as there are many implications in arranging finance for this kind of property.

Housing – what people really want

Oct 10,2011 Leave a comment

People who are planning to buy a property for rent or for future investment should know what most people are now looking for. It might have been a “Great Australian Dream” but having a home in the suburbs is no longer what most Australians prefer.

Ben Weidmann and Jane-Frances Kelly of the Grattan Institute wrote What Matters Most? Housing Preferences Across the Australian Population, on Australian’s housing and location priorities. The survey was conducted with 706 Australian residents from nine demographies and some results were surprising.

Buyers are now more concerned with convenience and access to friends, family and other establishments rather than house features. It has long been presumed that living in a separate house on a large block of land is the Australian dream however it only ranked 5th and 20th most important variable.

The top ten results for all age groups were mostly all about location as safety for people and property came in second, near family and friends, third; near local shops, sixth; near a shopping centre, seventh; near a bus, tram or ferry stop, eighth; and little traffic congestion tenth.

Weidmann, the co-author said, “While it is true that the number of bedrooms was the highest priority, aspects of location including security and proximity to friends and family are also clearly important.”

“The data also suggests that there are real differences in priorities across the population.

“In particular, while young families were focused on house size and type, older and single-person households were much more likely to think that characteristics of where they live are more important.”

An excerpt from the report says, “With Australia’s population changing, understanding this link between housing preferences and demographic characteristics has become more important. As is well documented, Australian households are shrinking, and the population is ageing. The fastest growing household type is ‘single-person over 65’, and the ABS expects that by as early as 2013, couples without children could overtake couples with children as Australia’s most common household.

The study wants to answer some series of questions like, “do growing population segments demand types of housing that are not prevalent in the current stock? Is our housing stock a good match for future demand? Is the design of the housing market conducive to delivering the mix of housing types in the locations that our changing population requires?”

Of course location and style of property is also of great interest to lenders and sometimes their preference runs contradictory to the individuals. Small studio apartments continue to be difficult to finance – on these deals especially if LMI is involved.

Investors Beware of the ATO

Jun 9,2010 Leave a comment

Property investment is one way to reduce assessable income through the range of tax deductions available to landlords. This year the ATO has flagged landlords among those it will be paying closer attention to at tax time.

Each year the Australian Taxation Offices announces a number of areas that they will be paying particular attention to at tax time. Included in their list for this year are investors, including investors with rental properties. The ATO tells us the reasons for their focus include the large number of new investors (the number of Australian tax payers owning rental properties has grown by 100,000 in the past 2 years to 1.6million) and the wide range of common mistakes made on claims.

What is the ATO looking for?

The ATO uses sophisticated software that identifies property investment claims that potentially contain patterns which suggest mistakes or deliberate deceptions in the tax returns. Tax payers identified in this process are then targeted for some form of follow up or audit. The characteristics of tax payer claims the ATO identifies as containing mistakes include:

unusually high claims for rental deductions
low rental income in relation to rental deductions
high claims for interest expenses, and
high claims for borrowing expenses.

The ATO lists some of the most common mistakes property investors make as:

Claiming deductions for rental properties not genuinely available for rent.
Not apportioning expense claims where the property is only available for rent part of the year, such as a holiday home.
Overstating interest claims on loans taken out to purchase, renovate or maintain a rental property.
Claiming the full cost of a visit to inspect a property when it is combined with a private purpose, like a holiday.

Some tips

If you are looking for some deductions before the end of the financial year, at this stage you may be limited to repairs and maintenance, prepaid interest or insurance or body corporate charges.

Ensure that you differentiate between repairs & maintenance and construction & improvement costs. Repairs and maintenance can be claimed as a deduction in the year incurred, construction and improvement costs are classified as capital expenditure and depreciation expenses may be claimed over time. For example, replacing an entire fence would probably be considered to be capital expenditure, where as repairing a damaged section would be classified as repairs and maintenance.

Ensure the property you are claiming deductions for is a rental property – not your weekender. If you do use the property for some of the year and rent in out for the rest of the year, revenue and expenses must be apportioned between the two uses appropriately.

Make sure that interest on your property loan has been claimed correctly; e.g. if you have a loan that is for both personal and investment use, interest must be apportioned (or talk to Peach about restructuring your loan to make things simpler!).

The ATO plans to write to new entrants to the property market with some information on the dos and don’ts of investment property deductions to let them know where to obtain more information. The ATO also publishes a booklet called Rental properties providing a guide to tax obligations for property investors. The publication can be accessed through the ATO website at: http://www.ato.gov.au.

Category Investors