How NOT to Stuff Up Your Property Investing 2015

How To Stuff-Up Your Property Investing

and build great wealth!

How (NOT) To Stuff-Up Your Property Investing Page 1. 2015 Results Mentoring Pty Ltd & Property Power Partners Pty Ltd. All Rights Reserved

Table of Contents PAGE Introduction 2 About the Authors 3 Part One: Understanding the Basics 4

Different Kinds of Investment 5 Houses, Units, or Vacant Land? 10 New, Established, or Off-the-Plan? 14 Capital City, Regional, or Rural? 16 What is Gearing? 17 Using Leverage 18 Passive Versus Active Property Investing 20 Who are the Players in the Housing Market? 21

Part Two: Buying and Selling Property 24 Buying an Investment Property: The Process 25 1. Research (Due Diligence) 26 2. Organising Finance 37 3. Offer and Negotiation 40 4. Exchange of Contracts 41 5. Settlement 44 Checklist for Avoiding Property Investment Stuff-Ups 46 When Should I Sell an Investment Property? 49

Taking the Next Step 51 Common Housing Market Jargon Explained 52 Appendix Free Sample Chapter from The Real Deal: Property Invest Your Way to Financial Freedom!

56 Important Disclaimer: This resource is provided by Results Mentoring Pty Ltd (ABN 84 116 115 667) and Property Power Partners Pty Ltd (ABN 90 146 786 889). Results Mentoring Pty Ltd and Property Power Partners Pty Ltd do not hold Australian Financial Services Licences and do not purport to offer or provide financial advice. The information contained in this resource does not constitute specific financial, accounting, tax, legal or other similar type advice. We strongly recommend that you liaise with your own financial, legal, accounting and other advisers to ensure that the concepts contained herein can be tailored to your specific needs. Results Mentoring Pty Ltd and Property Power Partners Pty Ltd does not accept liability for any loss, damage or expense incurred by you if you rely on or utilise any of the methods, techniques or ideas discussed within this resource.


How NOT To Stuff-Up Your Property Investing

and build great wealth!

Introduction Investing in property can be an exciting and rewarding way to create wealth. But, just like any other form of investment, there are risks and plenty of traps for the unwary which can make property investing a bit daunting, even downright scary, particularly for the first time investor! Whether youre just starting to build your property empire, or are already a seasoned investor, some of the questions youre likely to ask yourself include: What sort of property should I buy? How will I know if its the right property? Am I investing in the right area? How can I know if Im paying too much? What could go wrong with my investment property? How can I have the best chance of success? These are all important questions. The good news is that there are answers to all these questions, and ways to help ensure that your first (or next) property investment is a resounding success! In your hands, you hold a unique guide on How NOT To Stuff-Up Your Property Investing, created by some of Australias very best property educators, mentors and market researchers. This guide is designed to help you cut through the hype and provide you with simple steps you can take to minimise the risks involved in property investing, and maximise your chances of success. We hope you enjoy and profit from this valuable resource!


About The Authors

ResultsMentoring.com is the home of Australia's premier independent mentoring program for property investors, the RESULTS Mentoring Program, and Australia's Best Property Mentors a select group of hand-picked, highly experienced investors with a passion for teaching strategies and techniques that can help you make large sums of money from everyday property deals in any market conditions. Whether you're just getting started, or are an experienced investor wanting to take your success to the next level, ResultsMentoring.com can provide you with the personal support and in-depth information you need.

John Lindeman & Property Power Partners

John Lindeman, head of innovative research firm Property Power Partners, is widely respected as one of Australia's leading property market analysts. With over a decade of experience researching the nature and dynamics of the housing market at major data analysts, John is renowned as the property market researcher that property experts go to for all their Australian housing market insights. Johns columns appear regularly for Australian Property Investor Magazine and in Alan Kohlers Eureka Report. He is the author of the landmark publication Mastering the Australian Housing Market released in 2011 by Wrightbooks. John's extensive property knowledge is complemented by around 40 years' experience as a successful property investor. ResultsMentoring.com and John Lindeman have joined forces to bring you this valuable guide on How NOT To Stuff-Up Your Property Investing. We hope that you enjoy and profit from this exclusive resource! Acknowledgements Elements of this guide have been drawn from Mastering the Australian Housing Market by John Lindeman (Wrightbooks 2011) and The Real Deal: Property Invest Your Way To Financial Freedom by Brendan Kelly and Simon Buckingham (Wrightbooks 2011).


Part One

Understanding the Basics


Different Kinds Of Investment

Investments are made up of three components income, growth and risk. Income could be rent from property, interest on savings, or dividends from shares. Growth is the amount that the value of your property, shares or other assets increase over time, usually measured when you sell them. Risk is the chance you take that your profit may be lower than expected, or even that you may incur a loss. All common forms of investment, such as savings, term deposits, shares, gold and housing offer benefits and drawbacks, so lets see where they could fit into a balanced portfolio. Investing in Savings and Term Deposits Bank savings and term deposits can be a secure and easy form of investment. Small amounts of money can be invested and added to at will and the funds can be readily accessed in times of need. However, theres a strong argument that its not necessarily a good idea to have more savings than you need for emergencies, because the only return you receive is interest, while your savings lose value over time due to inflation. If youre seeking a better return, then consider investing in savings and term deposits only as a band-aid, to cover your other financial commitments and unexpected crises. Investing in Gold Gold (and, to a lesser degree, collectibles such as silver, jewellery and art) have traditionally been used as a hedge (protection) against inflation and recession. We have generally been spared such disasters here in Australia, and so the importance of insuring our welfare investments with gold is questionable. But history does show that the value of gold rises dramatically when the economy or social system is in trouble and other assets are placed at risk. Although gold doesnt provide income in the form of rent, interest or dividends, when economic conditions deteriorate as, for example, happened during the Global Financial Crisis (GFC) the price of gold skyrockets.


This is because people seek the security of gold in times of uncertainty and strife its essentially an investment of last resort. Investing in Shares Share investment can be fun and profitable when economic times are good and optimism abounds. Shares can be quickly traded, and have often been an attractive first option for investors seeking dramatic capital growth that can be quickly converted to personal gain. There are some features of share investment such as short-selling, floats, franking, futures trading, margin lending, warrants and options that can be confusing for less experienced investors, but the greatest worry about shares is usually their volatility (how fast prices can go down as well as up). Investors can sell shares quickly if prices start to fall, and this can and does cause share prices to crash as happened during the GFC. The historical long term annual capital growth rate of both property and shares is just over 8% per cent per annum, but with the important difference that the share market has taken investors on a roller-coaster ride full of thrills and spills. Shares have their place in an investment portfolio, but their role should be appropriate to the economic times and risk appetite of the investor. The oft-quoted maxim buy when prices are falling and sell when they are rising wears a bit thin when you buy only to experience further price falls, which at the time of writing seems to be the case all too often. For the inexperienced, investing in the share market is perhaps best left to times not when prices are falling, but when they are about to stop falling, which occurs at the beginning of economic growth cycles, not when confidence is low and global economic recovery seems years away. Investing in Housing Some experts will tell you that housing is an investment with high entry and exit costs, and long lead-times that create high risks for the unwary. In fact, the performance of housing is far more regular than that of shares and gold. And there are good reasons for its security and regular growth. Housing and land are essential yet limited resources, especially in our capital cities and even more so in the desirable parts of those cities.


As towns and cities grow in size, the proportion of the most sought-after dwellings those close to the city centre, or with views or water frontage decreases in proportion to the number of dwellings as a whole. As a result, the value of these more desirable properties increases by comparison to the others. But even in medium and high-density localities, there are limits to aspects and views. This means that demand for housing in Australia has always been a significant governor of price. In contrast, the value of shareholders investments can drop significantly when economic slowdowns and recessions occur. Not only are shareholders left lying awake at night wondering what has hit them, there is no compensation by way of higher dividends, which are the shareholders equivalent of rent. Although you cannot sell property instantly to obtain cash, in normal economic conditions you can borrow against property easily and banks are frequently willing to lend using your residential property as security. In contrast, if you try asking the bank for a loan based only on the value of your shares, you will find a very different story. Such lending (called margin lending) will generally be subject to the possibility of a forced sale of some or all of the shares if their value falls even if you have been making your interest payments on the loan. When it comes to houses though, the bank will never attempt to take possession of your property as long as you maintain the repayments, no matter what the housing market does. Benefits of Investing in Housing Housing has other crucial benefits, quite unlike other forms of investment Everyone needs a place to live Housing is not a take it or leave it type of investment like the share market, where panic selling can cause prices to fall in days or even hours. Even when the property market is slow, rents tend to rise to compensate investors for the lack of growth, and speculation is less common and usually easily recognised. However, while everyone is in the property market, they are not all in it to win it (or to make money from it). Two thirds of homes are owned or being paid off by the people living in them, and these people are not motivated by capital gains or rents, but by living where they can afford, or in a home they love, and in a location that suits them. This gives property investors a big advantage! Most people who own property dont sell to make a profit, but because their housing needs have changed.


This means that as an investor, if you choose the right property in the right location, you should be able to obtain returns that are greater than the average returns in any area. You can improve the value of your investment Anyone can improve the value of their property investment by painting, decorating or renovation. But try improving the value of your shares through your own efforts! While every share in a company is the same price as any other, every property has a different price which can be improved by its owner. You can gear your investment Chances are that when you buy a property youll need to borrow the majority of the purchase price from a bank or other lender. But the money isnt free, and the lender will expect you to pay interest on the debt. The process of borrowing to fund a property purchase is called gearing. The interest you pay on your investment housing loan, and other expenses involved in owning an investment property, can be claimed as tax deductions against your other income, including the rent you receive from the property. This is quite unlike the interest you pay on your own home loan, which is not claimable and comes straight off your household income. If the interest on your investment property loan, plus the other costs of owning the property (such as council rates and insurance), is more than the rent being paid by your tenant, then youll make a cash flow loss from the property. In other words, it will cost you money to hold the property, and youll have to come up with the shortfall between the rent and the ongoing costs out of your own pocket. The cash flow loss can usually be claimed as a tax deduction by the investor, partially subsidising the ownership of the property by reducing the amount of tax the investor would otherwise have to pay from their regular income. This approach is called negative gearing. Negative gearing is probably the most popular property investing strategy, but its not without limitations some of which well explore briefly later in this guide. One of the more sustainable investing approaches is to buy properties which are positively geared, meaning that they pay for themselves, with the income from rent covering all the outgoings, such as rates,


insurance, property management fees, maintenance, repairs and interest on the loan. The benefit of positive gearing means that you can invest in housing without any ongoing outlay of your own money, and the property pays itself off for you. But there is a greater benefit available to housing investors, which is called leveraging You can leverage your investment Leverage refers to the idea of doing more with less. Borrowing money to buy an investment property allows you to receive the benefit of price growth that takes place on the total value of the property, not just on the small deposit you contributed. Theres no point to leveraging unless the market value of your property grows substantially while you own it, because your success is ultimately measured by the capital growth that has occurred. Therefore, to maximise your chances of achieving the best possible results, you need to know:

1. The right type of property to purchase;

2. The best suburbs to buy in;

3. The right price to pay; and

4. The best time to sell. Over the following pages well explore how you can set yourself up for success in each of these areas. Lets start by taking a look at some of the choices you have about what you could buy, and where you could buy it


Houses, Units, or Vacant Land? Land has always been associated with wealth and security in Australia, and we have experienced some enormous land booms as railway lines, ports and cities have grown. The concept that land has inherent value is what encourages many investors to compare the underlying land value of their investments. This leads many investors to prefer houses to units, for the reason that the land component per unit is far less than that per house. However, this idea ignores the fact that we buy, sell, value and insure properties for their improved value, not their land value, and that the resale value of any property includes the value of the improvements made. In the case of units, the value of the improvements can vary considerably from one unit within a block to another. One unit may have a spectacular view, while the unit next door may not. Therefore, to measure the value of a unit only in terms of its share of the land on which the unit block is built is a flawed approach, as it ignores the attributes that have real value while the unit exists. This is why strata titles for units treat the land areas controlled by the body corporate, and the land areas controlled by individual units, as a combined legal entity. In order for an entire block of units to be pulled down and redeveloped, there must be a consensus among the titleholders acting as the body corporate over the value not only of the entire block, but of each unit holders share in that value. It is this proven potential value that determines the land value of the block as a whole, and explains why the value of the land on which a block of units can be built will normally be much higher than that of other parcels of land nearby that are only approved for houses. This brings us to the question of vacant land as an investment Scams and dodgy property investment schemes mostly involve unimproved land, because the potential for fraud is greater and the value is comparatively low, making it easier to find gullible buyers. There are fewer opportunities for fraud with land that has been subdivided and improved to the point where roads and footpaths are laid, and sewerage, drainage and other services are available. There is also a hidden danger for investors in vacant land. There are numerous cases of overdevelopment in rural areas and regional resort towns, where developers have overestimated the demand and where new estates have remained in a semi-dormant existence for years.


The essential principle to keep in mind here is that the value of land is what you can sell it for, not what you paid for it. If youre considering vacant land, then the first rule of buying land for investment is its location. You should only ever buy land in developed areas where it is already scarce. The days of making quick profits from land sales are long gone, and today buyers overwhelmingly choose to buy and build, or buy existing dwellings. Only consider land that has some differentiating attribute, such as ocean views or rezoning potential. The only reason to invest in vacant land is if you believe youll obtain a better return than you would from houses or units, and this can only come from your capital gain if the land value rises, or from improving (developing) the land yourself. Land does not provide you with an ongoing income return, only with expenses such as keeping your land scrub and vermin free, and paying council rates. Making repayments on finance for an asset that provides no income may be folly when houses and units can provide good returns. Your eventual capital gain in the land value is offset by the cost of the repayments you make, and other expenses. Holding vacant land also means foregoing the revenue that could have been made from an investment in a house or unit. In summary, buying vacant land for investment is something only for those with knowledge about the potential for rapid price rises in a particular area. At the other end of the risk spectrum are units, which offer potentially high rental returns and can also provide good capital growth. The downside is that there is little development potential, as the best use of the land may have already been achieved through the unit development. Opportunities for renovation are also usually limited to cosmetic improvements of the interior. Units are becoming a popular form of rental accommodation for new households and overseas arrivals, while an increasing number of couples without children and retirees prefer buying and living in units rather than houses. This is largely because our inner cities have been transformed in recent years, with old commercial and industrial areas, wharves and warehouses redeveloped into desirable living precincts. It is high-density unit blocks that have made this possible. They have brought million-dollar views and a range of living facilities previously available only to the wealthy into the reach of generation Y renters and generation X couples on professional incomes.


These developments often combine ground-floor retail areas with several commercial levels, and provide recreational facilities such as swimming pools, gymnasiums, barbecue and entertainment areas in the one block. They make unit living desirable and as such they offer investors enormous opportunities. You can buy a unit for far less than a similar style of house, and this can make units an attractive first investment. There is usually less that can break in a unit, so your maintenance bill will be normally lower than it would be for a house, and the body corporate looks after all external maintenance and improvements. This is why so many overseas investors buy units, especially off-the-plan developments, because the property and building managers will look after most things. If you do not have the time or desire to get involved with such matters, then unit investment might be a great way to go. The most important consideration with units is their location. If they are in desirable urban centres, or near major transport hubs or recreation areas, they are easier to rent and can provide excellent rental returns. If you buy in the right area and actively pay down the loan over time, you may find that your investment becomes positively geared fairly quickly, with your rental receipts becoming greater than the interest you are paying for the loan. Selecting a unit in an area with high rental demand means that not only will your unit rarely be vacant for long between rentals, but you ought to be able to increase the rent each time the unit is re-let in accordance with market conditions. Houses on the other hand normally provide a greater potential for capital growth than units. However, even though house rents on average may be higher than units, they provide a lower rental yield (the rental return determined by dividing the annual rent into the price of the property). Each house occupies an amount of land, so the value of houses is usually related to the value of the land area that the house sits on. Therefore, where developed land is in short supply, good growth in house prices can be expected. Contrast this with apartments where a huge capacity often exists to build more, as low-density homes can be knocked down and replaced with large high-density unit blocks. The land content attached to homes means that they are seen as less risky investments, and therefore better suited to cautious investors. The value of a house can also be improved to a far greater extent than is possible with units. With a unit, you can paint the walls, remodel the kitchen or bathroom, but ultimately the improvements are limited to the units internal space.


You can do all these improvements with houses too, but a house can also be extended outwards and upwards, so you can create more living space and additional rooms. Unlike units, with a house you also have control over external presentation, and can paint or clad the exterior walls, redo the roof, add a pool, put in decking and an outdoor entertainment area, and landscape the garden. Everything you do to improve the liveability, appearance and functionality of a house can add to its value. Investment in a house usually requires higher capital investment. As units become the only affordable option (and sometimes the only available option) for those wishing to live in the most sought-after areas in our capital cities, well-placed units are becoming more desirable. Because of this, the price differential between units and houses has been steadily falling, and the rent generated from units compared with houses has been steadily rising. This is why both the capital growth of units in desirable locations and their rental returns has been higher than the growth and rent returns for houses. Houses have always been considered the safer investment, but perhaps we are seeing not just a change in the pattern to make units in desirable locations an attractive investment, but an irreversible trend in our housing market that could be of huge importance to investors! In summary:

Land investors should focus on obtaining good capital growth, and only speculate with funds they will not need for other investments.

Houses offer the best options for improvement through renovation or redevelopment, and these possibilities should be considered before you buy, not after.

For investors not able to keep an eye on their investment, nor

wishing to renovate or refurbish, units potentially offer the most suitable investment option. If investing in units, it is fundamentally important to research the area and assess its potential for further unit development or overdevelopment. Select units that have a rare or special feature (note we said rare or special not weird!) such as a view or particular location. As a general rule, we suggest only buying units that have been sold at least once before, so that you can measure their real worth and inspect the quality of workmanship that went into them.


New, Established or Off-the-Plan?

Pros & Cons Of Buying A Property Off-The-Plan It seems like nothing could be easier than buying a property off-the-plan. Here the development is only just getting underway and your purchase is secured by payment of a deposit, which in some cases can be covered as a bond, so there is little up-front cost. Settlement may be a year away or even longer, and as prices rise in the meantime, you might be able to sell before settlement and make a tidy profit by flipping something you never really owned. Or, you could settle on the property when its finished, rent it out and watch your equity grow. There can be special government grants or savings in costs like stamp duty in some States and Territories if you buy off-the-plan, especially if you choose to live in the property for a while. New properties also attract tax benefits like high depreciation allowances when rented out as investments. However, there are several problems with the off-the-plan investment scenario, none of which the developers will share with you Investing in residential property normally brings four parties together the owner, the lenders, the tenant and the property manager each of whom plays a part. Buying off the plan introduces another player into the mix the developer. Here are a few points to be careful about:

It is essential to conduct research on the developer take a look at their previous projects and talk to the owners.

Buying off the plan involves putting a deposit down on a property that is still to be completed. Make sure your deposit is held in a trust account, and not the developers pockets!

When you buy off-the-plan, you agree to a price in todays terms, and settlement occurs once the property has been completed. From the developers perspective this is advantageous, reducing the risk he/she is taking, as the developer has buyers even before the property exists. For buyers there can be benefits too, because the property may be priced in todays terms but you should research prices of similar completed properties in the area, to make sure youre not paying a premium above current market values.


Settlement is delayed until completion, so there is the potential for good capital growth returns if housing prices increase while the property is being built. The delayed settlement also means that you have time to save before the final payment is due. But you must plan ahead and ensure that youll actually be in a position to settle when the time comes.

Many off-the-plan unit developers will guarantee rents for a period of time, which you can offset against the loan repayments. The rent guarantee might sound attractive, but its essential that you consider what will happen once the guarantee expires. Research current market rents for similar units to identify whether the guaranteed rent is artificially high, and is therefore likely to reduce when the guarantee period comes to an end.

Another issue with rental guarantees is that all the rent guarantees on the units within a development will probably expire at the same time, creating a glut of vacancies in the same area. This can result in desperate owners signing tenancy agreements for far less than current rentals in the area!

One potential issue with buying off the plan is that the final version of the unit may not be quite what you expected. Due to cost blowouts, the developer may have resorted to inferior materials and below standard subcontractors, so that promised fittings and features are reduced in quality or missing altogether.

Theres a risk that optimistic overdevelopment during the same timeframe that your unit is being built results in an oversupply of similar properties, creating the potential for negative growth or at least price stagnation for several years. Be sure to research what other large scale developments are also planned or underway in the local area.

Remember that youll be signing a contract that covers the price you agreed on, not what the unit is actually worth if prices change. There are many examples over the last decade or two where investors have paid too much for an off-the-plan property at the time of purchase, only to discover a year or two later when settlement is due that the property is not worth anywhere near what they agreed to pay for it.

Assuming the above issues are addressed and managed prior to purchase, off-the-plan investment properties are generally better suited to those who are interstate or overseas investors, as maintenance will be minimal and rent may be assured for some time.


New vs Established Properties Buying an existing property not only avoids the problems associated with off-the-plan purchases, but it enables you to determine what the property is actually worth based on recent sales of similar types of dwellings in the area. A professional pre-purchase building inspection can quickly reveal any structural or other problems that may need attention, helping to manage some of the risk of unforeseen costs. While tax benefits such as depreciation can be less for an established property compared to a new one, in our experience an established property in a well located area generally offers far better investment potential than the alternatives. Capital City, Regional, or Rural?

Most investors prefer city markets because they are more accessible and understandable. The problem is that they are also more expensive to buy into, especially for dwellings in the larger cities. If distance is not a problem and you are limited in terms of your purchasing power to regional and country towns, then there are many types of markets outside capital cities which have growth potential. That said, there are also large regions of outback and rural Australia where housing prices have not risen for many years, where rental demand is stagnant and there are long vacancies between tenants. The golden rule is to only invest in any regional or rural housing market if there is a genuine potential for prices to rise in the near future. A common cause of price growth in Australian regional towns is when a new mine is opened, or an existing mine is expanded. But mining towns have a whole range of problems and risks that investors need to be aware of. If the trigger for growth is mining, you need to be sure that the mining will lead to an actual increase in demand for housing in the town, and that the expected growth in housing demand is going to last for some years. Many regional locations, especially those in coastal areas and along our inland waterways are attractive to both holidaymakers and retirees. If the number of retirees moving into an area is rising, this is likely to continue until price growth in the local market eventually discourages further arrivals, but in the interim there can be excellent investment opportunities for investors.


These areas also tend to be located in close proximity to airports with connections to the nearest capital city or freeways enabling fairly rapid travel times to and from the city to be achieved. Other rural housing markets with potential are those where local economics are recovering from drought or otherwise thriving. The keys to these markets will be a prolonged number of years with no housing market price growth and stagnant population growth or even falls in population, followed by a period of recovery in local economies and population which has not yet worked its way into the local housing markets. In summary, the relatively low price of housing in regional and country areas should not on its own encourage you to buy there, as there may be good reasons why prices are low. It is, however, easy to pinpoint localities with good potential, such as new mining areas, rural recovery regions and baby boomer retirement destinations. You can often do better in many of these localities than in most cities! What Is Gearing?

Gearing is an accounting term which simply means that the costs associated with holding and maintaining the property, such as interest repayments, property maintenance, repairs, insurance, rates and management fees can be offset against your other income, including the rent from your investment property. Negative Gearing If you have to make up the difference each week from other income (such as wages or salary), the property is said to be negatively geared. A benefit of negative gearing is that the interest on loan repayments for investment properties is an allowable tax deduction against your other income. The theory behind negative gearing is that over the long term the capital gain on the property should be more than the total cash paid out while the investment is held, resulting in a profit for the investor. Negative gearing is popular because it is reasonably straightforward and, once the property is purchased, it doesnt take up a lot of time. The ability to claim a tax deduction is also an incentive for many investors as it reduces the amount of tax they have to pay. This is especially appealing to high income earners, because the higher your tax rate, the more benefit you get from a deduction.


But while negative gearing for a long term gain is a popular strategy, it does have limitations. The most significant of these is that property prices dont go up all the time. Property prices can and do fall. Theres no point to negative gearing unless the value of the investment property is rising, because if the value of your property is flat or declining then (despite the tax deductions) youre not getting anywhere. Remember that you only get a tax deduction with negative gearing because its costing you more to hold the property than youre receiving in rent. In other words, youre losing money now, getting some (not all) of that money back as a tax deduction, and hoping that the property goes up substantially more in value than it costs you to hold over the same time. If the property is not increasing in value, or worse actually falling in value, then youre simply paying money for the privilege of losing more money! In these circumstances you still owe most of the purchase price and are going backwards financially. Therefore, to profit from negative gearing, your property must be going up in value, and going up strongly! Positive Gearing If, however, the income is more than sufficient to cover the holding costs, then you are achieving a net positive cash flow return on your investment and the property is said to be positively geared. Theres a certain advantage to be had when your property investments are positively geared. This is not so much because of the net positive income that eventuates (although this can certainly help improve lifestyle or make holding the property easier), but because of another opportunity which housing investment offers, namely leveraging. Using Leverage

Leverage is a fancy way of saying being able to do more with less. Applying this in a property context, you can use a lenders money to help fund your purchase price rather than having to pay 100% cash, and as such buy more real estate with less savings. For example, its common for banks to lend at least 60% of the purchase price for a property, and, if you can prove your creditworthiness, then you may be able to borrow up to 95%+ of the contract price.


However - and this is a very important point - just because a lender is willing to advance money to you does not necessarily mean that its in your best interests to borrow the maximum amount that theyll lend. The Benefits Of Leverage When it comes to property investing, leverage means gaining the benefit of price growth that takes place on the total value of a property, not just on the small deposit contributed by an investor. Lets say that you purchased a house in Fern Bay three years ago for $460,000 with just a 10% deposit of $46,000 and borrowed the rest. After three years, the median house price in Fern Bay has risen to $649,000 and this has lifted your equity (what youd have left over in the value of the property after the loan is deducted) to $235,000 ($649,000 less the loan of $414,000). This would represent a profit of $189,000, or a gross return on your initial $46,000 investment of over 400% in just 3 years! Because most investors need to borrow most of the purchasing price of their investments, leveraging provides the main means by which they can grow their equity. Of course, theres no point to borrowing most of the purchase price of an investment property unless its market value grows substantially. Even worse, if the propertys value falls in real (inflation-adjusted) terms, the investor is leveraging a loss and could even be in danger of owing more than the property could sell for! As you can imagine, the key to successfully using leverage is to borrow as much as you are comfortable with in a market that is about to experience high capital growth, and to avoid those areas that are more likely to fall in value. This is why we say that timing in the market is everything! Buying the right type of property in the right area and then selling at the best time is the real secret to wealth creation from property.


Passive Versus Active Property Investing When it comes to property, you can choose to be a passive investor or an active investor or a combination of the two. A passive property investor takes a hands-off approach. They seek to profit through market-driven growth (rising property prices in an area) or through receiving positive cash flow (if the rental income from the property exceeds the costs of holding the property). An active property investor on the other hand likes to work their property investments for maximum returns, by taking proactive steps to directly improve the value of the property or the rental income it can get. This might include renovating a house, subdividing a property, building new houses or units, or any number of other active strategies designed to make money sooner than the gains that might be delivered by market-driven growth. Of course, you can mix passive and active strategies in your property portfolio. In our own investing we have properties that we hold for cash flow or for market-driven gains, and other properties that we renovate, subdivide or develop to sell for a quick profit!

For a reallife example of a property deal thatcombinesbothactiveandpassivestrategies,checkouttheAppendixofthisreport.

There youll find a free sample chapter from the criticallyacclaimed property investment book The RealDeal: PropertyInvestYourWayToFinancialFreedom!,detailingapropertydealthatcombinespositivecashflowwithopportunitiestoactivelyaddvalue.

Even if youd prefer to be more of a passive investor, being hands-off doesnt mean you should gamble your future property fortune on the whims of the market There are steps you can and should take to be clever about selecting the areas youll invest in, and which properties youll buy. Whether you plan to be a passive or active investor, getting educated before buying, and doing some research first, will help maximise the profits you make and minimise the risks. The following sections in this resource are designed to help you make more informed choices to ensure that your property investment journey is as successful as possible.


Who Are The Players In The Housing Market?

When buying and selling residential property youll come across many different professionals, each of which has their part to play in the process. Heres a run-down on some of the people youll encounter Real Estate Agents Selling property can be a complex business, so many vendors use the services of a real estate agent who promotes, advertises, presents and conducts tours of properties, and arranges the contract of sale. The Real Estate Agent performs this work in return for a commission (usually a percentage of the selling price), which is paid by the vendor. Buyers Agents As the purchase of a property can also be complex and can require more time than many people have available, some buyers appoint a buyers agent. In return for a fee or commission based on the purchase price, a buyers agent will sort through the available properties in the market and may even negotiate on behalf of the buyer. Marketing Agents Developers will often employ or use the services of project marketers to promote and advertise new developments in order to attract as much interest from potential purchasers as possible. This is common in larger developments, where the finance that the developer needs to complete the project is often dependent on a certain number of dwellings being pre-sold off-the-plan. Lenders Once upon a time there were very few choices when it came to deciding who you might borrow money from to help you buy a property. But these days theres a huge amount of choice, with many smaller lenders offering home and investment loans in addition to the traditional Big 4 Australian banks. Mortgage Brokers A mortgage broker acts on a purchasers behalf to attempt to find housing finance on the most favourable terms possible for the borrower. The brokers fee is usually paid by the lender, although many brokers will try to make additional income from the sale of insurance and other add-ons.


Registered Valuers Lenders usually do not rely just on the purchase price to determine what the value of the security (the property against which the loan is made) really is. For lenders its all about risk, and a lender will be concerned to ensure that the bank will get its money back if repayments are not maintained and they have to take over the property mortgagee in possession. Lenders use a registered or sworn valuer, who estimates the resale value of the property, and the lender is protected by the insurance policies that the valuer holds if they happen to get it significantly wrong. A sworn valuation is nothing more than a statement of opinion to the lender as to how much of the lending risk is covered by what the valuer believes the property is actually worth. Building / Pest Inspectors Its usually a good idea to get a building and pest inspection done before committing to a property purchase, in order to make sure that the property is in good condition and that no nasty surprises lie in wait. There are many companies that offer pre-purchase building and pest inspection services. Some of the most common problems in older dwellings are white ant (termite) infestation, stump subsidence, asbestos, leaky rooves, plumbing and drainage issues, and deteriorating electrical circuitry. Solicitors / Conveyancers The sale process commences with the acceptance of an offer and moves through a settlement period during which titles are searched and verified, contracts prepared, inspections are carried out and final disbursements, such as rates, power and water charges are calculated through to the settlement date when ownership of the property actually changes hands. This is normally carried out by the legal representative of each party (although in theory anyone can conduct their own property conveyancing). Property Managers Once settlement is complete, you can rent out the property. Although you can manage the property yourself, most investors will use a local property manager to look after their property. Property managers receive payment of a percentage of the weekly rent to oversee basic maintenance and repairs, timely payment of rent, tenancy changes, and regular property inspections.


Your property manager can be someone different to the agent who sold you the property, and you should always shop around, as the quality and reliability of property management services varies enormously. Property Market Researchers It can seem like everyone has an opinion about the property market, and about which towns and suburbs are the next hot spots. Good quality research can be a very powerful tool for an investor, however the quality and accuracy of analysis available on the property market varies considerably. If youre going to purchase or rely on analysis reports or predictions from a property market researcher, then do some simple research into them first. Investigate how accurate theyve been in the past. Perhaps Google some of the researchers past predictions about boom suburbs and see if theyve actually come true. And make sure the researcher is really independent For instance, do they have a vested interest in promoting a particular town or suburb because of a relationship with a local property developer? Property Investing Educators One of the best investments you can ever make is an investment in your education. The right education will help you avoid costly mistakes, spot opportunities that others would miss, and make better informed investing decisions thereby paying for any education costs many times over. As in any field though, there are significant variations in the quality and comprehensiveness of the education and training provided by property investment experts. Before purchasing any home study kit, course or program, do some research into the provider. Seek references, make sure the educator has a track record of their own property investing success, and watch out for ulterior motives! Be particularly wary of real estate agents, buyers agents or developers who offer educational programs that may be more about educating you in how to buy their pre-prepared properties, than about training you to make the best decisions to meet your own financial goals. Instead, seek out educators who are independent, have no financial interest in selling you a property, and who have been successful in the kind of investing youre interested in. Make sure that the educator is a member of the Property Investment Professionals Association (PIPA). PIPA members subscribe to the Association's Code of Conduct, which requires a commitment to education, disclosure, and honest practice. You can check whether they are a PIPA member at www.pipa.asn.au


Part Two

Buying and Selling Property


Buying An Investment Property: The Process While anyone can walk into a real estate agents office and sign a contract to buy a house, theres a bit more involved in getting the purchase of your first (or next) investment property right. If youve never bought your own home or an investment property before, then youll first need an understanding of the complete purchasing process. There are essentially 5 main steps involved in purchasing a real estate investment:

1. Research (Due Diligence) 2. Organising Finance 3. Offer & Negotiation 4. Exchange of Contracts 5. Settlement

Some of these steps may overlap, but which step do you think is the most important? Thats right Step #1 Research is the key, as its the quality of the research (or what seasoned investors call due diligence) that determines whether you buy a great property deal or a dud. Unfortunately, most investors ignore Step 1 completely, or only do a half-baked job of their due diligence! Instead of researching the area and the property to understand the risks, and crunching the numbers to tell how profitable (or otherwise) the deal ought to be, most investors make a gut feel decision when it comes to buying an investment property. In other words, they buy on emotion (or because someone told them it was a good idea) rather than making an informed decision on the basis of thorough research and analysis. And this can come back to bite the investor later. Prevention is better than cure, so wed encourage you to avoid unnecessary mistakes and financial pain. Weve created this guide in the hope that it will help you to make better, more informed buying decisions than most property investors. Lets start with a run-down on each of the 5 essential steps involved in purchasing an investment property


1. Research (Due Diligence) Before you buy anything, its essential that you take the time to properly research both the area in which you plan to purchase, and the specific property that youre thinking of buying. Why? Well if you invest in the wrong area, then you may find that youve just bought into a suburb that is going to go nowhere, or worse, decline in value. Why would you want to hold a property in a suburb where property values were going backwards? Even if you pick a great area, if you just buy any old thing (or any new thing for that matter) then you may find yourself saddled with a property that has endless property management issues like vacancies, or is a maintenance nightmare. What seemed like a property gold mine at the beginning could quickly turn into a money pit if you didnt properly check out what you were getting yourself into. Youre in this to make money, right? So picking the right area and the right property to invest in is critical to help ensure your investments are actually profitable. Carrying out due diligence is all about making sure your next property investment has the best chance possible of delivering a real profit. Due Diligence on the Area So whats involved in researching an area to know whether its a good one to invest in? Well spend some time later in this guide talking about the pros and cons of investing in cities versus regional areas and rural towns. Regardless of location though, the most important research you can do on an area is to get an understanding of the local market dynamics. Some of the most important market dynamics to look into include:

Median price trends. (Are prices going up, down or sideways?)

The volume of properties currently for sale.

How long properties are sitting on the market before they sell.

Whether properties are being sold at a rate faster or slower than the rate new listings are being added.

Rental trends. (Are rents going up, down or sideways?)

Rental vacancies.


Much of this information can be obtained for free by looking at real estate for sale websites (such as www.realestate.com.au or www.domain.com.au) and within statistical tables in the back of property investment magazines such as Smart Property Investment magazine, Your Investment Property magazine, or Australian Property Investor magazine. Once youve picked a suburb or two to focus on, the next important step in your research is to visit each suburb and see whats actually happening in the area on-the-ground. Talk with real estate agents and other locals in the area, and make a note of whats currently going on in the suburb. Are there changes happening in the suburb, and are those changes positive or negative? Some important questions to look into include:

Is the population of the suburb growing, stable, or shrinking? A falling population will undermine property values, whereas a rising population puts additional pressure on prices especially if new housing isnt being added very quickly to the area.

Is money being spent on major infrastructure improvements?

If the Local or State Government is funding major infrastructure projects like new freeways, hospitals, schools etc., then this brings new money and new jobs into an area. This in turn creates more demand for housing, increases what people can afford, and can push up property values.

Is there an over-supply or under-supply of housing? Prices tend to rise slower in areas where plenty of new houses or units are being built, especially if the supply of new housing outstrips the rate at which the population is increasing.

A Word of Caution Theres a lot of misleading property information out there which investors should 'treat with care'. For instance, youll often come across free reports or free seminars promoting particular towns or suburbs as hot spots or great places to invest. But youd be surprised at how often those areas actually fail to perform as predicted or even end up going backwards in value! The problem is that the information used to form opinions about so-called hot spots is often incomplete, out-of-date, or simply unreliable. If you come across a report or a seminar that is recommending an area, always ask what sources of information the recommendation has been based on.


Some sources of property information that should be regarded with extreme caution include:

Census Data Many reports use population, housing and income stats derived from the last Census, which can be several years old. Some reports show population or income growth from one Census to the next as part of their selection basis for suburbs, for example relying on growth figures from 2006 to 2011 but these trends are somewhat out of date! Many suburbs, especially those in inner urban renewal precincts and outer suburban areas in our major cities have undergone significant demographic changes in the last few years. Be very sceptical of any reports that rely on Census data, or, worse, do not even reveal the source of their demographic data.

Anecdotal Evidence Commonly known as hearsay, anecdotal evidence is used in many reports to justify the inclusion of some suburbs or towns. Be wary of terms such as selling like hot cakes or claims that a new mine is about to open, or a new railway is about to be built, etc. New infrastructure can only have a speculative impact on housing markets until it is complete, and can only then have a positive impact on housing prices or rents if the project actually results in an increased level of housing demand that is sufficient to create an actual housing shortage.

Keyword Trawls Some reports use the frequency of words such as distressed sale or renovation appearing in advertisements for properties on real estate listing sites, to define suburbs as suitable for renovation, or as having a high percentage of stressed sellers. Because this keyword trawl is only done on the text in advertised property listings, it does not necessarily represent the actual state of a suburbs housing market. It may simply reflect the local real estate agents preferential use of those keywords in their advertising to help secure sales. While this information may be of interest to certain types of investors, it is hardly the basis on which to make an informed purchase decision.


Reliance on Past Performance Be extremely wary of reports which rely on a property market cycle, or on the theory that housing prices double every seven to eight years, or claim that an area is overdue for growth, or purport to reveal hot spots on the basis that recent high growth proves that more is on the way. Past performance is no indicator of future performance where the housing market is concerned! This is because the conditions which caused price and rent changes in the past are very likely to be different in the future. There are only a few key dynamics which dictate changes in housing prices and rents and these apply equally to cities, regions or individual suburbs. These key dynamics are: o population growth; o the availability, cost of, and need for finance; and o the relative surplus or shortage of suitable housing stock. Even when the rate of population growth and availability of finance are identical to some previous point in time, the impact on housing prices or rents will be completely different if the housing stock situation is dissimilar to what it was before.

Due Diligence on the Property

Assuming youre happy with your choice of area, the search begins for a suitable investment property. This is the really fun part! But as exciting as looking for a great investment property can be, its essential to keep emotions out of your buying decisions. The decision to purchase an investment property needs to be clinical based on research and analysis, not emotion. Unfortunately, far too many investors make their buying decisions on gut feel or because someone else (usually an agent or a developer with a vested interest in selling the property) got them excited about the deal. And frequently these investors end up with properties that fail to deliver the capital growth or income they were hoping for. Keep It Simple, Stupid! Although we have substantial experience across many dozens of property deals, were very careful to avoid over-complicating our property investing.


While there are almost an infinite number of variations to a deal (such as location, house type, land size, tenancy, vendors, real estate agents etc.), every decision we make to buy a property boils down to five essential questions that every investor ought to ask: 1. How much money do I need to put down to get into the

investment? 2. How much profit, over and above my initial investment, will I

receive back? 3. How long will it be before I receive the anticipated profit? 4. What are the risks i.e. what could go wrong, and whats the

financial impact if something does go wrong? 5. How will the risks be minimised and managed i.e. what

can I do to reduce the possibility of something going wrong? If you cant answer all of these questions for any investment property that youre considering, then youre introducing unnecessary risk and may be setting yourself up for a nasty financial surprise! Of course, any form of investing involves risk and this is certainly true for property investing. Things can and do go wrong with investment properties The propertys value might fall rather than rise, the property could be vacant for an extended period, unexpected repairs could cost money, and weve all heard tales of tenants from hell whove trashed an investment property and done a runner! Its simply not possible to invest in property without accepting some level of risk. The key is to minimise the risks, and maximise the likelihood of making a profit. Look Before You Leap! You may experience powerful emotions (usually related to fear and greed) when first hearing about an investment opportunity. But the difference between someone who speculates in property versus a smart investor is the amount of time spent completing due diligence (i.e. formal review, inspection and analysis) over the opportunity. So, whats involved in analysing a property to ensure that the risks are known, minimised and manageable, and that theres the best potential for a profitable outcome from the investment? Knowing what youre getting into with a property investment means understanding both the physical condition of the property, including any repairs that may be required, as well as understanding the financials of the deal (number crunching).


PHYSICAL Due Diligence At a minimum, your research into the physical aspects of a property should involve:

Inspecting the property yourself to confirm that everything is as you expect it to be (never rely on photographs from an agent or an internet advertisement)

Obtaining building and pest inspection reports from a qualified property inspector, to highlight any unexpected structural issues, essential repairs, or pest infestations (like termites)

Checking that the boundaries and dimensions of the property

are actually as represented in the legal title for the property

Taking a look around the street at the neighbouring properties. Are other properties in the street quiet and well maintained, or do you have the local bikie gangs HQ right next door?

FINANCIAL Due Diligence Even if the property checks out physically, this isnt enough to know whether the property will make a good, bad or indifferent investment. To achieve profits by more than dumb luck, and certainly to achieve sustainable and repeated success, a smart property investor really needs a good understanding of the numbers in a deal. Sadly though, many people have a fear of maths akin to being burnt alive! If thats you, then dont give up your property investing dreams just yet! The good news is that crunching the numbers in a property deal doesnt have to be hard. In an attempt to try and ease the pain, weve set out an introduction to the essential number crunching for an investment property below... Number Crunching Basics Number crunching is all about helping you to understand and evaluate your risk in getting into a property deal, and is a critical part of your due diligence. After all, whats the point of buying an investment property unless you realistically think its going to make a profit? Thats where number crunching comes in!


For any property that you plan to buy and hold for capital growth or for cash flow, there are a few essential figures that youll need to collect and analyse. Weve organised these under 4 simple steps below Step 1: Work Out How Much Of Your Own Money You Need To do this, youll need an idea of each of the following figures:

Purchase Price

This is what youre thinking of paying for the property.

Loan Amount

This is the proportion of the purchase price you expect to borrow. Most lenders are comfortable with a loan of around 80% of the purchase price or valuation of a property, but you might be able to borrow a greater or lesser percentage depending on your personal financial circumstances. Anything you cant borrow against the property itself, youll have to raise in cash or through borrowing against equity in another property (like equity in your own home).

Closing Costs

Also known as purchase costs, closing costs include Stamp Duty (called Transfer Duty in some States) and other government charges, legal fees, etc. As a general rule, an allowance of 5% of the purchase price is usually sufficient, although this may need to be adjusted upwards in certain circumstances.

Closing costs also include the costs of any building/pest inspection reports you plan to get done as part of your due diligence, plus loan establishment costs such as application fees. If borrowing at higher Loan-to-Value Ratios (LVRs), you might also need to allow for Lenders Mortgage Insurance fees in your closing costs. If the property needs a bit of work done before you could rent it out, then make sure you also budget for any initial repair costs.

Total up how much cash youll need for your deposit, closing costs and any initial repairs. This represents the amount of money youll need to put into the investment at the beginning.


As an investor, its this amount of investing capital that youre aiming to get a good return on. Step 2: Work Out The Cash Flow Youll also need to calculate the expected Annual Cash Flow (before tax) from the investment property. The Annual Cash Flow can be calculated simply by subtracting the anticipated Annual Expenses from the expected Annual Rental Income. To work all this out we need to collect some more figures

Annual Rental Income Take the actual or appraised weekly rent for the property and multiply it by 52 to get an annualised figure. We suggest you use the rent as it is now or seek conservative rental appraisals from local property managers when working this out. Never rely on a rent estimate from the selling agent, as selling agents frequently arent in touch with the rental market, or might even talk up the rent potential of a property beyond whats actually realistic for the area. Unless the property is in a very hot rental market, its generally a good idea to allow for some vacancy. As a rough guide, take 2% off the Annual Rental Income figure for every week youd expect the property to be vacant in an average year.

Annual Expenses There can be a surprising number of expenses involved in owning an investment property, ranging from the obvious like interest on the investment loan, through to often overlooked costs like body corporate fees. A smart investor will take the time to research and understand all of the ongoing holding costs that are likely to be involved in owning a property. Potential holding costs may include:

Loan repayments

Loan fees

Council rates


Utility costs (like water rates)

Body corporate fees (where the property is part of a complex or strata group with other dwellings)

Insurance (such as building replacement insurance, contents insurance, and/or landlord insurance)

Property management fees to have a rental manager look after the property

Land Tax

Maintenance and repairs

This is not an exhaustive list, so its always important to investigate what other holding costs might also apply to a specific property.

Annual Cash Flow Subtract the total Annual Expenses from the expected Annual Income to work out your before-tax Annual Cash Flow. If this figure is more than zero, then the property investment has a positive cash flow. In other words, the rent covers all the expenses and leaves some surplus income. If, on the other hand, the Annual Cash Flow is less than zero, then the total expenses exceed the rental income and the property is said to have a negative cash flow.

What about tax deductions? You may be able to claim certain tax deductions that can improve the after-tax cash flow from the property, or potentially reduce any negative cash flow. For instance, a fairly common tax deduction available to property investors is called depreciation. Depreciation is an accounting concept reflecting the wear and tear that occurs on an asset through its normal use. The idea is that sooner or later, the asset will need to be replaced. So the tax office often permits a depreciation allowance to be deducted against current taxable income for certain assets in an investment property, which can reduce the amount of tax an investor has to pay.


For example, imagine youve just put brand new carpet in your rental property. The cost of the carpet cant normally be claimed in total as a tax deduction at the time it is installed, but you get to write-off (depreciate) the cost of the carpet over its useful life - a little bit each year. This depreciation write-off can be claimed as a deduction against the investors other income (e.g. salary, wages, or rental income), and a lower taxable income means a lower tax bill. In some situations, the tax deduction can be sufficient to allow a property to go from being negatively geared to positively geared. This all sounds great, but its very important to keep in mind that a tax saving doesnt turn a bad deal into a good deal. You only get a tax deduction if youre actually making a loss (at least on paper). And wed rather make money than lose money any day of the week. So we suggest calculating the cash flow for any potential investment property without worrying about tax savings like depreciation and negative gearing. Treat tax savings as a bonus not as the reason to do the deal! Step 3: Estimate Capital Growth Potential If youre buying for capital growth rather than cash flow, then its obviously important that your property has a reasonable likelihood of actually going up in value. This is especially important if the cash flows will be negative. Why on earth would you want to buy a property that costs you more to hold than it returns in rent, if the property isnt likely to go up in value by far more than it costs you each year??? Estimating future growth is a tricky business at the best of times, because it involves predicting the future. If anyone ever tells you that they can guarantee the amount by which the value of a property will increase each year, we recommend that you turn around and run the other way! You can try to extrapolate a growth estimate based on what the trend has been over, say, the last 12 months. But as they say in the financial services industry, past performance is no guarantee of future performance. You might look for anecdotal evidence that prices are likely to rise, such as money being spent in the area on major infrastructure projects like hospitals, new freeways etc. But even then, its uncertain when or by how much property prices may rise as a result.


Or you can research current market dynamics to look for indications about whether growth is likely to be strong, weak, or even negative in the coming months. Because of the uncertainties inherent in relying upon past trends or anecdotal evidence, in our own investing we prefer to rely on analysis of current market dynamics in a suburb when attempting to anticipate how prices are likely to move. We feel that this gives us the best chance of capitalising on strong price growth. But even with the best research, its important to acknowledge that any anticipated growth will be an estimate, rather than a certainty. Theres always a risk that the market might change or that property values may not move as anticipated. You cant eliminate risk, so your job as an investor is simply to do your best to minimise the risks, and maximise the likelihood of success. Step 4: Bring The Numbers Together With an idea of the anticipated cash flow (positive or negative), and your best estimate of the growth you realistically expect the property to achieve (at least over the next 12 months), you can put these figures together to see if you think the property is an investment worth purchasing. The essential question you need to ask yourself is this: Does the combination of anticipated capital growth and cash flow (added to the anticipated growth if the cash flow is positive, or taken away from the growth if its negative) represent an attractive return on the money you need to put down to buy the property? Or would you be better off investing in something else (or even just putting your money in the bank)?


2. Organising Finance Before you go anywhere near buying an investment property, you first need to know what you can afford to buy, and ensure that youll actually qualify for any finance that you need to complete the purchase. Were sure youll agree that it makes better sense, and will be far less stressful, if you know what you can borrow before youre committed to buying a piece of real estate! The last thing youll want to have happen is to sign a contract to buy a property and put down a deposit, only to find that you cant actually get finance. At best, this can be embarrassing and a waste of time for everybody involved. At worst, if the contract to purchase the property is unconditional, you might find that youve just blown your deposit (along with the savvy property investor reputation youve been working so hard to build)! So how can you work out what you can afford to borrow, before you start shopping for an investment property? It can make a lot of sense to begin by talking to a mortgage broker, who can investigate different lenders and types of loans for you, so that you dont have to do as much running around yourself. Be aware though that not all brokers are created equal... Different brokers will have different levels of experience, and some are better connected than others when it comes to finding finance solutions for property investors. Youre looking for someone who knows finance for property investing inside-out. Applying for a Loan When you apply for a loan, or for a pre-approval so that you have an idea about how much you could borrow, a lender will focus on two things in particular:

1. Your ability to repay the debt; and

2. The property (or properties) that will be used as security for the loan (meaning that the lender can force a sale of the property if you default on the repayments).

To determine this, a lender (or the broker) will ask you to provide some information about your financial position, and some details about the property (or type of property) youre considering for purchase.


Most lenders will have standard application forms, which are really data input sheets. Your information must be entered into a computer and unless you have answered all the mandatory questions, your application cannot be processed further. Dont give the lender an excuse to put your application at the bottom of the pile Make sure you fill in the form neatly and completely. In a typical loan application, youll be asked to provide proof of your income, such as copies of payslips, statements, and/or tax returns. Your application form will include a section asking you to list your assets, debts, income and expenses in the form of a personal statement of financial position. You can save yourself unnecessary delays by gathering this information together before applying for a loan. If your tax returns are not up to date, then do yourself a favour by getting them in order before you need to apply for a loan, so that you can provide your latest tax returns in support of any investment loan application. When formally applying for a loan, the lender will also ask you for your consent to them running a credit check. If youve ever applied for credit before (even for something like a phone account), then you probably have a credit file, and the lender will check your file for any issues like defaults on loans. If you have any concerns about what might be on your credit file, or are just curious about what it shows, instructions on how you can obtain a copy of your own credit file free of charge can be found at: www.mycreditfile.com.au In addition to personal information, lenders will seek data about the property to be used as security for the finance. Not all properties are created equal either. Depending on the location (city or rural), condition (good or poor condition) and also usage (residential or commercial), the lender might require a larger deposit, the interest rate might be higher than expected, or they might even refuse to lend for the property at all! Make sure you check with your broker or lender about both the postcode that youre thinking of buying in, and the type of property youre thinking of buying, before you make any offers so that youre aware of any potential lending constraints ahead of time. Loan-to-Value Ratio (LVR) An important calculation that any lender will perform is a loan-to-value ratio (LVR).


As the name suggests, an LVR is a calculation that compares the amount of borrowing against the assessed value of a property. The higher the LVR, the more risk there is from the lenders perspective. Most lenders are comfortable with lending up to 80% of the purchase price or valuation of a property, whichever gives the lower figure. Some lenders will offer LVRs as high as 95% if you can demonstrate a good regular income and the ability to service the higher debt. However, borrowing at a higher LVR usually comes at a cost called Lenders Mortgage Insurance (LMI). Almost every residential property loan, regardless of the LVR, has Lenders Mortgage Insurance on the loan to protect the lender (not you) in case you default on the loan. Yet youll usually only have to pay the cost of this insurance where the LVR is greater than 80%. The LMI cost, if applicable, is a one-off fee payable at the beginning of the loan. Because these fees can amount to several thousand dollars, its essential that you budget for LMI costs if youre considering applying for a loan at an LVR greater than 80%. The industry standard is an 80% LVR (or 20% deposit) without any Lenders Mortgage Insurance payable by the borrower, provided you submit full financial statements (tax returns, payslips etc). Make sure you shop around for the best loan product available, as the maximum LVR and also the threshold where you will need to pay mortgage insurance varies between organisations. Its worth noting that Lenders Mortgage Insurance is very different to mortgage protection insurance. The latter is paid by the borrower on the basis that if they are sick or disabled, then the insurance company will make the repayment on his/her behalf. A Word About Valuations Its common for a lender to require an independent valuation of a property to be carried out before the lender will confirm the loan approval and the exact amount of lending available. Lenders usually have a number of registered valuers that they use. Upon instruction from the lender, a valuer will look at the price of other similar properties sold in the area to determine whether the price you are paying is a reasonable value in their opinion. Valuers are not an overly optimistic group and can be quite conservative by nature, as the threat of being sued should they come up with the wrong value is an ever present contingency.


This is why, in all but the rarest cases, irrespective of any higher estimated market value, the value used by the valuer will almost always be the price paid for a property - and occasionally less. Its usually a good idea to make any offer to buy a property subject to bank finance approval, so that youre not tied into buying the property if there are unexpected issues with the valuation or with your finance application. Final Thoughts On Finance Normally the only way to get 100% finance for a property purchase will be if you can offer additional security, such as the equity in your existing home or in another investment property that you already own. If youre planning to get into debt then always have a plan for getting out of debt too. Its worth remembering that you cant go broke owing nothing! We dont advocate borrowing money to fund a lifestyle. Be very wary of falling into a trap of overextending your credit and using the funds to pay for non-investment related expenses. 3. Offer And Negotiation Lets get into the really fun stuff now Negotiating the price and terms of your next property purchase! The advertised price of a property will often be an asking price or just a pricing indication for the property, rather than necessarily the price that has to be paid to buy it. The actual price and terms for the purchase of a property are usually negotiable to some degree, although the amount of flexibility for negotiations will vary depending on how the property is being sold. From a buyers perspective, the greatest opportunities for negotiation often come from private treaty sales, where the property is advertised by a real estate agent or the seller as being For Sale, rather than a property that is to be sold at auction. If youre looking to buy at an auction, then the opportunities for negotiation are much more limited (which is one reason why we prefer to buy our investment properties under private treaty sales, rather than at auction).


For instance, you might be able to pre-arrange an extended settlement period for a property that is being sold at auction (on the assumption that youre going to be the successful bidder), but thats generally about as far as you can go. Deposits for auction sales are usually set at 10% of the price, and the price itself is determined through the auction. In contrast, when making an offer on a property that is For Sale by private treaty, the terms that might be negotiated are almost limited only by your imagination. Factors to consider in putting together an offer may include:

Price offered

Amount and timing of deposit

Settlement timing (i.e. when youll be paying the balance of the purchase price and taking full possession of the property)

Any subject to conditions, like finance approval, satisfactory

building and pest inspections, or anything else that you want to check before youre 100% committed to the purchase of the property

The basic idea to remember with private treaty sales is that, in essence, everything is negotiable! For instance, many agents will push for a 10% deposit, but theres no real requirement to pay that much. You might decide to offer less (or more) of a deposit depending on what works for you, and what might be acceptable to the seller. 4. Exchange of Contracts Youd think that the whole approach to buying and selling property would be fairly consistent across Australia, but thats not actually the case! Property laws, along with the processes and paperwork used to buy and sell real estate, vary across the States and Territories in Australia. For this reason, youll need a lawyer or conveyancer in the State or Territory where you plan to buy your property. Broadly speaking, there are two general approaches to real estate contracts around Australia:

1. Exchange of Conditional Contracts 2. Exchange of Unconditional Contracts


Conditional Contracts A conditional contract may contain subject to clauses that allow the buyer to carry out certain due diligence checks and confirm their satisfaction with the outcome of those activities before being fully committed to the purchase. Typical subject to clauses in a conditional contract might include confirming bank finance approval and obtaining satisfactory building and pest inspections, but could really inclu

How NOT to Stuff Up Your Property Investing 2015

Documents

Transcript of How NOT to Stuff Up Your Property Investing 2015