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Also look into how you purchase the property; I've seen few basic partnerships from time to time where they just put both names down on the Title. This can cause servicing implications for borrowing when it comes to the next property. It depends on the type of project; I’ve seen people do it through a company or trust as the entity which owns the asset and they own shares in this body. Talk to all three, JV solicitor, accountant and fin broker – one who looks to the future. Make sure they are all happy with the structure.
Hi Oryx,
Congratulations on emigrating to Australia.
If maintained a timber veneer house should last more then 40 years. I see plenty of 1940s built houses still around and that is 70 years. There are often many other variations (more popular depending on area) like brick veneer and double brick.
If you are worried when purchasing an older style home make it a condition of purchase that you obtain a Pest, Building and Electrical report. All up it would cost you about $800, but it is piece of mind.
The comment about getting houses getting ‘cheaper’ is understandable (buildings do depreciate) and that is why some investors gain a deprecation bonus from the ATO. However, when purchasing a house you are buying 2 things, the house and the land underneath.Often older homes are in older areas, and commonly have larger blocks and are closer into the city. This means that when purchasing a house that is super old, you are often purchasing almost 100% land content.
Now land is what the driving factor of the growth is, because land is finite. That is why many growth investors purchase high land content.
To your success,
Kent
Hi,
My background is a BA in economics and I would say there are few areas which do help with property investing or investing in general / don’t bother about most of the academic predication stuff because no one has a crystal ball.
Some areas where you should look into:
1) Excel class – You can do this at TAFE or even adult learning centres. Go all the way up to advanced, it is a great tool.
2) Accounting 101 & Managerial Accounting – The basics can really help you understand balance sheets/lingo/returns and all that jazz.
3) Monetary Policy class – if you have the time or have a mate at uni (no security checks lectures) feel free to go along or get the course books. This will give you an understanding of RBA.
4) To get you in the right mind set, read some books like (Black Swan, Fooled by Randomness, Reminiscence of a stock operator, What I learnt loosing a million dollars and anything from Trident Press)
5) Pocket economics book/iphone app is all you will need on the actual theory topic and read The Economist Magazine/AFR/WSJ. The only practicality of this tip is to sound intelligent at dinner parties.
Avoid learning from academic economists and try and read stuff from people who are actually making money. This does not mean go out a buy Robert Kiosaki, Donald Trump or all the other wealth spruikers.
P.s. I almost forgot, some knowledge on corprate/contract law also helps.
Squirrel,
A good managing agent will have a core area they specialise in and then reject properties outside of it. Therefore, they are able to operate under economies of scale. This means the cost to operate is lower and they can provide you with better service.
A good agent will have it on paper that they stay under 100 properties per agent. This is important because if they are managing 150 properties, that is 150 tenants, 150 owners, plus trades and other services (talking to 350 – 400 people every month successfully is almost impossible to keep up) .
Another good test is to ask if they take photos for the routine inspections. I have heard of some managing agents who mock these reports up when they get a little busy (it is not always the agency – but sometimes the overworked property manager). Photos guarantee that they have been inside every room. This is especially important if you are far away from the property.Hi Squirrel,
It isn't too common, but rent rolls are often purchased and sold. Often to keep you on as a client, they will keep the property manager assigned to your property. However, sometimes this is not the case.
Some things you should ask a managing agent in writing include:
What is the cap of properties for each property manger?
Fewer than 100 is good.What areas do they manage in?
If they say everywhere or are willing to take any property, this is not good. Another test is ask if they will manage a property in x suburb (far away from your current properties).Ask them for a written customer service charter and a marketing plan. If this is not written up, good luck on holding them accountable to getting back to you when something goes wrong with the property or marketing it well.
Ask to see a copy of their end of month statements.
I have a document with quite a few more questions your can ask, msg me you email and I can send them onto you.
This is a tax question and you should seek advice from an accountant.
From my experience in the past, with the FHOG you have to live in it for 6 months after settlement. When a renovation is done while a person is living in their principle place of residence it isn’t tax related because their principle place of residence is CGT tax exempt.
If a person decided to renovate their IP, this is considered a capital cost. Most renovations (maintenance excluded) are considered to add to the cost of your purchase, thus reducing the capital gain and consequently CGT.
Getting CGT reductions shouldn’t matter too much because when you live in a property for a period of time and it is still your PPOR, after you leave, you are exempt from CGT (as long as you always had the intention of moving back there.)
Hi Natasha,
If you don't mind, I'm going to post the same advice I sent to you in the private message in which you asked me for advice:
If you are both brand new to property investing I see young couples run into two areas of trouble. The first being equity and the second being servicing – this happens a little down the track on property 3 or 4. These two problems can be resolved through a few tips:1) Buying in a high growth area. We look for individual properties that have something good happening to them in the near future (2 year mark). Wether it be a zoning upgrade (allowing more properties to be put on the same block) or an upgrade in infrastructure (new shops/cafes or a nice council precinct being set up). Getting good growth is the key to getting the equity for property 3 or 4.
2) Some way to add value. We look for older properties (never new) that are easy to cosmetically add value to. If at property 2 or 3 you have purchased new properties all the way you will be stuck as there isn’t anything you can do to them to increase rent or equity. However, if you look for older properties in better areas you spend a little bit of money and either go back to the bank with the increased rent or go back with the increased equity and ask for more equity for your next purchase.
3) Buy in areas of low supply. This is what gets 90% of first time investors. Buying a new house and land package sounds good, but 2 min down the road in a year’s time, another investor will be getting sold the same thing for the same price. Then in 2 years, 4 min down the road, another investor will be getting sold the same thing for the same price. And then again in 3 years, 6 min down the road … and so on… Be sure to buy in an already established suburb as close as you can get in to the city.
4) Finally, being a first time investor, keep it simple and have measured risk. Being your first house you don’t want to muck up on this one because it will put you back many years. Keep it simple, stay away from much of the hype and buy smart. By hype I mean (developing, property options, mining towns and so on) these have higher returns because they are substantially riskier. You can get the same returns in a capital city, but you just have to be a little smarter when you buy.
If you’re not 100% confident when reading this, I’m exactly like yourselves just before I started in the industry. There is so much conflicting information and you don’t know who to turn to for advice. I can say the market isn’t going to run away for the next 6 months (despite what property spruikers will say – especially the ones selling brand new stuff) so use that time to educate yourself.
If you want to know good areas to learn stuff, let me know.
To your success,
KentHi Ravi,
Like yourself living in Perth, I had an interest in property from a very young age. Now 22, I've completed my first project (started at 21) and working on my next deal. I work in the industry full time, helping other investors build wealth. The job I have is quite lucky as our companies MD puts a lot of effort into training and has a strong foundation to integrity (which you can often loose working in the RE industry).From personal experience if you want some tips, here is what has helped me get to what I enjoy doing:
1) I started working in a RE agency at 17 (helping out). I did junior work and on rare occasions was allowed to do some “cold calling”. So lets put it this way, I was doing all the jobs worse then the main one most RE agency despise (cold calling). This will be a good test to see if you will have longevity in the industry. If you didn’t enjoy doing the grunt work, move on. From this experience, the fundamental thing I learnt was to have a thick skin – that is not to be confused with being obnoxious.2) Next tip is to get a good foundation in sales. This is regardless of if you want to be a developer or work in the industry. Being great at sales is by far the best skill anyone can learn and don’t let anyone suggest otherwise. The main reason some people think sales people are scum is because many people aren’t good at sales. Sale’s is important, because you will always be pitching and idea to someone. After working at the RE agency, I worked at Godfreys (vacuums) and despite the sometimes bad stigma. They have a really good training ground for sales. I would suggest looking at a part time job there.
3) While learning selling at Godfreys, I went to uni. I studied economics and this provided me a good foundation on investing (my majors were money and banking / international business economics) This mix doesn’t sound too relevant but it gave me a good insight into accounting, investment, risk modelling and other practical skills such as the ability to teach myself things and MS excel/report writing. I’m able to apply this knowledge to investing; this fortunately takes many rope learnt investors quite a few years to master. I would suggest doing a finance degree of some sort.
4) I did a lot of adult education. I went to as many seminars as I could and studied as much about property as I can. This gave me a really good foot up into understanding how the industry works and where I want to go for the future. I was quite fortunate as my family invested in property and this helped motivate me. Now this may sound like a conflict of interest (because we do property education), but I would encourage you to buy a course or two and buy as many books as you can. Aim for education other just written, such as seminars, you will retain more knowledge (I studied courses before working at MW).
5) I didn’t just apply for any RE jobs, because they can bog you down in the selling side. What I mean by that is if you work for a selling agent, they will teach you how to get listings and that is pretty much all you do. Now this is not a bad thing, but it will take many more years to learn about property. Often with little support. I would suggest working at a smaller development company / valuations company / buyers’ agency or a smaller selling agency. These firms will give you the research skills you’ll need to succeed. Albeit, sales is important, but you do actually want to learn about property.
6) If you do go to a selling agency / buyer’s agency get ready to take on the 600 day war. For the first 2 years of your life, you will need to work your bum off in order to get to know people and build up your professional network. That means lots of cold calling, networking and rejection. But hopefully, everything you have learnt in the prior 5 steps will help you through that.
The only other bit of advice that I would encourage, as bad as it sounds; the only person you can trust in real estate is yourself. The above 6 things is what helped me, but always remember real estate is a meritocracy so someone who hasn’t passed year 12 can be rubbing shoulders with a MBA.
To your success,
KentHi Kate,
Firstly, I would like to say congratulations on paying down your mortgage.
You can’t get tax concessions for an owner occupier similar to the ones of a negatively geared investment property. From my experience in the industry, I have seen one way some people have done it.
They have purchased in a trust and then they have applied to rent the property own by the trust. Their own trust has decided that they were the best tenant for the property.
For these people in the past, it made sense (for reasons more important then tax to purchase in a trust). Their reason was for asset protection. They had to make sure all rents and loans were at market rates and the property was managed through a property manager. This effectively created a firewall between the trust and their personal affairs.
Coincidentally, it worked out beneficial for them as they were able to negative gear their business profits against the trust loss.
Now to setup a trust structure you should always seek the advice of an accountant or lawyer. This is not personal advice.
Hi Dada,
I wouldn't say never invest in mining towns, but do it when the risk to you can be measured. If it is your first, 2nd or 3rd purchase, this will make up a substantial part of your portfolio. When speculating make sure you can afford the drawdown on your portfolio. Prior to the 00's mining boom the Northwest Mining Region of WA averaged a rough 2.5% capital growth. Once the capital works commenced, prices appreciated past their true value. The key to profiting from a mining town is by getting in early during the infrastructure construction faze. Investors profit from the lag between commencement of capital works and the completion of adequate housing supply. A more risky way is when companies are willing to pay above market rents to allow them to be dynamically efficient. This is a nice term for meaning they can move out quickly and don’t have to worry about falling real estate values.
I wouldn’t say it is all doom and gloom up the North West, but just be cautious. There are some signs of a speculative bubble, which includes:
1) Appreciable growth in 1 particular asset class.
2) Optimistic views to justify the appreciation.
3) Excessive leveraging.1) Even during the property boom Pilbara’s growth was a standout and now the market is flat, The Pilbara is still relatively buoyant (it did drop).
2) There are companies with the whole business model of selling the sizzle of mining towns. Did this exist 5 years ago? When it is an emerging asset, be very wary. People tend to be optimistic I site the following examples (Flowers were old to the Dutch, but Tulips were new – stocks were and old idea, but tech stocks were new – Grain futures were and old idea, but energy/weather futures were new – mortgages were an old idea, but CDOs were new – My example: real estate was an old idea, but mining real estate is new) People often justify their decision with the shroud of history.
3) If you check out the last Senses data (still quite old), 85% of properties have a mortgage on them (Karratha as example). This is about 60% higher then the WA average. Rental properties make up over 50% the market this is about 80% above the WA average. This means it is a bit of an outlier which is not always a good thing on high side of growth.
There are supply issues up there due to native title and contracting trades, but the WA Government is planning to increase the land supply substantially. This will help contain prices:
http://www.landcorp.com.au/Map/?cid=Karratha-Mixed-UseNow in Perth green fill doesn’t affect the price of inner city suburbs because the 45min travel time into the CBD is enough to differentiate the prices. However, in a small country town the difference between being 3min and 5min out of city centre is not enough to differentiate price.Secondly check out this study which was completed by the CBA:
http://imagebin.org/151589This suggests that for mining cash you may be better off investing in the Perth market.In conclusion, I would like to say; mining real estate speculation isn’t a bad strategy, but it should be done earlier in the cycle and with measured risk. There are other investment opportunities out there that could suit your portfolio better. Try not to follow the heard, and you can’t predict the future but you can use history as a good example of possible scenarios.
I would be glad to talk to you more about any questions, send me a message.
The banks don't do any classing, that is up to the valuer. In terms of bank application, it is up to you to fill it in as truthfully as you can. In grey areas, you should talk to your broker. On the valuation side, they should take the sleep outs into account as these will effect the price. What you need to know is the impact these sleep outs will have on price (I don’t want to state the obvious but it means the price should be more then 2 bedder, but less then a 4 bedder with proper construction).
You need to look to comparable sales with sleep outs. This can be hard as RP Data doesn’t normally disclose this. But a good tool you can use is:http://www.nearmap.com.au This will allow you to see changes in roof, indicating an addition and then correlating the address to the sale price on RP Data.
There is no easy way, I hope this helps.
Hi Larry,
When purchasing property, banks lend on two pillars. The first is deposit and the second is servicing. The most favourable banks I have approach calculated that I have enough income to service about 450K worth of investment debt (taking into account rent). This is because I am income and equity poor being younger.
With that 450K I could do the equivalent of one of deals every 4 months. That is once I have enough savings to draw down on the cost of renovations.
Calculating that roughly it would mean that I could achieve a gross annual return on 450k of about 27%. Now there aren’t too many times that property prices will annual almost 30%p.a. With this extra income I can channel it into a passive property portfolio (banks don’t take into account capital gains as income).
Now that being said, I would advocate 100% for actively buying and holding. The downsides of my strategy include:
– You have to be constantly looking in the market.
– You have to be active managing the trades.
– Higher risk
– Time commitmentIf you earn a good full time income and looking to build substantial wealth in property, what you suggested would be perfect. That is exactly what I manage for a lot of my clients (albeit we buy for growth in completely different suburbs). Buying well for future growth, adding value and refinancing is the key to getting past that 3 property sticking point.
It is your full marginal tax rate as it is less then 12 months. but 50% of something is better then 100% of nothing.
Just updated figures according to my final P/L statement.
Andrew:
I'll post up the figures later this week, A basic breakdown is as follows:Kitchen: 3.5k
Bathroom : 1.75k + 1.75k
Repaint all inside (some outside): 2k
Floors: 3k
Electrical: 2k
Plumbing: 0.5k
Pool: 1k
Outside: 2k
Plaster: 1.5k
Other: 2KBiggest bang for buck:
1) New floors
2) paint
3) Remove out old fans and replace lights (had ducted Aircon)
4) New basic kitchen (I doubled its size for 4k – includes extending a wall 1mtr, cabinet maker made kitchen, new appliances and other bits)Kong:
The discounted off asking price was a factor of 4 things:
1) The property was over priced (some people often give these outlandish “discounts” they obtain as examples, but this property was over priced by about 15k-20K)
2) Asking the correct questions – find out the level of motivation of the vendor and what they want other then price.
3) Put in quite a few unsuccessful offers before this. Numbers game! But not too many as this is a good way to get a bad rep with agents.
4) Have contract clauses to protect you and offer as concessions when negotiating. Most people worry about the clauses other then the price.RenoTeam:
I had a budget at start with quotes from multiple trades beforehand. The trades are sent a purchase order prior to commencement. It is budgeted on a hierarchical basis (from most important jobs to optional jobs). The budget is adjusted along the way, and as you get closer to contingency you can start to choose the importance of work.Hi Tom,
One of our Buyer's Agents have done a few developments up north, one of which is in South Hedland. If you want to PM me, I can pass your details on to him.
He's always keen to help.
Kent
There is the option of buying in a rezoning area, land banking for a few years and developing yourself to hold. Renovation is another way to obtain depreciation benefits.
I find a few draw backs in new property include:
1) You're competing against FHOG and they are normally market ignorant, emotionally attached and willing to pay above true value.
2) Limited scope to add value.
3) Green fill areas are often further out of the city. Historically, the longest period of sustained high growth comes from demographic enhancement. A bad suburb turning yuppie (often close into the city – but not all suburbs are like this). Brand new suburbs have a similar effect when new infrastructure is being put in, but not as sustained. It’s often too late once the suburb is already developed to benefit from this growth.
4) GST, project marketer fee and developer profit margin factored into the price of brand new properties.My apologise, I don't think I made myself clear. If you still have the income to service the loan then there shouldn't be a problem. However, if you are looking to solely capitalise interest without an income (living off equity) then you won't be able to do this.
Under the new NCCP it is not be possible to capitalise interest.
Would they pay the agents fees?
My general advice to people is even if the area you purchased in is going to sub perform after all the transaction costs you are often better to keep. FYI:
Sale Price: $385,000
Legal’s Buy and Sell: ($3500)
Agent's Fee: ($10,000)
Marketing: ($1000)
Duties on $450k: ($16,000)
Loan Swap Costs: ($1000)After Costs: $353,500
Equity: $14,500 + 25,000 = $39,500This means that over about 7 years you would need and extra 2-3% capital gains to simply break even! However, since your company is willing to pay all you’re transaction costs selling may be a viable option.
This is opinion and not investment advice:The South West especially Bunbury is oversupplied with stock. It is a little different to Perth in the sense that it has large land subdivisions on the outer areas of Bunbury. Now even in peak time it’s about 5 to 10min drive to the Bunbury centre as opposed to Perth where all new green fill areas are 30 to 45min out of the city in peak time. Now for a person to drive an extra 5min as opposed to 45min into the city is not a "deterring factor" when buying a property in Bunbury. Therefore, you will always be competing with a vast amount of stock for a long period of time (until this supply drops – but think how much land there is to be developed).
Comparatively, with $450,000 you could buy and older property 10 to 15 min out of the Perth CBD in suburbs with limited supply. From my clients experience these properties have tended to appreciate faster then regional properties, with of course the downside that they aren't new and flash.
