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Hi Shehan,
There is a mixed message to be given when the property is newish areas with a high rental return.First, it SOUNDS very attractive .. as in melton .. returns of 6-7% are actually possible.
But it falls short in a couple of necessary areas.
One of the main factors for keeping and holding a property is its placement in convenience.
In the good ol’ days the placement of convenience used to be close to the CBD as most of the business and jobs and commerce was in or close to the city or surrounds.
Nowadays that criteria has been extended towards any area with a decent shopping centre / district and a couple of good restaurants.
For instance Glen Waverley which all my compatriats tell me is overvalued .. has a sweet zone with both good restaurants of quality surrounding the shopping centre, easy parking and multiple options to choose from within either the shopping centre or surrounds.
It makes for a very attractive zone to enjoy and participate in.
Melton is a bit of a muchness, and always has been. It has areas of shopping that are ok but not great, it has Woodgrove for shopping which is ok but not great, and it has a main strip that always looks half dead towards dying .. with that deathly cheap look being todays fashion statement.
I remember going to Melton for one of my first real estate job interviews .. and it being the only time I wanted the guy to say .. sorry .. you arent for this job.
The returns are attractive for all the wrong reasons.
The neighbourhood of Melton is for the people who are prepared NOT to go to the city (its too long a distance) and not worry about working anything but local.
So even expanding the amount of people who live there (and are prepared to live there) its not going to change into a major tourist destination overnight (or even in the near future).
Your bank, and your interest and your returns will always be about going into an area where you can guarantee the return without risking proportionate or excessive risk, and having a capital gain within a period within your lifetime.
Melton falls short because of extended risk components based on tenancies, and lack of demand for property at a higher level or higher rate.
There are still areas across Melbourne within 50km of CBD that are value and in demand regularly so there are a lot better purchases to be had.
As a kid I used to pooh-pooh the dangerous aspect of some suburbs and the risk factors involved. Until that is, my father and I went to look at a couple of properties in Sunshine (this is 1990s Sunshine) that the tenant had been in dispute and had successfully burnt the property to a crisp.
You can think the risk is imaginary until you walk into a situation in Ballarat where the tenant wants to burn your property AND BLAME YOU because that means he gets to go back to a government backed property at no cost.
That happened .. thats real .. and you have to realise what is possible on a bad tenancy.
Always extend to where the value lies and dont limit yourself to just what you feel inherently comfortable with.
The longer term answer will be that the house sits upon a larger area of land and the land in time should increase around the base value of the house.
HOWEVER this may not either be the best way for you to invest nor your best return.
Units as such are a lot smaller, a lot less effort to maintain and still produce a good return.
If as you stated your budget is your main concern, then look towards maximizing your return so your earning income becomes the least concerning variable in the equation.
Sum it up, get what you can afford and which puts the least strain on your back pocket. It’s your first buy and at this stage you dont have the flexibility for risk or higher cost investing strategies.
Liam .. in one of my most vulnerable times .. and when I was most highly geared .. I nearly threw my hopes away …
Because of a newspaper headline.
It was 2006 .. and I was earning well .. and reaping my rewards .. and making my investment judgements. I remember it very well because in August 2006 a very well known broadsheet .. not mentioning any names but it is a lot thinner now .. released some doom and gloom statistics about how the market was oversaturated and there was a correction due any day now.
Now I turn with this headline to my father .. who has lived longer and seen a couple more markets than I have and is also a successful property investor ..
He says .. ignore it .. they come up with these headlines every couple of months.
I stuck to my guns .. highly geared .. and in that year to end .. spring season .. property marched up 33-38% in my area of investment.
You either listen to the headlines .. listen to the naysayers .. or get on with the doing, using your best judgement to value your cause.
I keep doing the latter .. even in markets where other people are running from them. I have invested in Florida .. Detroit .. Atlanta and now am starting my first projects in New York. Its taken time but the rewards have been worth it .. and with my experience I never doubted my actions again.
Even in this current climate in Australia (which I will rate as VERY average) there are still goodies coming up for sale .. and if you raise your hand at the right time .. you too can be there to invest.
Improve your judgement calls so you can turn around to any naysayers and just say .. WELL I WENT AND DID THAT RIGHT.
I did.
Assess your market.
How are things going in XXXTOWNXXX (insert burb name here)?
Are the properties flying off the shelf at your level of interest or are they hanging there for a couple of weeks?
You see .. this is where a top Property Manager (you know those guys that NEVER get respect for what they do .. even WHEN they do it right) who is worth his salt does his interference. He’ll tell you if the market can handle X dollars or if you are pushing for a harder to get amount. I appreciate it when these guys are to my face honest on rental markets .. it qualifies what I pay them.
At the top of the pyramid you’ll have what you push for .. above market rents .. or PREMIUM rents. As you might guess .. you must match what the market demands or better to get that. Premium rents are worth pushing for.
This is what everyone sticks the extra fancy washing machine or cooktop in to get .. the best bang for their buck .. and it comes out the other side … as a better rental price justifies that in the sale price .. hence all the recent ‘reno for profit’ craze.
But you want your dollar for rental to meet YOUR market conditions too.
The question always comes out to ‘how long can you hang out to meet the market conditions at a premium price’
At a low white collar worker level of @400 you should be ok within a month .. if you are pricing right.
If its vacancy that is your prime issue not price .. get a butt in there at whatever cost 3-6m .. you can always raise to market on them.Whether its sale or rental .. the worst thing is to hang out for the perfect price and miss the market as you do so.
One of the best lessons I learnt from stocks is .. work out what you’ll accept .. and your break price .. and dont panic either way on trying to find a ceiling or a trough .. just make sure your back pocket rules ok.
The same holds true with housing.
Settlement time is often a key factor in making a better judgement between two competing offers.
You should have kept times reasonable so you had cash in hand to work with.
30, 60, 90 days and thats it. You want the money that you get in the current market .. not the next.
And thats your current problem .. in a reasonably safe country where 70% of the time there isnt major monthly fluctuations ..
… well there is market action right now.
Always deal with your settlements so you are closer to cash (in other words get paid as soon as possible). Make sure you get your 10% deposit and dont fall for longer term negotiations either on settlement or deposit.
If he cant pay today .. there is a good chance he WONT pay tomorrow.
Heck … two years ago I invested in Detroit and walked away with a significant gain in a city where most people are swallowing their pride and walking away from their properties.
So you may ask .. with outrageous rates .. lousy infrastructure and a high crime rate .. where do you invest in a tough town?
Well for me .. it was still the same game .. its all about UNDERVALUED property.
You see .. there is lots of decaying stock .. and you might have guessed .. no-one wants that . . too much expense for no reward.
And lets be real about it .. the rates in Detroit are quite terrifying. Not to mention the expectations and inspectors .. Corrupt AS !
But like any city it has undervalued property. Recently Abandoned or undermanaged A1 stock sits there and starts to rot. If you catch it in the early stages .. you got your charmer to renovate.
So hold on .. how does this feed back to Australia circa 2015 ???
What if I told you we are at the START of the next boom in property for all the WRONG reasons?
You see .. the rules for property are simple .. people want it .. and they want it good .. and they want it in a nice position .. and they want it as flexible as possible.
And the property to take note of .. is good clean developing suburbs. Not the old run down 18th century veneers with shabby interiors waiting for a bulldozer to fall in love with it .. the ones where people have lived in the houses for 20+ years .. they were built on reasonable blocks .. and the area has decent facilities .. or the POTENTIAL for decent facilities.
You see .. i’ve been following property for a long time .. and when someone tells you that a suburb called Caroline Springs is a venture when its on the wrong side of town and close to some of the worst burbs in the city … is a good investment .. i listen with my half ear and learn to dismiss it quickly. And guess what .. totally right !
And when someone raises property prices with me c2002 with investing in Southbank being a consideration .. vs Dandenong .. I say .. yeah well .. i’m in the business of making money not waiting for expensive tenants and body corp to eat my lunch.
People come for the hard sell .. but they STAY for the lifestyle … and thats what you should be chasing in your property folio.
By the way .. coming back to my Detroit invest .. the returns PA were 44% when I purchased it .. the expense was reasonable (it DID cost me) .. and the margin of profit was threefold .. 400% on what I paid.
Look at the places where people WANT to go .. and they’ll still be good .. five to ten years down the track.
If you listen to the gossip you’ll hear declining market. If you walk with your ear to the ground and listen for what the market wants .. what the people are paying for .. DID YOU SEE THE BOX HILL INNER CITY SALES RECENTLY? then you’ll know where your dollars should be spent.
As long as there are sales .. its a market. Good or bad .. you just gotta pick wisely.
Watch for cranes on the horizon .. always a good measure for me.
I agree Corey that the $1200 figure proposed wont do much increase in financial pressure. But as with most govt taxation schemes .. the first time its handed out its nice and small .. and when things get bad .. oh .. lets raise that tax …..
And to the idea of the costs being absorbed into a rental increase .. just remember regardless of the perception .. its still a market out there for rental .. you can only plough the tenant so much before other cities / areas end up looking more attractive. And to boost rental in a city where its not easy at the moment to keep both business and residential clients would be tantamount to economic suicide.
Its interesting to see this happening in South Australia.
When I worked as a Sales Representative in Melbourne, the interesting thing was seeing the number of people who were basically seeking the value of their place PLUS THE STAMP DUTY AMOUNT as the price they would be trying to settle for.
So in Victoria at least .. the minimal increment of anything up to 5.5% leads to at least a 4% movement in house prices (because vendors usually end up settling for a little less)
So what happens when you remove this regular increment even though its painful?
Thats the overall question .. and I think it would be interesting to see whether it has any real effect on that minimal visible increment that exists BECAUSE of the stamp duty.
And does a straight across the board tax really equal the same thing? I would think it would be more of a longer term direct taxation burden and actually LESS incentive for the investor .. and that would NOT be a good thing for South Australia.
The other thing about reaching out to achieve ever higher levels of borrowing is it NEGATES the key factors that keep the value of the property market. Longer term trades .. higher degrees of land holding and a realistic pricing versus comparatives. You’ll have people releasing property due to the inability to afford the land taxes rather than holding for extended periods.
But who knows? A market adjusts to volatile conditions on a regular basis. If we were still dealing with the 1950s Victorian regulations with housing, no-one would be making money on property and nobody would be selling it. Having had details of it relayed to me by my father its a wonder ANYONE was investing.
Note: if you want to see how bad it was, go to St Kilda (vic) and look for the older style apartments that are unchanged. You’ll find a sudden burst in Apartment Building in the early 60s as the laws changed and people could make money on the places. You’ll also find that this was the chief reason for the stagnation in the area as the existing property conditions of the 1950s turned reasonable properties into carved up slums to maximise returns and make the properties viable.
Most of it happened about 15-20 years ago. There was also the great ‘push’ towards Newport as a possible new close to city hub, but there still remains the two defeating factors for the area.
Firstly, the attraction of the area is really Williamstown more than either Yarraville or Newport. Both Newport and Yarraville are banked up with heavy transit roads and have large pieces of highway running through them. This is not an issue on non-work days but you get to 4pm on a normal work day .. you can still spend anything up to an hour in traffic just crossing over from the city.
However I will say there has been a lot of revamping of the industrial zones .. a lot have been compiled into ‘estates’ however the placement of these estates is usually below par. Yes .. I’m thinking of the area near McIvor reserve .. which literally banks out onto the freeway .. but there are others.
Yarraville is a changing suburb and the ‘good’ places with maybe a little backyard have largely been worked up to modern standards by renovators who have been doing things in the last ten years. That of course doesnt mean that there arent still good deals out there to be had, they are just scarcer on the ground.
It remains attractive for ‘early workers’ who dont need normal hours to be caught in traffic and people who need to be close to the city for various reasons. Its not the best of a renting area from my overall perspective having bought into it twice. One of the few areas I had extended ‘gaps’ in my rental period. Please note this was 2004 and things may have changed.
The value for buying and renovating lies in being able to make a reasonably valid improvement on existing capital for the project you take on. If you think you can find such a project in Yarraville and the figures stack up, like any project .. do your due dilligence on the overall area and what you should expect. That remains your key to getting this area right. And this remains one of the areas where the due dilligence is incredibly important to accurrate accrual.
Historically the bounce back from a long period of little growth or no growth has been a rapid spiral back up of inflationary pressure. Unless historical bookmarks of previous events cant be relied on .. it looks very much like something similar is about to happen soon. This is why the 1972 inflation is so important .. its very similar conditions to what we have now and it was an enormous rise in inflation over the period 1972-1975.
This comes from a general lack of reliance on the state of the existing currency by the larger population.
And yes .. I find a downturn to extremely low rates very worring as it means that a lot of people who CAN afford to borrow in the current economic conditions end up gearing themselves heavily again. And this would lead to a repeat of similar circumstances to what happened in the US, where even the most minor movements render the majority of the borrowers on variable loans extremely vulnerable in the near term after such an event.
In other words .. I would love to say that a burst of inflation is going to happen for all the right reasons. But I think its most likely to happen for all the WRONG reasons.
Ok this is an easy one.
You have reached your ceiling because your existing folio is totally dependant on growth and better rents before it takes off into a situation where your debts are outweighed by your potential to support them.
Thats cool .. thats how longer term property deals hold together. Presumptively on the basis that the markets have to change .. and hopefully for the properties concerned .. thats up. And the overall market benefits because a property that is not on the market limits the supply available to the existing market .. hence driving the scarcity up for properties in the area.
But for you it means a wait.
And do you know something? I have a life to live .. I HATE WAITING.
Whether its in the queues at McDonalds or for stamps at the post office .. i have no time for waiting.And my folio doesnt either. And your folio shouldnt either.
There is no fun in waiting .. your current situation locks you in until your price/rental ratios double. And usually for most people thats between 8 to 12 years depending on when you got into the property cycle.
This is one of the reasons that value adding deals make such a difference to the deal. You buy when either price or rents are under market and improve the capital value or rental potential. This of course changes the ratio of expendable funds too and lo and behold ! The banks will treat you like a man with spare cash to invest again !
A property portfolio should be regularly assessed and re-assessed. I have had deals that were even positively geared but left little upside and the serious possibility of a downturn in rents. At that point I cut my losses .. and moved on.
You see .. if you treat property like a gamble .. then .. like a horse race .. you back either a sure winner which may not pay a hefty return (and still may not come in), or a mid range value which possibly has the goods on paper at longer odds. Only one horse will win the race .. (and in this case provide the better returns). But from the sidelines .. can you guess with 100% certainty which that will be?
From your folio .. you’ve started pushing ahead with cap gains over and above what you laid out. At this stage it would be just enough to cover the stamp duty you spent on purchasing the place .. plus a couple of thousand.
You are running a relatively conservative portfolio .. and as such .. the returns are at a level where they may JUST cover the loans or require input from you to service them. Banks like to see a little flexibility in the deal when they lend .. and if they dont see it .. they’ll jam up until they see enough flex to bank another deal or two.
That doesnt mean banks are your only source to finance a deal. Try vendor finance if you see one you can manage .. as the vendor plays bank on the deal .. hence the possibility of a little more flexibility. Outside of that there are non-conforming lenders who may like to value your existing portfolio differently.
The framework for your investment strategy should be considered dynamic and fluctuational AT ALL TIMES.
For Steve to say the way he worked things, they dont work like that anymore is fine.
Because no matter what ‘framework’ of litigation and banking practise you come across to start with .. it will be moderately different as your investment matures. However .. moderate changes add up over time .. leading to a significant change over a period of years. As an investor or speculator in real estate you MUST keep yourself informed as to what will either benefit or harm your investment in the short to medium term. It is part of your overall wealth strategy and not keeping informed can leave you with either expensive taxation on sale or per annum .. or even worse .. a loss of value on your investment.
And the market? You will head into a different market than Steve .. and a different market than Bob, Frank, and Peter. You will have to assess what the demands are in that market .. where the market sits on the investment clock .. what areas have the possibility of adding realistic and significant value.
As Steve notes in one of his books (OMG yes i did actually read at least 3 of them), he not only headed to Wendouree once .. he headed back again when the market condions were right. Because he understood the market .. he had experience in the market demands .. and he knew where the value lay.
So the answer for the 2015 markets is .. try to calculate what lies ahead in the market you have chosen .. for the next 5 years. If you can percieve value or an attractive market sector .. then go for it .. jump the boat .. take the risk .. talk to your lenders .. harasss your local agents .. and get to where you want to.
Because the first step will be yours to achieve .. and you will never regret it.
I totally agree with the understanding of lender rate not being the chief concern.
In my early days (this is how to date yourself guys .. you use phrases like .. IN MY DAY) I would be ok with taking on any lender at any rate as long as it was cheap and the broker was ‘honest’ (go on .. laugh now). Having had one particular loan company that was based largely online to save money and no real infrastructure .. it was VERY difficult to meet payments by the due date allowing for the fact that the payment systems they used took 4 days to process (this was NEVER mentioned in any conversation I had with the institution). So basically I was always getting a late fee even though I would be submitting payment a day or two in advance.
It was an excellent recipe for ending up with mortgage troubles and paying a heap more than you need to.
The other thing I found out over time .. that the LIABILITY you are exposed to by non-banking institutions is a hell of a lot greater than banks. If the situation is that the loan provider falls into receivership or sells off its folio to another lender .. the conditions on your loan may change faster than you really wish them too, or even worse .. you may be required to refund the loan AT THE FULL AMOUNT to the receiver or folio purchaser .. depending on the conditions of the transfer or redemption.
So my usual schedule over the years has been to get a loan with a reasonably secure non-bank lender .. wait a year or two then approach a bank and see if I can draft the loan across to them. By then I usually have either increased equity or better rents so the answer is usually YES straight up.
After the PYRAMID collapse (and Tricontinental and State Bank) the rules were rewritten slightly on the requirements for stability in the banking industry. This means that a bank in Australia usually has a bank guarantee (for whatever thats worth) on your loan and the arrangement. Thats the one key component that’s missing in non-bank lender transactions .. and the value of that really cannot be underestimated.
I can only expect the situation with non-bank lenders to get more strict over the next couple of years. There is a growing feeling in the lending industry that residuals (read RENT RELIANCE) which used to be capped at 60% are too much of a reliance for borrowing and not enough of a consideration vs income. However as someone who at one stage was TOTALLY reliant on my residual incomes (cos i got enough) and didnt actually NEED a job .. it really is a pain in the gluteus maximus for attracting lenders.
The issue has been that when things get tight for most people and the banks WONT lend .. well .. thats really the time you want to borrow .. because of the inherant value in being able to. So as I have stated many a time on here .. the appropriate mix when approaching a bank .. is to have a source of income .. and the possiblity of a residual as a balance .. rather than a pivot.
The other thing I have stated .. is to reduce your loans no matter what the market .. by a graduation of about 2.5-3%. In the short term it looks as if you are paying the loans down (which they like to see) and it also places you as a good credit concern.
And in a tougher market .. there is a great price to be placed on being a good credit concern.
OK .. sounds like a hardworker with a self-made ultraconservative scenario.
Lets delve into why anyone wouldnt approach leverage.
Lending from the banks is only either warranted or necessary when you cant make the difference by yourself or you want to gear to a level which would provide you with a larger holding or rental income from more property.
The rank conservative will NEVER borrow and would rather have his hard-earned dollar paid for by his own hard work.
Thats OK. That just takes time. And depending on how hard you work depends on how much time it will take.
And it can take a long time.
As covered by several other threads .. a trust is a specific category of investment and should be treated as such.
To have the level of property management concern that needs you to be looking over your shoulder on the property on a regular basis suggests you dont have a great deal of trust in your property manager. Treat your third-party access to your property with the same degree of caution and trust as you would any family member. If you cant trust them with looking after your property .. dont employ them to look after it!
That would be the only reason to have a property so close you need to keep an eye on it. Simple lack of trust.
The correct approach would be to have a level of borrowing that remains comfortable vs asset value .. a property manager you can trust implicitly and keep the home free of liens because .. heck .. you like it that way.
Property investment is still all about living within your comfort levels for investment. If you feel that you dont want to borrow .. DONT. But then you may find that you will just have to earn better to get any real long term value out of it.
Also you might want to go back and look at the possible tax deductible advantages with owning a property at a reasonable amount of leverage. There are reasons why people do this .. and they do make a hell of a difference in their long term wealth plan.
Explore your options and your timeframe. A person at 45 has a totally different set of concerns to a person at 24 investing. Work to learn a market you are prepared to invest in. Learn your costs structure for entry .. and your costs for sale.
It really is like any other market .. you choose your level of risk and outlay and profit and outcome.
But work with something you will feel satisfied with .. regardless of the structure.
Liz I would suggest a wider understanding of commercial property before you head into it.
The rules aren’t residential rules .. and my overall suggestion is to own multiples to offset vacancies in a single investment.
The lending criteria is different .. all purchases include GST, the overheads are usually picked up by the tenant .. and the period of vacancy between usage is usually significantly more extended.
My suggestion is where residential you look for a minimum return of about 5% (you know you’ll usually get slightly less than this unless the suburb is unwanted) you should be aiming for a minimum 7-8% return on commercial .. balancing out risk factors and extended vacancy with a larger income.
Again .. same as residential .. the aim is to keep the commercial tenant happy and there as long as possible to achieve both remuneration .. regular usage maintainence .. and capital growth all in the one hit. What is different .. is where you allocate 2.5%-3% (build up to at least two months if you can) safety margin on a residential .. you should allocate a 5% (allow for 4 months) safety margin on a commercial property – it is THAT much more risky.
Along the same note .. when the market is down on commercial .. as it is at the moment .. the best buys will hit the market and its the right time to take advantage of them.
Diversify your risk .. extend your capability and knowledge to an area you understand and eventually OWN .. and you’ll do just fine.
The overall perspective for commercial is because its more risky .. its an area that does best for people who already have a reasonable residential portfolio to fall back on and offset against vacancies. However .. for the budding entrepreneur who knows his market thoroughly .. it can be a fast growth area to wealth.
KNOW AND UNDERSTAND YOUR MARKET IN COMMERCIAL AND ITS EFFECTIVE COMPETITION IN THE SURROUNDING AREA.
unlike residential .. if the rents are too high or unattractive compared to street activity … people will walk to where the biz takes place. Its really that simple. Know when you are competitive on what you are offering .. and when you are not.
Good luck.
Jenman system pretends to take out the hard yards .. but it doesnt.
It requires a minimum quota or thats it.
Now if you are an established agent or an agent with a reasonable level of contacts to start with it can provide a reasonable degree of remuneration.
If you are a starter agent with none of the skills and no real means to acquire them .. 3 months or less .. simple.
There are other reasons I would discount the Jenman system .. but there are agencies who swear by it too .. two differing opinions.
Do your homework .. and find out what works for you. He does sell a big fat book to keep you reading .. if you need to research.
Is an apartment a good investment and why?
Well .. an apartment has reduced costs on the maintainence front .. due to the fact .. you dont have a garden or surrounds to deal with. It doesnt have the land component for real long term extended growth .. but land growth is not always a given on an investment.
What will work for an apartment investment is an apartment with relatively low ongoing maintainence .. minimal extended features such as pool or shared garden or gymnasium add to all the extra maintainence costs.
Also relatively affordable rates and water bills (depending on state). Rates can get out of hand when the community is sparse or decreasing as the council raises rates to cover costs with a smaller population.
It must also provide a niche market in the area and that must be close to matching demand. An apartment is in the lower formats for liveability and purchase, so there will usually be other choices in the market to take advantage of in poorer times.
Make sure your apartment is in a position where its distances to conveniences are attractive .. and it will be attractive to most renters in the area. Dont sit back and assume that just because its BEEN attractive .. that it will remain attractive in the next decade or so. Apartments .. being the low end .. are the most fussy category for fashion and utility.
The one great thing about apartments is actually their overall .. low footprint. You arent renting out much space .. to get back a decent return. And because land tax is shared amongst the block .. your taxable land component is also minimal.
Apartments have always been a good starting block .. and you must recognise them as such.
Just keep all the above in mind.
Having tried the ‘friends’ arrangement before with a loan transaction .. I’m always of the mind to keep friends (and relatives) and monetary situations separate unless absolutely necessary.
I would swing with Terry’s suggestion of getting a ‘family’ loan of the remainder rather than allowing the banks to take a mortgage over her property on your behalf.
Long term .. its much more sociable.
The proportionate level of risk element placed on your family is really un-necessary, and the banks get too much security for what they will be lending you.
As I say about my earnings .. I only let the taxation commissioner in on precisely what he needs to know and no more. In other words if its down on paper and I’m stating it .. thats all he needs to be concerned about.
Same with banks. If you give them a bite of something .. they’ll want the whole cake in the long run.
And all you have to do is default a couple of times on a repayment.Its the same reason why if you have clear title on a property previously held by a bank, mortgage paid off .. go in and ask them for your title. In a defaulting situation later on .. they will sell ALL TITLES HELD to redeem their monies. That includes any that may have been actually cleared.
Minimise the level of exposure to the banks .. and minimise the level of attainable risk.
Having done all the investigation of the FNQ / Port Douglas / Cairns area
.. the answer comes back …
… and its not pleasant.
Cairns .. Port Douglas .. Palm Cove
.. are weighted down with large body corp charges
.. are weighted down with expensive rates proportionate to the property value.
.. are in a zone which suffers from frequent damage from both flooding and hurricanes. (hence the high insurance premiums)
.. are allocated ‘holiday zoning’ priveleges for a large amount of property in the area .. restricting the tenancy supply.A current example in Cairns sums it up nicely. The property is permanently tenanted at $250pw (13k p.a.) The combination of rates and body corp EXCLUDING contents insurance (bodycorp has a structural insurance for the whole premises) comes to roughly 10k.
So for this particular property .. you NEED a tenancy just to cover the bills, not including any loan payments .. or any work and repairs due or needed on the apartment.
If you are treating a property as an investment .. you need to be able to see demand for the property in years to come .. and not have it leaking money while you wait for that demand to eventuate.
There are properties in the Port Douglas area which stand up as good investments .. the area has been badly depreciated and there are some genuine bargains available at the moment which will provide a good investment long term. However .. most of the units are sitting there waiting to be sold .. based on the promises of developers who offered a part time holiday pad with an ongoing investment strategy that is never going to eventuate barring inflationary movements.
Discretionary Trusts were used since the good old days to prevent the king or government .. who would try to get his hands on all your family assets if he could .. (and a lot of the time he did) from being able to attack the individual’s wealth.
They serve a larger purpose of making sure that the wealth vehicle is separate from the individual.
However because its seperate .. it has none of the tax advantages allocated to individual taxpayers for purchasing property. On the same note .. it may have a different tax level and deductions .. that may also be beneficial.
Most of the time .. a discretionary trust is a wealth vehicle for someone who already has a solid capital foundation. They have an ongoing expense to run and as mentioned above .. not as much of the tax benefits. So they are for solidifying wealth rather than capitalising on it.
That doesnt mean they dont have their place.
When Richard Pratt’s escort mistress went chasing him for a substantial amount of money in the Sydney Courts .. it was revealed that he only had about $10 million in direct ownership. This was for a man that was valued at a couple of billion when he died.
My advice to you would be to capitalise on the individual tax benefits and deductions until you reach a reasonable asset base (if you already have this .. ignore the above) and then take full advantage of this to extend to one or more discretionary trusts.
A good accountant with property investment experience should also be able to give you the appropriate advice.
