How much do you need to be earning in order to contemplate investing in property?
We would like to clear this misconception to begin with, of being enabled to invest only if earning big incomes. You don’t have to be wealthy to invest in property, you don’t have to earn a 100 thousand or 150, 200 thousand dollars per annum to start contemplating investing in property however in the juxtapose one has to invest in order to become wealthy, with proper planning and time of course.
In Australia a major share of property investors earn around 35, 40, 50 and 60 thousand dollars a year. Careful and conservatively drawn property investment plan will most likely work just as well with an average earning investor as it will with an investor who is on a higher income.
The 2 vital factors, rental income and the appropriate use of negative gearing to reduce tax, when put together will result in the investment property paying for itself to a large degree reducing the out of pocket expenses of the investors.It is quite unusual for an investor to buy an investment property outright given the nature of this investment, therefore, a properly structured investment property loan will allow an average income earner, to invest long term in property and reap the rewards of compounding given that they have some equity in their current principle place of residence to draw from or a sum saved for the initial deposit which is usually around the 10% of the purchase price or if they can borrow or generate equity from somewhere else.
So “No” you don’t have to be wealthy or earning big incomes in order to start contemplating investing in property and “Yes” over 90% of all millionaires worldwide have achieved their success through investing in real estate.
We can help you in contemplating investing by taking into consideration of your individual circumstances.
What are the initial and ongoing costs involved? In case I don’t have a big amount saved for the deposit and spare cash to support the investment, can I still invest?
Initial costs will consist of the deposit at time of exchanging the contracts of the property which amounts to usually 10% of the purchase price of the property, then stamp duty is payable on settlement which is approximately upto 6% of the purchase price of the property. There will be legal fees paid to your solicitor, loan establishment fees charged by your bank. Ongoing costs will consist of property management fee, loan repayments, insurance, residential rates, owner’s corporation and any other maintenance or repairing costs involved in running of that particular property investment.
Equity mate, over the period of time that you have owned your principle place of residence you may have paid off some of the loan and there is certainly a good chance that the value of your home has increased as well therefore you may have equity build up in your principle place of residence automatically or lets say naturally.
Banks and other financial institutions will allow you to use that equity built up in your principle place of residence.
Instead of coming upfront with large amounts of cash to cover the deposit, stamp duty, loan fees, insurance etc, you can use your equity by structuring it as a temporary deposit and the banks will also allow you to add all other expenses occurred onto your loan account.
Investment property loan as oppose to a mortgage on a principle place of residence works differently because the tenant and the taxman support most of the cost. Investor contributes after their contribution, gradually the contributions reduce, the property value increases naturally building up equity again.
A properly structured loan account with facilities like line of credit and tax deductions drawn in advance will allow an investor to be a step ahead and invest in peace knowing any unforeseen surprises are taken care of in advance.
So “Yes” you can invest even if you don’t have cash deposits saved up or don’t have that spare cash provided you have that equity as an alternative.
We can prepare personalised cash flow reports for investors, for them to analyze figures in terms of what the cost is? What is the income? How much is their contribution towards it? In the first year and the years to follow? What is the bottom line?
What about the tenants? How am I going to find them? What if there aren’t any? What if they damage my property?
Tenants contribute substantially towards facilitating a property investment. A good tenant arguably adds the most value to this investment, if the tenant is keeping the property well and paying the rent on time which usually is the case as there is the residential tenancies act and other relevant legislations governing the residential tenancy agreement between the landlord and the tenant, looking after the interest of them both.
Selection of an appropriate tenant must be based upon unbiased. Tenants should be selected purely on their merits and their compatibility with the subject property. Professionally run property management companies who have the expertise of rental property marketing along with a database of tenants can generate fairly good interest and therefore provide investors with options to choose from. In the current state of rental market where the inner city vacancy rate is approximately around the 1% mark compared to 3% when the market is believed to be in the balance, it is quite easy to find tenants. Selecting the right tenant is the key. We recommend specialised Property Management companies as our preferred rental property managers, they are experts in property management, and they specialize in that area, operate locally and are experienced in dealing with the local market.
As human beings we all need to live somewhere amongst other essentials of life, usually it’s not hard to find tenants. In case where one can’t find tenants to rent the property it starts increasing the out of pocket costs of the investor. Before acquiring investment properties the tenancy profile of the area should be analyzed carefully and the demographics should be studied diligently. We recommend to our clients to purchase properties in the best inner urban areas of Melbourne giving them an edge of selecting a property investment that will attract a strong and continuing demand of both, tenancy and sale, now and in the near future. To ensure that our investors are covered from the possible shortfall of not having tenants in the property, we have our philosophies and methodologies in regards to property investments to which we strongly adhere to. A perfect example of how we take care of all these potential shortfalls is by addressing them early and avoiding the paths where these problems may arise more often then others, e.g. renting a 4 bedroom home in Point Cook or Craigieburn will need a specific tenant, a family perhaps with a couple of kids and why wouldn’t they buy for themselves when the government is giving huge bonuses, boosts and grants for the first home buyers, that weakens the potential tenancy profile furthermore for that 4 bedroom home compared to say a 2 bedroom property in Richmond, South Yarra or Port Melbourne etc where the tenancy profile is more affluent, diverse and vast.
Moreover the residential property market doesn’t rely on investors only, home ownership accounts as the major share holder of the market therefore this solid underpinning of the market provides a safety net to residential property investors, again the owner occupier segment of the market whilst creating scarcity also creates a barrier to any market fluctuations as the home owners may choose not to sell if the market at a point is loosing strength.
Tenants from hell we’ve all heard about them haven’t we? Contrary to this belief, if you talk to a few property managers you’ll soon find out that in general most of their tenants are ok. Important factor to consider here again is the tenancy profile associated with that particular investment property again a 3 bedroom home let out to students in Bundoora or Cranbourne will be more likely to get damaged then a 2 bedroom property on St Kilda Road because of the nature of their tenancy profiles. Areas which are desirable and sought after will attract quality tenants. Also for protection there is landlord’s insurance which can be taken out to cover from any unforeseen events.
How can I use my property investment portfolio to fund my lifestyle in the future? I know my pension and or superannuation can take me only so far.
Like all the statistics stated to us over and over that a major portion of the population, even upto the figure of 93% will be facing poverty in their older ages. Old age and poverty NO. YES, living longer should be celebrated and independent. Any money worries should kept on the least nonetheless. You should be able to have a comfortable and relaxed retirement where you are able to eat what you want, wear what you want and go wherever you want, if there are any medical issues they are dealt with in the best fashion. Now superannuation and its contribution; if hypothetically we pick a figure of lets say $250K and suppose you and your partner together are spending $5OK per year from the time you retire at 65, by 70 its all gone, now what, there must be a regular income must be.
Still on numbers and let’s say if you and your partner are happy to keep within the means and an income of $50K again hypothetically is enough for a year, calculating that $50K as 5% return on investment per year, you would need $1Mil. YES, that is possible, that is only 2 or 3 investment properties of around $300K-$500K each in your non speculative property investment portfolio which is planned carefully, correctly and conservatively. Allow every investment property to return to you around $300-400 dollars per week as rent. It is as simple as that, if you are not within the means at $50K yearly and $100K is more comfortable which it is, duplicate the portfolio, simple, don’t confuse it with hi fi financial jargons such as units, hedge, shares, currency, foreign exchange, stocks, equities, oil, resources, infrastructure, export, trade, speculate, build, develop etc. Keep it simple, safe as houses, bricks and mortar leave it at that.
We encourage our clients and I dare say encourage starting a property investment portfolio as soon as possible in their working careers. Start with 1 property investment. The earlier they do it, the better of the will be, which is quite obvious and some people start late due to various circumstantial reasons, they are in their mid 40’s -50’s and it is still possible with proper investment planning and loan structuring, YES you can use your property investment portfolio to fund your lifestyle in the future without solely relying on superannuation, or the pension.
A carefully planned property investment portfolio will enable you to live longer comfortably and independently if inevitably it comes down to that. You can support your lifestyle through your investment portfolio in a relax mode where there is no fear of poverty or the next meal etc, As I’d mentioned earlier living longer should be celebrated.
Tax deductions !Negative gearing!! Please explain its relationship with my investment property.
Negative gearing!! Let’s keep it simple and relevant.
In some countries like Australia, New Zealand and Canada, here we refer to Australia; Deduction of negative gearing losses on a property investment against income from other sources (wage, rent, bonuses etc) for the purpose of reducing income tax is legal and allowed.
A property investor is allowed by the government to claim losses occurred while servicing a investment property as tax deductions.
Negative gearing in property investments works as a strategy where that it supports the investment and enables the investors to accumulate property investments through tax benefits.
The cash losses occurred in servicing the investment is supported by the tax system in a manner that it reduces your taxable income therefore encouraging investors to invest in the property market, to save for their futures and retirements which is a great initiative by the government. What about abolishing the capital gains tax, we will leave this topic for another day.
In residential property investment where you have borrowed to invest in it, if the returns are lower then your expenses occurred negative gearing occurs.
Cash expenses such as property management fee, loan repayments, insurance, residential rates, owner’s corporation and any other maintenance or repairing costs involved in running of that particular property investment along with the non cash expenses such as depreciation on the building and fixtures and fittings if exceed the rental income generated, that loss can be forwarded to the investors other source of income, for example Joe earns $90K per year and gets taxed in that bracket, he makes a loss of $15K per year in his investment property, therefore reducing the taxable income to $75K thus incurring tax savings through negative gearing to keep it simple and in perspective.
Expert advice on negative gearing and other taxation matters can be obtained from accountants and other tax practitioners.
Along with the strong owner occupier market, the property market gets the benefit of another strong underpinning from the negatively geared investors who support the tenancy market and it also reduces the pressure from the government to provide more public housing. Tax incentives offered by the government encourage individuals to invest in property therefore another strong force contributing and furthermore underpinning the property market in general.
Negative gearing can be looked as a tool available for your overall property investment planning; Utilization of it depends on each case.
We can prepare personalised cash flow reports for our clients to ascertain the returns & expenses in order to service a investment property and how their tax relates to it, what is their out of pocket costs every week etc.
When is a good time to invest in property? What is a property cycle? Explain the market forces dictating property markets?
Well “Now” is a good time to invest in property as per the caliber of the investment suggests. Whenever an investor is ready is perhaps a more appropriate answer. It’s when you have contemplated investing seriously when you are ready. Dynamic nature of property allows it to grow with evolution, as time passes by, the property values keep growing naturally, the idea must be to get in as early as possible in the market with the objective of holding it long term, Once you have entered in the market let it even out for a bit, then use the equity built in it as a wealth creation vehicle and duplicate the investment, keep duplicating the same strategy till you’ve achieved a comfortable level or lets say a healthy non speculative property investment portfolio. At the core of our property investment philosophies and methodologies lies the fact that we are non speculative when it come down to selecting and recommending investment properties.
A careful, conservative and correct property investment plan should be drawn upon and studied carefully. Upon ascertaining the affordability action must be taken and from there on the property investment planning should be followed regimentally by the property investor. Longer your term in the market, higher the returns will be and larger the compounding benefits will be.
History suggests that property values double up every 7-10 years in Australia, that’s its cycle; there is no need to time the cycle, get in as early as humanly possible by you and let it run its natural course.
Broad market indicators and local factors are the two main market forces dictating the property markets, general and specific together.
In broad market indicators lets refer to the SEPP principle which includes the
- Social Forces (Population size and its growth or decline that will affect demand and supply, age/sex structure of the population etc).
- Economic Forces (Employment rates in the area and Interest rates in the market effecting affordability, Commercial trends, etc),
- Political Forces (Government policies effecting the property, housing loans, first home owners grant, etc) and
- Physical Forces (Location, Character, Environmental conditions, etc), and
Local factors will be consisting of the following
- Similar properties for sale or sold in that market,
- Local demographics and its trends
- General supply of properties in that area,
- Specific supply of that particular property in that particular area,
- Annual change in prices, median house prices, median unit values.
- Per sqm rate of land and building as per its allowed use.
|
There is a range of things but relevant to the above synopsis is one of our property investment philosophies that we recommend to our client’s investment properties that will have a continuing strong demand of both tenancy and sale now, and in the near future. Where the market is mature and has strong fundamentals, where the desirability of occupying is equally strong between owner occupiers and tenants and also where the desirability of owning is equally strong between the owner occupiers and investors.
What if my property investment fails? What will be my loss? In my circumstances, may I lose money?
If you fail to plan you plan to fail. Without thorough property investment planning and a fine eyed research, the chances of investors exposing themselves to factors that are detrimental are higher.
At times some investors have expressed that their property investments have not performed well enough and when further investigation is carried out as to why not, it is revealed that in most cases very little research was done before entering into the investment, the objective of investing was not clear and again there was hardly any planning involved. They had purchased particular properties because someone else had, because they were in love with it, because they thought they could live in it therefore it will be attractive to the potential tenants, because the sales person told them that it was a “great investment” ” solid one this one”, because they thought that it was cheap and you couldn’t go wrong then, because it was in close proximity from where they lived and they could keep an eye on it, because a little birdie told them that a particular area is going to grow next and they better get in quick, there could be a range of others reasons unbeknown that may have motivated them to purchase that particular property investment at the time. Mainly lack of knowledge and planning accounts to the most of the debacles, particularly property investment knowledge to be more accurate and again investment to every different investor has its own meaning.
Property investment fails or let’s say does not perform well due to the facts that the loan was not structured correctly, high maintenance properties were purchased, maximum non –cash deductions were not claimed, overcapitalized at the start, bought in low capital growth areas, bought in areas where the rents were low and vacancy periods were high.
Supply and demand are the fundamental factors which act as catalysts in the property market fluctuations, there are other reasons as well but this is the vital factor, property values go up and down, depending on the supply and demand of that particular property e.g. a 3 bedroom + study home in one of the newer outer suburbs in the west, north or south east will have a huge supply of its kind, the adjoining new land sub-divisions will keep fuelling further supply. That’s good news if you are a first home buyer and looking for options but for an investor it is a disaster when compared to a 2 bedroom property in Richmond or South Yarra where the thought of a new land subdivision is vintage and the number of occupiers looking to belong to that address there is extremely high. Invest in the best inner urban areas which are most popular and have strongest demand, invest in properties which have high demand by most of the general population for example the average household of 1.65 persons per house in Melbourne fits well with 1 or 2 bedroom properties compared to a 3, 4 or 5 bedroom home where a specific tenant is needed and the supply of which is low. Shortage and undersupply of residential accommodation in Australia against a strong and high demand for it is one the chief reasons that Australian property markets held its ground and remained stable in the midst of this worldwide credit crisis, Sub $450K property in the inner urban areas of Melbourne like I would mention it again didn’t miss a beat. Demand and supply of the particular property investment, if read correctly, in a nutshell reduces a lot of speculation and while on speculation, at the core of our property investment philosophies lies the fact that we are non speculative when it comes down to selecting and recommending investment properties.
A poorly performing property investment may increase the out of pocket expenses of the investor, it may not gain much capital growth and therefore reducing the power of leverage to invest further, it may not have the capacity to gain high tax deductions and therefore failing to bring the taxable income down. Real term capital loss will only occur if you sell the property at a lower price then what you paid for it along with all the other expenses which were relevant to it at the time. This can happen if you keep redrawing the equity built in the investment property repeatedly for new pair shoes, new television sets, overseas holiday trips etc, this can also happen if the market takes a dip as soon as you’ve purchased the investment and there surfaces a non negotiable circumstance of yours that you have to dispose the investment urgently. The key is to do your property investment planning carefully, correctly and conservatively, take in consideration of all your individual financial circumstances beforehand, afterwards be patience, disciplined and focused. It’s a long term investment strategy and the good news is that the property market is not as fragile as some other markets driven which are solely driven by speculations therefore minimizing the risk of losses by investing in it for the long term.
Aim to keep it commercial, How, when, why, what, where in terms of investing in property must be purely a commercial decision, just like any other business call, no emotions attached, let the facts and figures decide.
Our company has strict property investment selection criteria’s and property investment philosophies and methodologies to which we strongly adhere to. One of our philosophies in this regard is that our selected property investments will provide investors with not only returns but also with security and flexibility and when you come down to look at it carefully, security and flexibility are as important as returns, if there is a change in the economy or if your personal circumstances change for worse, that property investment should have that fundamental strength of equal and strong underlying demand by both investors and owner occupiers to purchase that property and it should have the have the ability to gain higher capital growths, for example a 2 bedroom property sub $500K bracket in St Kilda or Caulfield, over long term will never miss a beat, I don’t care if the economy travels north, south or sideways and that’s how important security and flexibility is along with the returns and that’s a factor failing most investments, concentrating on returns only, how high are they? Markets have sorted themselves out over the centuries as to what the risk reward ratios should be, in the pursuit of higher returns than normal is, where investments fail as well, for example why is that property investment returning 7 - 9% yield, where as the norm is between 4 – 5%, what is the secret of this high yield on the other side?, less security and flexibility. Its either a commercial property, a student accommodation or a serviced apartment property etc, where the yields are higher but the capital growth is less, smaller markets, higher vacancy periods, less desirability by the larger population therefore yields are higher to attract them that way. To purchase a strategically located good commercial property you have to part with approximately $2Mil and the banks will want to see approximately a 30% deposit, see even banks consider them high risk, low security and flexibility and therefore aren’t prepared to lend 100% like they would generally lend confidently on a 2 bedroom property in Hawthorn. We are not commenting against commercial property here, commercial property investment can also play its part in an investor’s property investment portfolio provided that investor has already accumulated a non speculative portfolio of 4 or 5 residential property investments in its portfolio as a base and if their commercial property investment(s) are vacant for longer periods the situation doesn’t become diabolic.
So avoiding speculation and unnecessary high risks with proper planning and careful property selection along with time of course will reduce the chances of loosing money. We for once don’t like the word loosing money in our company, neither for our clients nor for us. We are more in the liking towards steady growth, long term, non speculative, low risk, conservative, correct and careful.
What next? Where do I begin? How can you help us?
We can help you start; most people don’t achieve the state of financial freedom or financial security because they fail to start, they leave it too long, they fail to do something about it, they either think that it is not possible for them to be able to do so or they are smelling rats every time they are close to doing something, you have to start somewhere and that’s by far the most important thing, activity breeds results, actions have reactions. So if you are contemplating property investing, we can help you there with our assistance and guide you to your goals, if you are an active investor we can help you to consolidate your existing investment properties in a plan to add further value to the portfolio.
One of our business’s corporate goals is to be down to earth and that we are relationship centric, we would like to build and nurture long term relationships with our clients and that it should be an absolute pleasure in doing business with us, we welcome everyone to call us, we have established ourselves to build on quality, we are passionate about the well being of our clients and we endeavor to help them with the best of our ability.
