Pick your investment strategists carefully
Today’s property investor is faced with an increasing number of investment options delivered by “experts”, all promoting their strategies for success.
With so much on offer how does the modern day investor select this all important mentor to advise, motivate guide them to investment success?
Before engaging with any property investment strategist, investors should undertake their own due diligence to ensure they are taking advice from someone experienced in the market with a proven track record of success – not someone with a mandate to sell product.
A true mentor can offer unbiased, honest advice and develop a strategy in line with your financial capabilities, goals and appetite for risk. They will put you on the right path to achieving your goals.
Here are the TOP 4 questions to ask your strategist to separate the investment coach from the overzealous salesperson:
- Are they themselves a successful property investor?
Take advice from those who have already walked your desired path. Ask them how long they have been in the market, what their portfolio looks like and where they have had successes and failures.
- Do they own or are they investing in property in the areas you are discussing and what products have they invested in? Are they established houses, apartments, off-the-plan, development sites?
They should practice what they preach. If they are not taking their own advice, there is cause for concern.
- What is their current investment strategy and growth achieved?
Your strategist should have the ability and confidence to share their own investment strategy with you and the growth and cash flow they are achieving from their portfolio. This includes how they have structured and financed their investments, techniques for maximizing equity and cash flow, where they have bought and why and where professional support services are required. This is not undertaken with a view to replicating their own model for success – everyone’s financial situation is very different – but they must be able to demonstrate a depth of knowledge and experience across all facets of property investment – finance, investment and property markets.
- Ask to speak to a number of their long term clients who have successfully created wealth with their help
Many will have case studies and success stories to refer you to but it is also extremely valuable to speak direct to other investors who can tell you one to one what their experiences have been like. Positive client references are a reliable indication of the credibility and capabilities of your strategist.
Tom Price opens up to property investors
The mining town of Tom Price in WA’s Pilbara has seen house prices increase 19.3% per annum on average over the past decade while its median rent is now at $2,300 per week, according to REIWA, placing it as the highest of all the Pilbara towns.
The doubling of its population to 5,400 in just six years, as a result of the integral role it plays in Rio Tinto’s and FMG’s iron ore operations in the region, along limited housing supply has put immense pressure on its housing market.
But while its performance has been consistent with other regional towns in the Pilbara, it has not garnered the same level of attention.
With 92% of the town’s residential housing is owned by Rio Tinto and a lack of new development (until 2011, there had been no new no land releases in 40 years) investors have had fairly restricted access to this lucrative market.
However, recent land releases have now opened up opportunities. Given its large rental market (86% of the population rent their home), zero vacancy rate and Rio Tinto’s and FMG’s significant new and expanding projects nearby, investors are standing up and taking note.
Rio Tinto intends to expand its iron ore operations in the Pilbara, investing about US$20 billion in the next five years (requiring over 6,000 employees) to facilitate a planned ramp up of production to 360 million tonnes per annum (mtpa), an increase of more than 50% of its current capacity.
The expansion includes a major investment in infrastructure at Rio’s Nammuldi mine, 60km north-west of Tom Price, which will increase production capacity from eight to 23mtpa, creating almost 1,500 construction jobs and secure ongoing employment for more than 700 people.
Recent news further enhanced the town’s prospects as an ongoing hot spot with Rio receiving approval from the Environmental Approval Authority to further expand its Western Turner Syncline hub, just 20km from the town. Western Turner Syncline has just ramped up capacity to 15mpta but the execution of these recent plans would see it double capacity to 32mtpa. While these plans are still in their early stages, it suggests significant growth ahead for the company’s Pilbara operations.
The fact that Rio’s Pilbara operations are the lowest cost in the region’s iron ore industry, indicates the mining giant is well positioned to deliver on these additional expansion plans.
Located 70km north of Tom Price, the Solomon Hub is FMG’s next major project and the largest iron ore start-up in Australia. The Fire-tail and Kings deposits are the first stage of the project and are currently under construction. When complete, they will produce a total 60mtpa of ore each year.
The Solomon Hub is the lowest cost operation in FMG’s business and has significant expansion potential.
The expansion of Solomon and development of Western Hub, an FMG project just 20km from Tom price would see thousands of additional construction and operational workers brought to Tom Price.
As well as investment into industry, the town has also received a $20 billion civil infrastructure upgrade as part of the government’s Pilbara Cities initiative which has dramatically upgraded the town centre, and sporting and community facilities.
Pressure on housing is likely to continue as any further land releases and residential developments are unlikely to create an oversupply given the projected workforce growth and housing shortfall.
According to a report by Regional Development Australia, Tom Price had a dwelling shortfall of 259 homes in 2012 and will require a total of between 271 and 471 new homes by 2015. Only 37 residential lots were released in 2011 and further releases are yet to be announced.
Encouraging news for investors seeking to build and diversify their property portfolios, by identifying the next WA Hotspot.
Grow faster with Deposit Bonds
No Cash? Use deposit bonds and bank guarantees to buy property quicker
Deposit bonds and bank guarantees are useful financial tools that enable investors to secure property when a cash deposit is not readily available.
They can be particularly valuable and inexpensive strategies for investors wanting to rapidly expand their property portfolios, act quickly on opportunities, and/or maintain capital during a lengthy settlement period, such as an off the plan purchase.
Deposit bonds are offered by most lenders and underwritten by an insurance company and can be used for all or part of the deposit. To be accepted for a deposit bond, buyers who have not already been approved for finance, need to demonstrate financial capacity to settle at the agreed settlement date.
The bond acts as a guarantee to the seller that the full purchase will be paid on settlement. The only immediate cost to the purchaser is the deposit bond fee which is payable to the lender.
As guarantor, the insurance company will pay out the deposit to the vendor if the purchaser reneges on the contract and, in turn, recover the funds from the purchaser.
Deposit bonds can be issued, usually in very short timeframes, for varying settlement periods ranging from a few weeks to a few years (depending on the provider), for investors purchasing off the plan.
A bank guarantee is similar to a deposit bond but can be more costly and time consuming, and requires security. The amount of the guarantee is secured dollar for dollar against another asset such as a term deposit or equity in an existing property.
Investors should familiarize themselves with these tools and assess their suitability as alternatives to cash deposits. They offer flexibility and the capacity to move quickly which can mean the difference between securing or missing out on a potentially lucrative property investment opportunity, and reaching your financial goals faster.
Get positive about wealth creation
Last week the ATO released data from the 2010/11 tax year which showed that two thirds of Australian property investors claimed a total of $13.2 billion in losses on property during the period.
It has renewed debate over the government’s negative gearing policy which essentially rewards investors for losing money (while draining tax funds) by allowing them to claim a deduction on their interest payments and other costs associated with owning a loss-making property.
It is unlikely the government will abolish the tax benefits associated with negative gearing after the last attempt in 1985 which saw it quarantined for a period. This allegedly caused rents to surge (although there is evidence to the contrary) resulting in a swift reversal of the decision. Nonetheless, it has highlighted the need for property investors to ensure their wealth creation strategies are in fact creating wealth.
Some investors are drawn to negative gearing solely by the tax advantages, giving little consideration to the capital growth potential of the property. Regardless of the tax benefits, while an investor holds negative property, they are losing money, putting them at financial risk.
Other investors are prepared to absorb the losses, relying on speculative capital growth to achieve a return, which will only be realized at the point of sale. By comparison, positively geared property delivers a cash return to the investor immediately, providing a passive second income stream and the opportunity to fund their lifestyle and further investments.
It the meantime, negative property investors must dig into their own pockets to supplement the shortfall in rent thereby reducing their monthly cash flow and reducing their capacity to funnel earnings into other investments. And while interest rates are currently at their lowest level in half a century, any future rate rises can impact on an investor’s ability to make payments.
A common belief held by negative gearing enthusiasts is that positively geared property does not deliver good capital growth; the resources towns of the Pilbara and central Queensland have proved otherwise. Investors in these regions have been able to build sizeable portfolios in very short timeframes by taking advantage of the equity generated and extra income available to them to acquire more positive property. For some, their portfolios provide enough passive income to fund their lifestyle, allowing them to shift their focus way from work and onto family, travel and other pursuits.
A negatively geared portfolio does not offer this option. If a negative property rises in value during the holding period, any equity generated can be used as a line of credit, but it cannot be drawn as an income stream to fund living expenses.
Furthermore, negative gearing benefits higher income earners (which are on higher tax rates,) the greatest. Yet, oddly, the majority of negatively geared property investors are in the middle income tax bracket.
Investors considering negative gearing should proceed with caution. Assess your financial goals and investigate the strategies that are available to you.
Benefits of buying positive property off the plan
There is significant new development occurring in some of Australia’s positive property hotspots such as the Northwest and Central Queensland, offering investors a variety of opportunities to invest off the plan.
Many consider off the plan property to be a high risk investment but with thorough due diligence it can generate excellent returns with low cost entry.
One of the major draws of buying off the plan is that a deposit of around 10% will secure the property. Pre-approval on finance will be required but the balance is generally not be payable until settlement.
With construction completion often taking six to 12 months, there is an extended timeframe for settlement and investors can take advantage of this to improve their financial position and benefit from any capital growth. As the property is purchased based on a fixed price contract, any equity the property generates between the deposit payment and settlement is the investor’s capital gain.
New properties also command top rents and investor profits can be further increased by taking advantage of tax depreciation, which is maximized for new properties. They also have minimal maintenance costs.
In addition to conducting comprehensive market research, it is vital that investors conduct due diligence on the developer. The developer’s track record, design and quality of projects, and capacity to deliver on schedule should be analyzed before committing to buy.
This includes investigating factors that can significantly affect a property’s value and rental yield such as floor plans, fittings, finishing’s and appliances.
Workmanship and products should be of high quality with suitable warranties. Ensure the process for rectifying defects is clear and assess the options for the customization of floor plans and fittings if it will add value and attract quality tenants.
Investors should review the contract carefully and seek legal counsel if they need clarification on the term and conditions.
Off the plan purchasing typically offers a low cost entry into the property market and in some states investors can avoid paying full stamp duty, making it a desirable option for first time investors.
100 Billion Reasons to invest in Gladstone
With over $100 billion in infrastructure projects planned or under construction, the city of Gladstone in Queensland can be aptly described as a super infrastructure location for property investors.
Infrastructure investment has historically been a key driver in property values because it results in a rising demand for homes as well as higher living standards. For example, the massive new infrastructure investment in Gladstone is predicted to create a demand for an estimated 8,100 new dwellings by 2018.
Gladstone is now a key hub for the growing energy sector in Queensland and as a result is attracting massive overseas investment both in coal and LNG.
The Port of Gladstone is Queensland’s largest multi-commodity port and the fifth largest multi-commodity port in Australia. It is now the world’s fourth largest coal exporting terminal with coal making up 70% of the total exports from the port. To help cater for the increasing level of coal exports from Gladstone, approval was recently given for the $2.5bn Wiggins Island Coal Terminal Stage 1 project.
In addition to coal, Gladstone is also the centre of a rapidly expanding LNG industry. LNG emerged as a major industry in the city in 2010 with the approval of BG Groups’ $20bn Queensland Curtis LNG (‘QCLNG’) project on Curtis Island, across the harbour from Gladstone. A few months later in January 2011, Santos approved its $18.5bn Gladstone LNG (‘GLNG’) project also on Curtis Island.
This was followed with Origin approving the first stage of its $23bn Australia Pacific LNG (‘APLNG’) project in July 2011 with the second stage further approved a year later. It is estimated that the potential of Gladstone’s LNG industry is capital expenditure totalling $70 billion and thousands of new jobs.
For investors taking a long term perspective of the property market, it is important to understand why Gladstone is attracting such a large level of investment and why it will continue in the future.
International companies are now pouring billions of dollars of new investment in Gladstone because of the surging demand for energy in the world – a demand which will continue well into the future.
This trend has been underlined by the latest predictions by the International Energy Agency (IEA) in its 2012 World Energy Outlook Report.
The IEA predicts that global energy demand will grow by more than one-third over the period to 2035 with China, India and the Middle East accounting for 60% of this increase.
Over the coming two decades, there be ongoing challenges to meet this growing world- wide demand for energy and that is why key energy hubs such as Gladstone will continue to attract the large infrastructure dollars and projects.
For investors seeking property in an established location, offering mining town rental returns in a lower risk environment – Gladstone should be given serious consideration during the coming year.
House and land packages – a strong start to investing
Over the past few years house and land packages have become increasingly popular with investors as a way to enter the property market.
House and land packages offer a number of distinct advantages when compared to buying an established home.
Firstly, they tend to be competitively priced and offer a lower cost entry into the property market. In addition to this entry advantage, investors can avoid paying stamp duty in certain states. This can be a saving of thousands of dollars when compared with the potential stamp duty payable when buying an established home.
The purchase of a house and land package also benefits the investor by offering a wide range of configuration choices, ideal if they are targeting the corporate leasing sector. For example, investors can add additional ensuites to the plan of the home which will appeal to renters and significantly boost the rental returns of the property.
In a rising property market, there is also the opportunity to lock in construction and land prices by using a fixed price contract and end up with a property worth significantly more than what it was purchased for. During the period elapsed from the contract being signed to completion and handover of the property, any increase in the value is to the benefit of the buyer, not the seller. In rising markets it is not unusual to see properties settling with instant equity, which the investor can borrow against to assist in future purchases.
The main advantage of a house and land package is that the property is brand new and comes complete with builders warranty and low maintenance costs. Buying older properties can eat into any cash reserves available, as maintaining older homes can be quite expensive and they are less appealing to higher end corporate tenants. A new home also offers attractive tax depreciation benefits that can significantly boost the properties return come tax time.
House & Land packages can serve as the ideal first investment to the cash-flow positive investor offering; increased rental return, lower maintenance costs, depreciation and the potential to capitalise on rising markets whilst protected by fixed price contract.
Crawford Property Group is currently offering a number of House & Land packages in Positive Property Hotspots.