Hedland & Newman

When is the right time to buy your next investment property?

Recently released data from the ABS showed property investment activity to be at an all time high in April with investor finance commitments for the month rising by 2.3% (seasonally-adjusted) to a new record high. Interestingly new investment figures were up by 30% over the year! 

However, Post-budget, it seems a different trend is emerging with investor confidence in the market dwindling, according to initial findings by Digital Finance Analytics.

There’s now plenty of talk in the media of Australia’s property bubble and the prospect of a looming crash. Many investors are being scared off from investing in the current market and adopting the view that they should hold out to potentially bag themselves a bargain when the market hits its low.

Investors have been trying to perfectly time property market swings for decades and although highly lucrative if you get it right, its not always the most effective or efficient strategy to grow wealth through property investment! 

The right time to buy your next investment property should not be dependent on the movements of the broader marketplace

In my experience the best time to buy your next property is as soon as you’re financially able to do so! 

Waiting for your local market to bottom out on the assumption that you’ll secure the lowest price and the best deal, may end up costing you more than your realize in the long-term. Experienced investors understand that there are pockets of growth in many marketplaces around the country at any given time with rewards for those willing to find and secure a property in these locations.  

Economists have long been predicting the old age story of doom and gloom heralding a major crash in the Australian marketplace. If the historical performance of property in the country is anything to hedge our bets on then yes, downturns and upswings will come around once every 8-10 years in capital cities and shorter periods general in regional locations. Waiting for the national market to reach its bottom before investing is a very difficult thing to pinpoint. Chances are, that by the time you hear from the property economists and researchers that it’s reached its bottom, prices are already on the up and you’ve missed your narrow window of opportunity.

One of my key recommendations to investors is: ‘don’t follow the pack’. There is no need to be at the mercy of the broader market. With the right advice, research and property selection, you will always profit, even during a national or state downturn. 

Here are the five tips to determine whether you’re ready to invest again – regardless of the wider marketplace:

Step 1: Review your equity position. 

Assess the current net value of your assets? Work this out by having your property or properties valued and then deducting the balances of your loans from the current values. Say, for example, you find your current investment property has increased by $150,000. You may then able to approach your lender and refinance your loan to release part of the equity. 

Be mindful of a couple of things here. Your lender may conduct thier own valuation and given the conservative approach many lenders take to valuations, it may well come in below your original valuation. Your lender will also want to retain some equity, usually around 20%, so you may find that your original calculation of $150,000 equity has now reduced to say $100,000 based on the bank’s lower valuation and its need to retain some equity. If you want your equity to act as a 20% deposit, then your budget for your next investment property is $500,000. 

Alternatively, you may have a deposit ready from cash savings, or you might be able to use a mix of cash and equity.

 

Step 2: Talk to your mortgage broker 

Find out how much you can borrow. If you’re determined to use your cash/equity as deposit then that will set the amount your able to borrow. 

Often when growing a portfolio quickly investors don’t want to wait until they have 20% deposit in equity, opting to grow faster by placing only 10% down against the new purchase., if you’re happy to put down less deposit and pay Lenders Mortgage Insurance, you may be able to borrow more which will allow you to purchase a better quality property. Tips on how to maximise your borrowing capacity can be found here and here.

 

Step 3: Determine your loan serviceability limit

It’s critical that you only borrow what you can afford – you must make sure that you’ll be able to service the loan payments.

If you’re pursuing a strategy of negative gearing, this is particularly important. You will need to work out the maximum you can afford to be out of pocket each month. 

If you’re seeking a neutral or positively geared investment, you will be in a much more secure position. However, you still need to be confident that you’ll be able to service the loan should the rental market deteriorate or if interest rates rise – two factors that will negatively impact your cash flow. 

Step 4: Set your budget

By this stage you should have a clear understanding on how much deposit you have and the maximum price you’re able to pay for your next investment (your borrowing capacity). You should also know how much you’re prepared to pay towards the interest on the loan each month (assuming an interest-only mortgage) which will determine the rental yield you need your next investment to generate.

 

Step 5: Property search and selection

Based on your strategy (negatively or positively geared), you’ll now be able to begin your property search, which will ultimately determine whether there is a good investment out there that fits your budget and loan serviceability. 

I’ve written several blogs on how to indentify potential hotspots and how to undertake market assessment and property due diligence. 

Also keep an eye out for next week’s blog where I’ll be looking at some of the best locations around the country for high yields.

 

 

How to comfortably invest in the other side of the country

For many investors, the appeal of investing in property is that, unlike shares, it is something you can see and touch.

The reality is, the best property opportunities are unlikely to be in your back yard.  Savvy Investors should take a nationwide and diversified approach if they want to generate the best returns and mitigate risk. This often means holding property thousands of kilometres away from the family home, which can be a daunting concept. 

Here are some valuable tips to identify, secure and hold property around the country.

Search for growth 

Research. One of the best ways to find a property hotspot is to identify areas with strong forecast industry growth, which will be accompanied by infrastructure development and a growing workforce.  The area should have multiple projects underway or in the pipeline; the local economy should not rely on a single project or industry.

Rental vacancy and new residential development should be assessed as these will also impact demand for housing. Once you have a shortlist of potential investment locations, the next step is to identify suitable properties.

Property selection. Buying off the plan or house and land packages can be a good option for the long distance investor.  Brand new properties require minimum maintenance and are typically more attractive to corporate leasing clients, which may enable investors to lock in longer term corporate leases. 

Even if you’re buying an established property, it’s not always a good idea to view the property prior to purchase. An investment purchase should be based on research, area, numbers and return. Too often investors can get caught up emotionally in a property they will never live in. Personal preference over street-front, colour scheme and other finishes can sometimes cloud judgement.

However, visiting the town at least once will give you an understanding of the region, and its dynamics. Nothing beats having your feet on the ground to get a feel for a town.

Local expertise. Partner with a local on-the-ground expert in the region.  They can advise the properties types and locations that are most appealing to the rental market, the types of leasing clients in the area, and the rent you could expect to receive for certain properties.  

Utilise expert blogs, free reports and engage with other investors and experts on forums to assist with the decision-making process and to gauge opinion of the best real estate agents in an area.

Asset management

Even if you live close to your investment property, managing it yourself can be a time consuming and stressful process. If you live on the other side of the country, trying to self-manage to avoid agent fees all too often ends in disaster.  Unpaid rent and a poorly maintained property will soon void any savings you have made on agent fees.

Choosing the right property manager.  A good property manager will be experienced in area, possess a strong corporate leasing client base and will be able to advise you on how to maximise your rent.  They should adequately care for you property on your behalf, without the need for you make personal inspections. 

Communication. Your property manager should update you every 90 days regarding the status and condition of the property. Ideally, they should also regularly keep you up to date with media releases, projects and major events affecting the region & your property.

Investing with low or no deposit – Vendor financing

The second part of this blog aims to provide investors with an understanding of another low deposit option available to them – vendor financing.

A big issue for most investors when first starting out is access to bank finance. Even with a decent deposit it can be difficult to meet the banks’ criteria.  If you have a less-than-perfect credit history, are self-employed or new to the country, then you will find dealing with the banks even more challenging.

Many people are unfamiliar with vendor finance but it has in fact been used in Australia for over a century and while it is increasing in popularity, it still flies under the radar of most investors.

No bank finance needed

Put simply, vendor finance (also referred to as seller finance or owner finance) is when the seller of the property makes the financial arrangement direct with the buyer – no bank loan required! 

Vendor financiers provide a more personal, tailored service focusing on the buyer’s capability to make regular payments, rather than their capacity to demonstrate a savings history, assets etc.

It is a popular service offered by developers who want to increase their pool of prospective buyers by offering more flexible finance options.  Vendor financiers will often lend 90 to 100% of the purchase price (LMI will still be payable though if you borrow more than 80%) which makes properties offered under this scheme attractive low deposit options.

The way vendor finance works can be compared to a lease-to-own structure; you make your repayments to the seller and the property becomes legally yours when all payments have been made.  You can rent it out, renovate etc but the title to the property will remain in the seller’s name until you have paid off the property and met any other contractual obligations.

A bridging strategy to the banks

For this reason, vendor finance is not generally considered a long term option and is typically used as a bridging strategy. It allows investors to get their foot in the door, secure a property and then look to refinance with a bank (thereby paying off the vendor finance and securing the title to the property) in two to three years when they have established a payment history.

Good property selection means many investors will have generated decent equity in the property over those initial years putting them in a much better position with the banks.

Another point to remember with vendor financing is that it is usually provided at a higher interest rate to bank finance.  This is less of an issue in our current super low rate environment but remain an additional motive for refinancing.

Protection

Both the seller and the investor are protected against certain risks under a vendor finance arrangement. The vendor cannot sell the property or borrow against it without your knowledge, while the vendor reserves the right to take legal action and terminate the contract if you breach any of the contract conditions.

Low deposit options for first time investors – Part 1: Deposit bonds

For many would-be investors, saving for a deposit presents the biggest challenge on their property investment journey.

A 20% deposit is great – but it can take years to achieve.  In the meantime, attractive investment opportunities are missed and wealth creation is delayed.

However, there are options that enable you to secure a property with as little as a few hundred dollars. 

Deposit bonds, vendor financing and house and land packages are three low deposit options available to investors.  Each of these will be discussed in detail across a three part blog. 

Part 1 – Deposit bonds

A deposit bond acts as a substitute for a cash deposit. They can be issued for all or part of a deposit (which is usually around 10% of the purchase price) and provide a guarantee to the vendor that the cash will be provided by settlement.

Offered by most lenders, they are a useful, low cost strategy when a cash deposit isn’t readily available and are particularly helpful when buying properties with lengthy settlement periods, such as those purchased off-the-plan. 

A deposit bond has three major advantages for the investor:

  1. Low cost: The fee for a deposit bond is typically around 1.2% of the amount represented by the bond which can equate to as little as a few hundred dollars!  
  2. Quick: Deposit bonds can often be issued on the same day. 
  3. Sufficient cover until settlement: The lender will determine the time frame that the deposit bond remains active for but it is often six months or more – sufficient time to cover most settlement periods.  

These features mean investors have the ability to act quickly, beat other buyers and secure attractive opportunities with very little cash and within 24 hours. They also allow more time to source funds from savings or other investments.

Most vendors and agents will accept a deposit bond, but it is at the discretion of the vendor so investors are advised to check in advance.  You will also require approval if you intend to use them at auction.

To successfully apply for a deposit bond, you will still need to meet the bank’s lending criteria.  In short, this means the ability to demonstrate that you have the capacity to pay the deposit as part of the full purchase price, plus fees, as well as service any other existing financial commitments you may have at the settlement date.

Stay tuned for the second part of this blog which will look at another low deposit alternative many investors are unaware of – vendor financing.

Five tips to achieve financial freedom in less than five years

As a beginner investor the path to creating a large portfolio to fulfill your capital growth and cash flow objectives can feel long, overwhelming and arduous.

A decade ago property investors accepted that financial success was achieved through years of strategy refinement and portfolio development.  In today’s fast paced world, the modern investor wants quicker results and minimal effort. We are looking for options that will accelerate our wealth creation and help us reach financial freedom sooner.

In just five years I was able to create a large portfolio that gave me the freedom to stop working and budgeting week to week, while still allowing my portfolio to grow continually.

Five tips to fast-track your portfolio, and achieve financial freedom.
 
TIP 1: Appoint a mortgage broker who specializes in creating multiple property portfolios.
These brokers understand the mindset of the property investor over brokers who typically deal with home owners. They will help you develop your financing strategy, focus on leveraging your equity and guide you on how to maximize your borrowing capacity.

Early on in my investment journey I missed a number of fantastic buys, due to my financiers not sharing and understanding the growth vision I had for my portfolio. Aligning with a proactive and investment-minded finance broker ensures your goals are mirrored by a specialist who will tailor a lending plan to exactly suit your needs.

TIP2: Create instant equity. When getting started, be savvy and look for opportunities in the market that will deliver instant equity within six months of settlement. This is key to fast growth. Instant equity might come in the form of a house and land package, renovating a well-located but older unit, or adding extensions such as a granny flat.  Selecting a property that will deliver a minimum of $50,000 equity upon completion of the project will place you in good stead for your next investment purchase, generally within 12 months.

I had the opportunity to invest in a number of house & land packages in the northwest, which at the time were delivering outstanding equity benefits upon completion.  With as little as $50,000 deposit required, these new family homes were taking approximately six months to complete and delivered $150,000 equity upon completion, which was then used to purchase additional sites and apartments with no further money required.  House & land packages are one of the fastest ways for beginner investors to get ahead and build an equity base behind them for future purchases.

TIP 3: Short term pain before long term gain. This means making some short term lifestyle choices to maintain a positive position with lenders while you grow your portfolio to a self sustaining level.

Investors who have not yet purchased a PPOR should hold back and remain in the rental market until they have secured a minimum of three to four investment properties.
Remain in a stable job and avoid unnecessary debt and spending while your portfolio is in its initial growth phase.  Credit cards, large car and personal loans at this early stage will only prolong reaching your goal.

Lifestyle freedom and luxuries are the spoils of a successful property investor and should only be indulged once financial freedom and stability has been reached.

I chose to wait until I had 20 properties behind me before purchasing a PPOR and second vehicle.  This was the key to continuing to invest actively, as by this point the banks did not see these expenses as having a significant strain on my ability to service further investment debt. Had I chosen to purchase these items earlier on in my investment journey they would have had an immediate negative impact on my ability to further invest in property at a rapid rate.

TIP 4: Get real about risk. Every investment, in any asset class has an element of risk. The key is not to disregard risk but to obtain a level of comfort with the risk associated. Market timing, location and the property itself will all carry risks, but they can and must be calculated against the benefits. There is no return without risk, so arm yourself with the best information to become comfortable with the direction and portfolio goals you have set.  Talk to other investors, finance brokers, property strategists and real life success stories – people who have walked the path you wish to take and achieved their property investment goals. In my experience, successful investors are more than happy to share the strategy behind their success.
See http://www.crawfordrealty.com.au/investment-success#itemDeni

TIP 5: Appoint a mentor. Like any business, sporting event or expedition in life, goals are more often than not reached when a carefully constructed game plan has been set from the start. An experienced property investment mentor will guide and advise you on how to best position yourself to achieve your goals. This should be someone who has achieved significant results in property investing and can provide accurate guidance based on their personal investment journey.  They will adequately guide the growth of your portfolio and save you from a number of costly mistakes that are often made in the beginner stages.  Being comfortable and confident with your strategy is the only way to rapid and sustained portfolio growth.
See http://www.crawfordrealty.com.au/One_on_One_Strategy_Session/ 

3 tips on how to maximise your ROI with current interest rates

With the RBA’s recent reduction of the cash rate to 2.5%, one of the lowest seen in modern times, the current marketplace presents property investors with a golden opportunity to both grow their portfolio and increase existing returns.

Here are three tips for every day property investors on how they can maximise the current interest rate climate.

Maximise your existing ROI
 
Take immediate advantage of the current low rate environment to reduce your payments on existing property.

Securing a lower rate will increase ROI on existing positive cash flow property and could also be the decisive factor that could turn your negative or neutral investments positive.

The easiest way to address this is to assess your options with your current lender. Negotiating a better rate with your existing loan provider is not only more convenient, but also means you avoid the various costs incurred with a new lender such as application, settlement and valuation fees.  Ideally your starting point should be with a finance broker who understands your strategy and desired investment goals.  Securing a well negotiated interest rate now has the potential to pay valuable dividends for years to come.

Select property based on market factors

The very basis of positive property investing and ROI achieved is based on the gross return of your property versus the net holding costs to service the investment.  Naturally, a lower interest rate environment offers ideal conditions for investors to maximise cashflow returns.

In many positive property locations around Australia, investment homes returning over 9% PA are putting tens of thousands of dollars in their owners pockets. – http://www.crawfordrealty.com.au/property-for-sale

Regardless of where you invest, it is still important to ensure you lock in the best rate possible.  Do your research and consider using a broker. 

An experienced broker will assess your financial situation, understand your investment goals and do the shopping for you by comparing the rates on offer from their panel of lenders – generally all major banks and lenders in the region.

This will ensure you put yourself in the best position possible to maximise your investment properties’ cash flow.

Time to buy

The current market is creating excellent investment conditions.

Lower interest rates are having a positive impact on affordability which is now better than it has been for a number of years. 
Low rates look likely to continue for some time and most economists are forecasting steady growth across national property markets in the coming years thanks to the actions of the RBA. 

Overall housing markets are showing a promise of better times and are offering good rates of return for the level of risk they are presenting.  In fact, they are presenting diminishing levels of risk for the investor as rentals increase and the potential for negative growth abates – John Edwards founder of Residex Pty Ltd.

Keep in mind low rates won’t last forever.

Investors should take action to maximise both their buying position and investment strategy to plan for the future before rates begin to rise again.

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:

  1. 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.   
  2. 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.  
  3. 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.  
  4. 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.