Five essential ingredients to investment success that the banks won’t tell you!
When it comes to financing your investment properties, choosing the wrong loan structure, lender or product can have a serious impact on your investment journey.
It’s important to consider that banks are more focused on their profits & products, than providing a personalized investment lending options tailored to your investment property goals.
Here are the top five ingredients for structuring a successful portfolio – which you won’t hear from the banks.
#1 Understand what impacts your borrowing capacity: Most lenders have specific policies that restrict or limit lending to those with lower incomes or those seeking to invest in properties in certain postcodes. Conditions will differ between lenders.
CBA, for example, announced this week that it will now cap rental yields at 8% for mining towns when assessing loan applications. The property might yield much more in reality, but the bank plans to only use 8% in its calculations as part of its risk mitigation.
In addition to rental income, existing debt, LVR, whether you are buying alone or with someone else, your age (and how this affects the term of the loan), your dependents can also impact your borrowing capacity.
#2 Find the best interest rate. Banks care about profit margins for their shareholders, so will generally not offer you their very best rate upfront. Shop around to make sure you secure the best deal. This is where a mortgage broker can really save you time; they will find the best deal based on your specific needs.
Regardless of the rate you secure, ensure you will be able to comfortably meet your repayments if interest rates go up (base on up to 2% increase).
#3 Choose the right product. How do you know you are on the right product to achieve your wealth creation goals? It is important that you research the products available to determine which meet the requirements of your investment strategy.
A low interest rate is important but securing the lowest rate will likely mean forfeiting other features that may be important to your situation such as the ability to make extra repayments when you want to.
#4 Avoid cross securitisation: Cross securitisation involves combining all of your properties in a single structure with one lender, and using the combined collateral to fund further investments. This structure benefits the lender by providing it with greater security should you fall into financial hardship or should you try to manipulate your portfolio either by purchase or sale. For the investor however having all properties tied up in a single structure can be a major disadvantage by reducing borrowing capacity and the ability to find better deals with other providers.
Avoid cross securitisation by separating your properties into standalone structures. Implementing a standalone structure for each property means that if one property increases in value it won’t be held down by another that may have decreased in value. You will still be in a position to build your portfolio by using a line of credit against the property which has generated equity.
#5 Diversify your lenders to secure the best deals – but be aware of fees. Further to #4, standalone loan structures give you the flexibility to take out loans with different lenders to secure the best deals available in the current marketplace. This is a great strategy on paper, but for big portfolios with substantial debt this usually results in more than one set of fees and higher interest rates overall. Compare the fees and rates of standalone structures within one lender with the rates and fees that would be payable across multiple lenders to find the most cost effective option.
Finance brokers who are property investment focused act as you’re representative to ensure the right loan, structure and rate is secured not only for a single purchase but with your ongoing portfolio growth goals in mind.
National Spotlight Falls on WA Property Market
Over the last several months there has been growing activity by Eastern States investors in the Western Australia property market.
These investors are now beginning to understand that on a national basis, Western Australia now offers some of the best rental returns and potential capital growth rates in Australia.
The growing confidence in the Western Australian property market was underlined by new figures produced by Australian Property Monitors. These figures revealed that during the December 2012 quarter, the median house price in Perth jumped by 2.5% which was the highest capital growth rate of any capital city in Australia except for Darwin.
It is also significant that Perth house prices jumped at a much faster rate than the national increase of 1.9% during this three month period.
This surge in Perth house prices recorded by Australia Property Monitors mirrors the latest figures produced by the Real Estate Institute of Western Australia which showed that the median house price in Perth rose by 3.3% during the December 2012 quarter.
Overall, Perth is now attracting media headlines as one of the property hotspots in Australia and as a result the value of house prices are expected to return to record levels within months.
Investors however should pose the question why are Perth house prices now beginning to surge?
The answer is quite simple – the WA economy is a mining economy and the Perth property market is now benefiting from the impact of the massive investment in the resources sector.
This impact is very apparent in suburbs surrounding Perth airport where there is now a huge demand for rental accommodation from fly-in fly-out workers with the consequence that property values in these suburbs are now beginning to surge.
While the potential capital growth of the Perth real estate market is beginning to impress investors on a national level, it is still being dwarfed by major mining towns in the Pilbara region.
For example, the latest REIWA figures show that in Newman, the median price of a home during 2012 surged by a massive 22.3% to $840,000. This was nearly four times the annual growth for the entire Perth property market during the same period.
Therefore, investors who are focusing on Western Australia during the coming year should understand that the overall economy is being driven by the resources sector and the best way to harness the maximum benefits from the resources boom is to invest as close as possible to the centres of mining activity – namely the major mining towns in the Pilbara.
These major mining towns such as Newman and Port Hedland continue to deliver investors double digit rental returns as well as the potential for very strong capital growth moving forward.
Invest Outside the Box to get ahead in 2013
It’s a tradition every January for real estate experts to give their predictions on the outlook of the Australian property market and pick hot spots for the coming year.
2013 is shaping up to be a very interesting year globally with all indications pointing towards the Australia property market during 2013 mirroring similar trends which occurred during 2012.
Property prices in most capital cities are expected to remain relatively subdued with marginal increases in rental returns, with the exception of Perth which is expected to benefit directly from the on-flow of growth from the WA resources sector in the second half of 2013.
In contrast, the standout performers for 2013 are expected to be the resource towns.
With property markets in major mining towns during 2013 remaining buoyant and investors achieving rental returns in excess of 10% PA in most locations.
The fundamental drivers that have underpinned the property markets in mining towns throughout Australia still remain the same in 2013 as they did in 2012 – Strong international demand for Australian resources, high ore prices, limited housing stock and a rising demand for accommodation, all contributing to strong trends in the Pilbara region of WA.
For property investors who have traditionally focused on investing in major capital cities, I challenge you to think and invest outside the box for 2013, as this year will be a game changer for the Australian resource industry and those investing in towns that benefit directly from it.
In particular, property investors should understand that the factors supporting the housing dynamics including rental returns and capital values in mining towns are long term trends with extremely positive futures both for the country and these regions in general.
Considering trends over the past 10 years, the median price of a house in Port Hedland, for example, has increased on average by 18.2% each year, twice the annual rate for Perth at 9.8%.
Interestingly taking a 15 year perspective, the annual median price of a home in Port Hedland has risen on average by 13% PA making it a high returning ‘blue chip’ investment using any independent criteria. In Karratha, property investors have achieved on average an 11.4% increase in the median prices per annum over the last 15 years.
The constant hype about boom/bust trends in mining towns should be placed into and considered with this long term perspective.
For those investors looking for the next hot pick and fast movers of 2013, there are specific mining towns in which real estate is currently undervalued and primed for future growth.
During the coming year, I believe the mining towns of Newman in Western Australian and Moranbah as well as Gladstone Queensland will be star performers for investors.
These three mining towns are set to benefit from continued new investment during the coming year, which is expected to place further pressure on the local supply of housing leading to an upward pressure on rents and capital growth.
Diversity is the key to any well balanced portfolio and helps to ensure that the investor is protected through both up and down markets. If your strategy has been focussed on negative or capital city properties, make 2013 the year you invest “outside the box” and add the strength of an income generating property to your portfolio.
New Infrastructure Investment Signposts Continued Confidence in WA Mining Towns
Property buyers can get a good forward indicator of future trends in mining towns by looking at investment in key support infrastructure such as airports.
Airports are now the life blood for mining towns as they are used to transport people, equipment and supplies to these remote regional areas.
It was therefore very significant that Qantas has just announced a major multi million investment in its Perth terminal to cater for future demand resulting from the resources boom.
Qantas has invested heavily in regional WA, having expanded QantasLink and Qantas capacity over several years and is now operating more than 280 return flights with 75,000 seats to regional WA every week.
According to Qantas chief executive Alan Joyce, the airline recorded double digit growth annually over the last five years in WA and believes growth will continue at a rate of 10% for the foreseeable future due to the resources boom.
As a result of this growth, Qantas is enhancing facilities in Terminal 4, its dedicated terminal at Perth airport, and from February, Qantas will expand its operations into the adjacent Terminal 3.
Looking to long term trends, Mr Joyce supports the need for a third – and second parallel – runway at Perth to handle rising future air traffic demand flowing from the growth in the resource sector.
With major companies such as Qantas now investing for future growth flowing from the long term expansion of the resources sector, it only makes sense that property investors should take their lead by investing in housing which is also a major support service.
In late 2012, property investors were bombarded with negative news about the end of the mining boom based on a slump in iron ore prices.
However, this slump only proved to be a temporary phenomenon with the benchmark price of iron ore now above US$140 a tonne.
Strong commodity prices will see a rebound in investment in mining regions during 2013. This trend is already underway with Fortescue Metals announcing that it will recommence expansion of the Kings deposit at the Solomon mine hub after it was suspended late last year due to low iron ore prices.
This increasing investment comes at a time when exports of iron ore from the Pilbara are already at record levels. Some 25.999 million tonnes of iron ore was shipped from Port Hedland during last month – the highest monthly trade in its history.
Therefore, the outlook for the Pilbara real estate market in particular, looks very positive as we enter 2013 and property investors in the region can look forward to rising capital growth rates and returns based on continued new investment in the region and support services.