InvestKit

As a Newsletter member you also have access to the InvestKit containing easy to use spreadsheets for researching and locating the right property.

If you haven’t yet looked inside the Invest Kit to see what’s on offer, don’t delay because you could be missing out on something that will make a difference to your investment strategy.

Last month I mentioned that I had attended several economic forums and that I would bring to you some of the key learning from those. Accordingly, this month the InvestKit has been updated to include the PMI BIS Shrapnel Property Report.

In my opinion BIS Shrapnel is very conservative with their market commentaries so when they say Brisbane, Melbourne and Sydney will experience 15% growth in the next 3 years it makes me very happy. Even better, these predictions came before the 2% interest rate drops we have just experienced.

In addition I have added a presentation from Bernard Salt a demographer from KPMG. Bernard is a wizard with predicting how Australians think and will react in the future - and how this will effect our investment decisions. Unfortunately his presentation was only forwarded as a PDF and there are some slides that look to have no relevance so when you go to the InvestKit please look at my comments to be read in conjunction with the PDF.


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How Renovation can minimise your Property Investment Risk

As many of you will know, before starting Investors Choice Mortgages I was a mining engineer for 18 years, with the last 10 of those specialising in the use of explosives. This meant that every decision of my working life carried with it a risk analysis. Fortunately this served me well as I’ve carried that approach into my investing philosophy.

Over the years many of my clients have asked about our strategy and specifics on our investment success. The Renovation for Profit courses cover these strategies and specifics on how these can be replicated. In my mind first and foremost any investor must set their personal goals and that for their portfolio.

When setting our goals for our property portfolio we firstly wanted a portfolio with rapid growth, with the potential to double in value in 7 years or less. Hence our investment philosophy was to have a 3 tiered strategy that ensured that each property purchased would have the best possible growth potential. Having 3 'chances' at the property growing in value meant we was minimising the risk that it would be a non performer.

So simply the 3 strategies discussed in the course are:-

1. Comprehensive location research. This has allowed us to pick the suburb with the best growth potential. Some of this is based on performance of surrounding suburbs, infrastructure improvements and demographics. So firstly identifying areas with a high likliehood of better than average capital growth.

2. Comprehensive property research. Dolf de Roos once stated that “you need to inspect 100 properties before you buy one”. From personal experience I know these figures are scarily accurate. By putting in the leg work and inspecting the areas you have identified you will be able to spot a bargain. This will allow you to buy below market price and put you ahead from the get go, ie creating equity.

3. Adding value through renovation. By the time you get to a specific property to purchase you should well and truly understand your area, be familiar with the properties for sale in that locality and be aware of the acceptable standard of finishes. Now you can start looking at opportunities to add value through renovation which like the first two points, will help to quickly create equity in your property.

NOTE: This does not mean you have to actually complete a renovation. While you may not see yourself as a renovator, if you buy a property with the potential of renovation, and then you need to sell that property you will have automatically expanded the potential resale market. You will appeal for instance to the first home buyer, the investor, the investor looking for renovation, and the family who wants to upgrade and add their own style through renovation. This means you’ll also have lowered your risk in regards to resale by offering a property that is attractive to many different types of buyers.

To register your interest in courses for 2009 in Sydney, Melbourne and Brisbane please email askus@investorschoice.com.au


Here are some comments from recent course participants:-

I have been to quite a number of courses over the past year, with most being a lot more expensive and none have provided me with the practical information I can use to find and renovate my next investment property. (DE, Sydney)

Fantastic presentation, invaluable resources not only pertaining to renovations but how to locate and assess a property for purchase, structure finance and project manage a team of tradespeople. Best bang for my buck ever! (AP, Sydney)

Far more was covered than I expected! I wish I had done this course years ago! (MT, Sydney)

Jane covered all the bits and pieces in ‘layman’s’ terms with real experiences. Understanding the little things that can save money and make a difference. (NH, Sydney)

Jane has combined her acquired knowledge and experience and enthusiastically shares it throughout the day. The course has seriously good information for those who want to invest and/or renovate properties. (PK, Sydney)

Jane's honest approach is in stark contrast to other presenters who have a personal agenda only. She does care for other investors. (DB, Melbourne)

Jane shared some priceless websites to conduct property research. Thanks! (AF, Melbourne)

Great information - tips and tricks, areas to maximise profit, common mistakes, things to be careful of. (BB, Sydney)

Breaking fixed loans

Just a mere four months ago we’d just had another rate rise bringing rates to around 9%. Many people were already feeling mortgage stress and worried they would be unable to cope with additional repayments if there were more rate rises.

Rates ‘across the ditch’ in New Zealand were more than 10% and it seemed as though the writing was on the wall for Australia and that we would soon follow. At that time lenders were marketing fixed rates at the mid 8% level.

Now, three year fixed rates are below 5% and many–including me–who hedged against rate rises feel disappointed in our decision. However it is important to remember why we fixed our rates in the first place. If rates had continued to climb you may have found making the repayments a real pinch and so you fixed, mainly for the ‘sleep at night’ factor. If rates had gone up you would have felt like a true genius, but as with any gamble things can go either way, and rates can also drop... as they subsequently have done.

Having said all this, before you ring up and request a product switch and break the fixed rate product there are a few things you need to do. The most important thing is to remember there will be a considerable economic break cost to you and when rates drop again the ‘break’ fees will get higher. Only your lender can calculate your break fee as they use a formula (mostly known only to themselves) that looks at the time left before your fixed loan expires and the difference between the cost of funds when the loan was taken out and now.

So before you start planning to break your fixed loan find out the costs... and be prepared for a shock. Once you know this cost you will need to work out what you consider to be the average price of interest during the rest of your fixed period. Hence you’ll need a crystal ball for 2010, 2011 etc.

If banks keep their current margins and all the predictions are correct (some are talking cash rates of 3% in 09) then interest rates could be below 6% by mid next year. So you could estimate the average rate over the next 12 months to work out your saving. At this stage there is no indication of what rates will be beyond that so you’ll have to estimate for subsequent years what the savings may be based on a guestimate of what rates may be.

Keep in mind that some long term predictors have rates increasing by the end of next year so the low rates may not last for the duration of your fixed term. For example, if your current fixed rate is 8.5% and you think rates will get to 6% by the end of next year, for simplicity of giving you an estimate of savings you may estimate the average rate as 7% for the entire 12 month period. If we assume you have a professional package with a 0.7% discount, then your rate would be 6.2% and your saving (if you were on variable rather than fixed) would on average, be 0.23%. So for every hundred thousand dollars you’d save $2,300 on your interest bill. If you have a $300,000 mortgage then this would be a saving of $6,900. However your ‘break cost’ may be $20,000 as your loan is only 3 months old. If you do decide to break your rate you will need to pay the break cost now.

If you are worried, ring your lender find out the economic break cost and any other fees (eg switch fees) and then speak to your financial adviser or accountant. If you are an investor, remember that if you are negatively geared you’ll also need to factor in your tax benefit.

Think carefully about your decision and reconsider why you fixed originally and if that reason is still relevant. Most of us will do the calculations and decide the cost is too high.

Many years ago I read a book by Wizard founder Mark Bouris who commented that the banks always win with fixed rates. I should have learned my lesson but when rates looked to be going over 10%, fixing at 8% seemed like a good idea… at the time.

Some final thoughts on how to deal with high fixed rates when everyone else is celebrating low variable rates

- Work out the economic cost after any negative gearing benefit for investment properties
- If you are in your own home then consider the benefit of renting your property out and claiming tax benefits and then renting elsewhere for the short term
- Remember that fixing rates is a gamble
- Consider your future strategy, maybe a cocktail rate is the better option; half fixed / half variable
- Turn off the TV, cancel the paper delivery and stay away from the internet. Ignorance is bliss and you won’t have to hear about the additional rate reductions predicted for 2009
- Remember why you fixed. If rates had gone over 10% what would your current situation be if you had not fixed? Your decision may have averted you losing your home or forgoing little luxuries.
- If you do not have the cash to pay for the ‘break’ fee then the entire exercise is fruitless, suck it up and move on.

A quick comment on historical comparison of fixed vs variable rates

Looking at the RBA data in the last 18 years there has been only 3 periods that the 3 year fixed rate was more profitable then the average professional package variable rate.

Between '90 and '92 on average you were 2% worse off if you had fixed rates, for a brief period on '93 you were approximately 0.2% better off. Between '94 and 03' on average you were 1% worse off in '03 approximately 0.3% better off and again in '05 to '06.

However, if we look just at the last 7 years, due to the rate increases borrowers have been better off , albeit marginally, with fixed rates. So as we seem to be approaching record low interest rates should you consider fixing?

Once again crystal ball territory. However looking at the 5 major banks they have already forecasted on average another 0.5% RBA interest rate reduction by March next year. So variable rates will fall again.

However you need to look at the long term to make your decision, ie consider the next 3 to 5 years. If rates do start to increase again you may actually be better with a 6% 5yr fixed rate then a 4.99% 3yr fixed rate. Once again you need to recognise that fixing rates is a gamble on the future and you may hedge your bets and decide to split your loan and only fix half. This is just one option you may consider discussing with us. Remember if you sell your property during the fixed rate period you will also be up for economic break fees.

I hear you say 4.99% 3 yr fixed surely it is not possible - well actually it is. Westpac has been running this special for the last week however we have been served notice that this will end this week. So if you do decide to fix then you better be quick.