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I realise that two newsletters so close together is unusual.
However there is two main reasons why I am doing this. Firstly I am
daily asked if it is time to fix rates and I thought it important
that you have the facts.
Secondly it is only one week to the
special one-off presentation on how to grow your property portfolio
despite bank policy changes. The enormous number of Bank policy
changes in the last 6 months has changed the lending landscape in
Australia incredibly. Book your seats now to secure early bird
rates.
This month I was invited by Australian Property
Investor Magazine to contribute to their cover story "Safe
Strategies for Stress-Free Profits". In this newsletter I also
continue my look at the 6 steps for minimizing risk in property
investment. See below for Step 2: Consider your Exit Strategy and
Step 3. Finding the Right Property.
Finally, it was great
to see so many of you at my recent Property Investing and Renovation
courses. Thank you for the great feedback. For those of you who
missed out, check the website for details on upcoming courses in
Sydney in Oct/Nov. Check the website for dates.
Jane
| Special one-off
Sydney Workshop - Creative Strategies for Maximising Finance
for Building your Investment Portfolio
Rich Harvey, founder and Managing Director of
Propertybuyer, Australia’s leading buyers agents was recently
awarded the 2009 National “Buyers Agent Award for Excellence”
by the Real Estate Institute of Australia.
Rich has
asked me to join him on the 15th September in North Sydney for
a special evening to discuss bank policy changes and how you
can maximise your lending and expand your property portfolio.
This will be a hugely informative evening and there’s even an
early bird special of $25 , so get in quick and book using the
link below.
For more details and to book, click
here |
| InvestKit
Remember, as an Investor’s Choice newsletter subscriber 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 InvestKit 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.
This link is not active for those who are not
members of the newsletter.
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| To fix or not
to fix…that is the question
Fixing interest rates can be a vexing dilemma at any time,
but never more so than now. Katrina Gay from Nicholson
Financial Planning has put a lot of time and effort into
working through this complex question and I’d like to give you
the benefit of her expertise:
Katrina says: “I have
started to received quite a few queries from clients about
whether to fix their interest rates. There is no doubt that
interest rates will go up in future, but this doesn't
necessarily mean you will be better off fixing your rates.
As many of my clients have Westpac professional
package loans, I have used the current Westpac fixed rates in
the examples below.
The current Westpac three year
fixed professional pack rate is 6.79% pa. If you were to try
and beat the variable rate by fixing now at this rate, you
would have to believe that the average interest rate over the
course of the three year period is likely to be higher than
6.79%. If, for example, we use a steady, straight line
interest rate increase, then to break even with fixing at this
rate, you would have to see discounted variable rates rise
from 5.11% (current) as
follows:
- to 6.21% by Aug
2010
- to 7.31% by Aug 2011
- to 8.41% by Aug
2012
So in order to profit from fixing your rate for
three years, you would need rates to rise by an average of 5
lots of 0.25% each year over that time.
Using the
current Westpac five year fixed professional pack rate of
7.44% pa, and steady, straight line interest rate increases,
then to break even with fixing at this rate, you would have to
see discounted variable rates rise from 5.11% (current) as
follows:
- to 6.06% by Aug 2010
- to 7.01% by Aug
2011
- to 7.96% by Aug 2012
- to 8.91% by Aug 2013
-
to 9.86% by Aug 2013
So in order to profit from fixing
your rate for five years, you would need rates to rise by an
average of 4 lots of 0.25% each year over that time.
If
you think that it is highly probable that rates will be higher
than the figures above at those points in time, then you have
a good argument for fixing. But, as with the share market,
nothing is certain, so I personally prefer to keep all my
loans variable. Looking historically, it is more common for
people to lose rather than win by fixing their
rates."
Nicholson Financial
Planning |
| Low risk
investing
When considering risk minimisation for property investment
I break down the investment into 6 bite-size pieces and make
sure I have a strategy that covers each of those steps. Last
time we looked at the first consideration for low risk
investing; your ‘Investment Strategy’ and over the next few
editions we’ll take a look at the others listed below:
1. Investment Strategy (visit the archived newsletters
if you missed this one)
2. Exit Strategy
3. Finding the
Right Property
4. Property Ownership
5. Cashflow
Management
6. Ongoing Portfolio Management
This week
we look at numbers 2 and 3 on the list.
Step 2:
Consider your Exit Strategy
Make sure you factor in
the resale of the property. In my experience with clients I
find that there is too little understanding of how banks
assess risk, and recently this has got a whole lot more
complex. Put simply, what a lender wants to know is if
something goes wrong and they have to take over the investment
will they be able to quickly and easily resell the property.
In order for us to be able to think the way banks do about
this issue we need to put ourselves in their shoes; they need
to be able to sell it to the biggest market available, eg
first home buyers, single people, couples, families with kids,
and investors. So let’s consider how lenders would view the
following securities:
i) A studio apartment in purpose
built student accommodation with a guaranteed rental, high
levy fees and a restriction on who can lease out the property.
ii) A 2br house in a small regional town of 5000 people.
iii) A brand new 1br apartment 40m2 in a block of 200
apartments (all very similar) located in the inner city.
iv) A boarding house with 6 bedrooms all individually
rented out.
v) A 3br house within 5km of the city in
Brighton, Melbourne.
vi) A 2br unit in block of 6, well
maintained and on Bondi Beach, Sydney.
vii) A 3br house in
Mackay, Qld with potential to renovate.
viii) A 2br unit
in Braddon, Canberra with high rental demand.
The first
4 securities have limited resale, for instance:
- only an
investor would buy student accommodation.
- the small town
has a limited resale.
- in the large block of units any
resale will be influenced by the most recent comparable sales
which could be distressed vendors, there would be high strata
fees for the pool and lift upkeep etc etc and a family of 4 is
unlikely to consider that their home.
- boarding houses
need special permits and can be considered a specialist
business.
By comparison, the last 4 securities may
suit a number of different markets:
- they are not limited
to one industry towns, and
- they fit the first home
buyers market and have good rental returns.
As a
lender which security would you rather have? As an investor
which security gives you a quick and achievable exit plan?
Surprisingly, you and the bank probably see the same
securities as attractive.
A word to the wise: have a
buffer of cash available, so that if you do have to activate
your exit strategy and sell a property then you do it on your
terms when the market is booming. The cash buffer gives you an
opportunity to have funds in place to cover mortgage
repayments or do a renovation for improvement.
Step
3: Finding the Right Property
There are many
different strategies for investment, yet choosing a strategy
and perfecting it then sticking to it is one of the hardest
things to do. A major risk is getting bored and trying
something new eg developments or commercial property. In my
opinion if you have a process and you know what you are doing
then ‘cookie cut’ it, ie repeat it and do it again. Personally
I have a 3 prong purchasing strategy, in reality if 1 of these
three strategies fails me then I have the other 2 to fall back
on.
i) I buy in capital cities.
In 1970 the average
house price in Sydney was $18,700, in 1980 it was $68,900.
Even if you overpaid by 10% at the time, the beauty of a
property as a long term investment in a capital city is that
the underlying immigration and requirement for housing will
drive the property market. In September 2008, the Australian
Bureau of Statistics released their population growth
predictions. It showed 6.9 million new residents over the next
20 years to 2026, 2 years earlier their predictions were just
3.2 million. These people will need to live where the work is
and traditionally this in capital cities. So as a risk
minimisation strategy this would be step i). Remember, in a
capital city traditionally time is forgiving.
ii) I
find an area within a capital city that has potential to
outperform the average capital growth.
Look at suburbs
beside those that have already boomed, and look at
infrastructure and council development plans.
In 2006
the largest non-coastal town to experience the greatest
population growth and hence housing demand was Mt Barker in
South Australia, due to an infrastructure improvement making
it commutable to the city. Selecting the right suburb takes
time and research. For instance, in 1997 you could have bought
a median price property in Coburg East for $122k or Coburg
North for $119k, in 2007 this $3k differential had expanded to
$173k. So selecting the right suburb, or area within a suburb
is imperative.
iii) The third prong in my purchasing
strategy for finding the right property is renovation. Being
able to add value quickly, improving the value of the
property, getting a better rental return, banking my newly
created equity as either a positive cashflow property (ie the
loan remains the same while the value of the property has
increased and so too the rental return), or accessing equity
to do it all again with the next purchase.
Even if you
never plan to renovate, buying a property with this potential
gives you another market for resale when considering your exit
strategy.
In my mind, before you even buy a property
understanding your investment strategy as well as your long
term and emergency exit strategies are paramount. Once you get
to finding the right property there are many additional things
to consider and that you can add to your ‘investment tool
box’.
Without doubt, knowledge is the key to a low risk
investment however be prepared, it takes hard work.
One of the most important tips I can give you is:
start with the basic analysis, including:
a)
Demographic study - a 1br unit in a outer ring suburban suburb
with a majority of owner occupiers in 3br houses may take
longer to rent out (and be much harder to sell) so remember
how this will effect your exit strategy.
b) Capital
growth and suburb study - everyone wants to locate the next
boom suburb or city before it booms. Statistics and free
information are available online and in the suburb returns .
Companies like RP Data and Residex also provide excellent
information however you will have to pay for access.
c)
I always consider a property with renovation potential. Having
just completed my 6th renovation in the last 8 years I know
that this is one way of adding equity to your property
quickly.
For alternative low risk option, consider a
government backed rental guarantee eg a Defence Housing
Australia (DHA) investment. I have one of these; the rent is
reviewed annually and it is in an excellent area experiencing
above average capital growth. While I pay a higher rental
management fee I also save by paying no maintenance costs and
I get the house painted and re-carpeted at the end of the
lease. It is a great ‘park and forget’
investment.
Finally, you can spend hours doing a lot of
research to find the right place, but you also have to keep
the renter in mind. Inspect other rental properties in the
area to see what is letting quickly and which features are in
demand. If your demographic study tells you that a large
percentage of people who live in that area drive to work then
having a garage or easily available parking would be high on
the list for a potential renter. Remember you need the renter
to help you pay for your property so they should not be
forgotten.
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A final comment
If there is any way the
team at Investors Choice Mortgages can assist you, regardless of how
big or small your query, please let me know.
Until next time,
I wish you prosperous investing and happy house
hunting.
Jane
PS: at Investors Choice we
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Disclaimer: You
should always speak to a financial planner or accountant about your
particular circumstances, the hints mentioned here are for general
discussion only and do not relate to your particular
circumstances |
