THIS MONTH

- Don’t miss the newly updated InvestKit, with an article from John Edwards, CEO of Residex on Property vs Shares, and a great mortgage software discount offer and much more!
- A look at the US sub prime market and what it means to us
- How to find a good tenant
- Furnished properties: the pros and cons
- A great competition for you: this month we’ll be giving one lucky reader a fabulous prize... specialised mortgage software (valued at $160) which provides a complete analysis of your current mortgage/s and an evaluation of whether you’re being overcharged.


Welcome to the Spring edition of the Investors Choice Mortgages newsletter. For most of the country the new season has seen a sharp increase in property prices, with the exception of Western Australia which reached its peak earlier this year. Many of my clients looking for investments in Melbourne and south east Queensland are having to get their preapproval limits increased as they’re finding themselves out of the market each month they delay purchasing.

As you know, at ICM we believe in adding value to your experience and to this end, in July all our clients with investment properties received their annual folder with a useful filing system, an updated Residex report for each of their investment properties, and a discount offer on depreciation schedules from two national providers.

Also on the topic of adding value; don’t forget, as a valued client of ICM we are happy to purchase on your behalf any Residex reports for properties you are considering purchasing or for getting an estimate on the value of your home for an equity release. These reports are valued at $95 from www.residex.com.au and use both the original sale data for a property and comparable sale prices over the last 2 years to determine a price estimate for the property in question. I have used these reports many times to negotiate – even as the highest bidder at auction – so I can vouch for their usefulness as a tool in your research toolbox.

In the last newsletter we asked readers to contribute their suggestions for future articles. Congratulations to Andrew from South Australia who was the winner of the investment book and CD pack. He requested some thoughts on securing a good tenant and the pros and cons of letting a furnished property. More on this later in the newsletter, but first, a look overseas.

As always, I hope you enjoy this newsletter and that you make use of the ‘members only’ InvestKit full of practical spreadsheets and handy information. There is a lot of content in our quarterly newsletters, so grab a coffee.


Jane

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. This month we have added the following:- - A discount voucher when you purchase the Home Loan Interest Manager Pro edition mortgage tracking software - An article of Shares vs Property as an investment vehicle from John Edwards, CEO Residex - A recent presentation from ANZ Bank regarding the Property market and Economic Update, a must read for the serious investor.  The link to InvestKit has been removed as you are viewing this newsletter from the Archive.

US sub prime market: what is it and how does it affect us? There has been much discussion in the financial press in recent months over the various impacts of the sub prime market collapse in the US, however it is likely that several of you don’t understand what it is (and haven’t wanted to ask). Here is a very basic summary of what it is, how it compares to Australia and its ongoing impact on us. What is the US sub prime market? Essentially this market exploded in 2005 when interest rates were around 1-2% and many people with bad credit histories (eg those who had previously defaulted on loans) were given new loans. A large number of these borrowers fell into the NIJA category (no income, no assets) and in some instances they were lent as much as 140% of the property value. Many signed up for this ‘cheap money’ in the hope that once their honeymoon interest rate period ended, their property would have appreciated enough in value that they would be able to either sell at a profit or to afford the regular interest rates. This shifting of risk or postponing the reality that you will one day have to pay interest at a higher rate has meant an avalanche of court cases and forced sales which in an already soft market, has further contributed to the softening of prices. It is now believed that up to 7 million people in the US have taken out sub prime mortgages and many of those caught out have experienced their loan interest rate rising from 1% to more than 7%. How does the Australian situation compare? High-risk mortgages represent up to 20 per cent of the US market, but fortunately they only make up 1 to 2 per cent of mortgages here in Australia. Lending regulations are much tighter here and not even our ‘no-doc’ and ‘low-doc’ loans compare with America’s sub prime loans. In addition, lender’s mortgage insurance is generally required in Australia when the loan accounts for more than 80 per cent of the purchase price, adding further protection. How does this affect us as borrowers? The US situation has affected (or should I say infected) money markets around the world as these sub prime mortgages were ‘packaged’ by lenders with the help of investment banks and sold around the world to financial institutions and hedge fund managers. These packages are often referred to as Collateralised Debt Obligations (CDOs). In basic terms; when the value in the US real estate market began to decrease and the level of defaults began to increase, the investments in these CDOs became non-viable to the point where many major investors lost substantial amounts of money. Two Australian fund managers who have been affected are Basis Capital and Macquarie Bank through its Fortress Products. Essentially, Australian banks that are not deposit-taking facilities (ie Deposit Taking Facilities are lenders who also offer savings accounts) have to ‘buy’ their funds and with the cost of money going up, these lenders have had to secure funds at higher rates. The reality is almost every lender has some exposure to this market and it would be fair to say that all lenders have had an increase in their cost of funds, or in other words, a margin squeeze on their profits. Some lenders such as RAMS and Macquarie Bank have passed this cost on to the consumer and they have increased their rates (in addition to the recent Reserve Bank rate rise); other lenders have just absorbed it. At a seminar I attended recently, Shane Lee from Citigroup estimated the cost to banks currently to be 15 basis points (0.15%) and more interestingly, the effect on Mortgage Managers to be 40 basis points (0.4%). Many mortgage managers (who do not have a savings account facility and therefore depend on buying in all their funds) have passed on to their customers these increased costs by increasing rates outside of the Reserve Bank cycle. So really this is a cautionary tale for those who are not with the major lenders and those without fixed rates….there may be some exposure to an increase in rates above and beyond Reserve Bank movement for you in the future. However do not panic, not all non bank lenders are exposed and not all major lenders are immune, before taking any action talk over the risks with your friendly mortgage broker. In summary, the risky lending practices in the US have already affected us and will continue to do so as the cost of money grows. It is believed that the full extent of the fallout from the sub prime crisis may not be felt until first quarter next year. This in itself may push local lenders to increase their rates and reduce the need for the Reserve Bank to also make a change. I guess we’ll just have to wait and see.

Good tenants: how to attract them and keep them If you believe the papers and popular current affairs television, it is impossible to find rental accommodation in Sydney at the moment, and the market is presently awash with queues of people lining up to inspect the few properties available. There have even been reports of bidding wars and ‘rental auctions’ occurring at open homes by those desperate to secure a lease. Vacancies are of great concern to landlords – although the exposure is not nearly as great as in the commercial property market where a property can sit for a year without a tenant – in the residential market it stills pays to put measures in place to deal with unplanned costs. In this case, a simple dilemma such as do you hold out for 3 weeks at the asking rent of $400pw or drop it to $380pw and let it now? When you consider a loss in rent of $1200 over 3 weeks compared to a $1040 loss over a year to have it rented out straight away, the initial price drop may well be worth it. So what does make a good tenant and how do you attract one? First let’s look at what doesn’t make a good tenant. Let me share some of my personal experiences with you: 1) I once leased a 4br terrace in Melbourne to four overseas students; their parents provided guarantees and even proof of funds in their accounts. These guys looked like perfect tenants, so imagine my surprise on the first inspection to find two beds in every room…no wonder the newly renovated bathroom was showing signs of mould, showering at least eight people per day. 2) I rented a small 2br unit to a couple with a new baby. Once again I was surprised when I discovered 3 beds in one room and found out they also had a 2 year old and a 4 year old. After they moved out recently, it took me days to get the Texta marks off the walls, a young family in a small apartment generates a lot more wear. So what makes a good tenant? It’s really very simple, a good tenant is one who treats the place with respect and pays the rent on time. Surely this is not too much to ask? No matter how thorough your agent is in checking out the prospective tenant’s credentials it’s also a good idea to have them check the blacklist (a national register for those with previous rental defaults or issues) which should highlight tenants who have proved trouble in the past. Regardless of whether you decide to manage the rental of your investment property yourself or pay between 6-9% to have a professional do it for you, without regular inspections you will not know what your tenants are up to. Even if you do plan on managing the property yourself, I recommend you have an agent conduct the initial lease process, that way they can do the background checks and see whether the potential candidate has been blacklisted. Remember regular inspections are also important. Attracting the good ones… ‘if you build it they will come’ One way to attract good tenants is to have a good property which gives you a better choice of tenants. Some solutions to this are more costly than others, but some just require some basic elbow grease and some smart thinking: - Take care of the basics: make sure the property is clean and attractively presented. Replace light bulbs (preferably with energy saving bulbs), iron the curtains, add an air freshener, steam clean the carpets and remove any obvious marks from the walls and floors, clean the windows and the oven, ask the agent to air the apartment for the 20 minutes they are there showing it. In essence make it somewhere that the potential renter can imagine moving straight into and being comfortable. - Be aware of the optimum time to let: we have a beachside property and we always make sure the lease expires in summer. Trying to let the unit in winter will not attract the competition for the unit that we want to generate, nor show it at its best. If your property is near a university most tenants will want to move out in late November but new students don’t arrive till February; consider this potential long vacancy and protect yourself against it, eg make sure the lease ends in January. - Know the area and your potential market: o Are you attracting students attending the local university? Having broadband cable hooked up to the house can be a good option to attract tenants. o Is it mostly families? Then maybe security is important and a secure front gate, deadlocks, keyed window locks or even security bars could make your house a more attractive option. - Check out the competition: if everyone else is providing built-in wardrobes then consider adding built-ins, these can cost up to $1000 per room or you could visit the Ikea sale bin and perhaps pick up a two door wardrobe for $100 like we did. - Add some extra value: consider leasing the property as furnished accommodation. NOTE: I have actually experimented with this last option by making basic furnishings available to prospective tenants as an optional extra (at an additional cost). I based the cost around a weekly addition to the rent eg a double bed, lounge and a dining room suite was an extra $35 per week which gave me a payback over a one year lease. So far we’ve had no takers.

Furnished property: a specialised security Furnishing a property for renting can greatly increase your weekly rental income however like most things it has its pros and cons: The pros - Higher rental return - Potential depreciation benefits The cons - Higher setup costs - Your market decreases significantly because only those needing furniture will look at the property - Less stability through shorter leases, in other words, it’s easier for the tenant to leave with minimum notice - The potential for long vacancies as you are targeting a niche market - If you do not attract tenants you may have to lease unfurnished and then store the furniture at additional cost - Wear and tear means professional cleaning costs and replacement of furniture on a more frequent basis However having said all this, the increased rental returns of furnished properties are very attractive, especially if it makes your property positively geared. A word of warning on the finance side If you are purchasing an already furnished property be aware that the bank will not lend you against the asking price only the actual property value (ie not including furniture). This can also hold true for guaranteed rents, in some instances the rental guaranteed value can be taken off the purchase price. Accurately valuing a furnished property can be difficult. For example the bank engages a valuer to value the property and he/she says it is on the market for $450,000 which includes a furniture package at an estimated value of $25,000. What the bank will lend you is based only on the property value of $425,000 ($450,000 market value less $25,000 furnishings) so you’ll need to come up with the difference on top of your 5%, 10% (or more) deposit. What’s a specialised security? This is something to keep in mind. Furnished properties, serviced apartments and purpose-built university accommodation – to mention but a few - are all considered specialised securities . This means that some lenders will take the view that first home buyers or home buyers in general would not be part of any potential resale market if these properties had to be offloaded by the lender. As a result, these lenders will require you to share some of the risk by contributing a higher deposit…anywhere from 20-40%. In some inner city university apartments it can even be 50%. Lenders like to think that if they need to ‘fire sale’ your property in the event that you can no longer make repayments then it is better to appeal to the whole market (not just investors). They want to ensure there is nothing that makes it ‘special’ and further reduces the potential of resale or creates extra hassle for them such as selling off $25,000 worth of furniture separate to the property.

Investors Choice Competition For all those questions you were afraid to ask or for anything you would like to know about buying and holding property, now is your chance! Forward your ideas and/or questions for the next issue of the newsletter and the best one will receive the fabulous prize mentioned below. Home Money Manager Pro is a mortgage audit software allowing you to track, plan and manage all aspects of your loans; check the accuracy of your interest charges; and discover how to pay off your mortgage sooner. You can easily upload your internet bank statements and get an estimate of how rate rises may affect you, the effect of offset account balances on your loan and the benefit of being able to effectively plan for the future. For those who don’t win, as a consolation you can download a free copy to trial for 14 days. Furthermore, Matthew from Home Money Manager Pro, has generously offered all ICM newsletter readers a $50 discount. See the InvestKit for your discount coupon. Send your entries to askus@investorschoice.com.au and remember to be challenging and creative. Competition is open till the end of January when the next newsletter is due.

A new resource for your Investing Toolkit. Recently I stumbled upon one of the best internet property search tools I have ever seen. Mark Ferris is the owner and developer of Suburb View, an Australian real estate search engine. It lists property results on Google Earth, Google Maps and on the mobile phone. Mark's inspiration for http://www.suburbview.com came from the realisation that searching for his first home was a tedious and time consuming process. He thought there has to be a better way! With the introduction of Google Earth, there was no current way of finding out which houses were for sale, what the asking price was and if there were other houses for sale in the same area. What does all that mean? Essentially you type in your Suburb and this site collates all the results from most of the property internet sites around the country and plots them on a map or a satellite picture. Try it out you will be as impressed as I am. If your suburb is not available leave a message and it will usually be added within 24 hours. Now that is service. Congratulations Mark on a job well done! Suburb View

A final comment.

Rates are moving up. However did you know that research over the last 27 years conducted by QuickDirect Online shows that in most cases you are better off sticking with a variable rate? Based on rolling periods the average 3 year fixed rate with subsequent movements of basic variables ( as opposed to standard variable rates) shows you are better off 83% of the time in staying variable.

Most people fix rates just before a rate rise when the lender has already factored in the rate rise. Predicting the future can prove to be an expensive gamble however for most investors a fixed rate is an additional insurance policy that makes it worthwhile. After all you know for 3 years exactly what your repayments will be. Many consider this a cheap deductible expense that hedges the gamble.

With a buoyant share and property market on the East Coast many investors are scurrying to find the right investment at the right price.

Regularly I see clients anxious to make the first step but worried about making the wrong decision and hence they delay making any decision at all. If this is you then go back to basics and redefine why you are investing, how you wish to achieve that strategy, and importantly what you can afford to make the strategy work. Then set yourself a time frame and a specific goal and start now. The markets are moving up again don't miss out on another capital growth cycle.

For loan updates or processing queries please email debbie@investorschoice.com.au or call the office on 02 95429887.

For all other enquiries please contact Peta on peta@investorschoice.com.au or Mobile 0432 687 560 or 1800 46 48 10 (toll-free).

Till next year, I wish you prosperous investing and happy house hunting.

Jane


PS: at Investors Choice we believe in sharing our systems, information and resources. Our website is continually updated to reflect any new information we think you might find of benefit. Check out the website at www.investorschoice.com.au

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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