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21 Tips For Successful Property Investment
Complete Property Solutions
21 Tips for successful property investment Property investment is the number one vehicle for most Australians to build wealth. The entire idea of property investing is to set you up financially with real estate assets. Despite investors becoming increasingly educated, there are still common mistakes made by both novice and experienced buyers. These range from issues with property selection, property management and due diligence, all of which can add up to potentially significant losses each financial year. In this eBook we will provide you with 21 golden rules used by successful property investors to assist you in building long-term wealth and security through Australia’s favourite asset class - Property.
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21 Tips For Succesful Property Investment
1300 937 277 www.cpsproperty.com.au
Complete Property Solutions
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21 Tips For Succesful Property Investment
1300 937 277 www.cpsproperty.com.au
Complete Property Solutions
#1
Source a proactive property manager
A proactive and knowledgeable Property Manager will consistently look for ways to add value and maximise your rental return. Ensuring the rent on your property is in line with market value is a sure fire way to maximise your rental return. Many investors are unaware that they could in fact be charging a higher rent. Your Property Manager can access up to date rental data through RP Data, Australian Property Monitors (APM), Domain and Realestate.com.au to determine what the fair market price for your property should be. This information should be provided to you either when the property is on the market or during the lease renewal process. Skilled Property Managers will also maintain the quality of your investment by understanding and assisting with the ongoing maintenance of your investment, which can stop problems occurring in the longer term. Having someone astute to watch over your investment property should allow you to not only rest easy, but also ensure you have quality tenants in place with each tenancy. A good property manager will keep you up to date with potential rental increases and it is worth checking in with them about their insights into the local market and for any tips on how to achieve rents of the highest possible market price. E.g. Beach side suburbs rent at higher prices due to increased demand from tenants coming into spring and summer therefore you should make sure your lease never expires in winter if you own a property near a beach.
Key Takeaways Make sure you partner with the right Property Manager committed to getting you above market rental return.
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#2
Select the right investment vehicle
For many, it seems natural to purchase a property in their own name however this actually isn’t the only option available. In fact, not considering the structure and its implications prior to purchase can cause you substantial difficulty and expense to your overall investment portfolio and tax position. If you’re looking to minimise your tax payable and to protect your assets, then you may want to consider purchasing in a company or trust structure. You may also hear of this being called the “investment structure”. As companies are taxed 30% on their profits, while individuals are taxed at their income rate, the best investment vehicle will depend on your personal situation. When estate planning, you must speak to your accountant to ensure you structure your purchases appropriately. This is particularly important if your investment goal is to pass the assets on to your children, as trusts can be particularly handy to avoid transfer costs later in life. Consider the following structures, in consultation with your accountant and/or legal advisors: • • • • •
Individual Joint tenants Tenants in common (often also called partnerships) Company Trusts (Discretionary, unit or hybrid)
Key Takeaways By not considering the structure and its implications prior to purchase, it can cause your investment portfolio substantial expenses in the future.
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21 Tips For Succesful Property Investment
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21 Tips For Succesful Property Investment
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Complete Property Solutions
#3
Leverage your equity
If you are holding on to an investment property that you think has grown in value, while saving frantically for your next deposit, then you may be wasting time and your hard earned savings. Using the equity from your first property’s growth to fuel your next investment is a time saving step that allows you to benefit from your initial investment sooner. Building equity can be achieved via renovations, repairs and most importantly buying in areas that have good capital growth prospects. Often, investors and home owners will sell property to realise a profit. In fact, refinancing and using the equity can be a far more effective prospect – allowing you to avoid capital gains tax and agent fees when selling your property. It also means that you can build your portfolio and allow yourself to realise future growth on both of the investments.
Key Takeaways Long-term investing is all about equity and leverage. Get your broker to re-value all your properties when the market is high in order to release the equity and re-invest in more property.
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21 Tips For Succesful Property Investment
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#4
Claim all available tax deductions
There are several tax deductions available to property investors which can save you a significant amount of money particularly on negatively geared investment properties. However, many investors aren’t taking full advantage due to a lack of good advice or understanding. Is your investment negatively geared? Have you made repairs to the property? Are you claiming the interest paid on your investment property? Do you have a depreciation schedule? These are some of the areas to consider when it comes to claiming all available tax deductions. While older properties generally have less of a depreciation benefit than newer properties, there is usually still a substantial amount you are able to claim particularly if the property has undergone repairs and maintenance. It’s important to get good advice from your quantity surveyor and accountant to ensure you are maximising your deductions on your investment property
Key Takeaways Make sure you get a depreciation schedule from a qualified quantity surveyor to maximise your deductions.
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#5 Make sure you have a long-term investment strategy It’s “Time in the market, not timing the market” that leads to long-term wealth creation through property investment. Some of Australia’s wealthiest families understand that Residential Property is a long-term, low yielding asset class. Astute property investors must keep an eye on macro and micro economic data which assists in determining movements in price growth and rental yields. Based on your investment criteria you can then make the most suitable investment for your individual circumstances. Ultimately, it’s important to buy when you are ready and can afford it.
Key Takeaways Residential property is a long-term, low yielding asset class.
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#6
Engage experts
The most successful property investors have a great team around them. Whether it comes to your buyer’s agent, selling agent or builders (if you’re renovating) it is essential that you have the best people partnering with you. You get what you pay for so don’t just go for the cheapest option. Invest in the right people who will in turn ensure you get the best return. Ultimately, the cost of getting the wrong advice far outweighs the cost of getting the right advice the first time around. Therefore don’t just choose the cheapest buyer’s agent or tradesmen for the job - if they don’t do the job right you will pay much more to fix their mistakes.
Key Takeaways “You get what you pay for”, so seek out professionals who charge for their advice and time.
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21 Tips For Succesful Property Investment
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21 Tips For Succesful Property Investment
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Complete Property Solutions
#7
Structure your bank debt effectively
Make sure your loan structure best suits your strategy. Is your loan flexible enough to switch from principal and interest repayments to interest only repayments with minimal fuss? Have you considered the tax implications for your loan structure? Have you considered whether an offset account may work for you, particularly to facilitate opportunities for future investments? While ‘cross-collateralising’ may work for some investors, others will find that if they want to take out equity to borrow more than 80% for an investment property, and your loans are crossed, then you may be charged Lenders Mortgage Insurance (LMI) on all of the loans. This costs thousands of dollars and can be avoided with some upfront planning. Having separate loans for each property will give you more flexibility long-term but speak to your mortgage broker to get advice on what loan will best suit your long-term investment strategy.
Key Takeaways Cross–collateralisation is a term used for a loan that relies on more than one asset for security, meaning there are two or more properties that provide the security for one loan.
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#8
Make consistent loan repayments regardless of interest rates
If you have a variable home loan and interest rates drop, your repayments will also drop. Smart investors will continue to re-pay their loan at the pre-existing higher amount. This will help you pay off the loan quicker, increase equity, reduce future repayments and save thousands of dollars in interest over the long-term. Another strategy to ensure you’re making long-term savings is to fix your rate when interest rates are low. When rates start to rise again you will be making your repayments at a lower rate. Speak to your mortgage broker to determine which option is best for you.
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#9
Diversify your portfolio
Smart investors will buy different property assets in different states or countries as part of an overall property diversification strategy. Diversifying your property portfolio spreads your potential risk. If you invest in only one area and prices or rental yields fall, your investment portfolio will drop in value considerably. If you have diversified, you can offset lower performing assets with higher performing assets. Diversifying also allows you to tap into potentially better opportunities outside of your area or even in a different state, so knowing the cap on land tax in each state or territory is crucial in developing a long-term diversified property portfolio. You can find the latest land tax rates at your state or territory’s Revenue Office.
Key Takeaways CPS Property recommends a fully diversified property portfolio which includes both house and land, apartments and townhouses Australia wide.
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#10 Understand lenders mortgage insurance (LMI) Lenders Mortgage Insurance or LMI is payable by the Borrower (you) on all loans above an 80% loan to value ratio (LVR). Therefore if you are unable to save 20% of your loan for a deposit you will have to pay Lenders Mortgage Insurance (LMI). For someone buying a new home for $400,000 with a $380,000 loan, the LMI premium can be around $12,500 which can be included in the loan and will increase your monthly repayments. LMI can be useful for buyers trying to get into the market on an upswing, looking to avoid rising house prices as long as the growth on your property will outstrip the cost of the LMI. However, if you are able to avoid paying LMI it can save you thousands of dollars. Also note that LMI varies between different lenders and the higher the deposit you have the less LMI you will pay if you are borrowing more than 80% of the property’s value.
Key Takeaways Paying Lenders Mortgage Insurance could possibly assist you to get into the market much quicker than saving a total of 20% of the property value in addition to stamp duty.
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21 Tips For Succesful Property Investment
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21 Tips For Succesful Property Investment
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Complete Property Solutions
#11 Check you have the right loan products. Many loans include add-ons designed to be enticing to the investor, such as lines of credit, waived loan application fees and deferred payment options. These kinds of “bells and whistles� can end up costing you more through higher rates or fees, so make sure you choose only the loan features that will specifically benefit you. It is always worth getting a second opinion on your loan product from your mortgage broker as to whether it may be worth refinancing.
#12 Use an offset account if appropriate
An offset account is linked to your mortgage. The more money you have in the account, the less interest you have to pay on your loan and the lower your mortgage repayments. You can withdraw from it as you like and you can keep all your savings in the offset account to reduce and shorten your loan term. Some investors deposit their salary each pay day into their offset account and then deduct their bills and expenses from the offset account, effectively using it as a transaction account. Talk to your mortgage broker about any costs associated with attaching an offset account to your existing loan.
Key Takeaways CPS Property highly recommends the use of an offset account for all owner occupied home loans as the interest on your home loan is not tax deductible and you should reduce it wherever possible. For investment loans it is optional depending on your overall strategy.
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#13 Tax Planning when selling property or transferring title Capital Gains Tax (CGT) is likely to be a reality for most property investors at some point or another. When you sell a property that has grown in value, it’s likely you’ll be asked to pay CGT. However, timing it carefully can save you a substantial sum of money and is something that those without a savvy accountant often neglect. Here are a few points to bear in mind when selling a profit-making investment: 1. A capital gain can only be offset by a capital loss. So if you are looking to sell a loss-making asset as well as a growth asset, you may want to do so within the same financial year so you can offset the loss against the gain. 2. Capital Gains Tax for individuals is calculated based on your personal income that financial year. If you know you will be retiring in the next financial year, or foresee a drop in income, then you may want to consider holding off on selling. On the other hand, if you are expecting an increase in income in the future and are looking to sell then you may want to do so earlier rather than later. 3. Capital Gains Tax discounts may be available for those who have owned the property for more than 12 months. 4. Keeping long-term detailed receipts of expenses, including interest paid on borrowings, legal fees, stamp duty, land taxes, insurance bills, rates, repairs, property maintenance, improvements and valuations can all help reduce your CGT liability, as all the above expenses are used to determine your adjusted cost base for CGT purposes (see your accountant for further clarification). Any event that causes a change of ownership, including a transfer of name or owning the property in a different structure, should be discussed with your accountant as tax implications may apply.
Key Takeaways Capital Gains Tax discounts may be available to those who have owned a property for more than 12 months.
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21 Tips For Succesful Property Investment
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#14 Undertaking suitable renovations on rental properties When renovating an investment property to increase its value or to replace old items and attract better tenants, you must ensure you use hard wearing and durable products. Don’t fall into the trap of doing things “on the cheap” as this may cost you more in future repairs. If you aim to renovate with an eye to renting it out long-term then use durable, reliable materials that are practical as well as visually appealing. Here are some classic examples: 1. Tiles or laminate instead of carpet or easily-marked timber floorboards 2. Blinds that open easily and are installed securely 3. Washable wall paint so you can clean the walls easily 4. White goods that are reliable and energy efficient
Key Takeaways Higher quality renovations using durable products attract better tenants, help to build equity and reduce property management issues further down the line.
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#15 No vacancy Vs higher rent Some landlords may fall into the trap of holding out for the highest possible rent, without realising that time without a tenant is actually costing them much more. Usually even just a couple of weeks without a tenant will cost you more overall than waiting for a tenant that is willing to commit to a slightly higher rent of say $10-$20 per week. Once you lock in a tenant you have the option to raise the rent to reflect the current market value as part of the rental review process once the lease expires. The alternative is that while you wait for a higher paying tenant, the market may drop or fewer tenants may be available as they select other properties. It is best to lock in a tenant as soon as possible and limit your vacancy where possible. Talk to your property manager about ways to limit the vacancy of your property and keep an eye on any cyclical changes in the rental market.
Key Takeaways It is best to minimise vacancy instead of chasing the absolute top dollar rent.
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21 Tips For Succesful Property Investment
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#16 Submit a PAYG withholding variation application If you find that at the end of each financial year you have a sizeable tax return, you may want to consider submitting a PAYG Withholding Variation Application. This will allow you to adjust the amount of tax withheld over the course of the year, freeing up funds to reinvest. You can place the savings into a high interest savings account, channel it into your mortgage or put it into an offset account. By adjusting the amount of tax withheld, you gain greater control over where your dollars go and when you can access them, giving you better options as an investor and allowing you to live more comfortably.
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#17 Research and due diligence Smart property investors take due diligence extremely seriously. Invest in a building and pest inspection when buying a house to ensure your investment won’t potentially cost you thousands in repairs down the track. You can also use any property defects identified to negotiate a lower price, so make sure you investigate the building thoroughly. Apartment buyers should purchase a strata report which will outline amongst other things: minutes of meetings, building insurances, strata by-laws, administration & sinking fund balances, strata minutes including upcoming works and previous works conducted, strata fees owing and payable for all owners, as well as any ‘special levies’ due and payable. This information is invaluable when negotiating your purchase price with the vendor and can sometimes mean you get significant discounts for accepting a property which has major or minor defects.
Key Takeaways Your due diligence on any property purchase should always include a building and pest report and a strata report for residential apartment buildings – your solicitor/conveyancer should be able to assist you with this task during the contract negotiations.
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21 Tips For Succesful Property Investment
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#18 Consider joint venture investing to buy more for less Should you choose to invest with someone else through a joint venture, be careful to mitigate certain risks. While joint venture investing can make it easier to invest thanks to a lower initial outlay, you also give up some of the control over the investment strategy, process and decisions on when to sell. Make sure you trust your fellow investor, have a clear plan, have decisions outlined and signed off in a written contract, ensuring each person is aware of their financial obligations including being responsible for missed repayments if someone defaults, and discuss potential scenarios for selling.
#19 Patience and education Property investment ultimately comes down to patience and hard work. Avoid getting impatient and looking for “get rich quick” property investment schemes. Usually they fail, which means you will have wasted your time and money. Get the right advice from seasoned experts, educate yourself and surround yourself with advisors who can tailor a plan to your situation. Remember the quick rules of thumb about investing for the long-term and not for a short spike in a volatile hotspot. Also investment advisors should be licensed, educated and able to tailor a plan to your individual circumstances – don’t be afraid to pay for astute advice as it will cost you less in the long run.
Key Takeaways Investing isn’t about secrets or magic, it’s about education, mentorship and a lot of planning and hard work.
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21 Tips For Succesful Property Investment
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#20 Demographics trends Demographics are one of the fundamental drivers of the property market. Demographics refer to the population changes and/or growth patterns in a city, state or country. The analysis of this important information can yield important conclusions about the type of property that will be in demand and the changing trends and growth patterns that may emerge in the future. Get the right advice from seasoned experts, tailored to your situation. Don’t fall for the gimmicks.
Key Takeaways CPS Property recommends following the Australia Bureau of Statistics, census data and Bernard Salt (Futurist) to better understand the changing face of society.
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#21 Invest with a solid plan of action Property investment is a long-term strategy which requires a plan of action. Start by considering why you’re investing in property. Are you saving for your retirement or looking for financial freedom? Consider the time frame in which you need to build wealth. Think about how much money you need to gain to meet your financial goals. Once you have outlined these end goals you can start to work backwards and figure out what you should be investing in, your ideal investment structure, what you can afford, what your cash flow will be and other day-to-day concerns. This will help you to quickly assess potential investments, making your approach much more strategic and hence much more successful.
Key Takeaways Building a property portfolio or even securing a single property takes time, research, commitment and a great deal of patience. Your personal plan of action will allow you to filter the thousands of potential properties available within the market. Engage expert advice to ensure you generate consistent returns and build wealth through property.
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21 Tips For Succesful Property Investment
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Disclaimer: Please note that much of this publication is based on personal experience and anecdotal evidence. Although the author and publisher have made every reasonable attempt to achieve complete accuracy of the content in this e-book, they assume no responsibility for errors or omissions and the views expressed herein do not necessarily reflect the opinion of the publisher. It is intended to provide general news and information only. The content does not take into account your personal objectives, financial situation or needs. Any trademarks, service marks, product names or named features are assumed to be the property of their respective owners, and are used only for reference. There is no implied endorsement if we use one of these terms. Readers are advised to contact their financial adviser, broker or accountant before making any investment decisions and should not rely on this e-book as a substitute for professional advice. All information is current as at publication release and the publishers take no responsibility for any factors that may change thereafter.
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