What does it take to be in the one per cent of Australian property investors who live off their passive income? In his latest book, The Property Wealth Blueprint, expert RASTI VAIBHAV provides stress-free steps to setting up and growing a robust property portfolio, and, in this edited extract, he shares how to invest in the current market and where your cash goes…
Many new investors are asking whether now is the right time to start their investment journey? The reality is that despite what’s happening in geopolitics, financial markets or the broader property market, there is always an opportunity to find high-quality investment opportunities. The real key is to understand how to buy in the current market and what factors to consider.
AFFORDABILITY IS RELATIVE
With house prices having risen by 20.6 per cent in the past 12 months (according to CoreLogic), many experts are now talking about how affordability is a key issue. While it certainly is tough to afford a property in the likes of Sydney and Melbourne, the advantage investors have is that they are not limited to any one market. Typically affordability is poor in many markets that have seen huge surges in growth in a short period of time. However, there are many markets where growth has been consistent and still trending higher. Look to identify suburbs where houses are still affordable relative to average household incomes. There are over 15,000 suburbs across the country and not all of them have moved to the point that they are not affordable for local owner-occupiers. Many suburbs are still seeing steady growth while others have slowed down.
TIME IN THE MARKET NOT TIMING THE MARKET
We all pay attention to media commentary around house prices, but the reality is that it’s very difficult to time the market with any degree of accuracy. Just remember 18 months ago, the RBA and economists were suggesting house prices would fall by 40 per cent. What played out was virtually the exact opposite. As an investor, your goal should be to buy well into areas that have strong growth fundamentals in place and then allow time for that property to grow in value. Historically, house prices have risen over many decades and if you’re buying with the goal of making yourself financially secure in 10 or 20 years, then you’ll be able to manage the ups and downs that come with price fluctuations.
LOOK AT THE MICRO-LEVEL
In property, there are few more important fundamental concepts to understand than supply and demand. While we often hear the property market spoken about in terms of the overall Australian market, to buy effectively as an investor you need to narrow your focus to the micro-level. When you examine a suburb and look at how much supply and demand there is at any moment in time you can quickly assess what the likelihood for growth might be. If a suburb has very few listings, strong annual sales, a low pipeline of new stock coming onto the market and solid fundamentals such as good schools, infrastructure and access to jobs, then you can be confident you’ve found an area that will likely see good growth. It’s not uncommon for these types of tightly held owner-occupier areas that might be in a good school zone, to see consistent growth through all market conditions.
MANUFACTURE EQUITY
When you’re buying properties you can look at ways to increase value above and beyond capital growth alone. It’s possible to identify properties that have additional upside potential such as the ability to renovate or undertake a subdivision. This is another layer of potential growth you can find in a property that is available regardless of what the broader market might be doing.
BE PREPARED TO NEGOTIATE
When markets are hot, your ability as a property investor to identify opportunities that are below market value is greatly reduced as stiff competition will keep buyers on the back foot. When markets begin to cool down, there is a lot less pressure on buyers and that gives you more opportunity to negotiate aggressively and secure yourself a high-quality property at a great price. All good property investors know that you make your money when you buy and in a changing market, this is a great time to do just that.
In property, there are always going to be opportunities to enter the market and outperform the averages. If you consider that property prices have grown by 6.8 per cent per annum between 1993 and 2018 (according to CoreLogic), that means 50 per cent of properties have outperformed that figure. By identifying the right property in the right location, you can achieve an excellent return regardless of the overall market conditions.
Getting into the property investment business is thrilling. To make money, whether to enhance your current income or become financially independent from the nine-to-five grind of the corporate world, there is so much to look forward to! However, there are some significant financial considerations before jumping into property investment. If you have just started, you may become easily overwhelmed with all the costs involved. While they may seem daunting, the reality is that budgeting for these numbers is pivotal for progress. The right numbers are essential for every property transaction – no exceptions. Let’s look at the costs associated with property investment – we will first examine the acquisition or property purchase costs, followed by the costs associated with holding the property.
WHAT WILL IT COST ME?
The property investing expenses you need to be aware of…
1 – ACQUISITION COSTS
Every property purchase entails costs beyond the deposit and mortgage repayments. Unfortunately, some first home buyers and inexperienced investors get into trouble as they fail to budget all the associated costs and expenses. In this section, we’ll review the potential purchasing costs you may incur.
a) Deposit: Saving a deposit of 20 per cent of the purchase price takes time, and it’s essential that the investors are realistic about the time required. Depending on your circumstances, you may decide to save a smaller deposit and pay for Lenders Mortgage Insurance (LMI) to speed up the acquisition process. Your course of action will be determined by your investment strategy, including your risk appetite. As a minimum, I would recommend you save at least a 10 per cent deposit.
b) Lenders Mortgage Insurance (LMI): The cost of LMI depends on the size of the deposit. If the deposit is 20 per cent, the charge is zero. If the deposit is 5 per cent, the cost may be 5 per cent of the purchase price. Your mortgage broker would be able to help you with the exact charge for your purchase price and LMI for the bank you are approaching.
c) Stamp Duty: Stamp duty is a mandatory tax that the state governments impose on buyers when they purchase a property. This amount is based on the purchase price, location and purpose. It can cost you tens of thousands of dollars, making it one of the highest additional costs associated with building your portfolio. It may amount to as much as 3-4 per cent of the purchase price. Commonly, purchasers focus so much on saving for the deposit that they forget about the stamp duty and the thousands of dollars needed for it. Budgeting for it and understanding your state’s concessions are critical to a comfortable property purchase.
d) Conveyancing: This is carried out using legal documents such as contracts, leases, title deeds, and others. It is the legal process through which the title (i.e. ownership) of a property is transferred from the seller to the purchaser and involves various legal searches. Although the pricing is subjective, it typically ranges from $1,500 to about $3,000.
e) Building and Pest Inspection: A thorough inspection certainly contributes to a purchaser’s ability to make an informed buying decision. As an investor, you need to know as many specifics about the investment property as there may be hidden structural problems that may cost thousands or even tens of thousands of dollars to rectify. Inspections reports typically cost $500 to $800 each, depending on the property’s size, type, and location.
f) Buyer’s Agent: Buying the right property on the right terms requires a specialised skill set. An independent buyer’s agent represents the buyer and is reimbursed by the buyer. Typically, the fee is covered by the savings they make, and plus a lot more. More importantly, having a professional on your side will save you from potentially costly mistakes. The fee of a buyer’s agent starts at about $10,000 and may go up to 2.5 per cent of the purchase price.
g) Miscellaneous: You should allow at least $2,000 to $5,000 to cover any contingencies or shortfalls for every property you buy.
2 – HOLDING COSTS
When it comes to property investing, the focus is the cost of buying the asset. However, there are also ongoing expenses that the investors need to be mindful of. Holding costs in property refers to the outgoings and expenses incurred by an investor pending receipt of rental income from a tenant. If you can’t meet these ongoing costs, you may be forced to sell the investment property and may end up in a difficult situation. It’s essential to know beforehand that you can afford the associated holding costs. For property investors, most holding costs can be offset against their general income for tax purposes. Here’s the typical holding costs of an investment property.
a) Mortgage repayments: These are generally the highest holding cost for an investor. Mortgage repayments are the sums of money you need to pay to the financial institution against your home loan. These repayments are usually made weekly, fortnightly, or monthly. The amount of a mortgage payment can be determined using various variables, including the loan size, interest rate, loan term and repayment type – that is, Interest Only or Principal and Interest, among other things. Mortgage repayment is a significant component. It’s recommended that you spend some time with your mortgage broker to understand the structured repayments. Let’s look at one of the common strategies to reduce this charge – Offset Account. An offset account is a savings bank account linked
with the mortgage. You can deposit your surplus funds into this account, and the balance is then offset against the amount due on your home loan, which reduces the interest charged.
b) Property management fees: An excellent professional property management office will proactively manage your property and quickly deal with any issues that may arise. The cost and level of service may vary between companies, so they must provide valuable guidance and annual reviews on your property. This service usually accounts for 5-9 per cent of the rents collected.
c) Strata fees: Generally, strata fees for apartments, villas and townhouses are the landlord’s responsibility. These are used to manage common areas of the property (i.e. lifts, gymnasiums, garden maintenance and security). Clearly, when a property has more features, the strata fees are higher.
d) Maintenance costs: It’s always a good idea to allow extra buffer funds for annual maintenance jobs, especially if your property is old. These funds may be used to meet unexpected costs such as repairing fences, fixing shower leaks or replacing a broken dishwasher.
e) Insurance: Investors need multiple insurances to protect themselves and their assets to minimise risks. Insurance premiums depend on various factors, including insured amounts, excess charges, cover and building type. It is best to consult an insurance broker as they can help you select adequate insurance coverage without overpaying.
f) Council and Water Rates: Investors are also liable to pay council rates, water rates, and land tax.
g) Property Tax: Property taxes vary significantly across the country. Each state has different definitions, classifications and property taxes. Properties owned by you and by your trusts are also treated differently. Your team accountant will be able to help you understand the taxes in detail.
In addition to mortgage repayments, typically, the holding costs are about 20-30 per cent of the gross rent that you may collect depending on the age and condition of the property. By factoring in the associated holding costs of an investment property, you’ll minimise the risk of financial difficulties in future. In the end, understanding these costs enables you to make informed decisions for your property investments. Property investing is a number game, and successful investors know how to evaluate numbers for their benefit or walk away if the numbers are not favourable. ■
RASTI VAIBHAV is the author of The Property Wealth Blueprint ($39.95rrp) and CEO of Get RARE Properties, a bespoke independent buyers’ agency that has been helping hundreds of clients across Australia secure their financial freedom through property. For more information visit www.getrare.com.au
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