When it comes to investing in property, there are many ways to boost your chances of making a lot of money while reducing your risks. But what tactics really work? We at Your Investment Property asked our experts to share the top property investment hacks that helped them succeed …so you can be successful too
How to Get the Best Mortgage Deal
Getting the right finance strategy ensures you can continue expanding your portfolio safely. Michael Lee shows you how to get the best finance deal for your investment property
If you have ever been to any kind of seminar, you are likely to be familiar with the saying, “You get out of it what you seminar principle applies.
If you don’t understand exactly what you need from your mortgage, or you don’t take the time to shop your deal well,or you avoid getting impartial professional help, then you’ll probably wind up getting an ordinary mortgage with an ordinary lender that’s overpriced… and you could be talking about paying up to 10% more than you need to in interest and fees. Now that’s a big deal, because as an investor, the deal you get on your mortgage hits your bottom line regardless of whether you are a yield or capital gain-based investor.
1. Fix your exposure
As an investor, you are subject to all sorts of management of a portfolio a little challenging while you wait for capital gain (if that’s your primary focus).
Vacancy, tenant issues and market competition affect your income, while council rates, managing agent fees, insurance, maintenance and interest costs all affect your expenses. All of this affects your bottom line. Among these factors, your interest bill is the only one you can readily influence and stabilise, which reduces the cash-flow volatility of your investment.
As an investor, it's prudent to consider taking a fixed rate on your investment loans taking care to make sure:
- Your fixed term doesn't excedd the period you expect to hold the property;
- There is enough capacity within the fixed-rate loan to accept extra payments you anticipate without penalty(assuming you don’t have any personal debt where that money could be put to better use);
- You do not deposit extra payments you may need to access during the fixed-rate period.
If you don't have personal debt and you will make extra payments against your loan that you also want to access, work out how much those extra payments are likely to tally during share of your loan.
And when it comes to making comparisons between different deals, base them on the rate type for the larger split. For example, if you work out that 80% of your loan should be fixed rate term as this will most likely have the greatest cost impact over
2. Shop the market
Buying a home is like buying a loan – except if you borrow mmore than 75% of the property value, you will probably wind up spending more on your loan in interest and fees than you paid for the house.
The relationship between real estate agents and property vendors is pretty similar to the relationship between conventional mortgage brokers and lenders.
Investors sometimes forget vendors and lenders have something to sell and real estate agents and mortgage brokers sell that “something” in exchange for commission from the vendor and the lender. The more money the vendors and lenders stand to make in a transaction, the more commission they pay their real estate agents and brokers – even when that winds up costing you more, too.
The smart approach is to shop your mortgage taking basically the same approach you did to shop for the property.
- Work out what you need from the business that arranges your loan (eg face-to-face or online service)
- What you need from your actual loan
- Get some prices from a range of sources, but don’t get preapproval from all of them as this will affect your credit rating
It's a good idea to choose a few brokers rather than just one as different brokers favour different lenders so one broker may be able to get a bigger discount from the same lender on the same loan than a broker up the road can arrange.
You should also choose some lenders on and off the broker’s panel, because brokers might promote a panel of 15-plus lenders, but research shows that 62% mainly use four lenders or less. If you really want to test how many lenders a broker compares, ask them to produce a printout of Total Individual Costs (TICs), including loan feature comparisons for the best loans from 10 lenders that you pick from their panel. The broker should also add the three or four they think are best if they’re not already on your list.
Investors sometimes forget vendors and lenders have something to sell and real estate agents and mortgage brokers sell that something in exchange for commission
If you don’t have time, or you are worried you don’t have the skill to do it, consider hiring an accountant or independent adviser to do it for you, after all that fee is probably tax deductible for investment advice, and a better deal on your finance means more money for you out of every investment. The key is to make sure whoever does your number crunching is professionally competent and fully independent, which means they don’t have a lender alliance or associate mortgage broker.
3. Keep them guessing
If you want the best mortgage deals today, tomorrow and in the years after that, then never show the deal you get from one competitor to another when shopping your mortgage. The reason is simple and many borrowers mess it up by trying to be too clever by half.
The fact is that lenders and brokers do what they do to make money and I'm yet to find one that will work for free. Fair enough, of course, but the bottom line for all business people (like you and your investment portfolio) is they want to make as much money with as little effort as possible.
That means when it comes to discounting, both lenders and brokers only want to give away “just enough” to win your business. If you get a sharp deal from one provider and show it to another, then you’ll probably wind up with one of two responses.
- The first is sorry, no can do.
- The second is to shave a little here and shave a little there. Sometimes it might even seem like they’re shaving a lot, so make sure you TIC it before you take it. If the deal is real, then the next question is ‘Wow, if they came down that far, how much further can they go?’
If you’ve already shown your hand, you’re left to take the deal when it may not be the best they can offer, or it leaves you teetering between different providers in some kind of time-consuming reverse auction until one or all of you get sick of each other. The simple alternative is to just say, “Here I am, this is what I have to offer, this is what I want. So what’s your best deal? If it’s good enough, you’ll get my business. If not, you can try again when I need my next loan.” Which brings us to an important point.
4. Don’t price match
You might have already noticed that smaller competitive businesses are getting swallowed up or squashed out by the big players with deep pockets. Price matching helps this along by allowing clever, pseudo competitive players to take a small hit on an individual sale to snatch the opportunity from the business that really was fighting the competitive fight. If you want an example, take a look at Bunnings. Its catch cry is ‘lowest prices guaranteed’. So if you show the hardware chain a lower price on, say, a particular shovel, it’ll beat it – by just enough and subject to some terms and conditions. The moment they do that, Bunnings knows it doesn’t have the lowest price on that shovel, but it doesn’t change its retail price across all stores for that shovel, just the one it sells to you. So the shop that was on the front foot to win your business misses out on the sale and there are only so many times a business can do that.
If you want the best deal, take it when you find it and kiss the lazy price matchers goodbye, otherwise the next time you need a loan, you might not have as much choice or competition as you do today.
5. Understand cross-collateralisation
If you're only buying your first property, then you can skip ahead on this… for now. However, if you already have one property and are buying your second or third (even if one of those properties is your PPOR), then it pays to understand cross-collateralisation.
Cross-collateralisation is the simple way of using equity in one property as the deposit for another, which essentially means financing multiple properties with one lender. It’s not impossible to have multiple properties with one lender and not cross-collateralise, however that’s a little tricky so let’s save that for another day and just assume that two or more properties with the same lender will create cross-collateralisation.
UPSIDES AND DOWNSIDES OF CROSS - COLLATERISATION
For some investors, cross-collateralisation is good, for others okay and for some, a nightmare.
Advantages of being with one lender:
- Upfront and ongoing fees are likely to be lower.
- Time taken to get an application for a new property will be less.
- Discounts are likely to be higher.
- Management and moving deposits and redraws between accounts is simpler and faster as everything is in the one spot.
- You are a “bigger” customer and therefore should have better on your deals, however that really comes down to your ability or your advisers ability to negotiate coupled with the size, attitude and mood of your lender. In other words, mark this advantage as a definite maybe.
- You extend the power of your lender over you and your decisions.
- Adding or removing one property affects your whole portfolio.
- The financial health of one property can affect your whole portfolio.
- One small change, like selling, can trigger multiple valuations and with that, multiple valuation fees.
In a nutshell, if you are an investor that makes fairly frequent changes to your property portfolio (ie flipper), or your properties are either a mix of high-risk / low-risk assets, or high-growth/low-growth assets, then you really ought to think carefully before cross-collateralising as the disadvantages probably outweigh the advantages.
It might be a little extra work and it might wind up costing you a little more, however you can avoid cross collaterisation and still use the equity from existing property relatively easily. You just need to release equity from your existing properties through top-ups or redraws, then take that cash as the deposit for your new property loan with a different
lender. The bright side of all of that: any extra cost should be tax deductible on investment properties (for now) and in any event. it buys you a bit of insurance by protecting individual assets in your portfolio from changes in the other.
6. Consider professional unbiased advice
Little over a year ago, rules changed to restrict the use of impartial, unbiased and similar terms where a business receives commercial incentives that produce a conflict of interest. Although professionals offering impartial advice remain a little scare, the numbers appear to rising, making it simpler to get help which puts your needs first.
Between growing adviser numbers and advances in technology, it should become increasingly easier and more affordable to find an independent mortgage adviser, or financial adviser or accountant that is not associated or paid by either a lender or conventional mortgage broker.
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7. Change over from a principal andinterest to an interest-only loan
When building up their property investment portfolio, a lot of investors make the mistake of taking out a principal and interest loan.
I say “mistake” because this kind of loan can put a stop toyour investing career before it’s even off the ground. When you’re building up your portfolio you want to gain as much equity as possible – equity which you will then draw from your properties and use to buy more investment properties.
How many investment properties do you need? In today’s market it takes about six to become financially independent. Although it’s great to pay off debt, you don’t want to stop at one or two. That’s why an interest only loan is the best loan type at this time. Once you have reached your goals and begin to consolidate your portfolio, you can choose to switch to a
principal and interest loan and begin paying down your debt.
8. Put compound interest to work for you by using an offset account.
An offset account is simply an interest-bearing savings account, which is tied to your loan account. The difference between a regular savings account and an offset
account is that the balance in your mortgage-offset account is “offset” against the balance of the mortgage.
Let’s say you have a $100,000 mortgage and an offset account with $10,000 in it. The interest you would pay on that mortgage will be calculated against $90,000 - not $100,000. Using the current average variable rate of 6%:
Without using offset:
$100,000x6%= $6,000 interest payment per annum
With $10,000 in the offset account:
$100,000-$10,000= $90,000x6%= $5,400
Savings: $400 pa
As you can see, the more cash you keep in your offset account, the higher your savings on interest will be. Any “notional” interest on savings is earned at the same rate as the linked loan. Over time the savings - which you can certainly add to at any time - can help pay down the principal or build up your equity.
9. File a PAYG variation to reduce your tax
Rather than letting the Australian Taxation (ATO) keep your monies, file a PAYG variation to reduce your tax bill and use your cash during the year. It’s your money after all, so
why shouldn’t you have access to it sooner?
When you file a PAYG variation you'll receive your refund on a regular basis - with ever pay packet-rather than one time at the end of the financial year.
Use the increased cash flow to pay down a bad debt, add towards an investment property deposit, add to your buffers, go on a holiday - whatever you choose.
The PAYG variation doesn't take the place of your annual tax return. Obviously, you will still need to lodge a return as usual; the payments you receive throughout the year will b credited against your tax obligations.
Note that variations expire June 30 of each year so best practice is to submit a new application by May or early June each financial year. Don't forget that if you change employers you will need to file a new variation request.
10. Use different lenders for each property to avoid cross-collateralising your assets
Cross-collateralising your loans is not recommended, as it will put a major roadblock to building
your property investment portfolio.
For example, if you own a property that you wish to sell and it is cross collateralised with other
loans, your lender may insist that you use the monies from the sale to pay down your loans so
that your portfolio is kept at a certain LVR.
- The lender can limit your borrowing options, such as only offering a principal & interest instead of an interest-only loan, citing exposure limits as their reason.
- Fees - including exit fees for fixed loans - can be significant, making it very costly and difficult to change lenders.
- Your properties are valued as one asset, so if your have one property which fails to perform it negates the capital growth of your other properties.
- To avoid the risk of cross-collateralisation, choose different lenders for each of your loans.
- Be aware that even if you have sole and separate loans with one lender, many load documents have what's known as an “all monies” or “all securities” clause which has the same effect as cross-collaterisation.
11. Create good buffers with your properties
With each and every investment property, set up a buffer account to cover two to three years worth of property costs.
Ideally, it will be linked to your loan as an offset account so
that it can earn interest.
Start whereever you can. If you don't have two to three years worth of capital, put as much as you can into your offset account and begin adding as much as possible to the account.
Once you have accumulated enough equity to cover the costs, refinance the property and stash a sizeable portion into your buffers - spreading it out among various properties if needed.
Boost your savings even more by living off a credit card with at least a 45-day grace period. Put your entire pay packet into the account – where it will accumulate interest – and then pay your credit card off to avoid any interest charges.
12. Always double any quote you’re given, whether for time or money
This is almost goes without saying, but whenever you're quoted a figure, double it. For example, if you're told that it will take three months and $20,000 for a development approval, double both the time and the money to avoid finance and scheduling issues.
Although it's nice to be pleasantly surprised and good to be optimistic, it's smart to be realistic as well!
13. Organise a depreciation schedule to increase your tax deductions
As investors we want to take advantage of every cost saving device available to us, and depreciation is a good one.
A depreciation schedule works by reducing your taxable income. Fees can vary greatly so shop around for the best deal.
Depreciation is compensation for the general wear and tear of your investment property. Investing in property is a business. There are two types of depreciation: capital works, and plant and equipment.
Capital works involves the structure itself as well as items that are permanent (eg door and window fittings, the driveway or built-in cupboards).
Plant and equipment are items that can be removed (eg carpets, blinds or air conditioning units).
A common misconception is that your property has to be new to get depreciation. While your depreciation will be greatest on a new property, older properties still have some depreciation left in them, so don’t discount the possibility of depreciation offhand.
If your property was built after July 1985, you can claim both types of depreciation; however, if it was constructed earlier you can only claim on plant and equipment. Still, it’s worth the effort. After all, even the fees for the schedule preparation are tax deductible!
14. Pair loan to value ratio (LVR) with density type
If you want to obtain a loan at 95% LVR, a good rule of thumb is to choose properties that are low-density type properties.
If, however, you want to go with high-density properties, go for 80% where possible. You can run into issues with valuations if you go up to 90% with these type of properties.
Should this happen, re-submit your loan application, find another valuer or lower the LVR by investing more of your own capital.
15. When researching, look for strong rental yields of 6% and above
A tell-tale sign of growing area is gentrification. Businesses are moving into the area, the population is growing and an infusion of both public and private money is being poured into the region.
Also, look for a strong council that has a tight grip on growth in the region combined with a strong vision for its future.
Look for areas that have seen growth of at least 1% to 2% over and above the last five-year average.
A quick way to calculate yield:
Weekly rent x 52 weeks, divide it by the property purchase price and multiply by 100.
A property worth $400,000 with a $400 weekly rent has a 5.2% yield.
$400 x 52/$400,000 x 100= 5.2%
If the rent is below $400 weekly, your yield is less than 5%
Don’t forget that you can follow some strategies to boost your yields without waiting on the market.
You can, for example:
- Buy at a discount
- Refinance to pay down your mortgage
- Add a granny flat to create an additional revenue stream
16. After finding a deal, speak with other agents in the area to get a better idea on the neighbourhood
Agents are obviously in the business to make money so the better light they can cast on their
property listing the better.
There’s nothing wrong with this unless of course they outright lie, however as a property investor the responsibility is yours to do your due diligence and discover any “dirt” a
property’s neighbourhood might hold.
A great way to ferret out information such as lousy neighbours, a very busy street or vandals, is to speak to agents who know the area.
Agents are very busy people, so the more information you've gathered upfront, the better your chances of finding someone who will agree to speak with you.
Call a rival real estate agent and tell him that you’ve put in an offer on a property his competitor is listing. Ask him what he thinks about the property, including its location. His answer might be very revealing, especially if he was unable to sell it himself.
Depending upon what you find out, you can potentially have the ammunition you need to get a reduction in price or a change in the terms of the deal.
17. Stick to investment properties within the $300,000–500,000 price range
The majority of individuals buying properties are owner-occupiers, and a very large share of them will be looking for properties just like yours – affordable and within their price range.
By purchasing properties in the “meat and potatoes” price range, you are ensuring a better resale value should you decide to unload the property. I recommend buying a property around the $380,000 price.
18. Plan for $3,000 worth of repairs when purchasing an existing property
Include repair costs of at least $3,000 when calculating the profit potential of an investment property.
If the obvious repairs exceed this amount, it may be worth reconsidering the deal.
19. Keep a good reference file on your investment property contacts
As property investors we rely on expert advice and opinions from many professionals: agents, valuers,property managers, mortgage brokers – just to start the list!
It’s important to maintain a warm rapport with these individuals – if for no other reason than to simply touch base with them from time to time.
To keep in touch, use a good system of customer relationship management (CRM) rather than just your phone’s contact list. You can even create spreadsheets with their personal information. In addition to the typical contact information – phone number, email, postal address – enter additional information such as their families, or birthdays.
Don’t ever forget that the professionals you count on to put together a great investment property portfolio are people with their own dreams and desires, too.
If you work at creating a good connection, you may receive notice of deals before they hit the market and be warned of any potential issues as well. Thoughtfulness goes a long way to creating a great working relationship.
20. Look for properties that are not on the market
This strategy works best when the market is at the bottom – before word has gotten out that it’s starting to move!
Observe the neighbourhood you’re interested in, paying close attention to the condition of the properties.
For example, if you’re looking at one deal, look around the area at the other homes. Take note of who lives nearby and the condition of
If the property looks like it needs just a bit of care, but is otherwise in good shape, the owner may be more willing to negotiate than someone who already has their home up for sale.
21. If you can’t get a return of $3 for every $1 you spend, don’t renovate
Renovation can almost be considered an Australian pastime! As much fun as it might be to renovate, as property investors we’ve got to keep our heads straight when calculating the profitability of such a venture.
Spend your renovation dollars where they’ll have the most impact, but don’t spend all of your cash on a single upgrade – such as a new kitchen – when the bath is in need of some help!
Determine the cost of your renovations and if you don’t get back at least $3 for every $1 you spend, either don’t renovate or change your renovation plans.
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22. Consider investing with others
The power of compounding interest, and the time value of money, dictate that controlling as many appreciating assets as you can for as long as possible is the key to successful investing.
Australian home ownership rates are around 70% and according to ATO data 8% of Australians own at least one investment property. However, only around 2% of people own two or more investment properties. Clearly building up a quality portfolio of investment properties is not easy to do by yourself.
So instead of waiting for years to accumulate enough resources to take action and make your investments, co-owning property with others is an alternative that can make a lot of sense. It means sharing a smaller percentage of the rewards but co-ownership:
- Can make you money – it can allow you to get into the market many years earlier than you could by yourself, meaning you get quicker access to capital growth and potentially allowing you to build a bigger property portfolio than you could by yourself.
- Can save you money, as it reduces the amount of money you need to cover purchase and holding costs. Saves you time – as you can share the workload of investing and managing your property with the others.
- Can help manage your risk – as you can build a more diversified property porfolio than you could on your own. While investing with others can reduce the effects of your own personal investment biases and can allow you to leverage other’s skills and knowledge to your advantage.
23. How to find joint venture partners
Co-investing requires a high level of trust to succeed. For that reason it helps if the members of your property collective are friends and/or family members. If you’re not in the position of having friends or family members who share your goals, consider looking for potential partners by:
- Asking your inner circle to recommend your idea to their friends or family members. Odds are that the person you are looking for is only one or two degrees away.
- Posting your idea on a property investment discussion forum and see who responds. You never know what response you could get if you put your idea out there.
- Posting your idea to LinkedIn groups. There are now many LinkedIn groups that have formed around property investing and property development.
Co-investing can allow you toget into the market many years earlier than you could by yourself, meaning you get quicker access to capital growth
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24. Knowledge is power: Invest in your education
Don’t be frightened to spend on your education. Start off reading a book or magazine each month on a variety of topics about property investment. They are cheaper than seminars. Keep building your library until you start seeing the same things being repeated and a particular strategy resonates with you. Then carefully pick out reputable educators and attend a few seminars. Focus on education and make sure you get your questions answered at seminars.
25. Budget cash flow
Make sure you have a realistic budget in place for your lifestyle and stick to it.
Get good with forecasting the balance between income and expenses. Your budget helps you save for a deposit; it highlights how to tight cash-flow might get it; it forces you to think forward; and to consider everything. Don’t set a budget that is too tight to enjoy your life. Remember, property is a long-term investment. If a bank rejects your attempts for finance, heed its warning, and get busy reducing debt or improving cash flow; don't find sneakly workarounds as these may land you in cash flow trouble.
26. Budget equity.
Allow a 5% equity margin for unexpected expenses. Accurately calculate how much it will cost to enter the market, just as accurately as you calculate how much it will cost to stay in it. If you’ve calculated it will cost you $100,000 in deposit, stamp duty, legal fees, etc to buy an investment property, then you need $105,000 in equity or savings to cover things like a hot water system going bung or a tenant taking off in the middle of the night.
27. Assess both risk and return
All investing comes down to only two things: risk and return. You must be able to assess an investment opportunity looking only at risk and return. Risk is ignorance. You don’t know if a property will fall down a sink hole, be vacant for months at a time or stay stagnant in
terms of growth. Knowing as much as you can reduces the risk, so do your research and ask questions.
28. Know when to chase positively geared properties
As a rule, you’re looking for the best return on investment (ROI) for the least risk with each
investment. You need to consider capital growth as well as income and tax, too. That may mean
buying a negatively-geared property.
If it is the best ROI with the lowest risk, then it is not stupid to buy negatively-geared property. What is stupid is choosing an investment with either a poorer ROI or higher risk profile simply because it is cash-flow positive.
But there may come a time when you’re unable to service more debt because your cash flow is too low. You need to know in advance how lenders will view your position after you’ve bought the next property. You don’t want to be stuck after you’ve purchased.
If your cash flow is looking a bit tight, aim for positively geared property. Not properties that are cash-flow positive after tax, but properties that have you paying more tax. That is, the income exceeds all expenses related to that property before tax is even considered.
29. Don’t fix your interest rate to try and save a buck
Choose fixed over variable to reduce risk, not to reduce interest expenses. Banks will offer a rate not knowing exactly what will happen with interest rates in the future – they’ll factor in a margin for that risk. For the marginal perceived improvement in interest expense you think you’re going to get by fixing, you lose the ability to refinance or sell without incurring a break cost.
30. Maximise your leverage
A high loan to value ratio (LVR) is one of the most important factors in maximising the profitability of an investment.
A good investment is made so much better by leverage. Without attractive finance, I wouldn't even bother investing in property. The lowest interest rate is not the most important part of your financing.
Not all low interest rate loans will allow you to buy in any entity. You may prefer a company or trust ownership structure, for example.
Not all loans will be interest only. Paying principal & interest will hurt cash flow terribly. Choose a loan that offers interest only for as long as possible.
31. Use available stats to your advantage
Rapid capital growth is all about imbalance in supply against demand. Prices change according to the law of supply and demand. When demand is high and supply is low, prices rise. This is a market out of balance. It will need either high price growth or sudden supply to restore balance.
As an investor you should be looking to capitalise on markets that are out of balance. Locate markets with growth potential by examining the supply and demand for property there. A number of indicators can help including rental vacancy, days on market, stock on market, discounting rate and rental yield. You can get this information at the back of Your Investment Property
magazine or at dsrscore.com.au.
Along with the demand to supply ratio (DSR) data, check for recent price growth. If there has been significant price growth in a market with a high DSR score, the price growth remaining
may not last for too long before the demand is subdued. To maximise your capital growth potential find markets that have a high DSR as well as lack-lustre recent growth over the last few years.
32. Check out the market fundamentals
Do both ‘statistical’ and ‘fundamental’ research. Statistical research is pretty quick and objective, you just look up the property data published by the data providers such as RP Data and DSR score. But unfortunately, it doesn’t tell you the whole story. That’s where fundamental research comes in. It is more time-consuming and subjective than statistical research.
Examples might be checking private and public spending in the target area. The most valuable single piece of quick fundamental research you can do is to check development applications on the local council website to gauge how much future stock is about to come onto the market. This represents the supply side of the equation. Low supply is a good thing. A new development is not a good thing.
33. Find out what will trigger a price growth spurt in the suburb
Positive change affects capital growth. Proximity to existing schools, shops and transport sounds positive, but doesn’t translate directly into capital growth. For example, if a train line is extended into a suburb, property prices in that location will rise as the new infrastructure benefits residents making the place more desirable to live in. But after 10 years, the value of having a train station is already well and truly factored into the price of properties. The rapid price change occurred when the new train station was built.
Positive change is what is needed to keep a property market growing above the national average growth rate. Locations with the least infrastructure are the ones that can change the most if that infrastructure is added. Markets that have already can't experience the same level of change.
Don’t be afraid to spread your wings interstate. Investing interstate gives you diversification of property markets, ensuring you have at least one property growing in your portfolio somewhere. You can also reduce land tax liability by investing in other states since it is a state tax, which kicks in once a threshold is exceeded.
Although it is advisable to visit wherever you plan on buying, it is not essential so long as your online research is top notch.
35. Pick your property manager carefully
A good property manager versus a bad one can be worth thousands a year for only a $300,000 property.
Picking a good property manager usually comes down to researching their policies concerning operation and seeing how many properties they have to manage.
Be prepared to change managers until you find one that provides the level of service you expect. Make sure your property manager feels appreciated to get them onside – they are the closest thing you have to an employee for your ‘property investment business’.
36. Beware of depreciation deception
Don’t be fooled into thinking that depreciation is a nice little bonus for property investors. Sooner or later you are going to have to pay for the repair or replacement of a fixture or fitting related to your investment property.
Imagine you have spent $5,000 on some carpet and assume it depreciates by 10% per year for the next 10 years. After six years you then spend $8,500 replacing the carpet. You can’t claim that full amount. The depreciation you were claiming has already gone into that. You have already claimed $3,000.
37. Find a pedant to do your bookkeeping
You want your accountant’s time to be spent on strategy and your bookkeeper’s time to be spent on compiling data for your accountant to make decisions with. Scan and store all correspondence you receive from insurers, councils, tradesmen, property managers, etc, so you can easily share this data with your accountant and/or bookkeeper.
Have your bookkeeper create a spreadsheet for each financial year that lists every transaction related to your property portfolio.
38. When it comes to retiring on property, lower LVR is the key
Obviously you can't retire on a portfolio of negatively geared properties. But you also can’t retire on a portfolio of cash-flow positive properties if they're only cash-flow positive after tax. High cash-flows areas are quite often high-risk areas. These are not locations to hold a ‘set and forget' property. The relaxed cash-flow portfolio is one with a low LVR.
Fifty per cent LVR should be more than enough to make a property cash-flow positive. That's your target.
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39. Ensure you buy under market value
Buying under market value ensures you immediately get instant equity that you can then use to buy your next property. This also means guaranteed, instant profit.
Best of all, buying under market value lowers your risk. Say if you lose your job or got sick and unable to work, you will not lose money when selling your asset because you’vealready bought at a discount. The worst-case scenario wouldbe for you to break even.
How I estimate/calculate market value:
- Look at comparable sales over the past six monthss
- Look also at the recent sales and what properties are on the market.
- Compare that with the asking price of the property you’re considering.
You need to make sure that you’re comparing like for like to establish the amount the market is willing to pay for similar properties. You can then use this figure to estimate the value of the property. Of course, you also need to bring in a professional valuer to ensure your estimates are correct and you’re truly buying under market value.
How to spot an undervalued property
40. Cheap asking price
This can be tricky because a lot of agents engage in underquoting. But you can tell a genuine bargain when the agent is fairly negative about the property and is keen to take any offers to the vendor.
41. Properties that are undercapitalised and may have poor presentation
If the property is poorly maintained, you may have a higher chance of negotiating down on price.
42. Property may be located in areas with bad reputation
Some of the areas I invested in had bad reputations, but are slowly gentrifying and shedding their bad image. In these areas, you can still pick up reasonably-priced, even under-market valued properties as many investors often overlook these areas.
43. Distressed sales
The owner might be in financial trouble and needs to sell quickly.
44. Buy properties with strong cash flow
In my experience, having a strong cash flow position reduces your risks and also enables you to build your portfolio more rapidly. This doesn’t mean you compromise capital growth. You can have both, despite what many experts have you believe.
A strong cash flow position means the rental income is meeting the cost of holding the property, at the minimum. This is also called cash flow neutral. You're not earning extra cash, but you’re not spending a cent on your property. Essentially, your investment property is costing you nothing.
From the serviceability point of view, you can buy as many properties as your risk profile allows you to, in principle. Since you’re not spending a cent on this property, as far as the bank is concerned, your serviceability remains intact. Of course, you should try and get cash-flow positive property without compromising on the capital growth, where possible. This can be achieved by buying under market value and getting a strong rental income.
On the other hand, having a poor cash flow, where you're tipping you hard-earned salary to support the lifestyle of your tenants, puts you in unnecessary risk and prevents you from expanding your property portfolio further.
How to quickly calculate cash flow:
Cash flow = Expenses (mortgage repayments, landlord and building insurance, management fees, rates and maintenance) = $ (positive/negative)
Rent $430 - Expenses $480 = -$50 negative per week
Rent $340 - Expenses $300 = $40 positive per week
In order for a property to be cash flow neutral, you need to get a yield at least 7%. Personally, I would not accept a yield lower than 7%.
Is your rental yield high enough?
A quick way to tell if your yield is high enough is to add 1.5% on the interest rate and factor in additional 1.5% for expenses.
Assuming mortgage interest rate of 6%.
6% + 1.5% interest rate buffer + 1.5% maintenance cost = 9%
You need 9% gross rental yield to ensure positive cash flow.
If you get 7% gross rental yield before tax deduction, this might bring you to neutral position.
Top tips for finding bargains
45. Know areas intimately
Know each street in the suburb as there could be $50,000 difference between streets. Become a specialist in a few areas.
46. Build good working relationships with agents and be at the top of their lists of buyers to call first
47. Research, research, research
Nothing beats good old fashioned hard work. When you have looked at 1,000 property deals, you will view them through different eyes than someone who has only seen 100 properties.
48. Get to know the local players
One of the great benefits of relentless research is that you become familiar to agents and sellers.
49. Keep records diligently
Sending email enquiries is one thing, but keeping the replies and remembering contact names is another When I come into contact with real estate agents, I make sure to pay attention to detail.
50. You have to get someone to understand your goals
People send an email to a real estate agent and they get spammed the next week with messages about open houses. Whenever an agent contacts me, I systemise it, keep the email address and then sit on it. Then later, I email them back and say, ‘Hey, I need something, what have you got for me?’
51. When I’m speaking to an agent, I think about the last time I spoke to him
I say ‘oh I remember speaking to you about six months ago… With regards to the property, it will work for me at these numbers, I'm happy to buy at this figure'. He might then remember me and think that I’m pretty good to deal with.
52. Build up Great Contacts.
Over time, the contacts build up and I widen my range of people that want to help me achieve a purchase
53. Ensure there is adequate infrastructure around
When buying in a regional area, make sure there’s enough demand for both growth and rental. No point buying in a town of 50 people and speculate where there is no industry or infrastructure. It is important to know there are major retail players around for jobs, and potential for further
growth. If in a capital city, infrastructure is generally sufficient, however, make sure there is a strong demand, or potential for demand, to increase due to infrastructure around this.
54. Don’t get emotional
Work on the numbers, not emotion.
If the numbers work, and the property makes sense, then what’s stopping you? People get caught up with their emotions, and most of the investors out there take the emotional decision over the logical decision.
When searching for properties, work with the numbers, not emotion. The numbers will lead the way and never lie; emotions will lie and try to help you justify the numbers. Opinions form, and this is where most investors lose money as they look too deep, and picture the property being for them, not for the tenant. People will rent properties, and you need to assess what’s happening in that market. Someone
from a premium waterfront suburb won’t want to live in an old, dilapidated fibro in Western Sydney; however, for Western Sydney you will have locals lining up for such a property to occupy. . It’s a different market from what you may perceive, and you need to assess the property from your customers’ eyes, and your customers in this instance are tenants.
Having information at hand is key to being proactive and gives you more confidence for calling the shots. Be clear on what you are hoping to achieve. Know what to ask for and when to ask
55. Leave your ego and emotions at the door
The better negotiator you are, the less emotion you will show. Using humour is a great way of disarming the other party and hides from them what you are really thinking.
56. Listen, listen, listen
Selling isn’t telling, it’s listening and listening well. Not listening is a sign of disrespect. Listening carefully gives you little clues that can give you an insight into the other person that are not obvious to the casual observer. If you have poor listening skills, you will ultimately have poor negotiation skills.
57. Prepare any arguments before you walk through the door for negotiations
Having information at hand is key for being proactive and gives you more confidence for calling the shots. Be clear on what you’re hoping to achieve and write down your ideal
outcome(s). Know what to ask for and when to ask for it. Timing is crucial, as it can cost you the race.
58. Have confidence in your preplanning and ask for what you want and be assertive with your expectations
If you don’t ask for a certain price, term, or inclusion, you’re not even trying. If you have a solid rapport and you deliver your case with confidence, portraying what you’re requesting is not out of line or unreasonable, you have a far greater chance of achieving your desired result.
59. Be flexible and realistic
If you’re going into negotiation more aggressively than you need to according to your goal, don’t suddenly get greedy and renege/stall. You also don't want to take a first counteroffer; present another, present another opportunity to the other party closer to their response. Remember that timing is of the essence, and more important than screwing the last $5 off someone. If you get too greedy you can end up losing the deal.
I’ve seen many people go through the thrill of the negotiations just to go cold at the end. If you cannot commit, it is a sign of disrespect, and you will lose credibility. If the other party you are dealing with shows no sign or level of commitment, then perhaps you are being too generous. At the end of the day, any deal comes down to both sides being in agreement on fair and reasonable terms.
61. Close on a positive note
For example, if I am talking with a real estate agent and putting my offer forward, I will end the conversation with a reassuring close. For example, ‘OK, great. Please keep me posted so I can organise a time to come over and sign the contract’, or ‘OK, great. Can you please give me your details so I can put the deposit into your account?’ This shows you are serious, committed and you’re the easy option.
This feature is from the September issue of Your Investment Property Magazine. Download the issue to read more.
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