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July 2008
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Nothing can stop the man with the right mental attitude from achieving his goal; nothing on earth can help the man with the wrong mental attitude. Thomas Jefferson Welcome message from Damian Collins 
Hello , On behalf of the Momentum Wealth team I am excited to present to you the July edition of Property Wealth News. Recently we've had a few clients ask us what we think about buying property off-the-plan so we've decided to look at the pros and cons of this strategy in this month's feature - don't miss it. We also look at the latest building approvals figures and whats happening with rental returns; and, as always, we provide a multitude of hints and tips to assist you with your property investing. Remember, if you would like to speak to one of our consultants about how to improve your current situation or accelerate your investment plans, please call 1-800-000-159 and they will be happy to help and answer any questions you may have. I hope the coming financial year brings you great success.
Damian Collins
Buying off-the-plan: wise investment or rotten carrot?
For many investors, the prospect of purchasing a property at today's prices and not having to settle on it for 2 years may be difficult to resist. Particularly when the likelihood is that interest rates will start to decrease over the coming years. But just like the proverbial 'dangling carrot', when buying off-the-plan there is often more to the story than meets the eye. So, what are the benefits of purchasing off-the-plan and do they outweigh the risks? For those of you who are unfamiliar with the concept of buying off-the-plan, it is when you purchase a property before it has been built (i.e. still in the development phase). The majority of off-the-plan purchases are apartments, but it is not uncommon to find townhouses, villas and even house and land packages for sale off-the-plan. When buying off-the-plan you are generally required to pay a 10% deposit (or purchase a deposit bond) on signing and the remainder at settlement. Why it can be enticing When you buy off-the-plan, there is often a long period of time before you have to settle on the property. It can be months or even several years. A delayed settlement means you have more time to organise your finances and save for a deposit. But this isn't the main benefit. The big 'carrot' for many investors is the possibility that the property will grow in value before you settle and will therefore provide instant equity. Many investors have successfully managed to sell a property before settlement and achieve a healthy profit. Buying off-the-plan can also mean you may be able to make changes to certain aspects of the property (e.g. the fittings) to suit your own taste. And some developers may also offer discounts to early purchasers as it enables them to reach their required level of pre-sales commitment. Being brand new, off-the-plan property is often promoted as having good rental returns. In fact, some developers even sell off-the-plan property with rental guarantees that guarantee a certain rent for a period of time. Add to that the depreciation benefits and stamp duty savings that often come with off-the-plan purchases, and buying off-the-plan can seem to be a pretty enticing option. Why it can go rotten It is difficult to predict what will happen to property prices at the best of times, particularly over the short term. This makes off-the-plan purchases particularly vulnerable to market fluctuations. So what if the value of your property actually falls by the time it comes to settle? This is a serious concern and could put you in a position of negative equity if your loan is greater than the value of the property. In fact, many people have found themselves in such as position after a market has softened and especially when the original price they paid was already inflated (perhaps to cover a rental guarantee). A fall in prices is more likely to happen when there is a sudden increase in the supply of property, such as when big apartment complexes are completed and there is a sudden increase in the number of properties for rent and for sale. This situation could cause the value of your property to fall or force you to lower your rent due to increased competition amongst landlords. This has occurred for many investors who purchased apartments in high-rise developments and found themselves competing with other landlords in the same complex. Given that most banks won't give you an unconditional offer of finance until close to completion, another major concern when buying off-the-plan is that you may be unable to obtain finance. Your financial situation may change or lenders may adjust their lending criteria as has happened recently with the credit crunch. Since you are legally obliged to settle, you could face a serious problem if the banks say no. Another concern for buyers who purchase a property off-the-plan is that you don't know whether the quality of the finishes will meet your expectations. If not, it may be difficult getting the issues resolved after settlement. If you are planning to move into the property, construction delays may also pose challenges particularly as contracts rarely include penalties for late completion. Also be aware that historically most newer property does not increase in value over the longer term as much as older style property, due to the higher building value and lesser land value component. Therefore you may be locking yourself in to a lower performing property that over the longer term could cost you hundreds of thousands of dollars in lost capital growth. What you should do Clearly, buying off-the-plan can be a risky venture. And, like many property investments the risks are greatest when you plan to hold the property for only a short period of time. There are a number of things however you can do to mitigate the risks associated with buying off-the-plan. Firstly, make sure you research the investment in the same way you would evaluate any other property investment. Do a thorough demand and supply analysis. Will the demand for this type of property grow over time? How scarce is the property? Does it have views or other characteristics that would be difficult to replicate? Is there a chance there will be an oversupply of similar property? Getting some short term capital growth by purchasing off the plan will not make up for a longer term poorly performing investment property. Some new properties in excellent locations will do well over the longer term, but a significant percentage will underperform the market in general. Another important area for research is the actual contract for sale. Before signing it, you should take it to your solicitor for inspection. Make sure the contract gives you as many rights as possible, such as the option to cancel the contract if the project is delayed or changed significantly. You may also consider including a clause that will ensure the developer keeps you informed about any changes that affect your property. Does the contract specify the actual appliances and fittings that will be installed in the property? If not, you may want to include these in the contract to ensure you get what was promised. If you are planning to sell the property prior to settlement you might also want to make sure there are provisions in the contract that allow this. Your due diligence should also include looking into the developer's reputation and inspecting previous work. You might even consider employing your own valuer to value the property, especially when the property is sold with a rental guarantee. With the promise of instant equity, good rental returns and tax benefits, buying off-the-plan is definitely a carrot worth considering under the right circumstances. But unless you take extra caution and prepare yourself for the likely pitfalls, you may find that the whole experience leaves a rotten taste in your mouth and you could have achieved far better returns elsewhere. Momentum Wealth and its affiliated entities are not Solicitors. While all information is provided in good faith, you should seek your own independent legal advice in relation to all contract matters.
Building approvals down again, but ANZ predicts home prices to explode The number of building approvals across the nation fell 1.4% in May, according to the latest figures from the Australian Bureau of Statistics (ABS). This downward trend, which has continued for the last 6 months, is a clear sign the country is not building enough houses to satisfy the demand. This can only put upward pressure on existing housing stocks.
South Australia and Tasmania were the only states to record an increase, with 2.0% and 0.8% respectively. ANZ Senior Economist Paul Braddick said that Australia faced a critical and potentially chronic shortage of housing. "A growing housing shortage is setting the scene for the mother of all housing booms" Mr Braddick said. Strong rental yields "With capital growth softening in the market, together with an exceptionally tight rental market, gross yields are trending up", said RP Data research director, Tim Lawless. Adelaide, Brisbane and Melbourne are the only capital cities that have not shown an improvement in gross yields between March 2007 and March 2008. With housing shortages faced by most cities, it is surely a great time for investors to take advantage of the yield increases. With home loan affordability already suffering, fewer houses being built and low vacancy rates, it seems rents can only continue to increase, a positive sign for investors.
Emma, a successful investor in her own right, is one of our Acquisitions Specialists. She has extensive experience working with investors and developers in acquiring residential and commercial properties; and development sites. As an investor seeking maximum rental and capital growth, you need to invest in property which is high in demand, yet also has limited supply. Let's look at the factors which drive demand. When assessing property for potential investment, it is essential to pay attention to demographic and social changes that influence where people want to live and what kind of property they want to live in. An example of social change is the lifestyle preferences of today's Australians. Collectively we tend to view ourselves as more sophisticated than we did a couple of decades ago. The "I culture" is proving to be popular, as is the attraction to reside in locations near water. Investors would benefit from capitalising on these preferences by investing in property near I strips, close to rivers, beaches or harbours, and in inner city locations rather than rural locations. Another factor which is responsible for driving demand is demographic trends. Many baby boomers have the view that the prosperity they have worked hard to create is for spending on lifestyle. As a result, many are trading their large suburban homes for smaller lifestyle-oriented properties located close to the ocean or near café strips. "Generation X-ers" (a group currently in their 20's to 30's), are also attracted to lifestyle - generally they are delaying marriage and family to allow themselves to achieve their goals and single person households are also on the rise. These demographic phenomena point to smaller, lifestyle-oriented dwellings as being in high demand in the coming years. A rise in professional, dual income households with no children or fewer children later in life heralds an emerging group with money to spend on ensuring that they live close to good amenities, including transport, schools and the workplace. However, close proximity to transport and the workplace will become less important as the trend to work from home and spend less time at the office continues to grow. When considering factors which drive demand, investors should ideally look for properties that appeal to both owner-occupiers and tenants. Bear in mind that these days, many of the features of a property that are valued by owner-occupiers are also sought by tenants. Bedroom size, a usable kitchen, storage, car parking, and other such features are just as highly valued by today's tenants who will pay good rents for these features. For more information on how Emma can help you find and evaluate a great investment property, you can her on 1-800-000-159
Property Tax Tips - Repair or improvement? Getting it wrong could cost you
Damian is our Managing Director and founder of Momentum Wealth. As well as being a highly successful property investor, Damian is also a qualified Chartered Accountant and is passionate about educating property investors in all aspects of property investment. It's one of the most common traps property investors fall into when it comes to tax time: incorrectly claiming property improvements as repairs rather than as a capital cost. Normally, expenses that relate to repairs and maintenance of a rental property will be deductible when they are incurred. But any work that is considered an improvement such as installing a new kitchen will not be deductible and instead deemed to be a capital item (that may be subject to depreciation). So when conducting work on a rental property, how do you know what you can claim as a tax deduction and what you can't? There are a few important points to consider:
Generally it is wise not to conduct any repair work for some time after you purchase an investment property (unless it is of course necessary for safety issues). There is no fixed time specified by the law, but if you were to claim a large amount of repairs in your tax return the first year you purchased a property, it could certainly arouse the interest of the Australian Taxation Office. Momentum Wealth and its affiliated entities are not Accountants. While all information is provided in good faith, you should seek your own independent advice in relation to all tax matters.
Is using a mortgage broker really worthwhile?
Sarcha is one of our mortgage & finance specialists. She is adept at handling the diverse situations and circumstances often encountered by property investors. If you would like to speak with Sarcha about your own situation, call 1800-000-159 today. Not too long ago when there were only a few banks in Australia, people approached their bank in person (cap in hand) to apply for a home loan. In today's home loan marketplace, there are many lenders - including banks, building societies and credit unions - and each of them have a range of different loan products with different interest rates, honeymoon periods, offsets and other various bells and whistles. It can be hard to know whether you should be talking to one lending institution or the other, and which loan is right for you. Using a mortgage broker can be very useful. A mortgage broker acts as an intermediary between a borrower and a lender and will usually be familiar with the different loan products of many lenders (sometimes dozens of them). Using them to help you sort through the myriad of loan products available in the market will save you time and money and the mortgage broker can offer their experience and knowledge of lenders' underwriting procedures to make your application as straightforward as possible. In addition, your mortgage broker can reduce the number of loan applications you make. When you make a loan application, the lender's query into your credit history is recorded, and although it is not widely known, too many of these queries can cause raised eyebrows among many lenders. Using a mortgage broker narrows the field of loans you apply for and your mortgage broker should have an idea of the likelihood of approval for your application. Different loans are suitable for different purposes, and your mortgage broker will be able to find loan products that are best suited to your individual financial circumstances, your goals and the property you want to buy. Seek out a good mortgage broker before you start making offers on properties, so you can get your financial details and paperwork ready early. As with any person providing assistance with your finances, find someone who is reputable, experienced and whom you like and trust. Be aware that a mortgage broker is paid a commission by the lender when the loan is issued and that some lenders pay better commissions than others - therefore make sure your mortgage broker is recommending your loan based on your best interests, not the best commission for them. If you can find a mortgage broker who fits all of these criteria, he or she will be a valuable resource. For more information on how Momentum Wealth can assist you with your loan needs, contact Sarcha on 1-800-000-159 Finance Broking Services are provided by Momentum Wealth Finance Pty Ltd, WA Finance Brokers Licence 3170.
Are your rent increases legal?
Verity, our Property Manager is dedicated to helping landlords achieve a steady income, whilst minimising fuss and maximising the value of their investments. She is a successful property investor herself and demands a high standard from all tenants to help ensure our clients' investments are always well maintained. Market rents have increased substantially over the past 12 months. This increase has highlighted two situations where landlords may experience issues - landlords increasing rents when they're legally not able to and properties being rented under market value. Landlords cannot simply increase the rent because the market has moved. The Residential Tenancies Acts in each State and Territory encompass strict legislation that needs to be adhered to or landlords can face hefty penalties. If your tenants are on a periodic lease agreement, the rent may be increased but the above conditions also apply. I ensure that rent reviews are a standard clause in our tenancy agreements allowing flexibility for owners should the rental market shift. Under-renting properties is also an issue for property investors. I recently came across a property that was being rented at half of its market value. The property was tenanted by the same tenants for 3 years who never received a rent increase during that time despite the property being under professional management, the market shifting, and the tenants being on a periodic lease agreement. Unfortunately I have seen this situation many times. Some property managers have too many properties on their books to give individual properties the attention they deserve. Many property managers don't own a property let alone an investment property and can fail to understand the needs of investors. This situation can also occur in self-managed properties. Owners can become 'emotionally involved' and don't want to offend or risk losing their tenants if they increase the rent. As a result of these situations properties may be under-rented leaving owners with a loss in income. It is important that owners take an active interest in their properties and know what the market rents are. If necessary you can question your property manager if you believe your property is being under-rented. For more information on how Momentum Wealth can assist you with your Property Management needs, contact Verity on 1-800-000-159
Passionate about property? WE WANT YOU!
Due to the continued growth and expansion of Momentum Wealth, we currently have vacancies for: To find out more please contact Sales Manager, Julia Smith on 1-800-000-159 or julias@momentumwealth.com.au
David Polkinghorne, one of our Acquisitions Specialists recently received this great comment from one of his clients: "Momentum rocks! David and the team really took care of us and made buying an investment property easy. Everyone is incredibly helpful and friendly and we knew that we would be looked after and that there was absolutely no way that any realtor was going to rip us off or take advantage of us. Momentum makes buying investment properties fun and David is a star!" - Nell U, WA For more information on how Momentum Wealth can help you find and evaluate a great investment property, you can contact David on 1-800-000-159
The Lighter Side of Wealth Building
An honest real estate agent "This house," said the real estate agent, "has both its good points and its bad points. To show you I'm honest, I'm going to tell you about both. "The disadvantages are that there is a chemical plant one block south and a slaughterhouse a block north." "What are the advantages?" inquired the prospective buyer. "The advantage is that you can always tell which way the wind is blowing."
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