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August 2008
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A moment's insight is sometimes worth a lifetime's experience. Oliver Wendell Holmes Jr Welcome message from Damian Collins 
Hello , On behalf of the Momentum Wealth team I am excited to present to you the August edition of Property Wealth News. It has definitely been an interesting month for property investors with comments from the Reserve Bank of Australia (RBA) indicating there is a good chance it will cut interest rates shortly. Given the announcement and other key indicators I have been monitoring, my recommendation is that you don't fix your interest rate at this point in time (unless of course you can't possibly afford the risk of another increase). I have noticed a high proportion of borrowers choosing a fixed rate over a variable one and I believe this is a mistake given the position in the rate cycle we are currently in. As everybody's situation is unique however, please talk with your Momentum Wealth Finance Specialist before making any decisions regarding your loans. Along with news on interest rates, the housing shortage has also grabbed a lot of media attention recently and we look at what this situation means for property investors in this month's feature article. Don't miss it. 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. Happy investing.
Damian Collins
Is the housing shortage a silver lining for investors?
I'm sure most of our readers have heard about our country's chronic housing shortage. The topic has received plenty of media attention of late. The crux of the issue is that with record population growth, stemming from high net migration and increasing fertility rates, we are simply not building enough new houses to house everyone. Migration into Australia is at a record high and it is quite widespread throughout the major cities, not concentrated only in resource states. There is some debate about the extent of the undersupply of new housing but little doubt that the problem exists. Some say that across Australia we are building 32% fewer houses than required. According to the Australian Bureau of Statistics, building approval figures have been trending downwards since September 2005. The Commonwealth Treasury estimates that demand for housing will increase to over 200,000 homes per annum by 2010 but the forecast for new supply is estimated to be around 150,000 to 160,000 dwellings per annum. Furthermore, there is strong belief that the problem may get worse before it gets better and we may not see signs of improvement for another decade or so. It is difficult to say exactly why we are not building enough houses. The matter is quite complex and involves a variety of issues such land supply, development costs and high interest rates. I will talk about this another time. For now, I would like to discuss what the housing shortage means for property investors. I believe the housing shortage presents 3 positive implications for property investors, all of which are closely related. Benefit 1: Fuel for the rental market The lack of new housing will put even more pressure on the country's rental markets, many of which are already extremely tight with vacancy rates across Australia at relatively low levels. The undersupply of new housing can only have the result of pushing up rental prices further. Despite many tenants complaining about higher rents, renting is still far less than a mortgage repayment. Renting a typical property costs less than half that of the interest payment needed to fund the purchase of the same property. It's clear that rental prices definitely have the scope to increase. Benefit 2: A solid foundation A shortage of housing coupled with rising rental values has the result of putting a floor under property values (barring any major economic shocks). The situation is like an insurance policy for investors, protecting the equity gains that have been made over previous years. This is not to say that all property is immune from declines, which is clearly not the case. But good quality property has already shown to be quite resilient, even in the current economic climate. This is perhaps testament to the 'underpinning effect' of the housing shortage. Benefit 3: Key ingredient for the next boom As rental values increase in a market, two interesting things tend to happen. Firstly, tenants re-evaluate their decision to rent, as the benefit of owning a home begins to outweigh the relative cost. Basically, as renting becomes more expensive, buying a home becomes relatively less expensive. This puts more buyers in the market and creates demand for property, a healthy sign for property values overall. Secondly, increased rental values means higher rental yields. Higher rental yields attract investors to the property market, further boosting demand for property. What could stop buyers flocking to the property market and pushing up prices? Two things come to mind. One is high interest rates, which discourage people from borrowing money and affects confidence levels. However, we have recently received strong signs from the RBA that we are at the top of the interest rate cycle and we could see some reductions in the cash rate very soon, which should flow through to variable mortgage interest rates. Fixed rates have already started to come down. After a few reductions, people will start to feel a lot more confident about borrowing and this will be a positive for the market. However it's important to bear in mind that confidence levels are also affected by a variety of other economic factors such as employment and the cost of living (such as petrol prices). While affordability is typically measured by looking at the ratio between income levels and property prices, there is also the issue of 'relative affordability' between renting and buying to consider. Incomes in Australia have typically gone up 4-5% per annum over the last decade (in a lower inflation environment) and coupled with demand pressures due to the shortage of property, rents and prices should increase by at least this figure, and in better quality areas, by substantially more. Conclusion Based on fundamentals, it seems a revival in the property market is definitely on the cards, carried along by high population growth and a shortage of housing. Given the strong fundamentals, what do you think will happen when rental prices increase substantially (increasing yields) and interest rates start to fall? An improvement in rents and values for starters. Some people are predicting substantial increases in property values. ANZ's senior economist, Paul Braddick, recently predicted that we could very well see the 'mother of all housing booms'. Keep in mind that rises in development costs are also placing pressures on prices or at least maintaining prices of existing properties. Supply is unlikely to increase until development is profitable, which will only happen when sale prices increase. In the next twelve months I'm confident that those who buy quality investment property will set themselves up to create substantial wealth over the next 5-10 years.
Interest rates on hold again - strong signs of future cuts The RBA has left interest rates unchanged this month and it is widely predicted that the next move will be a cut. Although the RBA acknowledged that inflation is still high, it also acknowledged that credit standards are now tougher overall and that there were a number of factors restraining demand, including lower asset values. Glenn Stevens, Governor of Monetary Policy, said: "The evidence is that the tightening in financial conditions, in conjunction with other factors including rising fuel costs, and lower asset values, has restrained demand. Indicators of household spending have continued to record subdued outcomes over recent months, and credit expansion to both households and businesses has slowed significantly. Surveys suggest a softening in business activity, and there have also been some early signs of an easing in labour market conditions." The best indication of future movements came in the last section: "Weighing up the available domestic and international information, the Board judged that the cash rate should remain unchanged this month. Nonetheless, with demand slowing, the Board's view is that scope to move towards a less restrictive stance of monetary policy in the period ahead is increasing."
Australia's major capital cities have experienced significant growth in rental values, according to figures released by Australian Property Monitors. Sydney, Melbourne, Brisbane, and Perth all recorded increases between 13-17% over the year, with the standouts being Perth and Melbourne at 17%. The full list of figures is in the table below:
Negotiations: understanding motivation is the key
David Polkinghorne, a successful property investor in his own right, is one of our Acquisitions Specialists. He has extensive experience in acquisitions and renovating properties for profit. It's often said that most of the profit in property is made when a purchaser buys the property. While that isn't always the case, being able to negotiate property deals is crucial to making a lot of money in property investment. Most people go wrong in property negotiations by not understanding that the person you are dealing with on the other side is human just like you, who has needs and emotions. You will be a far more successful property negotiator if you understand the underlying positions of the other party. There are 7 important questions you must ask a seller. One of those questions is simply "why are they selling". You want to ask this question for two reasons. Firstly you want to find out the other parties' level of motivation. How desperately do they need to sell their property? Secondly you ask this question because you want to see if you can structure a deal that meets their needs and at the same time gets you a great deal as well. Next time you go to a home open, ask the agent this question. Often you will get lots of information that can greatly help you get the best property deal. An important area to property success is using contract clauses to protect your interests when buying. In some states, a standard contract is used in most property purchases. In other states, the contract is drawn up by the seller's solicitor. Usually these contracts have one thing in common. They aren't particularly friendly to buyers. You also should be very wary of accepting real estate agents clauses for building inspections and other contract clauses. Don't forget the real estate agent is representing the seller, not the buyer. Only a Buyers Agent truly represents you. For more information on how David can help you find and evaluate a great investment property, you can contact him on 1-800-000-159
Property Tax Tips - Are Body Corporate Fees deductible?
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. Many investors who either own or are planning to buy a strata property are unsure as to whether they can claim Body Corporate Fees as a tax deduction. The answer depends on the type of Body Corporate Fee charged. There are usually three (3) types of Body Corporate charges: (a) Administration Levy - this is a levy to cover the day to day running of the complex (e.g. common water, common insurance, maintenance of lawns, management of the Body Corporate etc). (b) General Purpose Sinking Fund Levy - this is a levy that is imposed to cover non routine expenses (e.g. roof replacement or major repainting). It usually accumulates in a separate fund and is done so that owners are not hit with a large "one off" expense for major works. (c) Special Purpose Levy - this is usually a one off levy on the owners to pay for major works or a major expense required. So, are all of these Body Corporate / Strata Fees deductible? The ATO consider that the expenses are deductible to the owner based on what the fees are ultimately spent on (either a capital item or a deductible item). However given the very difficult task for the owner in trying to figure out what was spent on what, the ATO have accepted the following general rules. (a) Administration Fund Levies that are for the general running expenses of the complex are deductible when incurred. (b) Sinking Fund Levies that are imposed on a regular basis are deductible and the owner does not need to differentiate based on what happens to the funds (i.e. whether spent on deductible expenditure or capital expenditure). (b) Special Purpose Levies must be traced to see what the actual funds raised were used for. If they were to repaint the entire complex or replace the entire driveway, they would be capital expenses and not deductible. From an owners tax perspective it would be better for the strata body to collect General Purpose Sinking Fund levies (tax deductible) rather than wait until something major is required and impose a Special Purpose Levy, which if used for a capital improvement, would not be deductible (but may be depreciable). Before buying any strata property, you should always check to see if the strata company has a sinking fund to help with major improvements. Not only is it less of a financial burden to pay a regular payment than a one-off levy, it is also more tax effective as well. 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.
Marcus is one of our mortgage & finance specialists. He is adept at handling the diverse situations and circumstances often encountered by property investors. If you would like to speak with Marcus about your own situation, call 1800-000-159 today. Many people ask us why the average investor doesn't get past 1 investment property. Research done some time ago by the Australian Bureau of Statistics shows that:
In recent years, these figures have changed, but still the vast majority of people do not own a substantial number of investment properties and very few own 5 or more investment properties. If you understand the mindset and strategy of the average investor, then you will know why. The average investor will usually put down 20% as a deposit on a property. They decide to start saving for an investment property and this may take many years of saving (we will assume 5 years in this example). In addition, they will also require funds for stamp duty, which can be as high as 5% of the purchase price, and also borrowing expenses, (fees and charges, and stamp duty on the mortgage). That purchaser will usually pay market value for the property, then rent the property out and wait for capital growth to generate equity. Typical investors don't understand what drives capital growth and property profits, and they will usually select properties with average capital growth rates. In the first year, the purchaser may only just break even, as the price of the property may rise enough to cover the stamp duty on purchase. In many cases where capital growth is moderate, it may be 2 years before a property has increased enough in value for the purchaser to cover the costs of stamp duty and other settlement and borrowing costs. In the third year the purchaser finally starts to make some profit. The average investor has waited 7 years from the time of deciding to purchase an investment property to actually generating any profit! In order to buy another property, the purchaser normally needs to generate another 20% equity. In a moderate growth area, this may take another 5 years or more. They will only be in a position to buy a second investment property 12 years after first making that decision to invest. In a large percentage of cases, the average investor will get dissatisfied with the returns on the property and not even get to the stage of considering a second property investment. Many will sell within the first 5 years and re-join the ranks of people who own no investment property. Smart investors understand that there are ways to speed up the process. If you understand how to access your equity to purchase more property and purchase high growth properties, you can build a substantial property portfolio much more quickly than you think. For more information on how Momentum Wealth can assist you with your loan needs, contact Marcus on 1-800-000-159 Finance Broking Services are provided by Momentum Wealth Finance Pty Ltd, WA Finance Brokers Licence 3170.
Kahlia, our Property Manager is dedicated to helping landlords achieve a steady income, whilst minimising fuss and maximising the value of their investments. She demands a high standard from all tenants to help ensure our clients' investments are always well maintained. Property renovations are a great way to increase the value of your property, attract new tenants and also increase the rental income received. When completing a renovation on a rental property it is essential that landlords don't overcapitalise - which is a trap some investors can fall into. Finishes must be consistent with the market demand in the area in which the property is located. If the locality expects granite bench tops and expensive fittings then you must meet the market. Similarly if you are renovating in a lower to middle income area, do not overspend on finishes as tenants are unlikely or unable to pay for that quality. Keep the colour scheme and style neutral. The fewer people you offend the more potential renters you have. There is a tendency for some people to try something trendy but the tastes you have may not suit the market in the area. Street appeal is crucial as it gives people a first impression of a property. First impressions may decide whether or not a potential tenant will go into the house for a closer inspection. Street appeal can be increased through external repainting, landscaping and paving, and details and finishes in keeping with the original style of the home. When considering your renovations, remember that tenants expect good quality properties just as an owner-occupier would. However, landlords must be wary - meeting market expectations without over-capitalising is the challenge. For more information on how Momentum Wealth can assist you with your Property Management needs, contact Kahlia 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 visit our new careers page
Sudha, one of our Mortgage & Finance Specialists recently received this great comment from one of her clients: "I want to say on behalf of Esther and myself that I appreciate the work you have put into this loan process. It has been an interesting mix including the hybrid trust and the current funding environment (particularly with the low/no doc products) with lender policies changing during our process of loan applications. You have never once said that this is too hard and I have never felt that you were "fobbing us off" when things got "even more interesting". You were always willing to do whatever it took to get this over the line, so thanks heaps and I look forward to working with you in the future." - Clive & Esther M., WA Sudha is one our mortgage & finance specialists in Perth. She is adept at handling the diverse situations and circumstances often encountered by property investors and developers. If you would like to speak with Sudha about your own situation, call 1800-000-159 today.
The Lighter Side of Wealth Building
Hard works pays off After 40 years of hard work, a man retired with $9,000,000, which he had gained through courage, diligence, initiative, skill, devotion to duty, thrift, efficiency, shrewd investment and................................ the death of an uncle who left him $8,999,999.50.
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