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October 2008
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It is your attitude more than your aptitude that determines your altitude. Brian Tracy Welcome message from Damian Collins 
Hello , It has definitely been a tumultuous couple of weeks for the world's financial markets, including Australia's. While it's terrible to see people lose money (even if it's a paper loss), there is always a silver lining if you are able to see through all the negative publicity. So what does all the turmoil mean for the real estate market? It may mean that we see a faster reduction in interest rates than we previously anticipated. This will help stimulate the economy. We may also see investors start to move their money away from the share market and into the property market, as happened after the last stock market crash in 1987. Though, with credit still hard to come by, it's not likely we'll see the 50% + growth we had after the last stock market crash. On that note, I would like to welcome you to the October edition of Property Wealth News. In this month's exciting edition, we give you some of the interesting results from our recent National Property Investors Survey – don't miss them. We also discuss the recent interest rate cuts and provide you with a range 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. In these uncertain times, it's now more important than ever that you speak to an expert before making property investment decisions. Happy investing.
Damian Collins
Where to now for property in uncertain times in the international economy
The financial world certainly has changed in the last few weeks. I'm sure many of us have seen the value of our superfund diminish quite significantly and that has been painful. As I'm sure most of you are aware, the US property market has suffered a downturn in the last 2 years. What has caused this decline? There are a number of factors, many of them stemming from the excessively low interest rates in 2002-03 that fuelled the property boom through to the Wall Street engineered financial products that manifested themselves into sub-prime loans that meant people who should never have been lent money were able to access funds. Will Australia go the same way? I'm confident that we will not see anywhere near the problems that have plagued the US property markets. Why you may ask? Firstly Australia had nothing like the US sub-prime lending market. The percentage of loans considered "sub-prime" in Australia is approximately 1% and low doc and no doc loans account for around 7% of loans. In the US almost 15% of loans would be considered sub-prime and as much as 20% has been lent as the equivalent low doc / no doc loans in the US. Secondly the amount of loans in default in the US is approximately 7% in the US, vs. 0.4% in Australia. This means that the number of homes likely to come onto the market due to forced sales is significantly lower. Especially now we have a declining interest rate environment, we are far less likely to see forced property sales. Thirdly, Australia has a residential vacancy rate of less than 2% on average, vs. the US with an average of closer to 10%, meaning a massive over-supply of properties in the US. Fourthly, Australia has a population growth rate of around 1.6% per annum vs. less than 1% in the US meaning a much greater demand for property. What has been an important and painful lesson for governments around the world is that they cannot afford to let home prices decline significantly. A large part of the current problems in the world economy are due to the fact that house prices have declined in some economies by around 10%. We have already seen in recent days that the Rudd government has taken steps to boost the economy and has introduced a significant increase in the first home owners grant. In a nutshell here is where I see the property market in Australia heading over the coming years. I'll elaborate more in upcoming newsletters.
Maybe you are thinking it is time to sell your investment property or put on hold your plans to purchase more property. Before you make any decisions, talk to someone who understands property investment.
Results from the Momentum Wealth National Property Investors Survey
It's an exciting time here at Momentum Wealth as we have recently completed our national Property Investors Survey. We had over 600 responses which is truly a fantastic result. Thanks to everyone who contributed. Here are some of the results, which make very fascinating reading.
Nearly 50% of respondents said that high interest rates HAD NOT affected their property investment plans. We always advise clients to consider how they will be impacted if interest rates increase before committing to an investment. This statistic also shows perhaps that respondents can 'see through' all the negative publicity and make their own assessment of the market. Another 20% said that they now plan to BUY SOONER to take advantage of opportunities. Over 90% of respondents believed that (at the time of completing the survey) we had reached the top of the interest rate cycle and therefore it was not a good time to fix your interest rates. With the recent cut in rates by the RBA, it seems those 90% of people were right. Well done. I agree that now is not the time to be fixing your variable interest rates. 45% of respondents believed that in 12 months time variable interest rates will be less than 1% lower, while 32% believed variable rates will drop by more than that. Given that many banks have already passed on a reduction of 0.8 of a percent, all signs seem to suggest rates will be substantially lower in 12 months time. Widespread growth in rental values Of the respondents who own at least one investment property, most have seen their rents increase in the last 12 months, but the amount varies:
It's important to make sure your properties are earning full market rent at all times. This is where a good property manager comes in handy. Overall, the sentiment in the market is strong When we asked respondents to describe their thoughts on the current property market, 66% of people said that there are plenty of great opportunities around and it's a great time to buy. Another 30% were a little more cautious saying that it's a good time to stay put and see what happens. Less than 3% of people believed there's no more growth left in the property market and it's time to look at other non-property investments. I hope those 3% didn’t put their money in the share market, given what has happened recently in financial markets. A whopping 96% of respondents have confidence in the property market as a long term investment. Historically, property has delivered consistent gains with low volatility. Given the fundamentals in the Australian property market there's no reason to think this will change. Of course, there are always short term fluctuations, but over the long term property has been a consistent investment. The majority of people expect the market to deliver growth between 1% and 10% over the next 12 months. Of course, results will vary from place to place which is why it is critical to carefully research your purchases and get expert assistance where necessary. The majority of respondents will be purchasing an investment property either now or within the next 12 months. I would say that the best time to buy is within the next 6 months, so if you're planning to expand your portfolio you should be busy researching your options. We'll be distributing the survey twice a year so we can identify trends in investor sentiment towards property investing. I'd love to hear your comments on the survey results. Why not send me an email.
16 year hiatus broken with significant rate cut For the first time in 16 years, the Reserve Bank of Australia (RBA) lowered the cash rate by 100 basis points (1%) in a move to bring down borrowing costs and assist the economy to withstand current global uncertainty. RBA Governor Glenn Stevens commented, "Having weighed these considerations, the board decided that, on this occasion, an unusually large movement in the cash rate was appropriate in order to bring about a significant reduction in costs to borrowers. "The board does not, however, regard that movement as establishing a pattern for future decisions." The official cash rate now sits at 6 per cent, a rate last experienced almost two years ago in November 2006. ANZ chief economist Saul Eslake urged borrowers to not interpret the major cut as panic or a signal of an impending recession. Instead, the cut should be seen as assisting the health and stability of the financial system and reducing the negative risks to economic growth. Federal Treasurer Wayne Swan also echoed these thoughts commenting that the cut was likely to strengthen the economy over the long term. Many pundits are optimistic about further cuts with interest rate strategist Rory Robertson, from Macquarie saying, "The RBA seems likely to cut its cash rate all the way back to 4.25% within two years.'" In response to the cut, all major banks said they would lower their standard variable rate by 0.8 of a percentage point. In the last few days most major banks have passed on an additional 0.25% - 0.3% cut. Each 1% cut in mortgage rates sees an investor or home owner save $4,000 per annum on each $400,000 of debt. This should come as substantial relief to households, investors and businesses with mortgages, and may cause an increase in first home buyers re-entering the market over the coming months. Australia is the place to be! Australia's net overseas migration is at an all time high, according to figures released from the Australian Bureau of Statistics (ABS). In the year ended March 2008, net overseas migration to Australia of just under 200,000 people accounted for over half (59%) of Australia's population increase. The total increase in population for Australia over the period is the largest recorded for a 12 month period since 1971 (when this measurement technique was first introduced). All states and territories experienced positive population growth over the period, however Western Australia recorded the fastest population growth of all states at 2.6%. Population growth such as this should see demand continue for housing throughout Australia. We already have low vacancies in the residential property market, so I'm expecting this to place further upward pressure on rents.
What are you willing to negotiate?
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. When negotiating, everyone likes to feel they have won or gained something from the negotiating process. Realistic people know that you are unlikely to get everything you ask for during negotiations, unless the other party is totally desperate. Both sides know that they will probably have to give a little ground during the negotiation process. To start off on the right foot, you should never make your best offer first. If you make your first offer or counter offer your best offer, you may find that the other party will try to negotiate something additional, even if they may have accepted that offer under normal circumstances. It is human nature to try and gain something from the negotiating process. It is important that you have conditions or other positions you are willing to negotiate away. If you are the purchaser, perhaps you may make an offer with an extended period of settlement time. Perhaps you may make an offer that requires the vendor to complete some repair work on the property, or pay the next year's rates or strata fees. There are a significant number of conditions that you could include that you may not necessarily require and may be willing to negotiate away. Another reason to put in conditions you are willing to negotiate away is to distract the other party from the major issue which is probably price. The focus on a relatively minor point may give the other party some satisfaction and they may let this matter take more importance to the deal than the price. If you get the price you want you are probably more than willing to give ground on the minor matters you didn't want anyway. The same situation applies if you are the seller. Counter offers can include conditions you are willing to negotiate away. Whether you are the purchaser or the vendor, it is important to include conditions you are willing to negotiate away, that do not severely impact upon the deal. If the conditions are too onerous, it may result in negotiations collapsing unnecessarily. For more information on how Emma can help you find and evaluate a great investment property, you can contact her on 1-800-000-159
Property Tax Tips - When are interest expenses 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. It's critical that property investors understand which expenses can be claimed as a tax deduction and which ones cannot. This is especially true when it comes to interest expenses as these are often the biggest expenses incurred by an investor. Worryingly, many investors do not properly understand this area and it can prove costly. So what's the rule regarding the tax deductibility of interest expenses? Here's is a good wrap-up for you. Generally interest is deductible if it is incurred when the borrowed money is used for income producing purposes. If the borrowed money is used for some or all private purpose then the interest on the private portion is non deductible. For example, if you borrowed $300,000 from the bank and $200,000 was put into a property investment to generate income and the other $100,000 to purchase a home to live in, then 2/3rds of the interest would be deductible (being $200,000 / $300,000). This is referred to as the "use" test or "tracing" test which generally means that: (a) When borrowed money is used solely to purchase investment property then the interest will be deductible (while the property is rented or available for rent) (b) Where borrowed money is partly used for investment purposes and partly for private purposes, the interest will be deductible to the extent it is used for investment purposes. Many people believe that if they use an investment property as security for a loan than the interest on that loan is tax deductible regardless of what the money is used for. This can be a costly mistake. The deductibility of interest has nothing to do to with the security used to borrow the funds. You can use your own house, a car or a boat or anything. What matters is what the borrowed funds are used for. 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.
Comparing loans beyond just the interest rate
With all the news about interest rates recently, it's not surprising that many borrowers seem obsessed with them. These are the people that typically choose a loan on the interest rate alone. But this can be a costly mistake. You're not necessarily better off by going for the lender with the cheapest rate. Even if two loan products seem very similar on the surface, they may in fact be very different. It's important to not just look at the interest rate as the deciding factor between various loan options - differences in the small print can mean thousands of dollars difference between two loan products. First, the interest rate quoted may be similar or may be the same. If you will be selling the property rather quickly, you should investigate paying higher interest rates with lower application costs and exit costs. There are other costs that may be added on but may not be immediately noticeable. You need to read the fine print and determine exactly how much you are paying and see if you can convert application costs to interest rates and vice versa. Once you understand these components, you need to compare the interest rate using the Comparison Rate. The Comparison Rate gives a clearer idea of the true interest costs after taking into account all the fees and charges involved in establishing the loan. The term of the loan is also very important. You also need to be aware of any early repayment penalties that are associated with the loan. At the end of the day you will have to make a decision on what you consider is the best loan for you. If you are able to obtain some of the features that are important to you then the fact that the interest rates is a little bit higher shouldn't scare you off. For instance, if you got a higher loan to value ratio, it may be worth an additional half a percent interest rate. A good finance broker will be able to steer you through all the alternative options and help you find the most suitable loan for you. For more information on how Momentum Wealth can assist you with your loan needs, contact Ian on 1-800-000-159. Finance Broking Services are provided by Momentum Wealth Finance Pty Ltd*. We have brokers all around Australia who can help you with your finances. *WA Finance Brokers Licence 3170.
Is furnishing your property worth the hassle?
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. You've just bought an investment property and the time has come to prepare it for the rental market. You want a perfect tenant, high rent return and as many depreciation allowances as you can. So, should you consider furnishing your property? In Australia, most properties are rented unfurnished, but that's not to say that furnished properties don’t have their place. Furnished properties are most successful in the short-term holiday accommodation, student accommodation and executive apartment markets. These are very specialised markets and can be quite lucrative, but they are notoriously hard to crack. Furnishing your property can certainly help you to achieve higher rents, particularly if it's appropriate for your property to have furnishing of a very high standard to complement the property and the area. There is a willingness of tenants to pay a premium because of the convenience of having furniture already provided, which saves them time and money. It can also be a good option if you happen to have furniture in excess, as it is actually a convenient way to store them. Furnishing a property also provides you with additional depreciation benefits as furniture can be depreciated over a few years in most cases. Before you rush off to Freedom or clear out your garage of old furniture to fit out your property, there are some important downsides you need to be aware of. Firstly, there are the upfront costs involved if you need to purchase new items to get started. To recoup your investment in furniture you may need to allow anywhere from 3-10 years. This means it's more expensive to exit this investment compared to a standard unfurnished rental. Additionally, you need to consider additional insurance to cover these furnishings. To keep up your rent, you need to constantly maintain the furniture or even replace it because once it starts to deteriorate and look tired it will have a negative effect on your rent as well as your ability to secure future tenants. Furniture is also very personal, so you may in fact be turning off good tenants who aren't keen on your style (particularly if the furniture is shabby). There is also a likelihood of attracting transient tenants as without a property full of their own furniture, it is easier for them to move around on a whim. You need to ask yourself the question "if they can’t afford their own belongings, are they going to pay rent long-term?" Every time there is a turnover in your tenants, it will cost you in lost rent and extra letting fees. With the current shortage of rental properties Australia wide, it is not too difficult to attract tenants and so although there are certainly benefits to furnishing your property, it is not suited to every property. For more information on how Momentum Wealth can assist you with your Property Management needs, contact our Property Management team 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 careers page
The Lighter Side of Wealth Building
And now the latest stock report… Helium was up. Feathers were down. Paper was stationary. Knives were up sharply. Pencils lost a few points. Hiking equipment was trailing. Elevators rose, while escalators continued a slow decline. Light switches were off. Mining equipment hit rock bottom. Nappies remained unchanged. Shipping lines stayed at an even keel. Balloon prices were inflated. And batteries exploded in an attempt to recharge the market.
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Ian is one of our finance & mortgage specialists in Queensland. He has many years experience in the finance industry and is passionate about helping people build wealth through property investment. 
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