Merry XMAS and a Happy New Year

To all my readers out there I wish you a Merry XMAS and a happy new year. I hope you have enjoyed reading the blogs I have posted as of to date, and I look forward bringing you new material in the new year to further expand your knowledge.

Using a superannuation fund to buy property

Is using a superannuation fund to invest in real estate a good strategy for you?

In 1986 it was compulsory for an employer to contribute to an employees' superannuation funds. Self Managed Superannuation Funds (SMSFs) since then have become a popular choice for individuals wanting to take control of their financial situation at their retirement

The Superannuation Industry (Supervision) Act 1993 (SIS Act) under Section 67 sets out the conditions surrounding SMSFs borrowing to invest. http://www.austlii.edu.au/au/legis/cth/consol_act/sia1993473/. The act states that the borrower's funds are to be used to purchase an asset, and in this case that we are talking is property. The asset to be held in trust for the SMSF is by another entity; and in this case the property trustee.

The SMSF must have the right to acquire legal ownership of the asset by making payment and any recourse by the lender of the funds used to purchase the asset against the SMSF must be limited to the asset (or property) in question. This statement means that if any default on the loan occurs, the lender can only take possession of the actual property on which the default occurred; the other funds and assets held by the SMSF are protected.

The superannuation fund will be the beneficial owner of the property and is able to purchase a variety of real estate types such as: residential, commercial or even holiday units, provided you purchase it as an investment, and not for you to live in.  However you can transfer the piece of real estate from the fund to your own name after you retire and at that time move in and make it this property your primary residence.

How is the property purchased?  Well in the usual way where the investor selects the desired property and then their SMSF must satisfy the loan requirements as specified by the super-leveraged loan provider.

The SMSF pays the deposit, balance of purchase price, associated legal costs and stamp duty, as such for the case in a normal investment property purchase. Likewise the SMSF appoints the lawyer (or conveyance) and these bodies complete all the necessary legal work as usual.

Costs associated with the property are also paid through the SMSF. Costs such as: land tax, council rates, maintenance, mortgage fees and repayments, and repairs on the property and the property management fees.

Since the SMSF beneficially own the property, outside of the legal ownership of the property trustee, it also receives all rental income or other income and you can improve or renovate the property like any other investor who has not purchase a property under a SMSF.

The SMSF can also pay extra repayments into the mortgage or pay it out entirely, but these will be subjected to the lender's terms and conditions. Once the mortgage has been paid off, the property’s title can then be transferred to the SMSF or the property trustee can continue as registered proprietor.

Before you go off buying properties in a SMSF seek professional advice such as from your accountant to see if this strategy is ideal for you!

Property Insight Across Australia

Once every few months I would like to present an insight from my research on what is happening within each of the Australian state’s capital city property market. In general according to the Australian Financial Review home values across 5 of Australia’s capital cities up to September of this year are up .4 %. Anyway here  is a snapshot of what is happening in each of the state’s capital cities:

Sydney:

In general over the last year Sydney’s market has shown median house prices down by around 1%.
However the top end of the market is still  showing signs of increasing demand, particularly  the eastern and lower north shore suburbs. Also in the middle and lower end of the market there is an increasing demand for houses, but was interesting is that over the last few years Sydney’s apartment market has outperformed the housing market with stronger rental and capital growth. In  Sydney’s eastern, and beachside suburbs apartments are also performing well. However, buyers are being very selective and tending to avoid properties that are overpriced or apartments that are in secondary locations and not within prime locations. Overall still as a result of a combination of the following factors: Strong rental demand, Rental properties shortage. tightening vacancies and increase in rents means investors will go for the same apartments as owner-occupiers, underpinning prices.

Perth:
For the last 5 years The Perth property market has been in a slump and hibernating, but from reports it appears to be moving again with median house prices increasing by 3.17% and apartments by 10.05% over the last year again according to Residex. Western Australia is still being voted as the nation’s strongest economy, with a low unemployment rate and high wages. For both units and houses rents are rising and there is a shortage of accommodation for the increasing number of buyers and tenants. Residex is reporting that house rents last year in Perth have grown around 16%.

Brisbane:
Over the last year Brisbane median house prices fell 0.60 % and unit prices fell 0.61% over the last year according to Residex and is now hovering near the bottom of its cycle. However talking to other investors in Brisbane I am seeing more strategic investors recognising  that it’s a “buyers market” and taking advantage buying good valued property. Like Melbourne’s CBD there is an oversupply of apartments in Brisbane’s  CBD, Fortitude Valley and surrounding suburbs, with over 30 projects currently being marketed. Many of these apartments will remain unsold and this oversupply of properties will put downward pressure on prices and rentals. Overall  Brisbane is beginning to enter a stabilisation phase  i.e. prices are stabilising  but I am expecting that prices are unlikely to start rising until 2013.
For those property investors who already own rentals (me included) house rents in Brisbane have grown approximately 14% over the last year.

Melbourne:
Melbourne’s housing market has been a bit of a surprise, performing better than many expected with prices rising around 2.5% over the last quarter, clawing back half of their losses as a result of  values  falling over the first quarter of the year. Due to a substantial oversupply of newly built house and land packages in the outer suburbs, especially in the west and north property values in these locations may drop slightly due to oversupply. The top end of Melbourne’s property market is still quiet with an oversupply , however there is more demand for real estate priced between $500,000 and $900,000 in the inner- and middle-ring suburbs of Melbourne. With too many new apartment projects under construction there is an oversupply of CBD and near city apartments at a time when there is less demand. This will put downward pressure on prices and rentals for apartments, yet reports by Residex  are revealing that Melbourne’s house rents over last year have increased by 10.53%. As a result this oversupply of apartments will linger Melbourne’s market for a few years, causing prices to fall slightly as I said before.
However apartments with an element of scarcity and not commonly seen, are still selling well as a result of a limited supply of these unique properties. Overall I expect the property market in Melbourne from what I gather to be dull, but if you are smart there are properties out there that can be bought at good pricing, and with a renovation make over can add value to them thus making some money.

Darwin:
Darwin’s property markets have performed well. Residex has reported that  last year  median house prices has increase by 3.37% and unit prices by 5.95%. Darwin’s market has been supported by the increased activity in the resources sector, especially offshore resources.


Adelaide:
At present Adelaide’s property markets are flat.  According to Residex, median house prices fell 2.45 % and unit prices fell 2.1% over the last year. However median rents have remained steady. Since the  news that the expansion of the  Olympic Dam project has been put on hold, local’s confidence is lacking as many were hoping this project would turn South Australia into the next big mining state and boost the economy. Unfortunately there is nothing in the wings to suggest this market will change in the near future.

Hobart:

Median  house prices in Hobart fell 6.36 % and unit prices fell 6.68% over the last year. If you look over the longer term Hobart’s  property market has performed relatively well. However since Hobart’s economy does not shine or compare  the mainland’s resources economy  and its relatively isolated,  I believe there are better places within Australia to invest.

Canberra:

For the good old ACT (Australian Capital Territory) according to Residex median house prices fell 0.26 % and unit prices fell 5.47% over the  year. Since  Canberra has low unemployment, relatively high public service incomes and a shortage of accommodation, as a result of combination of these factors the market has stabilised and should be turning.

My conclusion:
From my own personal opinion I believe there is some very good buying opportunities for the astute and long term investor. Remember property investing is not a get quick rich scheme, but with reading, talking to other like-minded people,  and from people like myself presenting information when you put those together it helps one to make an informed decision.

Buying Off The Plan

Buying Off The Plan basically means entering a contract to buy a property from a developer prior to its construction. The property must be built from a subdivision plan and will be commonly be a unit or townhouse. A subdivision is a block of land that has been divided into lots (parcels of land varying in size). The developer will generally offer you a lower purchase price than what its expected market value on completion will be.

It can be very fruitful in a rising property market by buying off the plan. Since you lock in the purchase price early prior to construction,  if the market has risen  after a couple of years  when the property has been finally built, it  will be worth more than what it has been bought for.  However one needs to do their market research to at least ensure that this will be the case. For if research is not done, then the market can also drop and the buyer ends up with a property that is worth less for what they bought it at initially. So you can end up owing more than what it is worth.

In some states of Australia buying a property off the plan can save you thousands in stamp duty. As a result by buying off the plan, one only pays stamp duty on the vacant land (not the entire entity). Also significant tax deductions can be obtained by buying a new property,  as one can claim deductions for depreciation on the building and its fittings.

Generally on contract signing you will pay 10% on deposit and the stamp duty (if applicable in that state) say 3 months after signing.  The deposit can usually be secured via a deposit bond or bank guarantee. Once the buyer has received finance approval, the buyer can approach a bond provider. The bond gives the buyer the right to buy the property without dipping into their savings. Also the delay in settlement gives you more time to save for future mortgage payments. The delayed settlement from date of purchase can sometimes be up to 2  years.  Usually a normal mortgage is used to finance the property that you are purchasing.  Once the property is 100% completed the balance can then be paid.

It also pays to do research on the developer. If possible see if you can visit the last project that they have built to see how the project was finished, and if possible see if one can talk to the buyers in that project to see if there was any issues. Oh and one last thing please seek professional accounting and legal advice prior to acting on any of this information to see if buying off the plan suits your particular situation (refer to my disclaimer in my profile).

Do Your Research When Buying In Mining Towns

As a result of commodity prices dropping and the demand for those commodities reducing (which I believe is to be short lived) certain mining operators have decided to close down their operations in some mining towns in the past few months. One such devastating announcement for example was by BHP to close down its nickel mining operation at Ravensthorpe and axe 1800 jobs in June this year. A little over a year when it was officially opened. I recall certain property spruikers (i.e. slicked salesmen) and their seminars saying that buying properties in these types of areas was good as the yield on these properties were high (as a result of property prices being low and rents being high). I have heard that vacancies in Ravensthorpe are rising as people are leaving this area as unemployment is now rising. Also property prices are gradually declining. What I am trying to get at is if one is going to buy properties in these types of areas/towns, obviously one must do their homework to ensure the security of their investment.

Ask questions like:

1) How long is the mining lease to go for, and has that mine(s) in that town had a history of closing down previously when such a situation like commodity prices dropped.

2) Is there infrastructure to be developed in that area? One can check sites like the Department of State Development, Infrastructure and Planning www.dsdip.qld.gov.au as a source for information on infrastructure developments. Another site is the Department of Transport and Main Roads Project's Site http://www.tmr.qld.gov.au/Projects.aspx for road projects. Some of these projects do lead into mining towns. This is an indication that the state government is spending money to ensure that the roads are capable of further expansion in these mining regions. You may call it investing for the future.


Even though some of the websites are Queensland based, there is similar government departments that one can obtain information on infrastructure projects that is occurring/to occur in other Australain states.

Yes it may sound nice chasing the yields, but if one is to pursue such a venture wouldn't it make sense to do your own diligence instead of being lead by spruikers? It pays to also visit the town and get a feel first hand for what other economies are driving growth in that town apart from mining.

A Story For Landlords

Did you ever wonder how certain real estate agents in Australia select tenants for their clients, i.e. the Landlord. It is an important job being a property manager, as they assist the Lessor/Landlord in determining the right tenant for their property. I believe that the property manager should have in their mind, that when selecting a tenant for their client, they should treat it like they were selecting their own tenants for their own property. I think it is very important for even the lessor to think like this of their property manager (even mention this to the property manager that they select the tenant as if it was for their own property) before signing any forms concerning the appointment of agents.

There are a number of selection criteria that the property manager should consider when selecting tenants. This selection process should also be documented by the property manager (e.g. in Queensland this is done by using the REIQ’s Verifying Tenancy Agreement Form). Some of these checks are:

·        Positive Identification – In this criteria the property manager should check the validity of the prospective tenant. This is achieved by checking things such as: The tenant’s driver’s license; Medicare Card; Their utilities bill e.g. Gas, Power. This assures that the person who they are screening is the person who they say they are.

·        Their tenancy record – This is achieved by looking at the applicant’s previous rental record and to see what type of tenant they have been previously . Examples of questions that should be raised by the agent are: Have they breached previous tenancy agreements ? Why are they moving? Have they been refused to rent a property from a previous agent or lessor? This information can also be ascertained from commercial databases such as TICA (Tenancy Information Centre Australasia), and CONSOLE.

·        Financial Status-This is pretty much a no brainer where it basically means can the prospective tenant pay the rent. To check their financial capability things such as pay slips, tax records, Centrelink Statements should be used to assess their financial credibility.

·        References – Just like applying a job one must have references so that your future employer can see what type of an employee you have been. No difference here where the tenant’s references can be checked by the agent to help their screening on the tenant.

  Once the tenant has been screened by the property manager, the property manager should engage the Landlord/Lessor, and go through with them about the prospective tenants and their checks on the prospective tenants. Then after the property manager’s consultation with the landlord it will be the landlord who should select the tenant based on the advice of the property manager.  Once the tenant has been selected then the Tenancy Agreement Form should be filled. In Queensland this is Form 18A provided by the Residential Tenancies Act (RTA). It is important to note that this agreement is only between the lessor and the tenant.  The tenancy agreement will detail such things as:

·        The Lessor’s and Agent’s Details

·        Property Details

·        When and how the rent is to be paid

·        The Rental Bond

·        Number of people to live in the rental property

·        Is the rent a fixed term or periodic tenancy

It is also important for the property manager to do an ‘Entry Condition Report ‘ (In Queensland this is RTA Form 1A) detailing the state of the rental property prior to the tenant moving in. Copies of the condition report are given to the tenant and are to be signed by the tenant. This helps in determining how much of the rental bond is to be refunded  to the tenant after their stay in the property, meaning have they kept the premises in good order e.g. didn’t punch any walls, stained carpets with liquids.