Property Update – Property Investment

How are our property markets doing?

With so many indicators regularly mentioned in the media – which should you rely on?

Firstly, it’s worth understanding some statistics are lagging indicators – they tell you what has happened in the past.

Others are leading indicators – they are a sign of what’s ahead.

Here’s what I mean:

1. The commonly quoted “Median home prices” are a lagging indicator, they tell us what’s already happened.
2. Economic Fundamentals are leading indicators – and that’s what our research team at Metropole rely on to find future growth areas.
3. Days-on-market is a market trend indicator

Clearly there are many other statistics that keep getting reported.

Things like auction clearance rates, immigration numbers, new dwelling construction, infrastructure spending and so on.

But one statistic that is not often mentioned, yet which I’ve found a useful an indicator of where each of our housing are at, is Days On Market (DOM).

And more importantly, the trend in DOM tells us where our property markets are heading.

DOM is calculated by the average number of days that properties within a particular category (apartments, houses, villa units etc) are advertised for sale and I’ve found the trend of DOM is key indicator of whether we’re in a buyer’s or seller’s market as it is a serves as a marker of the relationship between supply and demand.

Think about it…

If the property market in a particular suburb is hot, properties will be snapped up quickly by eager buyers and DOM will be low – often less than 30 days.

In fact, that’s the way it was a few years ago in many Sydney and Melbourne suburbs during the boom times.

Fast forward to today, when there are more properties for sale than there are active buyers and properties are languishing on the market, DOM has blown out to over 50 days in many locations.

Understandably increased DOM is usually followed by vendors discounting the prices of their properties to achieve a sale and that’s why I believe it’s an indicator which astute property buyers should follow to determine the future property price trends in a suburb.

On the other hand when the market turns and buyers return, DOM starts to fall as turnover of properties picks up. And this happens before prices start to rise.

Can you now see why DOM trends is an important market statistic to keep track of?

Where do you find these stats?

You’ll find all the big property portals and Real Estate Institutes report average Days on Market for each suburb and then more specifically for different property types, such as 3 bedroom homes, 4 bedroom homes and 2 bedroom apartments.

Now there’s no right or wrong number for DOM and apart for the supply and demand ratio, it also depends a lot on market depth.

In suburbs where few transactions occur, for example small regional towns, you’d expect DOM to be higher than popular suburbs where there are more buyers chasing their next home.

And of course, the time of year can affect DOM.

Just like auction clearance rates can fluctuate based on the seasonal highs and lows, the same is true for days on market, which often blow out around Christmas time and over the summer holidays.

But as they say…there’s more

Clearly there are many other factors to take into account when researching property markets, starting with the big picture macro-economic factors such as the state of the economy, population growth, jobs growth consumer confidence and finance trends.

Then one needs to drill down to regional factors and then local factors such as supply and demand.

As with the price of almost everything, supply and demand have a huge role to play in the property prices.

And Days on Market is an oft forgotten indicator of supply and demand.

There are a growing number of people in Australia wanting to create wealth by undertaking a small property development.

Unfortunately, many people attempt it when they don’t have the knowledge or the know-how, and they end up financially worse off than they were before.

Others, while clearly capable of managing the project, don’t set up the ownership structures correctly from the outset and wind up forking out much of their profits in taxes.

Of course, it doesn’t have to be that way.

Let me explain further.

Two is better than one

Friends Mark and Paul wanted to build a duplex and each hold one for investment after completion.

The pair had the skills to successfully complete the duplex, plus they also had the nous to come and see me before they even bought the site because they were worried – and rightly so – about the tax implications.

If they had simply pushed forward with the project, without any expert advice, their hard work could have been for nix.

You see, by developing the site after purchasing it in both of their names, they would have wound up technically owning both properties jointly, when they wanted to own one each.

The thing is, changing the names – and the ultimately ownership – of each property would trigger income tax, GST, as well as stamp duty liabilities.

In fact, by my calculation, they would each would have been liable for more than $200,000 in taxes given the end profit of the project was about $1.2 million.

That scenario would mean a huge cut in profit for bothof them and probably plenty of sleepless nights wondering how it all went so horribly wrong.

As I always say, a failure to plan is a plan to fail, which would have been the outcome for Mark and Paul if they hadn’t come and see me.

Same, same but different

At the end of the day, one of the most important things in a joint venture partnership is trust, which they clearly had.

No one should ever enter into a JV agreement without feeling comfortable with their partner, because it probably won’t end well if they are having reservations at the beginning.

Like with most things tax-related, there are ways that a successful outcome can be achieved – as long as you work with a professional who knows the various ins and outs of the relevant myriad pieces of legislation.

In this situation, therefore, we developed a strategy for Mark and Paul that saw them enter into a formal agreement together that would see them develop the project together and then retain one property each after completion.

The agreement needed to satisfy a number of commercial requirements and responsibilities, but it also need to manage tax implications, so that meant it was more of a tax management agreement than a commercial one.

After the successfully completion of the project, Mark and Paul were the happy owners of one property each without having to pay hundreds of thousands of dollars in unnecessary tax.

We also created a strategy to allow more streamlined refinancing to an investment loan after construction.

What were the lessons learned?

The most valuable thing that Mark and Paul did in this project was getting professional advice before they even purchased the site.
In fact, that decision alone possibly saved them about $400,000!

Seeking expert advice ensured that we considered a number of different ownership structures, such as using a trust, long before they signed a contract of sale.

While we resolved to buy the site in their personal names for a variety of reasons, we considered a number of different avenues to ascertain which one was the best for their circumstances.

If they had gone ahead and bought the site and then come and see me afterwards, well, the options would have been far more limited, which would likely cost them money.

As it was, by using the services of an expert early, they had one less thing to worry about long before the first sod was even turned.

What about you?

If you’re a business owner, a professional or an established property investor why not have a chat with me about your personal circumstances.

You deserve your own private wealth advisor to create a Strategic Wealth Plan for your personal needs.

And this is especially important if you’re considering a joint venture like Mark and Paul.

Click here now and find out how Metropole Wealth Advisory could help you.

Having a Strategic Wealth Plan means you’re more likely to achieve the financial freedom you deserve desire because we’ll help you:

• Define your personal, financial and business goals;
• See whether your goals are realistic, especially for your timeline;
• Measure your progress towards your goals – whether your investments or business is working for you, or if you’re working for it;
• Find ways to maximise your wealth creation;
• Identify risks you hadn’t thought of.

And the real benefit is you’ll be able to grow your wealth faster and more safely than the average investor and leave a legacy.

Click here now, find out more about our range of services at Metropole Wealth Advisory and organise a time for Ken Raiss to formulate a Strategic Wealth Plan for you, your family or your business.

The Australian Prudential Regulation Authority (APRA) issued a letter to all authorised deposit-taking institutions (ADI) regarding consultation on revisions to prudential practice guide APG 223 residential mortgage lending.

While that may not mean very much to readers specifically the letter relates to APRA’s requirement for lenders to assess a mortgage on the ability of the borrower to repay at a mortgage rate greater than 7%.

By way of background, in December 2014 APRA wrote to all of the ADIs with a number of new guidelines for sound mortgage practices.

One of the measures specified by APRA at that time was that prudent ADI’s serviceability assessments should incorporate a buffer of at least 2% above the loan product rate and a minimum floor rate of at least 7%.

APRA further noted that prudent practice would maintain a buffer of 2% and floor rate above 7%.

As a result, many lenders used an assessment rate on mortgages of 7.25%.

The lending environment has changed quite a lot since that time.

We have seen the reintroduction of differential mortgage pricing for owner-occupiers, investor and interest-only borrowers.

Lenders have become much more focussed on responsible lending requirements and as a result they are asking borrowers more detailed questions about their financial positions and moved away from using the HEM Index.

The differential pricing in mortgages and the declines in interest rates since the end of 2014 are really the major factors that have made the greater than 7% buffer inappropriate for the current lending environment, as example owner-occupiers wanting a principal and interest mortgage can now comfortably borrower with a mortgage rate below 4%.

If someone is offered a mortgage at 3.9%, for example, they are currently being assessed on their ability to repay a mortgage at an interest rate of 7.25%. Of course, a mortgage is a 25 to 30 year commitment.

Over that period, interest rates will fluctuate, however, now it is a low interest rate environment with low inflation and low wage growth.

The market expectation is that interest rates will fall further however, under the current policy; lower interest rates (and mortgage rates) would not necessarily enable new borrowers to take out a mortgage.

The reason being those that could not qualify for a mortgage previously would still be unable to qualify despite the lower rates.

What APRA is now proposing the following revisions to its lending guidelines:

1. Remove the quantitative guidance on the level of the serviceability floor rate, i.e. the reference to a specific 7%. APRA will still expect ADIs to determine, and keep under regular review, their own level of floor rate, but ADIs will be able to choose a prudent level based on their own portfolio mix, risk appetite and other circumstances;
2. Increase the expected level of the serviceability buffer from at least 2% (most ADIs currently use 2.25 per cent) to 2.5 per cent, to maintain prudence in overall serviceability assessments; and
3. Remove the expectation that a prudent ADI would use a buffer ‘comfortably above’ the proposed 2.5 per cent, to improve clarity of the prudential guidance.

The reasons detailed for APRA about these proposed changes are:

1. The low interest rate environment is now expected to persist for longer than originally envisaged. This may mean that the gap between actual rates paid and the floor rate may become unnecessarily wide; and
2. Compared to 2014, when a single standard variable rate was used as the basis to price all mortgage loans, ADIs have introduced differential pricing for mortgage products. The merits of a single floor rate are therefore less obvious, particularly as it will be most binding on owner-occupiers with principal and interest loans, and least binding on investors with interest-only loans.

What all this means.

Under these proposed changes, if we look at the same scenario as previous, whereby someone is looking to borrow at an interest rate 3.9%.

This borrower would previously been assessed on their ability to repay the mortgage at an interest rate of 7.25%, now they would be assessed on their ability to repay at a lower 6.4%.

The proposed APRA changes seem sensible given the interest rate environment with the expectation that rates will fall from here and remain lower for longer.

Furthermore, since 2014 it has become much more difficult to get a mortgage, which is partly because of this serviceability assessment.

In a recent investor update to the market from ANZ, it noted that the drivers of reduced borrowing capacity were driven by three factors: HEM changes (60%), servicing rate floor at 7.25% (30%) and income haircuts (10%).

While these changes would ease, some of the tightening around the servicing rate floor according to the ANZ statement at least 70% of the reduction in borrowing capacity sits outside of these changes.

The bottom line.

While these changes are welcome and will help some borrowers that can’t quite access a mortgage currently to get one, it is unlikely to result in a rebound in the housing market.

As shown by ANZ, it will remain much tougher than in the past to get a mortgage because of other areas of tightening.

Furthermore, the buffer of 2.5% above the mortgage rate is higher than the 2% buffer that was used prior to December 2014.

Overall, for the housing market it will mean more people are able to get a mortgage.

These proposed changes in conjunction with the uncertainty of the election now behind will potentially provide additional positives for the housing market.

Furthermore, these changes may also ease some of the urgency for official interest rate cuts by the Reserve Bank.

If housing can provide some additional economic stimulus, rate cuts may be less necessary.

Should these changes be implemented it would potentially slow the declines further and may result in an earlier bottoming of the housing market (we currently expect the market to bottom in mid-2020).

Despite that prospect, it will remain more difficult to obtain a mortgage than it has done in the past and we would expect that if/when the market bottoms a rapid re-inflation of dwelling values is unlikely.

APRA’s scrapping of the 7 per cent ‘stress test’ buffer on home loans will effectively see a 9 per cent increase in borrowing capacity for owner-occupiers which will rise to between 13 and 14 per cent if the RBA undertakes two interest rate cuts before the year is out.

With the current ultra-low interest rate and two interest rate cuts projected by the RBA, APRA’s 7 per cent ‘stress test’ was a major barrier for borrowers in an already highly regulated and scrutinised lending environment.

However, with the stress test reduced or removed, it would mean that if the interest rate for owner-occupiers was about 3.75 per cent, they would pay about 6.25 per cent, which would create a 9 per cent borrowing capacity.

If there are no interest rate cuts the increase in borrowing capacity will be an increase of around 4-5 per cent for investors and for owner-occupiers about 9 per cent.

However, if the RBA cut rates twice, we will see an increase of around 9 per cent for investors and potentially 13-14 per cent for owner-occupiers.

This will be a major boost to the market, especially as now the number one risk has been removed thanks to a Coalition win and the elimination of the threat of taxation changes to negative gearing and capital gains tax.

APRA’s introduced a 7 per cent ‘floor assessment’ to the ADIs in December 2014 “to examine the resilience of the largest banks, individually and collectively, and to explore the potential impacts of grim and challenging periods of stormy economic weather,” according to APRA chairman Wayne Byres in July 2018.

While at that point of time this instruction to the ADIs was, indeed, required, this conservative approach could not be applied to the lending landscape of 2019.

In 2014, there was a tangible risk that in the foreseeable future interest rates might increase materially.

Further, a high proportion (44 per cent) of the loans were interest-only and 12 per cent of the loans had LVR of 90 per cent.

That, alongside loose controls over the accuracy of the information provided by prospective borrowers in loan applications and reliance on the HEM to assess household expenses, provided justification for APRA’s instruction.

The banks also applied a slightly higher rate of 7.25 per cent to ensure they were above the minimum threshold.

However, since then the lending environment had completely changed and APRA’s requirement had become ultra-conservative.

Interest rates are now very low with a very high likelihood of additional cuts by the RBA, and no signs of increases in the foreseeable future.

A low interest rate environment has, effectively, become the ‘new normal’ in Australia.

Loan applications are heavily scrutinised, lenders are applying more conservative credit policies, the proportion of interest-only loans is now low with only 16 per cent of the new loans (December 2018) being interest-only and 7 per cent of loans at 90 per cent.

RiskWise Property Research analysis showed a reduction of at least 1 per cent was needed in order to have some meaningful impact.

This is equivalent of the APRA’s announced change, that, while taking a different approach, will put the effective floor assessment at 6.25 per cent for owner-occupiers in the current lending market.

For example, RiskWise undertook a case study of a scenario involving a married couple, who both receive average weekly earnings at their full-time jobs, and have two children.

The couple require a loan of 30 years and their only expenses are either HEM or HEM X 1.5, and the assumption is they have no credit card repayments and other expenses.

Our analysis showed that due to the scrutinising of loan applications and by applying the effective 7.25% ‘stress test’ this materially reduced their borrowing capacity by 33 per cent.

The borrowing capacity of $698,000, based on the HEM and ‘floor assessment’ of 7.25 per cent, is equivalent to HEM X 1.5, with an interest rate of 2.87 per cent.

As a result, the couple would have to totally re-assess their entire purchasing strategy.

So APRA’s change is equivalent to the required reduction in the floor assessment that has the right balance between having a meaningful impact, while still having good risk-management practices.

No-one could forget the horrifying images broadcast from London’s Grenfell tower in June 2017, where 72 people tragically lost their lives and more than 70 others were hospitalised, due to cheap flammable aluminium-polyethylene cladding that had been installed on the exterior of the building.

The 24-storey building had originally been built in the 1970s, but had been renovated over the past decade, with the new cladding added to improve the building’s aesthetic and energy efficiency.

The incident sparked worldwide outrage and safety concerns, and it’s now clear that properties around the globe are being affected by this very same flammable cladding — including thousands of apartment buildings and homes right here in Australia.

We’ve already witnessed the impact of flammable cladding in Australia, with the 2014 Lacrosse tower fire in Melbourne’s Docklands.

It was a blaze sparked by a lit cigarette, with quickly engulfed 13 floors of the 21-storey building.

While no residents were hurt in the fire, it was a terrifying reminder of just how serious this crisis has become.

Sparking a major reform

After the Lacrosse fire, the Victorian Building Authority stepped in to ban the use of these dangerous products, following investigation by the Melbourne Municipal Building Surveyor.

The Authority has issued orders to several buildings across the state that the flammable cladding must be removed and replaced with suitable, fire-resistant material.

The exact number of affected buildings has not yet been determined, but in Melbourne alone the figure is shocking: it is estimated at over 10,000.

In New South Wales, the number of affected buildings is also in the thousands, with this number expected to rise as further audits are undertaken.

We’re talking tens of thousands of residents living in potentially life-threatening homes, and multi-million dollar bills to remove and replace the cladding.

Where is this cladding used?

This highly flammable cladding is present not only in inner-city high rises, but also on homes throughout the suburbs, making it much more widespread than first thought.

While the government initially sought to ban the use of these cladding types on multi-level dwellings, it’s now clear that they are completely unsuitable for use on any building types, leaving hundreds of single-level family homes at risk of falling foul of building regulations.

It is a genuine crisis of epic proportions not only for the property owners, but also for the surveyors, builders and architects caught up some potentially very nasty legal battles over whether these materials should ever have been deemed fit for purpose in the first place – and who should foot the bill to remove them.

On the flip side of this shocking situation, there is a silver lining.

Thanks to the mechanism of some very unorthodox economics, the cladding crisis could actually provide a boost to home values in affected cities.

How? Well, there are a few factors at play here

Firstly, there will be tens of thousands of Australians left homeless as their dangerous buildings are brought up to code.

While some may be able to stay with family or friends during the remediation process, most will be forced to find rental accommodation, and this increase in the tenant base should see rental values in the surrounding areas increase.

Now this is terrible news for those affected but on the other side, this is a positive development for landlords.

Second, builders across the country will be working flat out to remove the flammable cladding and install safer alternatives.

For those who were hoping to build a new property over the next few years, you may find there is a distinct shortage of available tradesmen to take on their projects.

This could well push the price of new builds higher, as it becomes not a buyer’s or seller’s market, but a builder’s one.

Prospective homebuilders will face the choice of waiting several years for construction to begin, or paying a premium to secure a builder now.

Finally, there is the impact the crisis will have on owners who are looking to sell apartments in existing, safe buildings.

With so many properties deemed uninhabitable, other dwellings will inadvertently benefit from a new, previously unheard of selling point — simply being able to call your property “non-flammable” will make it more attractive to buyers, and allow you to demand a higher price tag.

Who would have thought a real estate listing would ever need to specify that the property won’t go up in flames?

In fact, this crisis is almost the perfect antidote to the oversupply issues that have plagued major Australia cities in recent years.

Many apartment owners have found themselves out of pocket after buying a property off the plan and seeing it decline in value, thanks to the apartment boom.

Now, if you own an apartment in a safely-clad building, this may not be an issue – as the overall number of habitable dwellings will slump, boosting the value of the remaining buildings.

Overall, you can see how this very unfortunate situation could actually stand to benefit some property owners, and provide a much-needed stimulus to the major markets.

If you are the fortunate owner of a safely clad property, you may be able to use it to your advantage to sell for a tidy profit, or use your improved valuation to refinance and add to your portfolio.

Just be sure to triple-check the cladding on any new properties you’re thinking of purchasing.

The RBA capitulates

In a move nicely co-ordinated with APRA’s proposed changes the Reserve Bank is now set to cut interest rates.

The RBA noted that unemployment can go lower than 5 per cent without raising inflation concerns.

And therefore it won’t wait any longer, since interest rates need to be cut.

Markets are pricing at least a 90 per cent chance of rates being cut in a fortnight’s time – and all four of the major banks are cut – which is as close to a lock as you’ll ever see.

Fine-tuning was never on the agenda so it’s reasonable to expect at least the “double tap” to follow in August, and possibly more to follow looking at market pricing.

The language today was explicit.

It’s been quite a week, with Labor’s planned suite of taxes consigned to the bin, APRA getting set to recalibrate the assessment rate, and the RBA indicating rate cuts.

The overuse interest-only loans issue has been decisively tackled.

So this just leaves RG209 and lender scrutiny of expenses as outstanding headaches in the mortgage market, but brokers and lenders will be feeling a lot happier with the world with Bowen and Shorten’s changes out of the road.

Buying a property with friends and family may seem like the ideal solution in an unaffordable housing market.

In reality, it’s riddled with risk and is just one of the big mistakes that investors routinely make.

Today we share the five big rookie mistakes and how to avoid them.

Buying a property with your best mate might sound like a good idea: half the deposit, half the risk and double the fun, right?

It’s all well and good while times are positive.

But what happens if your friend gets sick or loses their job, and suddenly they can’t pay their half of the mortgage?

This is one of the many considerations that would-be property owners fail to take into account when they’re excitedly planning a joint venture.

Jacob Duane, director of Bennett & Philp, a law firm that specialises in commercial litigation and real estate, stresses that relationships can often fracture after a poorly considered dual purchase.

He adds that although there is a long list of things investors should do when purchasing a property, there is an even longer list of what they should not do.

“You often only read of the success stories, but the fact of the matter is that it isn’t difficult to make mistakes that could go on to have serious legal and financial consequences,” Duane says.

“These errors – many of which are easily avoidable – are sometimes mistakes that you might not even know about at the time, and they could potentially impede the success of any property investment.  So, it’s imperative as a property investor that you do your research and engage qualified consultants who are working in your best interests.”

Following are the top five mistakes that property investors make, and how best to reduce the risk of these happening to you.

Mistake #1: Buying with friends and family

Purchasing an investment property with those who are closest to you could seem like a good idea at the time, but it might just turn out to be the biggest mistake you could make.

It may seem like the right thing to do: a solid way of getting a foot on the property ladder or growing your portfolio while minimising your financial risk.

But it’s important that you don’t assume everything will go as planned.

Property and finance expert Noel Whittaker says that when considering an investment partner you should look closely at the differences in your temperaments, ages and investment goals.

He adds that  the potential for changes in circumstances, for example new relationships, a death or sudden unemployment, are also key considerations when weighing up a business partner – and make no mistakes about it, an investment decision is a business decision.

“Your best business partner is always the bank.  All they ask is that you pay them interest,” Whittaker says.

Avoid this mistake by:  Really thinking carefully before you invest with family and friends.

Investing with friends and family can result in a fire-sale outcome in which the vendors are left with no choice but to sell their assets at heavily discounted prices, usually because of financial distress.  This kind of outcome can put serious stress on your relationships.

“I have seen these investments go sour numerous times, and it’s not worth the hassle,” Duane says.  “To save you the money, time and stress, I would strongly recommend against it.”

Mistake #2: Not undertaking full due diligence

Failing to undertake due diligence correctly can have dramatic – and very negative – outcomes for property investors.

“At Bennett & Philp, we have a number of clients coming to us to cut corners and reduce costs in the due diligence phase by only focusing attention on the ‘relevant’ searches,” Duane says.

“From a lawyer’s perspective, all searches are relevant.  Without inspecting the property, how do you know if that pergola has been properly constructed or if that commercial building extension is over an underground easement?  What may appear relevant now could drastically change in the future.”

Duane adds that commercial properties carry their own unique due diligence risks.  For instance, many infrastructure charges to the land are not discoverable through the standard searches.

“Often these charges are only identified after a standard or sometimes a full town planning search, which is significantly more expensive to obtain.  A thorough investigation of all aspects of the property will enable an investor to identify possible risks.  Of course, not all risks are discoverable, but the aim is to reduce your exposure to risks.

Avoid this mistake by: Committing to not cut corners.  It may save you a few dollars up front, but at what potential risk?

“Your lawyer is just one consultant in the due diligence process – it’s vital that property investors work with a number of professionals from varying industries to mitigate any foreseeable risks,” Duane says.

“Considering this risk and your potential loss if a full due diligence is not undertaken should form part of your decision-making process.”

Mistake #3: Diving in head first without advice

Recently, an investor signed a contract to purchase a $14m shopping centre development.

The contract came with a seven-day due diligence period – half the standard 14-day due diligence period for commercial contracts – which put severe pressure on the investor’s legal team to cross all the t’s and dot all the i’s appropriately.

In situations like these, it would be ideal to engage a consultant or lawyer early in the process, as this would allow for more suitable time frames or terms to be established.

Working with consultants early on will also help identify any issues with the draft documents.

When it comes to purchasing a property in a self-managed super fund, for example, borrowed funds may only be used to acquire a ‘single acquirable asset’; multiple lots may, depending on the circumstances, require separate contracts and separate trusts.

The risks associated with purchasing a commercial property in an SMSF should also be separately considered by a practitioner with experience in superannuation requirements, as a general conveyancer may not have sufficient experience in those areas.

Avoid this mistake by: Engaging relevant support and advice so you’re not locked into unreasonable terms or unachievable time frames.

“Property investors need to extensively research not just the property but their advisors and consultants,” Duane says.

“Engaging consultants and legal advisors earlier in the purchasing process will ensure that any issues can be identified and ironed out before agreeing to unrealistic terms.”

Mistake #4: Failing at finance

Now more than ever it’s essential for investors to get pre-approval from their lender or bank before they make an offer on a property.

Furthermore, when you are approved for a loan and you receive the loan documents, it’s important to actually read and review them before you sign – or you risk being locked into a mortgage for several years that doesn’t suit your needs.

Consider interest rates, for example.

The loan you have applied for and are being approved for may have been advertised at a very low interest rate, attracting your interest.

“What people may not realise is that the cheap rate from one lender might be offset by the fine print, which could cause you financial distress in the future, with ongoing bank charges and break fees,” Duane says.

Legally, comparison rates must be advertised to try to combat banks and lenders misleading customers, but it’s still worthwhile researching the loan market properly to ensure you’re getting a mortgage that genuinely suits your requirements.

Avoid this mistake by: Working with a qualified mortgage broker who has specialist investment experience and can create a long-term finance strategy for you – one that will suit you well beyond this one property.

“It’s important to recognise that property investment is a long-term investment, and as such investors should use a financial product that suits long-term needs and goals as recommended by an experience broker and following careful review and comparison,” Duane says.

Mistake #5: Working with property spruikers

It often starts with a cold-call marketing introduction, or a free consultation awarded as a ‘prize’.

Next thing you know the investor has signed up for an expensive, junky investment ‘seminar’ that is primarily designed to sell them property flogged by the organisers for well above its market value.

“These marketing tactics may lead to other arrangements that are fraught with the possibility of conflict, such as meetings with a property spruiker’s related property agents, accountants, lawyers, bankers and so on,” Duane says.

It can be difficult to tell the difference between genuine advisors and spruikers, keep this in mind: advisors have an obligation to consider the best interests of their clients and to prioritise the client’s interest over the advisor’s interest.

The Australian Securities and Investments Commission released two reports in July 2018 specifying that the corporate watchdog would carefully examine the conduct of and any advice provided by one-stop-shop property spruikers.

“Not all one-stop-shop property spruikers do the wrong thing, and many are aware of their obligations to their clients,” Duane says.

“The risk is in the increased possibility of conflict and the reduced choices available or limited advice that may be provided.”

Avoid this mistake by: Asking questions and ding your own research.

“You can never ask too many questions when using a one-stop-shop property spruiker and their preferred associates,” Duane says.

True advisors are in a precarious predicament if they are pushing specific products and referring investors to certain associates for financial gain, so ask the hard questions like: What commission will you make on this sale?  How are these properties valued?  What track record do you have in helping other investors profit from property?

“Property investors should consider whether the advice being provided is on the basis that their financial position has been considered in all the circumstances, and if all services provided are in their best interest,” Duane says.

“It’s also recommended that you shop around and do as much research as possible.  As a property investor you are not tied to a spruiker’s referred associates, and so it is absolutely crucial to your financial success do your homework.”

What stands between investors and success?

Your Investment Property asked Michael Yardney, CEO of Metropole Property Strategists about the big differences between successful and unsuccessful investors – here are his thoughts…

The results are in and to the surprise of many, Scott Morrison has led the Coalition to win this year’s Federal election.

And this means our housing markets are likely to pick up by the end of the year.

The stability of government and the fact that there are no changes to negative gearing or Capital Gains Tax will encourage investors.

The market hates uncertainty, and the Coalition win should return confidence to our subdued property.

We began the year with two big stumbling blocks which have both been overcome. 

1. The Haines Royal commission into banking
2. The Federal election

Now it’s time to get on with business as usual.

The timing of the bottom of this downturn will however depend upon the banks loosening lending restrictions and the timing of any interest rate cuts – the first of which seems likely next month and deliver a boost to our languishing markets.

Sure we’re still in the slump phase of the property cycle with prices around Australia falling since late 2017, but there were green shoots appearing before the election campaign stalled things.

Last year property investors stopped buying because they were having difficulty getting finance under the new stricter lending criteria.

Then home buyers got scared as they kept reading headlines of impending property doom.

And things got worse when that 60 Minutes Program came out forecasting property values would fall by 40%.

That really sent a fright through the market.

In turn sellers went on strike.

Unless they really needed to sell, they put off the sale of their home as they were worried they would not find a buyer or that they’d be offered a price much lower than they would have received a year or two earlier.

But things are slowly improving.

• While property prices are still falling, the rate of decline is easing.
• Auction clearance rates are improving, albeit on much lower volumes than a year ago.
• Buyers are back in the market. Particularly first home buyers encouraged by incentive packages, but also established home buyers and investors.

However, there are still headwinds holding things back including our constrained economy, low inflation, minimal wages growth and rising unemployment.

First Home Buyers win

First home buyers (FHBs) have been promised some assistance under a Coalition government.

It has indicated it will assist a FHBs and enable them to buy their home with a deposit of only five per cent without having to take out Lenders’ Mortgage Insurance.

While the details of this scheme aren’t clear yet, FHB’s will still be required to meet the bank’s current strict lending criteria and, in my mind, the scheme creates potential risks around lending to households with a smaller deposit and no savings discipline.

Property Investors win

Many property investors rely on the tax benefits of negative gearing to subsidise their cash flow shortfall in the first years of owning a property investment.

The problem is that many people with only a hazy idea of what it actually is, blame negative gearing for virtually everything from locking first home buyers out of the market, to causing high property price rises, to ugly greedy investors rorting the tax system. 

A property is negatively geared when the costs of owning it – interest on the loan, bank charges, maintenance, repairs and depreciation – exceed the income it produces.

Since the costs of producing an income are generally deductible against the taxpayer’s other income, property investors can effectively offset some of the interest expense against their wages.

I would argue that property investors provide an essential service to millions of Australians who chose to, or have to, rent their accommodation and as such these investors should be treated like all other business people.

In our modern society we pay taxes and expect the government to provide us with certain essential services.

These include hospitals, roads, schools, jails, public transport, aged care and public housing.

In Australia the government often shares the burden of providing these services with private enterprises that can often deliver them more efficiently and cheaper.

When the government can’t supply enough public hospital beds, private run hospitals step up to the mark and not only receive tax deductions for their business loans, but also allowances to subsidize them.

So do aged care providers, schools and public transport providers who provide services in tandem with the government.

Our government also provides public housing, but not enough for all those who can’t afford to buy their own property.

While government social and public housing programs are helpful, it is only the private rental market that can deliver rental accommodation at the rate and scale that is required at present.

Property investors save a deposit, buy a property, commit to a loan for 25 or 30 years and provide accommodation for others in our community.

In return we expect to get a reasonable return on our investment risk, just like other business people do.

We know that the rent won’t cover our expenses, accept that certain tax benefits plus the long0-term capital growth will make up for this.

Sometimes it does, and sometimes it doesn’t.

This has made some argue that other, less fortunate taxpayers help these property investors meet their costs.

People like you and me have chosen to run our own little property investment businesses.

If I set up a dog wash business or a restaurant, I’d be able to claim a tax deduction for legitimate business expenses including loans to set up our business or purchasing business equipment.

Why should it be different for property investors who take on a business risk?

The fact that negative gearing tax benefits remain and there is no increase in Capital Gains will encourage investors to return to the market and take on these business risks.

And the fact that investors will still be able to buy properties in their Self Managed Superannuation Funds will help some where this strategy is deemed appropriate by their financial planners.

Home Owners

While some homebuyers have been having difficulty getting finance, others have held off waiting for the uncertainty about the property markets to clear.

As our property markets turn later in the year and more good news appears in the media, homebuyers will regain confidence.

When this occurs, home sellers who have been putting off upgrading or downgrading their homes in fear of not being able to sell at a reasonable price, will return to the markets.

It looks like we’re in for some good times in property ahead.

RiskWise Property Research has significantly downgraded the risks to the property market, particularly in Sydney and Melbourne, following the shock results of the Federal election.

Labor’s loss has eliminated the number one risk to the property market and this, combined with the high likelihood of interest rate cuts by the RBA this year and the first home buyers’ scheme, will support the bottoming of the market by the end of the year and then a gradual recovery.

Fears of a Labor win, and with it its proposed changes to negative gearing and capital gains tax, had a major impact on buyer sentiment, particularly investors, who saw residential properties as depreciating assets.

Our April Quarterly Risks & Opportunities Report identified two key factors that would have major impact on the market, particularly in Sydney and Melbourne, being the proposed taxation changes and interest rate cuts by the RBA.

The number one risk of a Labor win has been eliminated.

What we saw happening was the ALP’s proposed changes have, rightfully, had a major, and tangible, impact on buyer confidence, which RiskWise identified in its report, Impact Analysis: Negative Gearing, CGT and Australia’s Residential Property Market.

Those, jointly with APRA’s credit restrictions and the banks’ scrutiny of loan applications as a result of the Royal Commission, lead to major price reductions, uncertainly and impacted buyer sentiment, according to the Westpac Consumer Report, which found house price expectations were extremely low.

This meant even before an actual ALP win, the high possibility of these taxation changes had impacted the property market.

The Coalition win has eliminated the uncertainty and complexity in the market associated with the taxation changes, as well as significantly mitigated the property downturn, given it can be demonstrated the price reductions were, in part, due to fears of the proposed taxation changes.

In addition, with the other key factor we identified in our Quarterly Risks & Opportunities Report that RBA are extremely likely to undertake two interest rate cuts by the end of the year, we should expect the market to bottom by the end of 2019 followed by gradual price increases.

While the impact is likely to be lower than the impact of interest rate cuts in a higher interest rate environment, this will still have a very positive impact on the market, as rental returns in Sydney and Melbourne are, generally, very low.

Therefore, interest rate cuts will materially reduce the ‘out-of-pocket’ costs for property investors.

Interest rate cuts will increase dwelling demand, decrease price reductions in weaker markets, support the recovery in Sydney and Melbourne markets, and increase prices in areas that enjoy good demand and show resilience.

In addition, on May 11, Prime Minister Scott Morrison announced a first home buyers’ scheme, which will allow those eligible to buy with only a 5 per cent deposit rather than the standard 20 per cent and help stimulate the market.

While, overall, there would be major improvement in comparison to the situation in April, there were still risks associated with the property market.

Tighter lending standards, the findings of the Banking Royal Commission, restrictions on foreign investors, unit oversupply and large falls in dwelling commencements still all had a material impact on the market.

Weak markets with continuous price reductions, weak economies and poor population growth will take longer to recover and will require a more conservative and risk aware investment strategy.

While there has been a reduction in dwelling commencement, sale of new units are still very low and, therefore, in some areas it could take a longer period of time for the stock to be absorbed into the market meaning the risk is still high in many areas.

Today I’d like to share with you one of the biggest “Ah-Ha’s” I ever experienced.

You see…I’ve been running my Mentorship Program for over 12 years now. 

I believe it’s Australia’s longest running program of its type.

I’ve had the pleasure of working with some very, very successful property investors and I’ve had the joy of seeing some beginning investors grow, mature and flourish.

The thing all these successful investors have in common is that they understand the importance of personal development and, more importantly, they are prepared to change.

You see, what you become is far more important than what you get.

The important question to ask on the job is not, “What am I getting?”

Instead, you should ask, “What am I becoming?”

What you become directly influences what you get

Think of it this way: Most of what you have today, you have attracted to you by becoming the person you are today.

I’ve also found that income rarely exceeds personal development.

Sometimes income takes a lucky jump, but unless you learn to handle the responsibilities that come with it, it will usually shrink back to the amount you can handle.

If someone hands you a million dollars, you’d better hurry up and become a millionaire.

A very rich man once taught me, “If you took all the money in the world and divided it equally among everybody, it would soon be back in the same pockets it was before.”

It is hard to keep that which has not been obtained through personal development.  

So here’s the great axiom of life:  

To have more than you’ve got, become more than you are.

This is where you should focus most of your attention.

Otherwise, you just might have to contend with the axiom of not changing, which is:

Unless you change how you are, you’ll always have what you’ve got. 

If you interested to learn more about my Mentorship Program where I teach you The Science of Getting Wealthy – please click here.

The results I’ve achieved have been very gratifying for me, but life changing for many mentorees.

Some beginners have significantly sped up their journey by having someone hold their hand and show them where the landmines are.

Other more successful business people, investors and entrepreneurs have taken their “game” to the next level.

If you interested to learn more about my Mentorship Program where I teach you The Science of Getting Wealthy – please click here.