Puzzle Finance Blog
Why property investors aren’t necessarily as rich as you think they are
Investors have surged in the Sydney and Melbourne property markets at record levels over the past few years, with many amassing significant property portfolios. Many Gen Y investors have made headlines for having a large number of investments to their name, often worth millions of dollars.
But are they really as wealthy as they appear?
Answering this question is about understanding how they have managed to buy properties in the first place.
The first property
Getting the first property is widely described as the “hardest” for investors and first-home buyers alike.
At this stage, saving up a significant cash deposit – or using a parental guarantee to top up a deposit – is the most typical buying approach. Without any assistance, most investors and first-home buyers do have to do the hard yards to save funds, let’s say $100,000 plus costs.
But for those buying an investment property rather than a home, there is a difference worth noting.
While investment loans are typically now subject to higher interest rates, in many situations investors are seen as more serviceable – meaning they can borrow more – than home buyers on the same income. This is for one simple reason: having a tenant in the property is considered to be income.
Research undertaken by Macquarie analysts in 2016 found someone earning $105,000 a year could borrow $813,000 as an investor, compared to $588,389 as a home buyer.
If a first time property investor is keeping down their living costs by renting somewhere cheap, living in a sharehouse, or staying at home for longer, they have a much higher ability to borrow.
In addition to this increased ability to borrow, they can also get on the ladder earlier by buying wherever they can afford and think there will be good growth – compared to first-home buyers who are restrained by where they are able to live and work.
Investors are also frequently more able to buy in more affordable areas – where deposits are already cheaper – such as regional locations or the outskirts of major cities. By buying cheaper properties, it means they may be able to buy more real estate in the future.
Every investor has a different approach. But let’s assume our investor bought two apartments five years ago in an investor favourite area, such as Sydney’s western suburbs, for $250,000 each – prices that were achievable in 2012.
The next properties
For investors, the fastest way to get a deposit for the next property is not to save again – but to use equity in their home or other properties as it becomes available.
This could require waiting and hoping for the market to increase in value, doing a renovation or paying down the loan.
Here is how it works.
Home equity is the amount left over when you take away what is owed on a home loan from the current value of the property. With our investor’s two $250,000 apartments, the revaluation is likely $350,000 today ($700,000 in total) – to be conservative.
In this situation, our investor initially paid $50,000 in a deposit for each home – meaning her loan was $200,000 per property ($400,000 in total).
Even without paying any additional funds into paying off the homes, she has turned her $100,000 worth of deposits (two x $50,000) into a total of $300,000 because she has, in theory, gained an extra $200,000 from the revaluations. This means the portfolio would be worth $700,000. The debt remaining would be $400,000.
In this situation, it would be possible for the investor to pull equity out of these properties to cover more deposits plus costs. This approach could be used multiple times to ramp up a portfolio above the 10-property mark, provided they don’t hit a “serviceability wall” where the bank will no longer lend.
Mortgage Choice’s 2017 Investor Survey found 22.2 per cent of investors borrowed the full purchase price of an investment property using the equity in their current home as security and another 29.6 per cent borrowed some of the purchase price with this method.
Based on this data, more than half of Australian property investors rely on equity to build their portfolio.
If our example investor decided to buy a $500,000 investment property using her equity – she could push her portfolio up to home number three. Her portfolio value at this point would be $1.2 million.
But if our investor sold her portfolio at this point – she wouldn’t walk away with $1.2 million. In fact, she is far from a “property millionaire” and would be unlikely to even walk away with $300,000 – the equity plus initial deposits.
When capital gains tax and selling costs are considered, this can quickly erode the leftover value. Add to this costs incurred by holding the property – including any shortfalls between the rent and mortgage repayments, improvements to the property, insurances and other outgoings, and it doesn’t look as attractive as the initial one-off figure.
Many investors would not be selling at this point – in fact many are willing to lose money in the short term, by paying more to hold an investment property than it makes in rent, in the hopes of future gains.
The 2016 PIPA Annual Investor Sentiment Survey found 64 per cent of respondents had bought for “long-term” growth. Growth of 10 per cent on our example portfolio would be an additional $120,000 in equity.
If this growth didn’t occur, they could be losing money due to the holding costs.
And if values fell, it is entirely possible these investors could end up with mortgages costing more than the properties are worth.
What to ask when determining the success of an investor
- What is the value of the portfolio? (Are the valuations conservative and where have they come from?)
- Does anyone else share ownership over the portfolio?
- How much has been spent on the portfolio in terms of deposits?
- How much is left owing on the mortgages (this will determine how much of the principal has been paid down)? How much has been paid in interest?
- If they sold today, how much would they be left with before and after costs? (Consider stamp duty, agent fees, capital gains tax and marketing costs.)
- How much has the investor spent improving and renovating the properties? Take this cost away from the dollar figure above.
- What is the investor’s cash flow – that is, how much are they paying out each month to make up the difference between the rent and the mortgage repayments? If this figure is a positive – that is, the rent is more than the mortgage repayments – the investor is described as “positively geared” or “cash flow-positive”.
- What are their monthly outgoings on their portfolio, including insurances, property management costs, council rates, taxes and maintenance fees? Subtract this figure from the cash flow amount.
- How does depreciation and negative gearing affect their annual cash flow position?
- How long does the investor intend to hold their portfolio for? As the value increases in the properties, or decreases, these balances will change significantly.
Posted by Jennifer Duke - The Age on 8th September, 2017 | Comments | Trackbacks | Permalink
‘Risks magnified’ when investors use equity loans to buy multiple properties
A common strategy used by property investors around Australia to amass large portfolios of real estate is potentially very risky, experts warn.
More than half of all property investors are using equity in their homes or other investments as a way to pay for a deposit on another property, with lenders allowing them to tap into house price growth seen during the property boom.
While this strategy is popular with property investors as it doesn’t require them to cough up any savings, some commentators are raising the alarm, including LF Economics co-founder Lindsay David, whose newly published report The Big Rort points to significant risks for investors and the housing market generally.
Mr David claims that investors’ high level of borrowing through accessing equity – which in many cases allows them to borrow more than the value of the property itself – puts them at a higher risk of default.
It may have also helped to keep houses prices higher by allowing people to borrow on top of any wealth made during the boom.
“The Australian house of cards has ballooned through the use of issuing new loans against the unrealised capital gains of other properties in a portfolio,” the report said.
He said households were “creaking under the strain of servicing an immense stock of mortgage debt which still continues to grow”.
Mr David’s research indicates that those with an “officially listed [loan to value ratio] in the 50 per cent to 70 per cent bracket” – common to those who have borrowed using equity – are more likely to be close to default than those with a loan size at 90 per cent or larger.
In many cases, these investor loans are interest-only and “when house prices have fallen in a local market, many borrowers were unable to service the principal on their mortgages when the interest only period expires or are unable to roll over the interest-only period”, the report warns.
Usually, when someone buys a home they have to stump up a 20 per cent deposit or pay lender’s mortgage insurance. For instance, in the case of a $500,000 home, a 20 per cent deposit would be $100,000 and they would be given an 80 per cent loan of $400,000.
If they have another property also worth $500,000, they could borrow 20 per cent of the value of the property they’re hoping to buy, by using the value that is already in the property they own – known as pulling out equity – which usually involves refinancing.
Of course, the owner would need to have enough value in the home – either from repayments or from value growth – to be able to do this.
Mortgage Choice’s 2017 Investor Survey found more than half of Australian property investors surveyed relied on equity to build their portfolio, either by funding full deposits or part-deposits.
But Mortgage Choice chief executive John Flavell said investors were still required to prove they could manage the loan commitment.
“You can minimise risk by looking to acquire an investment property that is mid-range in the purchase price, located in a well-established metropolitan area, where demand for rental properties is high, this provides an income outside of wages to service the debt,” Mr Flavell said.
Property Investment Professionals of Australia chair and Empower Wealth founder Ben Kingsley said it was more important to consider serviceability than equity when it came to this method of financing property.
“You won’t be lent a lot of money just because you have a lot of money in your family home,” he said.
He also urged people to consider keeping loans separate rather than cross-collateralising – for instance, by taking the deposit proportion out of the borrower’s home from an offset account and then having the rest borrowed against the investment property.
Cross-collateralising has many consequences for the borrower. This includes less control over buying and selling, complexities around future use of equity and increased difficulty switching loans.
He warned that those who invest are able to use the borrowed funds to maximise the outcome. But it “magnifies risk as well as reward”, he warned.
“There are horror stories out there with people with negative equity in Dysart, Moranbah, Mackay and Gladstone. Evidence of prices lower than what people originally paid.”
Dream Financial mortgage broker Paul Bevan said investors should remember the equity they have accessed is secured by the owner-occupier property, not the investment.
“If you cannot meet your repayments on the new higher loan amount and default, then you could be at risk of losing your owner-occupied property,” he said.
“Similarly, if you are relying on rental income to service your investment property loan of $320,000 and your property remains vacant for an extended period of time and you are unable to meet your loan repayments and eventually default, then you are at risk of having your lender repossess your investment property.”
Posted by Jennifer Duke - The Age on 5th September, 2017 | Comments | Trackbacks | Permalink
Investors can own multiple properties but still be eligible for first-home buyer benefits
A little-known loophole across all states and territories is allowing investors, who already own multiple properties, to take advantage of government grants aimed at helping first-home buyers.
An analysis of rules around grants across the country shows that it doesn’t matter if you already own one property, or 10 – a homeowner who hasn’t lived in their properties for more than six months may be able to claim certain first-home buyer stamp duty concessions and grants.
This means someone like Uber driver and quantity surveyor Dean Munro, 29, a multiple property owner – is eligible for government first-home buyer benefits, because this time he is buying a house with the intention of living in it.
His property portfolio, which includes three properties owned in his name and some he teamed up with family members to buy, is worth more than $2 million.
After a decade of rentvesting – a term given to those who own investment properties but continue to rent – Mr Munro has bought a house in Melbourne’s Broadmeadows. The first-home stamp duty exemption he is entitled to will save him $17,620 on his $425,000 home.
If the property he had bought was a new build, he would have been able to claim up to $10,000 from a government grant.
An examination into the rules found property investors across all states and territories may be eligible for some form of government benefit on a property purchase, provided they haven’t lived in any of their previous investments and they haven’t owned real estate before July 1, 2000.
This is good news for Mr Munro and investors like him.
Despite also having a shares portfolio, gold and silver bullion, and a cash buffer in the bank “just in case there is a downturn in the property market”, he said the stamp duty concession – which his lawyer confirmed he was eligible for – is one of his “tactics” to get the last loan over the line and push the portfolio to its eighth property.
“This last loan was not easy to get and required a lot of thinking outside the box,” he said. “I’m just going within the rules and I haven’t used it before.
“I never used [the grant], so I’m using it now. It’s the right time to settle down and stop renting a room [in a share house]. I want to live by myself and do some renovations.”
So, how many multiple property owners like Mr Munro have been given a first-home owners grant? Even government departments handing out the grants aren’t sure.
Domain requests to all state and territory relevant government agencies for providing first-home owner grants revealed none of them collect data on whether first-home owners are also investors when providing the grant or stamp duty concession.
While rentvestors claiming first-home buyer grants are simply playing by the rules, First Home Buyers Australia founder Daniel Cohen said the grant should be a one-off payment to people purchasing their first property to live in. Both he and FHBA co-founder Taj Singh were surprised at the rules.
“So if you choose to enter the property market as a rentvestor … while this is a viable option for consideration, by choosing this method you should be giving up your right to the [grant],” Mr Cohen said.
He noted that investors were able to receive other tax incentives, such as negative gearing benefits, which were not available to first-home buyers.
The rules around the grants aren’t new.
A Queensland government spokesman said the purpose of the grant was primarily to offset the increased costs of housing arising from the introduction of the GST in 2000.
Since then, some variations have been introduced. In both Western Australia and the ACT, a property investor cannot claim entitlements if they have lived in the home for more than six months, if it was bought after June 30, 2004.For properties owned between July 1, 2000, and June 30, 2004, they could not have lived in it for any time period.
A Revenue NSW spokesman said: “It is important to note that investors do not benefit from the stamp duty exemptions that were recently expanded in NSW”.
Richie Muir, legal director at Lawlab, said there were some differing rules between the states and territories, but many rentvestors would be eligible.
“The number of rentvestors are increasing in Australia, particularly with younger generations, because they want to get on the property ladder as quickly as possible but can’t yet afford their ideal home,” Mr Muir said.
Rentvestors may be required to provide evidence they hadn’t occupied their properties, such as lease agreements, tax returns and utilities bills, and the rules also applied to their spouse, he said.
Mr Muir also noted this list was not exhaustive, and there are other eligibility requirements for the first-home owner’s grant that vary by state and territory, and the rules relating to stamp duty concessions can also be different.
“Where the first-home owner concessions are not available, there may be other home owner stamp duty concessions available,” he said
Posted by Jennifer Duke - The Age on 30th August, 2017 | Comments | Trackbacks | Permalink
A homeowner's guide to letting on Airbnb
More and more homeowners are looking for ways to increase their household income. This includes looking to their family home to provide extra funds through Airbnb or renting out the granny flat in the backyard.
While this might seem like a short-term win that may include the ability to claim a percentage of your mortgage as a tax deduction, it's important to remember the long-term cost when you sell.
Too many people aren't aware that they may lose their main residence exemption if they use their house for income-producing purposes, which means they'll potentially pay capital gains tax (CGT) when they sell their home.
If you're thinking to yourself, 'I'm only renting my spare room out every other weekend on Airbnb, the Tax Office will never find out. Besides, if I don't declare the income and claim the deduction then I don't need to worry about CGT' – I urge you to think again.
That's because the Tax Office can data match your information on sites such as Airbnb to ensure that you're declaring income.
The ATO's assistant commissioner Matthew Bambrick has said that information is used from "a range of third-party sources" such as banks, eBay and Uber, to data match with what is being declared on tax returns and to catch undeclared income.
"The data enables us to put together a picture of what a person's assessable income should be. If something doesn't look quite right, it will send up a red flag and we'll investigate further," he said. You will now receive updates from Money Newsletter
"The ATO is keeping up with the sharing economy, meaning that we have the ability to identify if you have left out a significant amount of your income."
Does this mean that you shouldn't be renting out the granny flat or making a few extra bucks on Airbnb? Generally, no however it's important to understand the long-term financial implications of the short-term gains you're currently making.
Let's take the case of renting a granny flat on Airbnb. If you decide to rent the granny flat on Airbnb, it's available to rent every week and it's available for market rent then you may be entitled to claim a percentage of your interest, council rates and more against the income derived which means part of your ownership costs may be tax deductible. Which can be a great thing. This may mean that the income and expenses cancel each other out and you end up paying no income tax on the net income. Let's assume in this example that the granny flat represents 7.5 per cent of the house.
When you eventually sell your house, let's say you make a profit of $300,000. Normally you'd pay no tax on this as you'd be entitled to the main residence exemption. However, as the property was income producing for half that time then $150,000 is potentially now subject to CGT. The good news is you are potentially entitled to a 50 per cent discount, which reduces the profit to $75,000 of which 7.5 per cent is now declarable for CGT purposes or $5625. If your taxable income is an average one, the tax payable would be $1771.88.
Now that might not seem like a lot of money; however, if you live in a suburb where house prices have skyrocketed, your profit could be much more than the example above, which means that the CGT payable is also much more.
With the average Australian income for Airbnb hosts at $4500 a year, in the example above, even with deducting the CGT payable, the host would be better off.
However, with some suburbs, particularly in Sydney, having increased dramatically, there is a chance the CGT will be more than the income received, which may mean you want to reconsider your options.
You may argue that you have no intention of moving and therefore any potential CGT is irrelevant because you only pay tax on the profit when you sell. However, circumstances change for all of us and it is important to be aware of any potential gain should you choose to sell.
What is important is not to bury your head in the sand and claim that you didn't know. That's simply not a good enough excuse and the Tax Office will issue fines and penalties if you're not declaring both the income and the CGT.
Airbnb and granny flats can be a fantastic way to make some extra money from what is often our biggest and most expensive asset, however it is important to be aware of both your tax obligations both in the short term and the long term.
Melissa Browne is CEO of accounting firm A&TA and financial planning firm The Money Barre and author of Fabulous but Broke.
Posted by Melissa Browne - The Age on 29th August, 2017 | Comments | Trackbacks | Permalink
Organise finance early this spring property season
With more properties soon to hit the market, lenders will be stretched and house hunters should organise finance well ahead of time, property experts say.
That's not only because lenders receive more mortgage applications during the spring property season.
Lenders have been tightening their lending criteria, which could add further delays to getting approval.
And tighter lending criteria could also mean that just because you had an approval a year ago, you may not qualify now.
Spring is traditionally a time for buying and selling property.
Approval times for home loan applications could blow out from four weeks to six weeks, says Vincent Turner, the chief executive of mortgage broker, uno Home Loans.
The number of property sales in September, October and November typically increases from the previous three winter months. Lenders manage this increased workload without putting on extra staff. Advertisement
Someone who sees a property they want to buy risks missing out if they leave the approval process too late, Turner says.
Mortgage approvals usually last for three months, after which time they need to be renewed.
The first thing that a borrower wants to know is how much they can borrow, but a verbal assurance from a broker or a lender is not enough, says Donna Beazley, a mortgage broker with Oxygen Home Loans.
Borrowers should also get the pre-approval in writing from the lender. If using a mortgage broker, insist on being given the lender's pre-approval letter, she says.
The letter or email should spell out how much can be borrowed, and how long the approval lasts, Beazley says.
The approval should list the suburbs and type of housing that the borrower intends to buy.
If the personal circumstances of the borrower don't change, there should be reasonable confidence that the approval will be honoured, she says.
If the lender lifts the interest rate, usually the borrowing limit will not change, says Beazley, who is also the chair-elect of Mortgage and Finance Association of Australia (MFAA).
Any possible problems should be flagged early. For example, many people are paid with a component that is variable, like commissions.
Lenders will assess that pay in different ways, she says.
Not all pre-approvals are the same in terms of the level of confidence that the borrower has the approval will be honoured.
Conditional approval best
Brokers use automated software provided by the lender to calculate how much can be borrowed, says Turner, whose platform allows borrowers to search, compare and settle on a mortgage.
He says with pre-approval, the lender providing the mortgage may not have even looked at the borrower's documents supporting the application.
Turner says the next level up in certainty for the borrower is a "conditional approval".
It means the lender has checked the borrower's documents, like pay slips, bank statements, monthly expenses and proof of genuine savings.
If the borrower has a poor credit rating, that would want to be flagged straight away with the lender or broker, Turner says.
Conditional approval is essential before bidding at auction, he says.
"You don't want to successfully bid on your dream home and risk losing the house, or worse, risk the deposit because you didn't get conditional approval before the auction," he says.
Peace of mind
Scott Johnston, 38, wanted the peace of mind of having the finance sorted well before he started looking seriously for an apartment to live in.
The business development manager bought an apartment by private sale in Melbourne's Richmond in March and sought approval for a mortgage well ahead of time.
Johnston has an investment property that he has owned for five years and went to a mortgage broker to see how much he could borrow using the equity he had in the investment property.
"I wanted to get into my own place rather than rent," he says.
"I gave the broker all of the facts and figures and they re-financed from there. They were very specific in the number, the ceiling, whereby I would have no trouble in getting approved, but they made it clear that if I went above that there would be no guarantee.
"They emailed a spreadsheet with the options [of lenders]. The benefit of it is that it told me what I was targeting and stopped me from going over and above what I should be doing."
What are the conditions?
Sam White, the chairman of mortgage broker Loan Market, says not all conditional approvals are the same.
The best conditional approval is where everything about the borrower has been checked out.
If the borrower's circumstances don't change, that should leave only the valuation of the property as a condition, he says.
That"s important because if the lender's valuation comes in at less than the purchase price, that may put the lender's loan-to-valuation ratio above what the lender will allow.
Sam Lally, a buyer's agent at Buyer's Advocate Australia in Melbourne's Hawthorn, says there can be wide differences in valuations from different lenders.
"Some are conservative and visit the property while others do a 'desk' valuation by comparing the sales of like properties," he says.
"Buyers should do their own research on prices or get a trusted adviser to help, so as not to overpay," he says.
Most lenders have lifted the mortgage interest rates they charge investors, often including existing investors who have variable rate mortgages.That's as well as tightening lending criteria, says Kirsty Lamont, a director of comparator website Mozo.
The higher mortgage interest rates are part of their response to increasing their capital adequacy at the behest of regulators, she says.
"Our research shows almost nine out of 10 borrowers with variable rate loans have been hit with an interest rate rise in the past two years despite the Reserve Bank not lifting the official cash rate over that time," she says.
"Many lenders have toughened their loan criteria off-the-back of pressure from regulators by lifting their interest rate buffer used to assess whether borrowers can afford to take out a mortgage.
"Some lenders have even introduced strict postcode restrictions by requiring borrowers to have a larger deposit for specific areas," she says.
Lamont says those with variable rate mortgages should expect they will be paying higher interest rates.
"We expect banks to continue to increase interest rates independently of the Reserve Bank cycle with investors and interest-only borrowers likely to be the most affected.
"It's more important than ever for homebuyers to future-proof themselves against mortgage stress by factoring-in at least a two percentage point increase in their mortgage rate," Lamont says.
Posted by John Collett - The Age on 27th August, 2017 | Comments | Trackbacks | Permalink
The obvious mistakes first home buyers make
JUST say you won the Lotto or a kindly relative left you a sizeable inheritance and, hooray, you have a deposit for a bedsit in a far-flung corner of Sydney.
It’s time to hit the listings with your chequebook and your shock-and-awe auction tactics.
What could go wrong?
Lots, in fact.
“First homebuyers are often at a disadvantage because you have inexperience combined with the intense emotion of buying your first home,” said co-founder of Cohen Handler buyers’ agents, Simon Cohen.
“It’s a recipe for disaster.”
Here are some of the most common traps to avoid.
TELLING THE AGENT TOO MUCH
The agent may be a great person, charming to boot, and you really like the way they spare you the hard sell. But it’s important to remember their loyalty is not to you.
“The selling agent works in the interests of their seller and it is their job to sell their house for the absolute maximum the market is willing to pay,” buyers’ agent at Property Mavens, Miriam Sandkuhler, said.
In order to work out your budget, they will either ask you how much you think the property is worth, gauge whether you have missed out at nearby auctions to determine your ceiling price or even inspect your cheque on auction day.
“They might take a look at your cheque to see if it’s all correct and they can then gauge from your 10 per cent deposit what you maximum is,” Ms Sandkuhler said.
“At home viewings the selling agents will ask you seemingly innocent questions about your likes and dislikes, what you’re looking for and how much you’re willing to spend.
“This is done to see how much money you have and work out if you are a serious buyer, but they are also gleaning information should they need to use it during the negotiation phase.”
So the less information given to an agent, the better.
NOT KNOWING THE VALUE OF A PROPERTY
First homebuyers waste months — sometimes years — attending auctions and missing out to other buyers. Meanwhile, property prices are increasing at a rate they cannot possible keep track with through saving.
“If you have never done it before then you won’t know how to price property properly and that can cost you a lot of money,” said Ms Sandkuhler.
“The quote range of property often does not relate at all to the buyer’s budget.”
Not only is the market going up while first home buyers miss out at auctions, but they’re also having to paying hundreds of dollars on pest and building inspection fees for each auction they wish to bid at.
Mr Cohen recommended first home buyers research what similar properties have sold for (not listed for) in a particular area before buying — and that doesn’t mean relying on what the agent says.
“Go to auctions in the area you’re hoping to buy in and look at what homes are selling for and search for similar properties online,” Mr Cohen said.
“You want to get a good understanding of what a bargain would look like in those suburbs and then, eventually, what the home you want to buy is worth and why it’s worth that amount.”
BUYING THE MONEY PIT
Sometimes first homebuyers think they need to buy a rundown house and tart it up to get into the market. The kind of home the agent refers to as a “renovator’s delight”, but are, in fact, only delightful if money pits bring you joy.
Financial comparison website Mozo.com.au’s property and lending expert, Steve Jovcevski, cautioned against falling blindly for the DIY fantasy.
“If you’re going DIY, don’t forget that there are certain things, such as electrical wiring, that you need to hire a licensed contractor for,” Mr Jovcevski said.
“Make sure you get property inspections done to find out the extent of the work that needs to be completed, and get quotes from contractors so you can budget properly for them.”
Furthermore, banks often won’t lend on a property that is deemed uninhabitable.
“So if your lender inspects the house and finds that it’s unlivable, they may not agree to give you a mortgage, or only lend you a fraction of what you ask for,” Mr Jovcevski said.
“While some banks will lend going off the contract price of a property, you can’t rely on that.
“It’s important to be upfront with your bank about the property you’re looking to purchase, so you can be sure you’ll secure the loan you need.”
NOT UNDERSTANDING MORTGAGES AND MONEY
We get it. Securing a mortgage and filling out paperwork is burdensome, but if you don’t pay attention to the details you can end up big trouble.
First homebuyers often forget to factor in additional expenses, such as stamp duty, mortgage and solicitor fees and mortgage insurance.
While it may be tempting to cut back on professional advice to save money, Mr Cohen said this was a bad idea.
“Make sure you get a solicitor to look at your contract because they can pick up all sorts of things that turn a good property into a bad one, such as heritage overlays or problems with the body corporate,” Mr Cohen said.
Mr Cohen said first homebuyers desperate to get a foothold after years of feeling locked out of the market, shouldn’t feel grateful for just any old property.
“They should remember that their money is as good as anyone else’s,” Mr Cohen said.
“The first property you own really is a stepping stone for your life and it’s so important to get that right.”
Posted by Johanna Leggatt - News Limited Network on 26th August, 2017 | Comments | Trackbacks | Permalink
Tips to save thousands on a home loan and pay it off years earlier
HISTORICALLY low interest rates have saved Australian mortgage holders thousands recently, but there are simple tweaks that can boost these further.
One example is changing from monthly to fortnightly repayments, which can save a packet over a loan term; thanks to compound interest says Mortgage Choice CEO John Flavell.
“Say you have a 30-year Principal and Interest loan of $500,000 with an interest rate of 4 per cent per annum. Your minimum monthly repayment would be approximately $2,387,” Mr Flavell said.
“If you decide to pay fortnightly and divide your monthly repayment in half- $1,194 per fortnight- you could save approximately $56,643 in interest over the life of your loan.” media_camera John Flavell says fortnightly payments can save you thousands.
Careful budgeting of spending money is important. One method is to withdraw cash to spend and restricting yourself to that sum, rather than absent-mindedly tapping away with cards.
“A good budget will factor in your regular spending habits,” Mr Flavell said. “Inject all the money you save into your offset account or redraw facility to help you pay down your mortgage faster.”
Making extra repayments, even a minimal amount, amplifies savings over the long term, claims Canstar spokeswoman Belinda Williamson.
“If you have a $300,000 loan over 30 years and increase monthly repayments from $1520 to $1720, you stand to save almost $60,000 in interest over the loan (term) and could repay it six years earlier,” Ms Williamson said, adding that if you can’t pay extra all year, seasonal adjustments will help. “It might mean that once the current footy season wraps you might put that ticket money towards your mortgage.” media_camera Belinda Williamson says small extra repayments can make a huge difference.
Picking features of a potential loan carefully can also make a difference.
Offset accounts or redraw facilities can lessen interest payments significantly.
“Consider having your pay, tax return, or any other windfall deposited into your offset and with the addition of a redraw facility, withdrawing when you need it,” Ms Williamson said. “If you had a loan of $300,000 and had already repaid $100,000, you would pay interest on $200,000. But if you had $50,000 in a linked offset account, you would only pay interest on $150,000 of your remaining balance.
“Based on a loan amount of $300,000 over 30 years, if you deposit $2,000 into an offset account you can shave around $9,650 in interest over the life of the loan and repay it three months earlier. If you increase your offset deposit to $10,000, you can save almost $30,000 in total interest and cut your term by almost 18 months.”
Posted by Tim McIntyre - News Corp Australia on 29th July, 2017 | Comments | Trackbacks | Permalink
Business owners can use SMSFs to pay themselves a lease
BUSINESS owners can save thousands on workplace leases and unlock a raft of other benefits, by using superannuation to effectively become their own landlord, industry insiders say.
Omniwealth financial planner Andrew Zbik claims there is $78 billion worth of commercial and industrial property owned by self-managed superannuation funds, compared to just $28 billion of residential property.
This is because SMSF trustees have realised that their business can pay a lease to a property owned by a SMSF fund they set up themselves, enabling them to use cash flow from their business to build personal wealth.
If this sounds like an option for your business, Mr Zbik says there are three things you need to get right.
1. Have a SMSF
“To choose your own commercial or industrial property you will need to have established your own SMSF. In superannuation terms, we call such a property as ‘business real property’,” Mr Zbik said. “A special exemption permits business real property to be leased to a business owned by members of the fund; considered a ‘related party’ to the SMSF.”
Mr Zbik said that borrowing money for the purchase of the property must be permissible by the fund’s trust deeds. media_camera Commercial buildings can help build wealth for business owners.
2. Have a cash deposit
“Cash deposits required for commercial or industrial property purchases are substantially larger than for residential,” he said. “In most cases, the SMSF will need a cash deposit of around 35 per cent to 40 per cent of the purchase price.”
3. Pay a ‘market’ lease
“Superannuation rules clearly require that when business real property is leased to a related party, the lease paid by the business must be on commercial terms,” Mr Zbik said. “Pay for a property appraisal from a professional valuer to avoid any confusion.”
Fail to do this properly may see funds deemed noncomplying by the ATO, which will take a penalty payment of 47 per cent of the fund’s assets.
TAX: What you can claim working from home
“Having your SMSF own commercial or industrial property leased to your business is a smart way to get the lease money to build wealth for you outside of the business,” Mr Zbik said. “Given that many commercial or industrial properties have an income yield of 6 to 8 per cent, plus, the relatively large cash deposit between 35 per cent to 40 per cent, the lease payments often cover all of the loan repayments. Thus, the SMSF still has a positive cash flow position.”
Posted by Tim McIntyre - News Corp Australia Network on 28th July, 2017 | Comments | Trackbacks | Permalink
Christmas comes in July for real estate investors — here’s why
TIS the season to be smiling for many of Australia’s two million-plus real estate investors.
Christmas comes in July (or August) for property investors because many have a big tax refund heading their way soon, or at least some big tax deductions to offset their other income.
The latest Australian Taxation Office data shows that property investors claim average interest deductions of $12,800 a year and other rental property deductions of about $11,000 a year.
Deductions outweigh investors’ average rental income of about $19,700 a year, although for many investors with bigger loans and newer properties, the gap is much wider, delivering thousands of dollars annually in negative gearing tax benefits.
Property investors have been stung by the Federal Government’s recent decision to ban travel deductions related to rental properties, and to limit depreciation deductions to new items bought by investors.
However, a bigger financial hit is often self-inflicted. Accounting experts say many landlords fail to make the most of deductions available to them, so are giving away their money to the ATO. media_camera It’s a season of huge smiles for real estate investors waiting for a welcome tax refund.
Whether you’re a current investor or a would-be investor, it’s wise to understand the tax deductions that can put a big smile on your face.
CAPITAL WORKS DEDUCTIONS
The ATO lets investors claim 2.5 per cent a year of the construction cost of rental properties built after 1985, but its data shows that fewer than half of all investors claim this. That means they’ve all got very old properties, or they forget a deduction that can hand them thousands without draining a cent from their pocket. Renovations such as new kitchens and bathrooms can be deducted this way.
Writing down the value of things such as carpets and curtains has delivered investors breaks for decades. Now these depreciation deductions are only allowed on items or homes bought new by investors, but there’s still a potential windfall for those who plan.
BMT Tax Depreciation managing director Bradley Beer says its research has found that up to three quarters of investors don’t maximise their depreciation claims. And many don’t realise that they can back-claim for up to two years if they have previously forgotten depreciation deductions. media_camera Santa may have a big surprise for property investors who take time to check their tax deductions.
Half a million real estate investors don’t claim interest deductions, the ATO data shows. While many own their rental properties outright, others forget a potentially large tax deduction. However, interest can only be claimed if the property is available for rent, so holiday homes for personal use are off limits.
REPAIRS AND MAINTENANCE
While the government is shutting the door on some depreciation deductions, it will still let you claim for the costs of repairs and maintenance. The ATO has strict rules about what’s a repair and what’s an improvement, which must be written down over several years, so check if you’re unsure.
LITTLE COSTS ADD UP
Pest control, land tax, council rates, insurance, property management fees and even stationery are extra deductions than when combined can deliver investors an early Christmas present.
The ATO Rental Properties 2017 guide is available online for free, and its online lodgement system myTax prompts you with claims categories to help you not miss anything. If you use a tax agent, make sure they are across real estate investment expenses.
Posted by Anthony Keane - News Corp Ausatralia Network on 28th July, 2017 | Comments | Trackbacks | Permalink