So let’s examine the questions many professional property investors consider.

First Question

Who is your preferred tenant?

That question leads you to the location and type of property that best suits your tenant preferences and forms the basis of your whole buying strategy.

My preferred tenants are highly paid professional because they can afford regular rental increases, spend less time in the property (less wear and tear) which minimises maintenance costs, also they tend to move less frequently.

Second Question

What type of property do highly paid professionals prefer?

The answer, a one or two bedroom flat. I prefer two bedders because of the flexibility the extra room brings which means it appeals to a broader market and that optimises more frequent rental increases and better capital gain.

Third Question

Where do professionals want to live?

The answer is within a 15 – 20 minutes commute (train or tram) to their highly paid jobs.

Why is living close to work so important?  Because they work such long hours they don’t want to be traveling out to a house in the suburbs or worse to an outlining estate, they want the commute to be short and convenient, that means close… but not too close.

Fourth Question

Where is the biggest concentration of highly paid work?

The CBD and CBD fringe of our biggest capital cities, Melbourne, Sydney and Brisbane, that means the location of the property is around St Kilda, Armadale & Kennsington in Melbourne or Paddington, Glebe & Randwick in Sydney.

Fifth Question

Should I buy a house or a flat?

My answer is a flat every time.

From a cost point of view, you don’t have nearly as much to maintain or repair with a flat, the owner’s corporation’s pays for nearly everything outside, whereas with a house, it’s all your responsibility including the roof, fences etc.

Cash-flow is also and important consideration. Comparable houses are significantly more expensive however while tenants will pay a little more for a house the difference certainly won’t reflect the higher price.

While houses have traditionally enjoyed higher capital growth in the past capital growth of houses and flats has converged in recent years.

Sixth Question

Should I buy a new or old flat?

A classic blue chip block of flats int he blue chip suburbs of South Yarra

New properties can be replicated at will, a developer simply has to buy a block and ‘shoe-horn’ as many apartments into the space as council will allow, creating competition for you property, whether it be or rent or sell, see my recent blog, “New or Old”.

However, if you buy ‘aged stock’ it cannot be replicated.  Only so many flats were built in the 1930’s, 40’s, 50’s and 60′s. What has been built is all there is and the market will not compare a new apartment with an older flat and all its charm and character.  Also, ‘aged stock’ has the uniqueness of belonging to the area, they blend in. New properties can be quite alien to the area, they just don’t have the character that attracted the buyer/tenant to that suburban in the first instance.

The Ideal Investment Property

Not every inner suburban flat will meet the stringent demands of highly paid professionals, so you may need good advice to find the right property, but once you have found it you will enjoy benefits including:

1. Lower maintenance costs
2. Higher and more frequent rental increases
3. Higher and more resilient capital growth
4. Less damage from higher quality tenants
5. Lower tenant turnover
6. Less problems

If you want to learn more about how you too can locate the ideal investment property for your portfolio call Investors Edge Finance on 9822 3256 for an exploratory consultation with Financial Architect, Andrew Gardner

This is one of the most frequently asked questions… and it’s a very good question.

You are a property investor, you bought a brand new house on a beautiful estate five years ago.  You want to buy another so you apply for an increase on your loan, or maybe you want to sell it to fund the purchase of a new family home, it doesn’t matter, either way a value has to be set and that valuation is determined by comparing it to comparable properties in your estate and neighbouring estates.

But, let’s begin by considering two identical houses. Both were built five years ago by the same builder. One was bought by a Hong Kong businessman but never lived in, the other was the property you purchased which you rented out to mum, dad, two kids, a dog and a cat for the entire five years.  Both are now on the market, both the same price, $600,000.

So, who is the likely buyer? Being on an estate in the outer suburbs most enquiries have come from families looking for a home. Prospective buyers look at both properties. Which one is going to sell, the one that’s never been lived in and looks and feels brand new or yours that looks, feels and smells like dogs, cats and kids?

The answer is pretty obvious!

So, how much does the price on your “used” property need to be reduced before it will sell ahead of the “like new” property?  $20,000, $30,000, maybe even as much as a $50,000 discount, it’s a much tougher sell.

But then there’s a third, fourth and fifth dimension.

Being in a new estate both houses are competing not only against each other but also directly against dozens of other “brand new” houses with all the latest technology, making it tougher to sell your house as the new ones push the price of all the “older models” down.

Then there are the improved properties that the owners have lived in and improved with beautiful landscaping etc adding substantially to its appeal… and value further eroding the value of your ‘rental’ property.

Case study: We have had numerous cases where banks have valued brand new houses on estates as much as $50,000 under purchase price because of the number of completed houses for sale at the time creating a supply well in excess of demand. In another case a client who built a magnificent house in an estate in an ‘award winning’ outer south-eastern estate had their property valued at a whopping 39% below land/construction costs. It was a devastating blow.

If you still have any doubt about the potential for falling values of new properties give me a call and I’ll share more distressing stories with you.

There’s not much doubt that the brand new house you bought and rented out has depreciated in the same way a car does in the first 5 years, however you don’t suffer the same loss with what I call “aged stock”, so let’s examine investing in ‘aged stock’.

So, let’s go back five years but this time you bought an established house in the town proper, you are close to all the shops, cafe’s, trains etc. Now when your house is valued for a loan increase or sale you are only competing against houses of the same age, type and style because they are the only comparable properties if someone wants the convenience of town living.

You are not competing against brand new or improved houses because all the available land has developed years ago when your house was built so it’s all growing at the same rate.

So, quite clearly, in many if not most cases buying “older” house  you can put you ahead by tens of thousands of dollars compared to buying that new property, certainly the chances of a bigger gain are in your favour.

Footnote: If you buy a new property in an established area you are likely to pay a premium for a well designed and appropriate building especially if someone has demolished an older house to build. It is worth noting that as the building ages that value edge may be eroded as it starts to look more like surrounding properties.

Allow me to explain.

John emailed me the other day to say he was planning to sell the “jewel in his property crown” to pay for an extension on his home.

Yes he could borrow the money but by selling the property he could pay cash and that would make things so much easier.

But, like so many others he hadn’t done the numbers. Let’s have a look at the financial consequences of ‘cashing up’:

1. He immediately triggers a capital gain tax event, direct cost, around $25,000.
2. He incurs selling expenses, including agent fees and marketing, adding another $14,000
3. And he will have to pay stamp duty again on a replacement property, as he plans to buy again in the future, putting another $26,000 on top.

The costs of selling alone would end up taking away a whopping $65,000 plus the $33,000 his prized investment property was increasing by each year, which brings us to a staggering $98,000… and the extension was only going to cost him $120,000!

You see John took the simplistic view that if he sold his best performing investment property it was net him close to $120,000 cash so he wouldn’t have to borrow the money for his renovation.

However, he hadn’t factored in was Capital Gains Tax. In addition to this, he hadn’t considered the Stamp Duty when he replaced the property in a year of two – so it would be back to square one for his cashflow.

On top of this, we haven’t even considered the advocacy fee to re-buy, which would cost him another $12,000.

It’s easy to see the upside when you’re so close to it, and too often the down side is not quite so obvious.

I can’t count the number of clients I’ve heard lament their hasty decision to sell a quality property so they can pay down their home loan, buy a new one or renovate their existing home.

So few come to be relish their decision while so many suffer the regrets as they watch their old property soar in value, sometimes out of reach forever.

Before you make a hasty to decision to sell, or indeed to buy, make sure you get your advisor to weigh up ALL the pros and cons of what really is a monumental investment decision.

If you’re considering selling an investment property, give our Financial Architect a call today on (03) 9822 3256 and let him determine all the options available to you.

Those who followed my advice have saved a fortune, locking in just $500K would have save you $11,000 pa on today’s pro pack rates, that’s the value of being a Platinum Member!

It is unusual for fixed rates to be lower than the variable rate, but this is one of those usual times when both 3 and 5 year fixed rates have dropped well below the prevailing variable rate with some as low as 6.29% for a 3 year term and 6.39% for 5 years although most are around 6.69%, that’s up to 1.5% lower for the 3 year term, rare times indeed.

What is the up side to fixing your rate?

1. The 3 year rate is about 0.8% below most prevailing pro pack rates, that’s a saving of about $4000 pa on a $500,000 loan or about $2,000 pa on the 5 year term
2. You have rate certainty that your interest costs won’t increase over the term
3. Provided you have the equity you can still apply for additional funds

What is the down side?

1. You lose flexibility as you are locked into that lender for the term of the loan
2. The loan must be fully drawn so you lose any available credit you may have on the loans to be fixed
3. If rates fall you are locked in at that rate
4. If you exit the loan before the end of the term and rates have dropped you may face penalty fees

What to consider:

1. As most, but not all lenders, limit the amount fixed loans can be reduced or offset you need to consider how much you can pay down/off over the term from your cashflow, an inheritance etc
2. To save interest over the term of the fixed period the average variable rate needs to be higher than the fixed rate for more than half the fixed term
3. The experts advise people to lock in closer to the lower end of the cycle range, not the high end
4. If you have any plans to sell the property within the fixed term, be wary of locking in
5. That your circumstances won’t substantially change within the term
6. How much of your lending you should lock in and the term of the fixed period, for example you should not lock in a transactional loan account such as your ‘Expense Account’
7. Typically deductible loans should be locked in before non-deductible so you can pay your N/D loans down first

I can’t recommend or advise you to fix or not to fix, not even RBA chief Glen Stephens knows where rates are headed over the next 3 to 5 years because there are so many factors that affect rate movements, however, I feel a sense of responsibility that if I’m fixing some of my own loans for the first time in many year I should raise the issue with you so you can make your own informed decision

What to do if you do decide to fix:

If, after considering all the circumstances, it is best to stay with your existing lender the process usually should be quite straightforward requiring only a “switching” form. Give us a call and we will advise you accordingly.

If you want to switch to a lender (eg for a better rate) then you will need to call us today on 03 9822 3256 and we will make the arrangements

He has done very well, just into his 40’s “Larry” is a paradox!

‘Larry’ fears debt but went into debt to build an amazing extension and deluxe renovation on his outer suburban home, adding maybe 75 cents for every renovating dollar spent.

He is “very conservative” but proudly showed off his new luxury new SUV that he just bought for himself and the wagon he bought for his wife!

He is “risk adverse” adverse but casually told me of the tens of thousands of dollars he has lost on the share market.

His “analytical mind” has filled his filing cabinets with detailed research but made an impulse purchase of what he now recognises as an inferior property 3 years ago and laments that it has barely increased in value.

Putting all this aside I sat down over a coffee to encourage him back into the property market but this time with a carefully crafted strategy that would see him get a solid, high growth property in one of Melbourne’s premier suburbs where consistent high year on year growth can be achieved.

Immediately the self doubt raised its ugly head. “What if the market dives?” he added.  “What if it doesn’t” I replied, how will you feel if in 10 years you see that same property with a price tag double what you paid for it”.

“Oh, I don’t know” he whined, it’s a lot of debt, I hate debt!  It’s too risky, what if things turned pear shaped and my income drops” he moaned.

In desperation I told him the story of a long term client of mine I have been working closely with over the past four years.

“Henry” is a motor mechanic, in a good year he might earn $70K, his wife, a teacher’s assistant, earns a little under $10K pa. They have one teenage daughter at private school.

Henry came to me a few years ago with a small loan on his home just about the same time you did in ‘07 seeking assistance to invest in property.

He already had one investment property, working closely together with me he bought his second; the next day, consumed by fear he called me anxious that he had done the wrong thing.

Slowly, with close support his fretting subsided and he has moved past that fear to enjoy strong growth from his investments. Today, still not earning a lot more money, he is readying himself for his third foray into property investment.

It’s an interesting parallel, high income earners spend too often spend so much of their income on ‘big boys toys’ and a lifestyle they come to ‘serve and protect’ but see investment as too risky.

Interestingly, lower income earners often have a diametrically opposed view of risk, they see the risk in doing nothing because they know if they do nothing they will have nothing, they simply have to do something to secure their financial future. High income earners rely on their income to carry them through never stopping to realise that their income may well be the very reason they have little when, eventually, their income dries up as it so often, or they retire.

Another look at a blog about him a year or so ago, might be worthwhile at – The Car or The Property

Four of my clients attempted to buy first-class properties on the weekend, only one succeeded, they paid nearly $50,000 above the quoted price for a mid eastern suburban home.

Those that failed included:

1.       A superior home in Yarraville, it sold for $1.195M, staggeringly, the quoted price was $1.1M!!

2.       A quality town house in Brighton, sold for $ $40,000 over the quoted price

3.       An exceptional duplex in Prahran that sold for a whopping $400,000 above the reserve after frenzied bidding from well healed professional investors.

The common theme at the auctions/open for inspections I attended was that the buyers were more sophisticated which is in line with industry rumours, the real estate agents are on the prowl for their own bargains.

Umm, interesting how the pro’s move in when others move out, it’s called counter-cyclical.

So much for the doom and gloom; the fact is, there is always a buyer for quality properties, not so for “cheap” properties, hence my obsession with helping my clients into premium properties that will stand the test of time.

Clearance rates were again just 62%, clearly “A” grade property owners are not facing the same disappointments as those vainly trying to off-load the “C” graders.

The message; get the best advice and stay focussed on securing the right property and you will be richly rewarded.

Some reputable property consultants promote high growth property as the key to successful property investment.  While growth can be a critical component of a quality portfolio, it can, for some investors, at times, be counter-productive.

It is true; the biggest rewards come from capital growth, however, in today’s market that reward comes at a cost.  The cost is cashflow.

Today, high growth properties are returning as little as 3.5%.  That means where an investor has, as is often the case, borrowed the full purchase price plus costs, the return can be down to a little over 3%.

Even with interest rates as low as 6%, this still leaves a substantial cashflow shortfall which must be made up with other income, eg salary.  While this is off-set by negative gearing, because the highest growth properties are typically very old properties, there are usually less non-cash deductions, such as depreciation, to bolster tax credits.

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Case Study:

We have a client who earns over $130,000pa living a miserable lifestyle because all available cash goes to subsiding the family’s growth oriented properties.  The access to finance has also been cut off because they can no longer meet a lender’s serviceability requirements.  To regain momentum, they have had to sell a property and pay substantial capital gains tax to reduce debt levels.  Then, of course to replace that property they have to pay stamp duty, agent fees, marketing fees to mention a few.   The cost is substantial.

Financial Architect, Andrew Gardner and his team of industry experts are trusted advisors have coached thosands of property investors to success. To arrange your free consultation with Andrew, call 9509 8911

My expectation is that we (buyers) could enjoy good buying conditions through to Winter as excess stock is slowly soaked up setting the scene for a stronger Spring/Summer selling season.

The signals are clear, opportunities abound for alert savvy investors with their finances ready… but you will need to plan and negotiate to achieve the best outcomes.

Auction Strategies:

With many properties being passed in you now need a plan to ensure you capitalise on your opportunities.  Professional investors set themselves three price points. Their ‘A’ price is the ‘pleasant surprise’ price, their ‘B’ price is at the upper end of their expectations, but the most important and their ‘C’ price, the price at which they will walk away without Monday morning regrets if the vendor refuses.

Here are a few tips:
TIP 1: Stay outside. If you are the last bidder you will be invited inside to negotiate with the vendor. Don’t go, it might just take the auctioneer out of his comfort zone and give you an edge.
TIP  2: Stall. Take your time, you will have more time than the auctioneer, he’ll have another auction he’s got to rush off to. The longer you take the fewer alternative buyers the auctioneer has.
TIP 3: Low ball. Start the negotiation by asking how much the vendor will bring the price down. Don’t be bullied into raising your price first, be prepared to walk.
4000% Growth

You might have seen the story in Saturday’s paper where a Canterbury house sold for over $2M. Its owner, Bruce Shields paid just $36,000 in the mid ’70′s. A Valuer General’s report revealed that the best performing suburbs over the 35 years, the inner east have risen by almost 4,000%! Malvern had increased by 3726%, Armadale by 3447% and Kew up from $47,000 to $1.52M for a stunning 3234% increase since 1976. By comparison petrol has only increased by 635% and a Holden by 717%.
Those who have invested in multiple properties over the years have enjoyed some amazing growth in their wealth, many times the inflation rate, even those who have bought over the past 5 and 10 years have enjoyed huge growth… if your bought the right property in the right location, that means getting the right advice.

If you need assistance with your investment finances, strategies or education give us a call.

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Again, last weekend we saw the market rest in the 60%’s, with a clearance rate 61%. As has been the case throughout the quarter premium properties have attracted a premium price with some being sold well above their reserve (that is vendor’s expectations) while those properties without a real WOW factor have been left on the rack.

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It has been interesting to see very strong performances in Richmond over recent months with premium properties in particular getting top prices as this suburb starts to make in-roads to top precedence of South Yarra as one of the jewels on Melbourne’s inner east crown.

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So, what does this all mean for you?

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If you are “market ready”, that is you have your finances and finance structures in place, right now just might present some of the best buying opportunities for some time; don’t become one of those still sitting on the sidelines in 6 - 9 months time wishing so desperately that you had bought when prices were softer.  If you do not have your finance/structures in place and do want to buy, give me a call.

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Summary of last week’s results below

Oh and by the way, I am appearing on TV on Friday evening, Channel 602 Sky News Business at 8-9pm AEDT to discuss property and finance. Should be an interesting show.