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.

.
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.

.
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.

.
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.

.
So, what does this all mean for you?

.
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.

.

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.

Real estate agents are reporting mixed results with premium properties still commanding solid prices, however there are some great opportunities for the property investors with a flair for decorating and renovation as these properties struggle to find a new owner.

So, if you have plans to secure your next investment property, as I have, you are approaching near ideal buying conditions as vendors start to sweat and agents start to swear!  Get on the net and start trawling, you might just ‘bag a bargain’.

It’s very interesting watching the banks slug it out over rates and exit fees. Here’s a few observations:

·  CoreData research found that while politicians, consumer groups and the banks argue many borrower have simply switched off!
·  It found that as many as 30% didn’t realise their lender raised rates above the RBA rise, they are no longer “engaged”, it’s called rate fatigue.
·  For many it is a storm in a tea cup with few of those who really matter, the customer, really caring anymore.
·  The beat up is extraordinary really, for example CBA makes a major announcement of a “fee free” loan at “just” 7.24%, one of our own lenders has always been fee free and the rate is 6.98%
·  Exit fees are a bit of a furphy, yes they are annoying, but they shouldn’t and won’t be a deterrent to those switching banks for the right reasons because the gains from a well structured loan recover the fee in a short time.
·  Finally, all ‘The noise’ about credit unions is also a red herring because they simply couldn’t access enough funds if they there was a big shift from the majors because the global credit supply is still tight.

As I noted in last week’s Market Watch Report, caution must be exercised when considering switching banks, it is vital for property investors to have the right flexibility and then the right rate, fees and charges. If you are considering a refinance, call me for a chat first.

.

As a result, we’re looking at whole new ball game. Although SMSFs have always been able to own property, until recently, the rules have not been clear. Since the clarification, We have been inundated with enquiries from clients interested in setting up SMSFs and using them to acquire property.

.
In simple terms, the current status:
•    Your SMSF can buy residential and commercial investment property
•    You cannot transfer a residential property already owned into your SMSF
•    Your SMSF can borrow up to 80% for a residential property or up to 65% for a commercial property
•    You can lend money to your SMSF to buy a property

.
Some advantages of using a SMSF include:
•    Greater investment choice for you
•    You have control over investment strategies
•    You can invest borrow to invest in residential and commercial property
•    More efficient estate planning and ultimately more control
•    You get the ultimate in asset protection
•    You can own your business’ property into your SMSF
•    There is no Income & Capital Gains tax in retirement (if asset held more than 1 year)
•    Your lender can’t take your home if you default, only that property it mortgaged
•    Negative gearing counters your contribution tax, it’s great!

…

People in their 50s are leveraging their SMSF to fast track their home loan reduction by investing in high-growth properties and selling without of capital gains tax worries.

.
Say you’re 55 and you have a $400,000 mortgage on your own home. You buy a residential investment property with good growth.  Over 7 – 10 years, if you buy the right property, that’s going to double in value and better.

.
At the end of that period, you’re retired and the super fund can sell that property and the capital gain out of it is tax-free and pay down your home loan. Really, every investor over 50 with $170,000-$200,000 should be looking at an SMSF as an option. Oh, if you don’t have $200,000 in your super, don’t worry there strategies to get in there and get some great tax benefits along the way.

.
Investing in property this way gives you the same control over your investment that you would have buying it yourself. The only difference is that you can’t access the profits until you retire. But then again, that’s the whole point of super funds.

There are many complex laws restricting the use of SMSF’s to borrow money which you need to understand. You really do need to get some good advice from a qualified financial consultant first before implementing any strategy, as they will be able to help you better understand and abide by these laws and also to advise you whether this is an appropriate solution based on your needs and circumstances.

.