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Wholistic Financial Solutions provides information and updates regarding the property investment industry. Learn more from Catherine's chat here.

The Benefits of a Mortgage Broker when Purchasing Property

Monday, July 28, 2014

The Benefits of a Mortgage Broker when Purchasing Property

 

property investment advice 

 

“How to be confident that you have found the right loan and structure so that you can meet long-term financial goals and avoid serious costs – potentially saving 1000’s of dollars in long-term exit fees and interest rates”


Property Investment Advice

“Finding the right loan to meet your needs can be a very daunting task. With so many lenders to choose from and so many products within each lender, it is almost impossible for the average person or investor to sort between the products (including all the fine print). It is important that you are sure the finance you are choosing is the best one for your circumstances.’

 

Property Investment Advice | Example

 

For this bit of property investment advice we would like to use the example of buying a car.

 

If you walk into a Ford car yard and describe all of the features you want in a car and the salesperson thinks to themselves, “Gee, the latest Holden Statesmen would be the best,”– will he tell you that? No! He will convince you that the latest Ford something-or-other meets your needs. It’s the same with the banks. If you walk into a bank, any bank, you will only be sold that bank’s products.

 

We would recommend that everyone who wants to take out a mortgage should use the valuable services of a mortgage broker. Whether you are buying your first home or investment property or whether you are building a huge investment portfolio you should consult a mortgage broker. The advantages of using a broker are twofold. Firstly, it is free – the bank pays the broker the commission – and secondly, the broker is aligned to scores of banks and will find the best for you. It is in the broker’s interest to find the best product because they want your continued business.

 

Brokers have access to over 30 banks and lending institutions, including all of the majors (CBA, St George, NAB, Westpac, etc) and many popular smaller and non-bank lenders (ING, Bankwest, Rams, Suncorp, etc). Mortgage brokers will help you find your way through the complex maze of product choices and help you decide the best one for you. Everyone’s situation is different and different products suit different circumstances.

 

Mortgage brokers also assist you with all of the paperwork, submit the loan, handle all the bank’s annoying questions, co-ordinate the process with your solicitor and real estate agent and basically take all the stress and pressure from you. They’ll ‘hold your hand’ the whole way through and deal with any complications that may arise.Mortgage brokers are one of your main sources for property investment advice.

 

Pros

  • May save you time in shopping for loans.
  • May save money if fully independent.
  • Usually free.
  • Sometimes, given the broker-lender relationship, a bank will accept a loan application that they would otherwise have rejected.

Cons

  • You may pay more for your loan than necessary if the broker is not independent.
  • They may charge excessive fees or undisclosed commissions.
  • You may be persuaded to borrow more than you need, as this will boost their commission.

The cons can be easily overcome by using a broker who can correctly answer the questions above.

 

Check out the video below for more advice on investment properties

 

Real Estate and Superannuation is the most Powerful Wealth Creation tool of all

Monday, July 14, 2014

Since time immemorial it has been argued by numerous opponents as to whether the benefits of investing in property outweigh the tax concessional environment of superannuation. 

From a cynic’s point of view, one could say that the opponent’s opinion’s debate varied considerably depending on their own bias.  And this bias seems to be greatly influenced by the advisor’s commission structure. 

Funnily enough, analysis provided financial advisors proved, without a doubt, that superannuation and shares is the way to go whereas just as convincing arguments, raised by property spruikers, real estate agents and mortgage brokers, suggested that property was by far the superior investment.

Who should you believe? 

A new battalion – property and superannuation join forces?

The battlefield has changed and changed dramatically. 

Why would you choose Property over Super OR Super over Property, when you can have the best of both worlds instead!

So Why has the front line shifted?

New laws introduced in September 2007 allow Self Managed Superannuation Funds (SMSF’s) to, for the first time, buy geared property in a simple and uncomplicated manner. 

SMSF’s can now select a property of their choice, be it;

  • residential
  • commercial,
  • or rural

and borrow up to 75% of the value of the property. 

Previously an investor had to choose between;

  • using his spare funds to invest in a negative geared property,
  • OR contribute the funds to superannuation.  Let’s have a look at an example comparing the two alternatives.

Comparing the two – Option 1:

Take Johnny who is 35 and purchases an investment property.

Presuming average capital growth of 7% and rental yield of 5% (both very achievable) the following scenario occurs at age 60.

Value of Property:  $1,775,328

Mortgage owing: $350,000

Net Value: $1,425,328

Plus, the property has been cash flow positive since year 7 netting a cash flow of $584,480 which Johnny could use for further property investing.

Taking tax out of this amount will bring the returns down to:

                        Net Capital Gain: $1,211,529

Net Cash flow: $409,136

Overall Outcome: $1,620,665

 

(*Presuming a 30% tax rate,8.5% IO Mortgage rate,rent yield grows at 6% in line with property growth, excess cash flow taxed)

Comparing the two – Option 2:

Compare this to Sally who invests the same amount as Johnny into superannuation. Presuming the same growth and yield (if his superannuation was invested in a well diversified growth portfolio) he would achieve a superannuation balance of $432,658 by age 60.  This is well short of the gains made by Johnny.

(*Presuming a 15% tax rate, contributions include the initial deposit and the cash flow shortfall and cease in year 7 when property cash flow positive, no CGT as investment held until after age 60)

Comparing the two - An un-biased opinion

As any professional advisor and serious investor should know there is more to consider than the pure numerical outcome.  Whether considering property or superannuation other important factors need to be considered. 

One of the most important factors is the stage of the investor’s lifecycle. 

In the working years of an investor’s life a strong cash flow allows the possibility of using gearing strategies to maximize returns thus making property a preferential option. 

Once the investor reaches the pre-retirement phase, it may be unwise to take on the risk of gearing.  Therefore, this may be the preferential time to consider locking away as much as possible into super.

The most common investment strategy seen in the baby boomer era was to invest all surplus funds into accessible investments including property and shares and then cashing these in and contributing the funds into super just prior to retirement.  The only disadvantage of this strategy was a potentially very large Capital Gains Tax bill.

Why would you buy property in a SMSF instead of personally?

For many reasons including;

  • you get the benefit of ‘leverage’,
  • a maximum of 15% tax on any rental income in excess of costs,
  • you receive a tax deduction for the loan repayments of principal (which is normally impossible) via salary sacrificing the amount required to cover the shortfall,
  • asset protection – the asset is protected from creditors in the event of a lawsuit or bankruptcy (some conditions apply),
  • the property can still be sold and the loan repaid at any stage,
  • any capital gains on the property when sold will be taxed at a maximum rate of 10% (if asset held for more than 12 months)

 

But the biggest incentive of all – if you keep the properties until age 60 and commence a pension from the fund;

  • any capital gain on the property will be TAX FREE,
  • any rent on the property will be TAX FREE,
  • any income paid out to you will also be TAX FREE.

 

The laws are only new and law complying products are now being introduced and marketed.  It is envisaged that these products will hit the market like a storm once investors realize the potential.  There are already over 350,000 SMSF’s operating in Australia and it is likely that this figure will increase exponentially once knowledge of the loan products becomes widespread. 

In fact, as at May 2010, SMSF’s are growing at a rate of 2500 per month.

It is also interesting to note that this may be the first time in history that all advisors (financial planners, accountants, auditors, property advisors and mortgage brokers) have a common ground for advising clients.  All advisors have something to gain by assisting clients into these products. It’s not only a busy time ahead for advisors but a time to join forces and put a cease fire on the battle.

Property Investment in Brisbane Real Estate is better than Shares

Monday, June 16, 2014

 

Real estate and shares are often considered the two most popular investment options.

Both are long term investments.

The most obvious difference between the two is the amount that can be the amount invested - an investor in the share market can start small by buying shares worth a few thousand dollars whereas real estate investments generally involve a commitment of hundreds of thousands of dollars.

Of course, the fundamental objective of an investor should be to find an investment which generates maximum returns.

A small stock holding will not lead to an early and easy retirement unless that company enjoys an absurdly spectacular escalation in its share price. This rarely occurs. It can happen with mine shares when an unknown company strikes oil or gold.  Betting your future on finding such a company, at the right time, is simple gambling and not a sound investment strategy.

The stock market can be extremely volatile, and driven by sentiment rather than rational financial thinking.   In terms of today's share market, an investor needs to be financially well-educated and prepared to monitor their investment portfolio constantly or pay the often considerable price for professional management.

At times, there is only a very small window of opportunity in which to make the right decision about a share investment.

By comparison, real estate investment delivers the comfortable expectation for a well-chosen property of significant capital growth over time, combined with other attractive benefits which include:

  •     consistent rental income
  •     lower risk
  •     tax advantages
  •     the security of "bricks and mortar" and
  •     the capacity to manage and control your own investment   

The aspect of control is a very important consideration -- shareholders who supposedly "own" the company have no idea of what is really going on with the management of their investment and even if they did, they have no control. Property is a much more tangible option, and as the owner, you can see exactly what condition your investment is in.

But perhaps the best way to compare the two is ‘by the numbers’.

Let’s say you have $500,000 to invest in either Property or Shares.

 


The figures above speak for themselves, shares provide a superior net wealth increase BUT what happens when you take tax benefits into account?

 

 

 

When you take into account the fact that you can ‘borrow more’ or use more ‘leverage’ to invest in porperty the numbers change.

Real Estate is a more Effective Wealth Creation tool than Business

Friday, June 06, 2014

 

Check out the "rich lists" and you will find many business owners. A lot of these entrepreneurs started out with a small business operation or an innovative idea which developed over time into a very large corporation.

There is no doubt that business investments can deliver an extremely lucrative outcome but there can be drawbacks.

Interviews with high net worth business owners reveal a common theme -- an intense focus on the business and a very significant commitment of time, often at the expense of personal needs and relationships. Today's business world is an extremely complicated scene with various facets to consider -- you are required to wear many different hats or pay for a lot of professional advice.

By contrast, an investment in real estate can deliver all the benefits of a business investment and more, but without all the management headaches.

As with a successful business investment, real estate will give you capital growth, an income stream and tax advantages however with business investments there is an appreciably higher risk (many businesses fail) and a drop in liquidity (it can often take a very long period of time to sell a business operation and they can be difficult to value).  The easiest way to say it is that wealth through property investing is just so much easier, understandable and far less risk.  Far more investors lose in business than by property investing. Property investing, by its very nature, investing in bricks and mortar, provides a far more stable and secure investing foundation.

Another factor is funding -- often lenders are reluctant to support the growth plans for a business because it is difficult to get a clear picture of its current financial situation or future prospects. There are generally no such problems with real estate loans because of the easy availability of records and financial data and the more tangible and transparent nature of property assets.  For example, banks will lend up to 95% of the value of a property whereas in most cases they want lend at all for business unless you have property to offer as security. 

While it is possible to operate as a "silent partner" or withdraw from a lot of the day-to-day worries and workloads of a business investment by employing managers, it is in an investor's interest to monitor a business closely.  Property can be a set and forget investment basically as your property manager can look after it for you.  Whereas a business requires constant day to day management.

Property Investing is simply far easier than business investing.

Will Australia Crash like America did?

Friday, May 30, 2014

 

Comparing Australia to America is like comparing Chalk and Cheese’.

As explained in earlier chapters Australia has a

  • Massive undersupply of houses
  • Record Population growth
  • Vacancy rates are at a record low.
  • Demand > Supply

In contrast America has a

  • HUGE oversupply of houses – empty streets, empty suburbs – where no-one wants to rent or buy
  • Very low population growth – if fact, American’s are deserting their own country
  • Horrendous vacancy rates
  • Supply far exceeds Demand

Australia also has different lending policies including 

  • No NINJA loans – Ninja loans are known as ‘No Income, No Job, No Assets’ No problems – here’s your loan.
  • The Amercian banks were also lending up to 110% of the value of the property. So it didn’t matter if the applicant had no deposit  - No problem – here’s your loan.
  • They gave out loans at 0% interest rate then hiked the rate up to 5% and wondered why the owners could no longer afford the loans.
  • They also have ‘Jingle Key Lending’  also known as ‘non-recourse’.  If you couldn’t afford the loan anymore, No problems, send the keys back to the bank and all will be OK.  The bank won’t chase you for anything

In Australia, on the other hand, bank requirements are much more onerous. ‘Lodoc’ loans only make up a very small % of overall lending in Australia and the banks are very careful to not go over 80% of the value of a property to a lodoc applicant.  Loan servicing ability is assessed at 2% above the current standard variable rate.  And all Australian loans (other than for SMSF’s which will be explained in later chapters) are full recourse loans.  If you default on the loan the bank will come after all of your other properties, other assets, your cars, your cash and even your husband or wife if you are lucky (just jokes).

Simply put, comparing Australia to America is like comparing chalk and cheese.

It is worth pointing out though, that America now, may be a fantastic investment opportunity for Australian’s.  You will need to read our later chapter on this issue.  It is not for the faint hearted but a great opportunity for those willing to take the plunge.

Do you want to know more? Click here to watch five free webinars on - ‘Proven, Must Know, Property Investment Advice’

Property Utilises the Power of Leverage

Friday, May 23, 2014

 

Leverage is one reason why real estate investment makes so much sense to so many of the wealthy.

Leverage = using other people’s money to make more money

Leverage is also described as making ‘more’ with ‘less’

In the example below – if you have $30,000 and you invest it in the bank you will make a 5% return (based on today’s rates) so $1,500.

But if you take the same $30,000 and invest it in a $300,000 property and lets say it only goes up by 5% (to compare apples with apples) then you have now made $15,000 – 100% more than simply putting the money in the bank.

How good is that?

And, if instead, the property went up by 10% (closer to the average) then you have made $30,000 or 20 times the amount you would have made by putting the money in the bank.

 

And you don’t have to feel bad about using other people’s money.  Institutions called ‘banks’ WANT you to use their money – they make money too. 

Leverage has been a tool used by mankind since cave man ages.  The first spear was invented to catch more prey than the bare hand could.  Then horses were used to pull carts to get us places faster.  The greatest form of leverage in today’s world is the power of the internet.

Property is unique for its ability to be leveraged as you as you can borrow up to 95% of the value of the property.  In contrast to shares where you are lucky if you can raise 60% of the value of the share.

This really means your property investment is working hard for you.

There is a multitude of ways to leverage property in your favour and these include;

  • Leverage the banks money to buy property to make you rental income as an investment;
  • Use rental yield collected from tenant to help pay the mortgage;
  • Improve the property to increase the value of the property
  • Improve the property to gain a higher rental yield.

 

Do you want to know more? Click here to watch five free webinars on - ‘Proven, Must Know, Property Investment Advice’

Property Provides Opportunities to Add Value

Monday, May 19, 2014

 

Very little effort can bring about substantial gains by adding value to your real estate investment.

Something as simple as clearing up the garden, a coat of paint, new carpets, modern bench tops or a new bath room can easily add value to a property.

Investors who are able to add value to their property may also do so while enjoying the benefits of tax deductions – either outright in the year incurred or depreciated over a number of years (more about this later on the ongoing costs and tax effect chapters).

Value-adding can also increase the property's cash flow potential - for every $10 extra rental income you get you can usually add an extra $5,200 to the valuation of your property.  This extra equity may be all that is required to get you over the line for your next purchase.

Deciding how to add value to the property is the biggest hurdle and you do not want to over-capitalize on the investment or its capital growth potential.

The simplest rule to follow when value adding to your real estate investment is to keep it simple.

If the kitchen is old and run down and potential tenants are deterred by its state it's probably worthwhile investing in a kitchen renovation. This can be done simply; maybe all you need to do it replace the bench top, splash back and repaint.

Similarly, re-painting the main rooms of the house can be cheap (particularly if you are able to do it yourself) and it can make the house far more appealing to renters (and valuers). 

Every little bit counts when it comes to adding value to your real estate investment -- and it's usually little changes which come at low costs that are most worth your while.

The more equity you have as capital leverage when re-borrowing the better.

 

Do you want to know more? Click here to watch five free webinars on - ‘Proven, Must Know, Property Investment Advice’

Rent Continues to Rise

Friday, May 16, 2014

 

You can buy some shares in a company with just a few hundred dollars. And you can start a bank account with just a few cents.  How much do you need to invest in real estate?

Real estate investment requires a far greater initial outlay than other investment options.

So how much do you need?

Generally, you will need at least a 5% deposit and you should also allow 5% for stamp duty, fees and charges (unless you are a First Home Buyer which will be discussed later). So allow at least 10% of the value of the property as your required contribution.

For example to buy a house for $350,000 you will generally need 10% = $35,000.

Ouch – there are ingenious ways to raise the 10% required which will be discussed in later chapters.

You then take a mortgage to pay for the balance of the property.

For example the $350,000 house above – you have paid a 5% deposit of $17,500 and spend the rest of your funds on fees.  You will then need to borrow the remaining $332,500.  This will be a 95% LVR (Loan to Value Ratio) loan.  Not all banks are comfortable with 95% loans.

In order to be granted a mortgage loan in the first place, particularly a 95% LVR loan, you usually have to present a deposit and proof of income information to convince the lender you will meet your mortgage repayments.

More detail on types of loans and the loan application process will be provided in later chapters


The good news for most Australians is that these days you can make the repayments on many mortgages for the same price you would fork out to rent a similar property.  Some banks will take the rent you have been paying consistently as evidence that you can afford the mortgage.


The initial outlay to buy your first property will sometimes deter the nervous investor from taking the plunge into property.


The hardest part of breaking into property investment is buying your first property. As long buy a good property in a good location (issues this book will help you with in later chapters), then you can generally move onto your next purchase, and the next purchase, quite smoothly from here. This is because of the combination of two powerful factors – Equity and Leverage.

Equity = the difference between the Value of the property and what you Owe the bank 

Leverage is explained in the following chapter.


If the first property you buy is a "bargain", or there is a surge in the market, or you manage to add value (see later chapters) may see you earn equity quickly.


Equity in one property can be used as leverage for your next buy, and so on and so forth.


Breaking through the initial capital requirement barrier will be your toughest problem, but once you utilise your friends Equity & Leverage, you will be able to move forward as a real estate investor with ease.

 

Do you want to know more? Click here to watch five free webinars on - ‘Proven, Must Know, Property Investment Advice’

Brisbane takes over other Major Cities for Capital Growth

Friday, May 09, 2014

Sydney and Perth halt, Melbourne and Canberra fall, but Brisbane will be where the action is this year – RP Data

RP Data-Rismark figures for April show that Brisbane had the strongest growth of the major capitals at 1.1% in April, while Sydney property prices grew at a paltry 0.5%, and Perth only increased by 0.2%.

All capitals recorded some rise in dwelling values during April except for Melbourne, which fell 0.5% and Canberra, down by 1.1%. Some cities experienced their lowest monthly growth for nearly a year, including Sydney.

Brisbane is going to be the strongest housing market going forward from here and that is purely because the gap in pricing between Sydney and Melbourne compared to Brisbane has really widened and that was always the thing in the past that attracted people to Brisbane, according to RP Data.

This lower rate of growth, especially in Sydney and Melbourne, where property values have surged since the end of 2012, signal that these markets are moving through the peak of their growth cycle.

The growth that Sydney has seen is having an adverse impact on buyers’ ability to afford property, especially at the lower end of the price range. Affordability constraints are now entering the market.

And the lower end of the Melbourne market is also slowing as the higher prices mean that a lot of buyers aren’t in a position where they can afford to buy a property.

Investing in Property is a Great Tangible way to take Control of your Financial Security

Monday, May 05, 2014

 

When you invest in shares your money buys small piece of a company, whose board members you probably don’t know, who can use that money to make mistakes and you have no ability to control the board.

Investing in property provides far more security for investors. For one thing, your investment is ‘tangible’ you can touch it, feel it, paint it and tend to it. The fact that your investment is actual ‘bricks and mortar’ makes many people feel much safer.

Because property is tangible it is also able to be insured thus allowing investors to protect their financial security. You can insure property from fire, floods, tenant damage, rental arrears and accidental damage. Unlike stocks, property is unlikely to just disappear and if it does (such as through fire) it can be replaced using your insurance money.

Unlike investing in shares, a property investment is controlled by the investor.

The investor decides how much they pay for the property, the investor decides the rent they will charge tenants, the investor selects the tenants,  the investor decides if renovations will be made and when and how much to sell the property for.

Investing in property is a great tangible way to take control of your financial security.


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