The best strategy for investors in the current economic climate is to stay calm.

Fear is a great motivator but a bad guide. People who act coolly will make better decisions than those (who) act emotionally.

Investors must remain disciplined and invest for the long term in order to reap the benefits of their efforts once the current troubling times pass.

The seven deadly sins for investors in the current climate are:

1. Instant gratification. Overemphasising immediate rewards at the expense of long-term needs.
2. Naive diversification. Taking on unnecessary risk by dividing money based on rules of thumb without evaluating risk tolerance or return expectations.
3. Overconfidence. Believing too much in one’s prowess as market prophet when markets are just in a bullish cycle.
4. Belief persistence. Ignoring evidence or indicators that are contrary to what is believed to be in one’s own best interest.
5. Overweight recent events. Giving too much importance to recent events.
6. Loss aversion. Planning more for worst-case scenarios to minimise losses than on how to best maximise wealth.
7. Fear of regret. Doing nothing because of not wanting to make the wrong decision.

Australian Property Investor

You make money when the value of your property rises or alternatively you have more rental income than property and finance expenses.

An example…

Imagine that you purchased the median priced property in Melbourne back in March 1996. With the benefit of hindsight, let’s see how your investment would have turned out assuming:

• You paid $144,300 (per REIA statistics)
• Closing costs were $8,000
• You borrowed 80% on a five year fixed interest-only loan at 9% per annum
• The average rent over the period was $190 per week
• The property has been let 98% of the time
• The annual property expenses, including management fees, is $3,000
• We ignore taxation implications
• Agent’s commission and other sale costs are a flat 3%

Over that five-year period you would have:

• Received $43,316 in rent
• Paid $15,000 in property costs
• Paid $51,948 in interest costs

Today your property would be worth $256,300 (per REIA statistics), so imagining that you sold today, how much profit would you have made?

• Capital gain = (Price Sold – Agent’s Commission) – (Price paid + closing costs)
  = ($256,300 * 97%) – ($144,300 + $8,000)
  = ($248,611) – ($152,300)
  = $96,311
• We also need to subtract the ongoing income loss that we made each year, which comprises (rental income) – (interest + property expenses)
  = ($43,316) – ($51,948 + $15,000)
  = -$23,632
• Our overall profit was $72,679, which is an average annual cash on cash return of:
  ((Profit / (Deposit + Closing Costs)) / 5 years)
  = (($72,679 / ($28,860 + $8,000)) / 5)
  = 39.44% per annum.

(Please note that an alternative to selling the property would have been to retain it, have it revalued and then looked to redraw or refinance so to get access to the equity).

What are the critical success factors?

When buying a property you need to decide what is more important – capital gains or income returns, because it’s difficult to find a property that offers both – especially is a prime location.

Depending on your strategy, the following factors are important:

Location

The better the location then the better the chance of capital gains. For example, a property that is close to amenities such as schools, parks and shops stands a much better chance of rising in value than something that is less well positioned.

If you’re looking to bank on location then you’re probably likely to shop for the worst house in the best street.

Tenants

The type of property that you should be looking to buy will dictate the type of tenant that you are going to attract. For example, a studio one-bedroom Inner City apartment is not built to cater for a family – so the proximity of schools isn’t likely to be important.

All manner of tenants will apply to rent your property, but the real challenge is to find the right tenant for the right property. Pre-qualifying tenants is essential to your successProperty

The construction and condition of the property is also important. Brick homes are generally worth more than their weatherboard counterparts and period style homes attract emotional charm that generally ups the price too.

But what’s critical to know about the property is what you can’t see… for example, I’ve heard of seaside homes built with nails that’ll rust, which is a big disaster waiting to happen!

Being a savvy investor means making sure that you know what you’re buyingThe Numbers

There’s no point buying a property under a buy and hold strategy if you can’t afford to own it for the long-term. That’s why it’s important to avoid buying on emotion and gut feeling and instead focus on the facts, which really means that you need to complete a full analysis of the numbers.

But if you’re financially challenged or crunching the numbers makes you squirm, then it’s all the more important as you’re probably the sort of person that’s most at risk of making a poor financial decision.

Make sure that you avoid buying based on the best case scenario too. See what effect a change in interest rates and a movement in rents does to your profit margin and ability to hold on to the property if it starts making a loss.

From propertyinvesting.com

Select the right location for your property development

Which region and then which town are you going to develop in?

You’ll need to do lots of research. Start with the local council’s website, which will give you information on:

• Community profiles – who lives in the area?
• Population estimates – very important to see if the area is growing
• Migration figures – where is the community coming from?
• Working population breakdown – is it mainly a retiree area or does it have a large working community? You will obviously be looking for the latter for a strong rental market.
• An overview on the economic development of its community – what is planned for the future?
• Recent development approvals will be listed so you can see what type of developments are currently being approved.
• Tourism – how much does the area rely on tourism as an industry?
• Infrastructure investment/planning – very important, make sure there is considerable investment being made here
• Development control plans (DCP) and local environment plan (LEP).  Find the one that gives guidelines on the type of development you are planning to do, for instance and there should be a separate DCP for dual occupancy development, which is building an additional dwelling on land that would normally house just one.
• Long-term strategic plans – this is a really important document to read as it will show housing and employment needs for the future and pinpoint the areas earmarked for growth.

When talking to a council town planner and ask questions like:

• How long the average DA takes to process?
• Is the council open to new development in the area?
• What is the minimum lot size?
• How many dwelling can you build on this particular lot; and
• Can the planner see any issues that may impede developing this lot; for instance, is it in a flood zone?

The council website will usually include many valuable links to other websites in the area.

Speak to local agents to understand the average lot size and use Google Earth, it’s a fantastic tool for armchair street inspections.

Of course, you will need to visit the area and drive around, chat to the locals and take note of the type of housing currently available and what perhaps is missing.

Look for an area that is currently undervalued and has huge potential to grow and whose population is actually growing and is supported by diversified industry.

This means it will probably have a strong rental demand. You can find out the vacancy rates by asking all the local agents how many properties they manage and how many they have available to rent. Add them all up and divide the available for rent properties by the total under management and you’ll get the vacancy rate percentage.  Areas with a consistent vacancy rate around 1% have a strong rental market.

For example:

Total number of properties available to rent in X town:  29

Total number of properties under management: 1,397

Vacancy rate:  2%

You’ll need an area that has affordable land with large lot sizes.  The more dwellings you can build on one block, the more equity you can create.

Also consider how far you want to travel, in order to manage your development you’ll need to do regular site visits.

From propertyobserver.com.au

If all this sounds a lot of work, Stateland Properties can do it all for you. Just call Mark on 0411558265 or 02 49611499.

Property investing may be simple, but it’s not easy. And that’s not a play on words.

When you look at the statistics and see that most investors never get past their second property, you realise that most who get into real estate won’t achieve the financial freedom they were looking for.

While it’s possible to make good money in property, it will be more of an uphill battle in the current slow real estate markets. However, avoiding some classic mistakes will help keep you on the right track.

So let’s look at them…

1. A plan? I’ll just go ahead and buy something.

Deciding you’re going to be a property investor is more complex than just buying a property. Approaching investing without a well thought through strategy that fits in with your long-term wealth creation goals and financial situation is a fool’s journey.

You would never take off in your car without knowing where you intend to go and how you plan to get there. As a property investor you should map out where you want to be in five, ten and fifteen years time, then construct a detailed plan to take you there.

2. I can do it all myself!

All successful property investors build a great team around themselves. I often say that if you’re the smartest person on your team, you’re in trouble.

However you can’t blindly hand over financial control to your finance broker, accountant or solicitor. It’s your responsibility to gain knowledge about the property investment business and become financially smarter – what I call financially fluent. This will teach you the right questions to ask your advisors.

3. Research…who needs it?

I’ve met investors who researched the purchase of their new car more carefully than their investment property.

Many buy their investment close to where they live, where they holiday or where they want to retire. They make emotional purchases in locations that are in their comfort zone.

The due diligence that goes into purchasing an investment must be more rigorous than that.

As an investor, there are only three good reasons to “fall in love” with a property: it fits your investment strategy and goals, the numbers work and it has upside potential. Never let your emotions drive your investment decision; that’s what homebuyers do, not people looking to create wealth with real estate.

4. Losing sight of the big picture.

Sure, property is a long-term investment and the costs of buying and selling are considerable, but that doesn’t mean you should fall into the trap of not regularly reviewing your property portfolio.

Do you own the type of properties that will allow you to take advantage of the next property cycle?

Remember, over the next few years some properties will strongly outperform others. If you own secondary properties or real estate in areas that are unlikely to benefit from strong capital growth, it may be worth selling up and replacing them with the type of property that will help you develop long-term financial independence.

When was the last time you checked to make sure you were getting the best rents or that your mortgage was appropriate for the current times? Maybe it’s time to refinance against your increased equity and use the funds to buy further properties?

5. I’m going to buy a property and make millions!

If you are like me, you get regular emails promising you instant real estate riches. These pander to those investors who are really speculators looking for that one big deal that will make them overnight millionaires. Trust me, these doesn’t exist!

Warren Buffett wisely said: “Wealth is the transfer of money from the impatient to the patient.” Successful investment is about patience and time. It can take two to three property cycles of to build a sufficiently large asset base to allow you to fire your boss.

7. I’m looking for a bargain!

Sure you make your money when you buy your property, but you set yourself up for property investment success by buying the right property, not a cheap property.

8. A lick of paint and I’ll make a killing!

Popular TV shows like The Block have created a new generation of “want to be” renovators and developers.

I’m all for adding value through renovations; but you can’t buy a property, do minimal work and then sell it at a profit, because stamp duty, buying and selling costs and tax eat away at your profits. On the other hand, buy renovate and hold in the long term is a great investment strategy.

9. Risks? Bah-humbug? Bring on the rewards!

Some investors don’t understand the risks associated with property investment and therefore don’t manage them correctly.

Strategic investors don’t only buy properties; they buy time by having financial buffers in place to not only cover their negative gearing, but to see them through the down times like we experienced in the last few years.

Another way smart property investors protect their assets is to buy them in the correct ownership structures to legally minimise their tax and protect their assets. Most wealthy property investors own nothing in their own names, but control their assets through companies or trusts.

The reality is that if investing in real estate were easy, everybody would be successful at it it. Fortunately, many of the struggles that investors endure can be avoided with proper education, planning and due diligence.

In the short term there will be some challenges but also some great opportunities so it is critical to learn from experienced and successful property investors, from someone who has already achieved what you want to achieve and has retained their wealth in the long term.

Adapted from propertyupdate.com

Most people believe that debt is a dirty word. It’s something to be avoided at all costs or, if it’s necessary for some reason such as buying a home, to be paid down as quickly as possible.

Many Australians are starting to realise what seasoned property investors already know – income producing real estate is one of the best ways to generate long term wealth.

Truly savvy investors also realise that the combined effects of inflation and the income generated by investment properties, actually allows you to get paid to borrow money.

Essentially, inflation means that the value of a dollar diminishes over time. However, you can protect yourself against the dollar’s declining value by investing in high quality, long term debt associated with an income producing property.

Let me explain using an example. Assume you bought a property in 1980 and at the time, the dollar was actually worth its full value – $1.00. However 30 years later, that same dollar is now only worth $0.40 due to inflation, meaning the purchasing power of that dollar has decreased.

While the dollar’s value has gone down though, the principal balance on your long term property investment debt is not adjusted in line with inflation at any point.

In other words, by paying down your debt with increasingly cheaper dollars than those you originally borrowed you end up saving yourself a substantial amount of money each year.

Let’s dig a bit deeper though and assume you buy an income producing property worth $1 million with a mortgage of $800,000, that requires interest only repayments.

After the first year, if inflation was sitting at an average level of 3 per cent, your loan balance of $800,000 is suddenly only worth $776,000 in real dollars. In effect, this means you just got paid $24,000 thanks to inflation.

Taking this scenario further, ten years from when you initially took out your mortgage (assuming the government’s floated inflation level of 3% is applied every year during that period), your $800,000 loan would only be worth $590,000.

If you think that’s impressive, keep in mind that we have often seen inflation tracking much higher than 3 per cent and in some instances according to economists, its been as high as 5 per cent in most recent times.

From this perspective, debt is not necessarily evil. In fact long term debt can be downright profitable if you use it the right way – to purchase income producing property which increases over time, even as your mortgage shrinks through the miracle of inflation.

From propertyupdate.com

According to Australian financial and property guru, Mark Bouris, now is a great time to become a landlord. Read his recent article on just this ….

Aussie shares went backwards in 2011 and superannuation mostly lost ground – so what should people be investing in now? I suggest a serious look at investing in property and renting it out to tenants.

There are several reasons for this outlook, including soft house prices, strong rental demand and good total return.

One of the first rules of buying property is that you must not over pay and with property prices having dropped between 3-4 per cent in 2011, it’s seems like a good time to find a bargain.

Housing affordability is also attractive for investors right now. Disposable household incomes grew about six per cent in the year to September 2011 while dwelling values declined by a total of 3.3 per cent since May 2010, according to RP Data-Rismark research.

Rental demand is also looking good for investors: weekly rents across the capital cities rose 1.0 per cent over the December 2011 quarter and are 6.3 per cent higher than at the same time last year.

This means rental demand is exceeding supply, which is good for landlords.

If you feel you can buy cheaply in the current property market, and you can take advantage of the strong rental demand, then you have to think about your total return.

In the current environment, the return enjoyed by property investors around Australia has averaged 1.0 per cent over 2011, much better than the losses experienced in Aussie shares.

The average capital city apartment is now offering a gross rental return of 5.1 per cent. And that’s with a relatively flat property market – if you build future capital growth into your calculations, total returns are likely to be stronger in the next few years.

I believe this is a good scenario for property investors right now, but I advise potential landlords to hold out for a property that is in a sought after area, close to shops, transport and schools.

It’s no point having a rental property that you can afford when no one wants to pay to live in it.

As a final hint to first time property investors, I would urge you to take professional advice before entering into this: consult a solicitor or accountant about your tax position as a landlord, use an insurance broker to get the right insurances, and spend some time finding the right property management company.

It’s a good time to be a landlord, but only if you do it properly.

Adapted from Neoskosmos.com

If you’re interested in becoming a property investor, call Mark today on 0411558265.

We all know that debt means ‘to owe money’. But what constitutes good debt and bad debt.

Good Debt is when you’ve borrowed to buy something that –

a) produces an income

b) appreciates in value

c) where the interest is tax deductible

Examples – investment properties, stocks.

Bad Debt is when you’ve borrowed to buy something that –

a) does not produce an income

b) depreciates in value

c) where the interest is not tax deductible

d) ties up assets and cash that could be used for investment

Examples – new car, credit card, stereo, clothes

Probably the best debt you can have is for a new investment property because you get help from a tenant via rent and from the government in the way of tax breaks like depreciation.

The definition that I like best doesn’t just look at what goes up or down but adds the question who helps you pay for it?

The more people who help you pay for things the better, as shown by the examples above.

By this definition your home loan is bad debt because you are solely responsible for paying it off.

Probably the worst debt you can get is a new car – it depreciates very fast and no one else will help you pay for it.

So what’s your mix of good debt versus bad debt?

If you’re anything like me, just hearing the words Loan to Value Ratio or ‘LVR’ make my eyes immediately glaze over. Boring as it can seem, it’s really quite simple to understand and invaluable knowing if you have a loan. Check it out!!

The LVR is the percentage of the property’s value that is in debt. Most banks and financial institutions are willing to lend you up to 80% of the property’s value (80% LVR) but you can go as high as 95% in some cases.

Example 1 – Available equity at 80% loan to value ratio (LVR)

Your home value - $300,000

80% of home value - $240,000

Less existing debt - $200,000

Available equity at 80% loan to value ratio is $40,000

Example 2 – Available equity at 95% loan to value ratio (LVR)

Your home value - $300,000

95% of home value - $285,000

Less existing debt - $200,000

Available equity at 95% loan to value ratio is $85,000

Evidently, there is a great deal of difference between the equity at 80% LVR of $40,000 and the the equity at 95% LVR of $85,000.

If you’d like to learn more, just give Mark a call on 0411558265.

We have often talked about having a ‘business plan’ and those two words alone can make a reader switch off on the topic or read on but only taking part interest and this is because it sounds rather daunting.

The Next 12 Months

I don’t think it would be a surprise to an investor if they were told to think of their future planning and what they want to achieve but what is perhaps even more important is the next 12 months.

It is at the beginning of the year that we should put our plans in place for the next 12 months. We should not take a ‘wait and see’ attitude with property investing.  We should, at all times, know our financial status and plan for the year ahead whether it is buying another property, refurbishing a property, or saving some more money to put towards a deposit.

It is the time to write down what is going to happen in the next 12 months and set time lines in place for those steps to eventuate.

Without a time line it is amazing how often our hopes and dreams just never eventuate.

One needs to realise that plans are just that. They are adjustable and one does not need to feel disillusioned if their original plan does not work.  That just means that there needs to be some tweaking to suit the current circumstances to make it fit within the time structure that you set.

There is no point in being a ‘gunna’ person – they don’t get anywhere.

Adapted from Property Investment Wise

More and more Australian parents are looking to their children’s future and making them property owners even before they can walk.

The far-sighted plan is more common in Europe than Australia but the same benefits apply. As Australian prices continue to rise and affordability worsens, child landlords are expected to become increasingly common here too. Read more …

Under Australian law, minors (anyone under age 18) can own property in their own name. So there is nothing stopping parents or family pooling their combined birthday and Christmas money for the kids and buying a property for them instead. What better gift than to have a home virtually paid off by the time they move out?

But there are some catches. The first is tax and the second is finding a seller willing to enter a contract with a minor including those so young they can’t read or write.

TAX

According to tax expert Adrian Raftery of MrTaxman.com.au, income earned from the property will be taxed at the highest marginal tax rate because it will be classified as “unearned income” by a minor.

The maximum tax rate of 46.5 per cent applies to investment income such as rent received by a child, but this also means a greater potential benefit from negative gearing.

“Of course, the minor is entitled to the usual deductible expenses incurred while owning the property such as rates, strata levies, management fees and repairs,” Raftery says.

“If they are able to borrow funds and negatively gear the property, then the interest can be claimed as well,” he says.

LEGAL STUDIES

In most cases, a minor can enter a contract and own a property, but the problem comes for the people on the other side of the contract as they can’t enforce the contract if something goes wrong.

So anyone who enters a contract with a minor runs a greater risk that the child is not going to see it through. Unlike with an adult in a contract, the other party can’t enforce the purchase or keep the deposit of the child.

Law firm Wisewould Mahony partner Julie Barkla says this stems from the principle that minors lack capacity to understand or enter certain arrangements and therefore can’t be bound by them.Despite it being uncommon, children can own property, Barkla says, although there can be a few extra hurdles.

For example, most states require the date of birth to be noted on the certificate of title to show the owner is a minor. This is so future prospective buyers will know they are buying from a child and therefore the same enforcement issues arise with the contract. However, check each state’s requirements.

For example, in Victoria, according to Barkla, a minor first needs to obtain a court order before a property registered to a child can be sold.

MORTGAGES

A contract for the repayment of money lent to a minor will not be binding on the minor.

“Potential financiers tend to shy away from the prospect of engaging in a legal stoush with a minor to recover money,” Barkla says.

There are exceptions to this, she adds, which allow loan contracts with minors when they are members of a building society or co-operatives.

Another option could be a formal but private loan to the child from a family member or parent.

TRUSTS

A popular method of buying property for a child is through a trust, says Thomsons Lawyers partner Eu Ming Lim, in which an adult parent or guardian holds the title to the property as trustee for a minor.

“The adult trustee will be able to deal with the property, for example by taking loans against it, but it will still be required to be dealt with and held for the benefit of the minor,” Lim says.

However, with some trusts there can be capital gains tax to pay when the trust eventually transfers the property into the name of the child, such as when they leave home.

Another similar method is through a “bare trust”.

“As with a discretionary trust, the trustee would purchase the property but the trust deed would state that the trustee holds the land absolutely for the benefit of the nominated child,” Barkla says.

“When the property is later legally transferred into the name of the nominated beneficiary, in these circumstances there would usually be no stamp duty or capital gains tax implications for the child or the trust,” she says.

Adapted from news.com.au

Call Mark today on 0411558265.