26 May Finding real estate GOLD + NT real estate takes a nose dive
So, you’ve found what appears to be the perfect “splitter block” for your first potential property project. To help with the due diligence, Nhan Nguyen, from Advanced Property Strategies, runs through his checklist of items to ensure the project is viable.
In recent times Northern Territory home sales take a huge hit. Quentin Kilian, CEO of the Territory Real Estate Institute says it is the lowest quarterly levels on record and he explains why.
Andrew Mirams from Intuitive Finance answers the often asked question – to lock in or not?
Michael Yardney answers Adam’s question about looking for a property with a twist.
A new report says that most Australians have identified a 4 bedroom/2bathroom home as their ideal property. So how does that compare to the homes of our parents and even our grandparents? Bernard Salt says what were considered luxuries for our parents in terms of housing was 3 bedrooms and an indoor toilet. My how things have changed.
Wouldn’t it be nice to know that when you plan to approach a lender, you will have an idea about how they will look at your potential purchase? There are some properties that the banks will treat more favourably than others and Bryce Holdaway tells us which ones.
Kevin: Say you found what appears to be the perfect splitter block for your first potential property project. Maybe not; maybe you’ve done it before. Well, we’re going to talk about due diligence with splitter blocks now. Nhan Nguyen from Advanced Property Strategies has had a lot of experience with this and helped many people do it. We’re going to ask him some questions about due diligence.
Nhan, thank you very much for your time.
Nhan: Excellent, mate. Thanks for being here.
Kevin: How do we go about finding a splitter block, Nhan?
Nhan: One of the easiest ways to find splitter blocks is you need software, which is the ability to see – x-ray vision as I say. We use PriceFinder or RP Data; they’re subscription programs that you can use, and it allows you to integrate with Google Maps and see what double blocks look like from an aerial view, because they’re all there.
Kevin: Are all double blocks the same?
Nhan: No, definitely not. There are a handful of different types. One is what we call the widow block, so two triangles added together; it becomes a big rectangle. That’s what’s called a widow block. They can be a bit more cumbersome and you may need to get a development approval, or reconfiguration as we call it, to make them usable.
The standard splitter block that you have is a 20×40, and when you split them, you’ll have two lots that are 10×40 each. The other block, which is the third option that you have, is a double block we call it in generic terms, but really, it’s just one block that does need to be subdivided into two, and that’s a 20×40 subdivision block.
There’s a technical difference between a splitter block and a subdivision block. The subdivision blocks, you actually have to get a development approval, because you’re going from one into two and you’re creating a new lot, whereas a splitter block is already on two titles and you don’t have to get an approval as such.
Kevin: Apart from finding out what sort of block it is, what other due diligence methods or steps should we take in terms of services?
Nhan: There are two key parts to due diligence. With the services, you generally can check it out before you dig. There’s a website – it’s just 1100.com.au – and on that, you can log in and once you give the address, and it will spit out for you where the location of the services are.
Generally, I use the five finger technique, where you look at the five services. There’s water, sewer, stormwater, Telstra, and power. Generally, the connections that you have to connect straight away are the water and sewer. If it’s what is called an infill block, where there’s power and telephone directly nearby, then you may not need to worry about that, but generally, the main ones that people have to connect are water and sewer.
Kevin: In your experience, Nhan, where have you seen potential developers go wrong with this? What could go wrong?
Nhan: There are a lot of things that can go wrong. One of the reasons we suggest to beginning investors and developers to start with splitters is you don’t need to get a development application most of the time, but one of the things that may stop you from doing the splitter block is the house may not be actually removable from a council regulation point of view.
If it’s built pre-1946 and the council have an overlay or a zoning where you cannot remove the house, the house may straddle both blocks and let’s say it’s brick, part of it, but the council said “No, it’s tin an timber in this part, and you cannot demolish it,” for example, then you won’t be able to realize those blocks, because you may not be able to move the house, or if the house is too big and you may not be able to cut it to make it fit on the block. That’s definitely one part of due diligence that you need to check out if you’re doing a splitter block.
The other part is just knowing where the services are. With the services being across the road, for example, or around the corner, it may just cost you a bit more to be able to access those services and cost you a bit more in terms of designs. I actually had one client who did a splitter block but he had to move a manhole to make sure that the block was workable, and that just took a little bit longer, a fair bit more cost, and a bit more challenging time-wise.
Kevin: In your experience, do you find that people who own these properties and they’re aware that it is what we call a splitter block, do they end up having an over-inflated opinion of value – in other words, they say “This is two lots, so therefore it has to be double what it’s worth now”?
Nhan: I find that most people actually don’t know that it’s on two lots, even though it’s on their rates notice – it says “Lot three and lot four” or “Lot seven and lot eight.” They may not be aware of it; they’re just aware that the size is, let’s say, 800 square meters.
Yes, they definitely do inflate the price. They don’t take into consideration the services, which might cost $10,000 or $15,000 at the higher end, and they don’t take into consideration the ability or the cost to remove the house, which may be somewhere between $12,000 and $20,000 depending on the size of it, asbestos, and things like that.
Yes, they generally just make up figures on “One block is worth this,” they double it and that’s what they sell it for, but there are a lot of expenses in between – stamp duty on the purchase, GST on the sale, holding costs, things like that. So as a developer and investor, there are so many other expenses that I need to take into consideration. Agent’s commission on the selling end, as well.
Kevin: Just in terms of expenses, those two you mentioned there – that is, removal of the property, if it can be removed, and/or getting services to the lots – are they the two biggest expenses?
Nhan: Yes, they are. They’re the two biggest expenses from a cash outlay point of view, obviously from purchasing the property, stamp duty and agent’s commission on the other end, as well as GST is a serious consideration, as well. Those other two costs – which are the services, which is the water and the sewer, as well as the demolition of the house – are other major costs there.
Kevin: Nhan Nguyen from Advanced Property Strategies, great knowledge here when it comes to splitter blocks.
Nhan, thank you for giving us your time today.
Nhan: Absolutely, my pleasure. Thanks for having me, Kevin.
Kevin: The number of home sales in the Northern Territory is at its lowest quarterly levels on record. That’s according to data released by the Real Estate Institute there in Northern Territory. There were 479 homes sold across the Northern Territory in March in the quarter, which was a drop of 13%. To have a look into this, I’m joined by the Real Estate Institute of Northern Territory’s CEO, Quentin Kilian.
Quentin, thank you for your time.
Quentin: Good morning.
Kevin: What’s behind this? Is this anything to do with the mining downturn?
Quentin: It could be partially linked to that, although the fly-in fly-out workers who were predominantly here not so much for the mining but for the INPEX build that we’ve had, the big LNG project, which is coming to an end. They didn’t have as big an impact on the private housing market as one would have imagined. A lot of those guys were accommodated in work camps and other areas.
I think the biggest reason for what we’ve seen in this large downturn is an exodus of population from the Territory and a general malaise at the moment in the economic situation, so we haven’t seen investors coming back into the market.
They rushed off to go particularly to Sydney and Melbourne where the heat was coming into the market, and we’re yet to attract those investors back in. It’s good timing for them, because of course, the prices are also starting to come down a bit, but at the moment, they’re not here.
We have seen a fairly sizeable downsizing in the population, so unfortunately, real estate being the commodity that it is, if you don’t have people to sell it to, you’re not going to move any product.
Kevin: Yes, a median price of $582,000, I believe. Is that correct?
Quentin: Yes, $582,500, and it’s the first time that it’s actually dropped in about two years. It fell 4.3% in the last quarter, and that, again, is predominantly driven by the fact that the sales numbers were down, so there was less volume going through, and it meant that the volume that was going through the under $500,000 / under $600,000 sector actually had more of an impact in this quarter.
Prior to that, the volume that was actually going through was predominantly above the $600,000 mark, which to some degree, overinflated the median to a figure that it probably shouldn’t have been at, but it was.
Kevin: Of course, there’s no real correlation between median and values, because median is really just a reflection of where people are buying, which is the point you’re making.
Just on another point, the loss of the First Home Owner Grant – which I think was sometime last year – has that contributed to the fallen sales?
Quentin: We believe it had a major impact on it, particularly in Alice Springs, Katherine, and Tennant Creek, so outside of metropolitan Darwin more so, but yes. Because the First Home Owner Grant was only taken away on existing properties – it was retained on new purchases at $26,000 – what it was doing was driving all first-home owner purchases into the new home market.
Yes, it did stimulate around about 1200 new builds for the year, but those new builds were priced at the $600,000+ mark. So again, that inflated the median price and took a lot of the heat out of where we believe the first-home buyers should be, which is largely in the existing home market with the much cheaper do-it-up type properties.
Kevin: What about supply? Of course, there is a direct correlation between supply and demand and values. What’s happening there? Are the listings coming on?
Quentin: We have plenty of listings. There are lots of listings. In fact, there’s probably too much supply, and again, this comes back to having a resurgence in population. So as we’ve been getting the supply coming in, we’ve been losing the population, so we haven’t had the buyers into the marketplace to be snapping up those bargains that are coming in.
And we’re now starting the see the effect of that with vendors. It’s taken them a good 12 months to realize where the market is going, and now we’re starting to see vendors discounting their prices to meet what offers are still coming through in the marketplace.
Kevin: What is the level of discounting at present?
Quentin: In general, I couldn’t tell you, but it’s not as harsh as we believe it should be. We feel that the discounting should be a bit stronger than what it is. But time on market now has been stretching out to around 120 or 130 days, which is putting, again, additional pressure on, because in some markets you might say “Okay, it’s been on the market for such a long time, I’ll just put it on the rental market and we’ll make do,” but we now have very high vacancy rates, which is telling the vendor, yes, you could put it in the rental market, but even in that market, you’re going to have to discount heavily to get a tenant.
Kevin: Even with the exodus of people from the Northern Territory, which is what you’re indicating, I think, with investors, a drop in the interest rate, which we saw, is not going to make all that much difference.
Quentin: It could spark some new buying, because anecdotally, what I’ve been hearing over the recent couple of months – the data that we’re looking at, picked up from March, going backwards, of course – looking at March and April itself, I’m starting to hear from our agents that here’s a little bit more foot traffic happening through the opens, that they’re getting a bit more interest, so it’s showing some very early signs of a recovery. Taking the interest rate out – assuming of course that it flows through to actual home loans – could have possibly sparked some of that interest in the first-home owner sector again.
Really, what we need to do – from our view, anyway – is to stimulate that first-home owner sector in the existing market, because that then will stimulate the sales by the aspirational buyers who want to sell to them and the empty nesters who want to sell to the aspirationals and downsize. So we need to stimulate that early part of the market in order to stimulate the rest of the market.
Kevin: One final question about returns for investors; what can an investor expect?
Quentin: This is still a good thing. We still have yields that are sitting close to 5%, so they’re still sitting around 4.5% to 4.9%, which although we have high vacancy rates and we are struggling with the population base, there are still rental yields that are much better than what the other major capital cities are offering.
So for the investor who is actually looking at the marketplace, it may require you to adjust your rental prices for a period of time until the market becomes re-stimulated, but you’ll still get rental yields that are much, much stronger than any other city.
Kevin: Yes, that’s certainly a good sign for investors. Quentin, I want to thank you for your time. Quentin Kilian has been my guest, CEO for the Real Estate Institute of Northern Territory.
Quentin, thanks for your time.
Quentin: My pleasure, Kevin.
Kevin: This question comes in from many, many, people – no one specifically, but we are regularly asked this question and more so right now with the movement in rates. The question is “Is this a time to fix my interest rate?” Well, let’s find out. Joining me to discuss this is Andrew Mirams from Intuitive Finance.
Andrew, no doubt, you’re asked the same question.
Andrew: Absolutely, Kevin. Very, very, very topical at the minute with rates high on the agenda and rates reducing lately, and now there’s a real frenzy towards fixed rates. And the frenzy is largely being led by the lenders coming out with some really great fixed-rate options.
Kevin: They’re all out touting for the business. How do we make that decision when it is time?
Andrew: There is a whole range of things. Rather than just focusing on the rate, there’s a whole range of things that you probably need to attend careful consideration that I think you need to just take into account before you go and rush in and just grab a rate. I think there are a number of things.
The first one with that is really deciding on the fixed rate term. Lenders are trying to lock you in for certain times because that’s where they are able to access cheap money. But does that actually suit what you are trying to achieve either from your home, your investments, or whatever it is. So actually deciding on the terms is a really important one.
The next couple that you need to be aware of is the majority of lenders won’t have an offset account with a fixed-rate mortgage. They very seldom allow you to make additional repayments. Most of them will allow you a small increment each year – maybe $5000 to $10,000 – but if you’re really looking to fast track repayment on your loan, you generally can’t do that with a fixed rate. You can’t have a redraw. Just like most lenders won’t have an offset account, you can’t redraw your additional payments, as well.
The fixed rates really do just give you a guaranteed rate. They reduce your flexibility and your options a hell of a lot more, as well.
Kevin: What about additional payments? Is that an important consideration, as well?
Andrew: I think for a homebuyer or someone trying to reduce their home loan or something like that, absolutely it can be. Everyone is different, Kevin. Some people can’t have cash sitting in their account; the temptation is too much. So actually reducing their loan and seeing it come off the loan is an easier way for them to be disciplined around their loan repayment.
Kevin: Will all lenders allow you to split your loan – in other words, do part fixed and part variable?
Andrew: Yes, and that’s a really good strategy we are finding at the moment with rates so low – being able to grab some rate security with a fixed rate but keeping a flexibility available with an offset, with additional repayments, with redraw, and things like that. I think, depending on the size of the portfolio, that’s probably the best strategy to be looking at and considering right as we speak.
Kevin: Is there a better percentage to do it?
Andrew: The majority of people say, “I just want to fix half.” If you’re really fixing because you’re worried about your rate security and rates potentially going up – which I don’t think will happen any time soon – you might put more into the fixed and keep more flexibility. If you had the opportunity to be paying more off over the short term, you might put more in the variable rate and less in the fixed rate. So it’s really just getting the balance right.
Kevin: I suppose a couple of other considerations would be if we want to sell during the fixed-rate period and also if I’d like to refinance.
Andrew: Absolutely. Once you’ve agreed with that rate and it’s for a two-, three-, four- or five-year term – whatever you’ve agreed to – that means that you’ve actually locked those funds in. So if you want to refinance within that term or you sell the property within that term, you can be up for some – at times – quite hefty repayment penalties.
Kevin: We’re all a bunch of gamblers, mate. What about that feeling of “Wow, maybe rates will go lower”? Should that be a consideration?
Andrew: No, it shouldn’t be. It’s like taking an insurance policy. When you take an insurance policy on your home, you’re hoping it doesn’t burn down so that you can claim on it. A fixed rate is a bit the same; you’re fixing it in for that period because you want that certainty and you think it’s a good rate. Don’t focus on what the rates might do because there is generally a longer term rationale and philosophy around the fixed rate.
Kevin: I said at the outset that we get this question quite often. I do recall someone who wrote in and asked about this question and was wondering whether or not they could access extra equity if the property increased in value during the fixed-rate term.
Andrew: That’s a great question. The short answer is yes, you can, but it has to be with that lender that you’ve fixed at. So you can’t take it to another lender unless you’re willing to pay the repayment costs. It’s not added on to that current loan. It would be set up as a separate loan or line of credit or whatever facility you wanted to take.
The short answer is yes, but then you’re subject only to that lender’s terms and conditions at the current day.
Kevin: What about job security? I guess everyone should have a buffer anyway, but you should have a buffer if you’re not quite sure about how secure your job is.
Andrew: Absolutely. If you’re thinking that you’re looking to change jobs, your position might change for better or worse, and that might give you the opportunity to make more payments or you’re going to struggle with the loans, then I would suggest fixing at that time is not the best option unless you’re guaranteed to have some ongoing income.
You’re right; you have to have your buffer there, but you want to make sure that you’re not fixing yourself in to give yourself less flexibility. All of the splitting and fixing and having a variable rate, you should always be looking at the maximum flexibility as well as then grabbing some rate security.
Kevin: That’s a great insight, Andrew. Thank you so much for that. Just wrap it up for me, now give me a conclusion to this – your summing up.
Andrew: I think before you rush out and fix rates or do anything, that you’re just grabbing an actual rate, just make sure there is a little bit more strategy around what your actual end goal is. Don’t grab a five-year rate when you might be going to sell the property in two years. You need to just put a little bit of thought process in before you actually lock in, because once you’re locked there is no unwinding it without some cost to yourself.
Kevin: Great advice from Andrew Mirams at Intuitive Finance. Don’t forget you can discuss your specific needs and formulate the right strategy for your needs by getting in touch with the team at Intuitive Finance. Organize your complimentary 60-minute session today. Click on the link on the home page at RealEstateTalk.com.au.
Andrew, thanks for your time.
Andrew: My pleasure, Kevin. Thank you.
Kevin: Gee, we have seen house styles change over the years, haven’t we? I reflect back on my parents’ house and even my grandparents’ house and how the yards are getting smaller but the houses are changing. I was driving around some of the areas just last weekend looking at some of these more contemporary homes, and it got me wondering about Australia’s current favorite house versus the homes of our parents and our grandparents.
A report is out saying most Australians have identified that a four-bedroom, two-bathroom home is their ideal property. It got me thinking about how that compares to the homes of our parents and our grandparents. Joining me to discuss this, Bernard Salt – demographer, futurist, and commentator, and also from KPMG.
Hi, Bernard. Have these things changed much over the years?
Bernard: Hi, Kevin. No, in fact, our housing styles and preferences have changed mightily over the generations. What our parents considered luxurious, we would consider to be quite basic. I can remember in the 1960s living in country Victoria when the sewerage went through was a big deal to actually have a toilet inside the house as opposed to having an outside toilet.
At that stage, the three-bedroom brick veneer with one bathroom and an inside toilet was considered to be the height of luxury. That was the pinnacle of the suburban dream for Australians, whereas today we’ve lifted the bar quite considerably. What we expect as a basic standard of living has, in fact, skyrocketed in a generation.
Kevin: Now, it’s not a matter of whether the toilet is inside; it’s a matter of how many toilets we have inside.
Bernard: In fact, that’s correct. Now, it’s four bedrooms, two bathrooms. Back in the 1950s and the 1960s, where it was three bedrooms, one bathroom, there were probably four kids – or more – so you might have the boys in one bedroom in bunk beds and the girls in another bedroom, and you’d have one bathroom shared amongst five, six, or seven people in a house.
Today, it’s four bedrooms, and the number of kids has shrunk to two, so each kid gets a bedroom, the parents get a bedroom, and there is a spare bedroom, and there are two bathrooms. Really, this is not the minimum, but is certainly what most Australians – certainly out in suburbia – would aspire to.
Kevin: Of course, we’ve seen the blocks of land reduce in size and the houses go up to two levels, so the houses have gotten bigger on smaller blocks of land, as well, Bernard.
Bernard: This is very much the case. I suppose it’s the land component that is the expensive part. In fact, it’s halved. A quarter-acre block is about 1000 square meters. Today, if you go to the edge of Brisbane, Sydney, or Melbourne, you’ll have some land packages typically around 500 square meters. We’re building houses on an eighth of an acre – and even less in some places – but the house has doubled if not tripled in size.
I think this is partly because if you go back a generation, there would have been a veggie patch, there would have been a chook shed, there would have been an incinerator – can you believe it, people used to burn stuff in their back yards – a compost heap, places for a trailer, or a few fruit trees, It was almost an era of self-sufficiency, whereas today with both parents working, you don’t really have the time to actually tend a garden as such. It’s just easier and more convenient to buy it at the supermarket.
Kevin: Of course, many things have impacted these changes, among them being technology. The television has now become the media room. And even as you mentioned earlier about the toilet coming inside, all of these things are advancements, and it’s changed the Australian dream for a home, hasn’t it? It’s evolved.
Bernard: It has indeed. The back yard is no longer a back yard; it’s another room, in fact, to be prettied and to be organized. The barbeque area has come back up onto the deck, which we now call al fresco. It’s indoor/outdoor. I don’t think there is a television room anymore because I think there is a screen in pretty much every room – greater flexibility and fluidity of usage around the home.
I think that the kitchen is actually merging with the lounge room, so if you were sitting on a sofa, for example, there will be cup holders. You have the kitchen functionality invading the living room or the family room. Our houses are much more fluid than they once were. Instead of dedicated spaces, there are multi-purpose spaces, and every individual in the house gets far more individual space or private space.
If you’re one of four boys in a bedroom – as I was; I grew up with three brothers in two bunk beds – there was no privacy and you had to wait your turn for the bathroom, of course. That’s a very different lifestyle to the lifestyle we enjoy today.
Kevin: You talking there about outdoor al fresco areas, Bernard. I remember one of the great things in our home was when Dad built one of those Besser block barbeques out the back, but now they are full-on entertainment areas, aren’t they?
Bernard: They are full-on entertainment areas. There will be sinks, there will be mini bars, there will be a [5:31 inaudible] as well as a six-burner barbeque. And then it will be on a deck or an al fresco terrace overlooking manicured lawns with box hedging and whatever.
The old days of a bit of a back yard with back yard cricket – well, there are fewer kids per household, there are fewer kids in the neighborhood, so you can’t really put together an impromptu game of cricket, anyway. And besides, the desire to play cricket, football, or netball is met these days not so much by an impromptu street game but in fact by organized after-school sport. So if you have everything organized after school, then you don’t need that space in the back yard. That, I think, is the logic.
Kevin: Bernard, do you think it’s likely that Australia’s fascination with huge houses and multiple living spaces is going to continue, or are we becoming more miserly and more frugal as a nation?
Bernard: I think there is a backlash in some areas where there are people who are seeking out smaller, more efficient spaces. That’s clearly a movement. But I think that the mainstream of Australia will still want four bedrooms, two bathrooms, and possibly even more in the future.
I think if you could magically transport a four-bedroom, two-bathroom home back to the 1950s and say, “Well, this is how average Australians will be living in the year 2016,” they would say, “Well, that’s far too much space. It’s wasteful.” This was a generation that would have remembered the Great Depression and fought in the Second World War.
Equally, if you go forward to, say, 2050, I think we would be quite shocked at the level of materialism, space, privacy, and communications technology that would be in the family home in 20 or 30 years’ time. Every generation feels comfortable with their space, their time, their housing, but these things do change over time.
Kevin: A fascinating subject and I wish we could project ourselves 20 or 30 years down the track, Bernard. As you say, I guess we probably would be horrified at the sheer waste.
Bernard: The sheer waste, but I imagine also at the cost. I have no idea what a house is going to cost at that time. It would also be great insight to know which are going to be the hottest suburbs in every city and which ones are going to go through the greatest transformations. So this was a down-and-out suburb back in the old days of 2016 and then it went through this great transformation. Which are those suburbs? That’s the greatest insight in property perhaps.
Kevin: Yes, I think I’d much rather look at what are going to be the burgeoning areas as opposed to how we’re going to be living in 30 years’ time. I think I’d become a lot more wealthy by knowing that, Bernard, that’s for sure.
Bernard: That’s true. Or understanding what drives us, whether it’s new technology, whether it’s new infrastructure, whether it’s just the invasion of a particular social group. Who are going to be the hipsters of the 2020s and 2030s? They might be the Techsters – as in the technology people. Who knows? That’s the fascinating part about demography. It can convert into property and the trends.
Kevin: Yes, the wonderful part of what you do. Bernard Salt – demographer, futurist, and commentator from KPMG.
Thank you so much for your time, Bernard.
Bernard: My pleasure.
Kevin: Adam sent me an e-mail that we’re going to address now. Thanks for your e-mail, Adam. “I was wondering if you could ask Michael Yardney to define in greater detail what he means when he says to look at properties with a twist.”
Well, good news, Adam; Michael joins me on the show.
Michael Yardney, thank you for your time.
Michael: Great, thanks, and it’s a good question, Adam. What I’m really looking for is a property that’s going to outperform the averages, an investment-grade property that will remain stable, not go up and down in value as much, and grow with wealth-creating rates of return.
What I’m looking for is something that in strong markets will always do well, but as we’re now getting into the weaker stages of the property cycle is also going to do well. When there is a shortage of properties, when there are more buyers or renters around, every property will rent, every property will sell, but now in some parts of Australia, where the equation is turned the other way, I want the sort of property that will attract potential tenants and also if ever I want to sell – not that it’s my intention – will attract buyers, that’ll always hold up the value of my property.
A twist is something that’s different, unique, special, scarce. You never get that in those big-high rise monolith blocks where there are 50, 100, or 200 apartments that all look the same. But it could be nice features, it could be an art-deco apartment, it could be two car spots rather than one, to attract a wider range of people. It could be just a two-bedroom apartment but interestingly, it has two bathrooms, an en suite. It may be a nice outdoor living area, good views, a good aspect, something that will make it special and different from the pack, to make it unique.
Kevin: Michael, would you say that a property with a renovation potential has a twist?
Michael: Yes, it has a twist, but I don’t put it in the same category. When I look for an investment property, I use a five-stranded strategic approach.
Kevin, I’m sure you know by now that I like the properties with renovation potential, but that’s a one-off, and once you’ve done it, then the renovation is done. It adds some value, it manufactures capital growth, it increases your rental return, it gives you good depreciation, but then it’s gone. To me, the twist, the scarcity, is something that will be there in the long term.
Kevin: What about a renovation potential to reshape? In other words, I’ll give you an example: a two-bedroom apartment that has one bathroom but a very large laundry, that you could then turn into maybe another en suite, so you end up with two bathrooms.
Michael: Sure. Again, that’s a great one-off, and it is a form of twist – no argument that it’s going to make it a bit different – but I’m talking about a twist being that property in the long term – 5, 10, 15 years’ time – when it’s open for inspection, tenants go into that and they compare it with down the road, they’ll think “Hey, this is different. This is a bit better. I like this one.”
Kevin: So Adam, there is the answer to your question.
Michael: My pleasure, Kevin.
Kevin: When it comes to buying an investment property, it’s always handy to know how favorably the banks are going to look upon your investment. There are some properties that banks like, and others that they don’t. Let’s find out a little bit more about this. Bryce Holdaway, who is the director of Empower Wealth, and also the star of “Location, Location, Location Australia” joins us. Good day, Bryce. Thanks for your time.
Bryce: Hi, Kev, how are you?
Kevin: Good, mate. Are there some properties that banks favor over others, Bryce?
Bryce: Yeah, I always think that it’s always a good sign to ask the bank of they would be prepared to give you mortgage insurance on a particular property. That’s often a very good way to measure a risk of a particular property. If you think about a standard residential property in a built-up area, the bank would be quite comfortable lending you 90 or 95 percent of the value, and therefore issue lenders’ mortgage insurance.
However, some properties, they won’t do that on. Things that come to mind are student accommodations; service departments where they find it a little bit more risky, and the pool of buyers that are willing to buy if they put a “for sale” sign out the front. You don’t have the same pool of buyers, so they would consider that a bit more risky. That’s usually a good little tip to find out whether the bank would see it as a good investment or not.
Kevin: That lenders’ mortgage insurance; just explain how that works, Bryce.
Bryce: Basically, if you want to borrow … standard scenario is you borrow 80 percent and deposit 20 percent plus costs either through cash or maybe using other forms of security, i.e. the principal place of residence, to get the loan. In some cases, the bank will actually let you go higher; 90 and 95 percent. That’s on properties that they consider an acceptable risk.
If they won’t lend you lenders’ mortgage insurance, that’s usually a good sign that they consider it a bit more risky in the marketplace. I see that as a sign for exercising some caution.
Kevin: What you’re suggesting is actually going to the bank and asking that question before you commit to the property?
Bryce: Yeah, talk to your bank or your investment-savvy mortgage broker. Ask them that question; which ones do they consider a fair credit risk, and which ones do they consider more risky than others? That can give you a good sign.
For example, I spoke to someone this week and he asked me about a service department, and whether or not that’s a good investment. I said, “Before I even judge on that, go and talk to your broker and ask them what sort of lending they will give you on that. That’s usually a good starting point.”
He came back to me and he said, “You’re right. They’ll only lend me 65 percent on that.”
Kevin: I know the banks were very sensitive, some time ago, to properties; particularly units under 50 square meters. Has that tolerance improved a bit?
Bryce: I think that’s a really good point that you put out, Kevin. Sometimes, some banks will actually let you … it used to be, 50 square meters used to be the magic number. In some cases, if it’s 40 or 45 square meters, you can sneak it through with some lenders.
The key is, only some lenders will do that. For me, that still puts you at a bit of risk. When it comes time to sell it, and you put a “for sale” sign at the front, you want the maximum number of buyers that you can get. If some of them have got lending restrictions and some of them don’t, to me that’s not giving yourself the best chance. Particularly, if you’re going to send the value around, you want to make sure that they don’t place any extra risk on it, and downplay the valuation that they put on the property.
Kevin: Always good advice. Bryce Holdaway, who is the star of “Location, Location, Location Australia, and also a direct of Empower Wealth. Bryce, always great talking to you. Thanks for your time.
Bryce: Likewise. Thanks, Kevin. Chat soon.