01 Sep Property in super – how can it go wrong? + Does ‘hook and flick’ work in all markets + Buying property with friends and relations
Highlights from this week:
- Renovation expert – Paola Tapia – shares some tips on how you can go about transforming a residence into something with that elusive ‘X factor’.
- The best time to consider the hook and flick strategy and the types of properties to use.
- Traps for young players planning to buy off the plan
- Things to be aware of when buying property with friends and relations.
- What can go wrong when putting property into a super fund and how to avoid the pitfalls.
Renovation with the ‘X Factor’ – Paola Tapia
Kevin: This week, we released a podcast that details for you what’s inside the latest edition of Your Investment Property magazine. Go and have a listen to that. You’ll find it on the Your Investment Property magazine channel on Real Estate Talk.
I feature in that podcast, along with a chat to Sarah Megginson from YIP who is the editor, a chat that we had with Paola Tapia. Paola is featured in the latest edition in a special renovation feature. She joins me here now to talk about another aspect of that renovation.
Paola, thank you very much again for your time. I’m keen to talk to you about your tips on making sure that when we do a renovation, we don’t overcapitalize. In the article, you talk about the importance of shopping around, getting your hands dirty, and doing a bit of shopping yourself. How important is that?
Paola: Thank you, Kevin. Yes, I believe that you need to be, obviously, very smart about what you’re going to be spending and what you want to be investing, which is really what it is, an investment. When it comes down to prices, you do need to compare, but obviously, you need to make sure first of all that you’re just working on the things that will make the difference.
For any property, you need to make sure that you do just stick to the things that are going to make the difference and will increase the value of the property. Look at each specific trade and see whether it is something that would be easy for you guys to do or just outsource to the best people who have the experience.
Kevin: In the article, you talk specifically about some tapware, and there is an example inside the article where you compare two taps, one $619 and the other one $99, purchased at the same location but I would defy anyone to tell the difference. These are some of the things that you’re talking about, are they?
Paola: When it comes to materials, yes, you can get things, but what I tend to do is just get good quality stuff if it’s going to be for a long-term investment. But yes, do shop around and compare different suppliers. I wouldn’t recommend to just go with the cheapest because obviously, then you have issues later on and if you keep the property, well, you’re going to have to pay more later down the track.
When it comes to more the actual team who would help you do the transformation, you want to make sure that they’re people who see your vision, who can work with you, and who can potentially, if you do have the time to invest into the renovation yourself, you can work with them.
It’s always easier to say “Yeah, I can do that,” but when it comes to actually getting the work done, you need to make sure that you’re going to get the same efficiency of someone who does it day in and day out. It’s just a matter of shopping around and making sure that you get the best bang for your buck.
Kevin: We see a lot of television shows, renovation shows, where they do actually spend a lot of time in styling the property. How much effort do you put into that, and how important is that, Paola?
Paola: Now, I do it as a business. I help other people with that, getting their properties ready for sale. I think it depends on what the property is going to be used for. If you’re going to rent it out, and obviously, giving that styling/vision of what they could do with the property when they move in is obviously great because people don’t actually imagine what they’re going to be able to do with the space and the flow.
Flow is super-important. When people see something styled, you want to make sure that the furniture highlights the space in the property, the access, the movement, what you can actually do with it.
Whether it is for buyers or for tenants, styling the property is always going to give you that, but also, now that I do it as a business, you can see how people are prepared to pay a lot more money for a property because they can imagine themselves in that property because it looks good, because it feels good, and they don’t have to do anything when they move in.
Yes, it’s definitely something that is important to do, and it’s going to maximize the potential at sale and also for rental as well. It’s going to give you good tenants. It’s going to give you tenants who are going to look after your property. And it’s also going to attract a lot more people to the open house.
Kevin: There is some great advice inside this article. It’s inside the latest edition of Your Investment Property magazine. Make sure you also have a listen to the podcast, the special podcast that’s now on the YIP channel on Real Estate Talk.
Paola Tapia, thank you so much for your time. Congratulations on your work, and thank you for talking to us today.
Paola: Thank you very much, Kevin.
Hook and Flick as a strategy – Pete Wargent
Kevin: Gearing is a term we use that’s quite commonly used in property investing. Not a lot of people understand it, or if they do, they probably don’t use it. Let’s try and find out why. Joining me to talk about this, Pete Wargent. His blog again is PeteWargent.blogspot.com.
Pete, tell me firstly, what is gearing? Let’s explain it first, and then we will talk about why it’s not used all that often.
Pete: Yes, in a financial sense, gearing typically means borrowing or leverage. So, a company that is highly geared is one that has a sizeable amount of debt on its balance sheet.
From a property investor’s point of view, gearing tends to relate to borrowing money to invest. So, mortgages against investment properties, typically.
Kevin: It’s not just for property, is it? It’s for any type of investment where you have some equity that you can actually use and leverage?
Pete: Yes, that’s right. The idea behind using gearing is that it can magnify the results that you achieve. So, in property, the capital growth in particular is what you are looking for. But obviously, the downside is that gearing or borrowing magnifies good results and bad results, so you need to make sure you choose carefully what you buy and also you use debt carefully.
Kevin: Can you give me a practical example of gearing and how it does work, let’s say in a property sense?
Pete: If you borrow to invest in, let’s say, a $500,000 property, you might put in a 20% deposit and then borrow the balance from the bank. Therefore, you have only invested a $100,000 of your own money, plus costs, but you are investing in an asset that’s worth $500,000. Therefore, if you get capital growth on that property, the results are effectively magnified. So, let’s say, a 20% capital growth on the property could actually see you double your money.
Kevin: How do the banks look at this? And should you deal just with the one bank, or should you be working with different lenders?
Pete: You need to be able to demonstrate an ability or repay the loan, and that’s especially true in the current environment where serviceability rules are tighter than they were. So, banks will look at your income from various sources to determine how much money you’re able to borrow.
Kevin: What sort of language do you use when you go to the bank? Say I was with NAB and I wanted to go and invest with ANZ in a different property. What kind of language would I use with them?
Pete: When you’re approaching a bank to invest in property, you would tell them exactly that. You would tell that you have an amount of money saved up, you’re interested in buying an investment property, and you’d like to look at some of the loan products that the bank could offer.
Kevin: I would imagine that most banks would then try to get you to switch that loan across to them as well. Is that such a good idea?
Pete: It depends on personal circumstances really. There are pros and cons to using one bank or a range of banks. You sometimes find by shopping around that you can get better products and better mortgage rates. There’s no one-size fits all when it comes to which lenders to go to.
Kevin: Are you finding that more and more investors are tending to deal with brokers, so they can almost keep an arm’s length relationship with the banks?
Pete: Yes. It’s becoming increasingly popular, particularly for serious investors to use brokers to shop around, to look at all of the various products that are available, and to negotiate the best terms that are possible for each individual investor.
Kevin: I guess the good brokers would be able to sit down and help you work through that scenario too. If you went to them with your portfolio, they can sit down and say, “Well, look, you have a certain amount of gearing here, and I know that this particular bank at this point in time is probably the best one to go with, and these are the reasons why.”
Pete: Yes, that’s exactly it. The thing that investors need to be aware of is that while the broker can help you with the choice of loan, ultimately, the choice of asset to invest in is your own. So, you want to try and find the properties that will generate a reliable cashflow to cover those borrowing costs and something that generates a reliable long-term income. The income growth allows your property to become positively geared over time.
Kevin: Always good talking to you Pete. Pete Wargent, and his blog site, of course, is called PeteWargent.blogspot.com. You can get some details there about the no-nonsense financial education program that Pete’s running in Sydney, on the 7th of October.
Pete, thank you very much for joining us. All the best on the 7th, and we will watch out for that new book too, coming out in October, The Wealth Way. We will look forward to talking you about that when it comes out, Pete.
Pete: Pleasure, Kevin. Will do.
What to watch out for with ‘off the plan’ – Shannon Davis
Kevin: We hear a lot about buying off the plan, whether it’s the right thing to do or the wrong thing to do. Well, let’s get a bit of on insight now. Shannon Davis joins me.
Shannon, just give us the tips and traps for buying off the plan.
Shannon: There’s no uniform rule across the whole buying off the plan space, but if a person wanted a place for living in or investment, there would be two different thoughts I would give there.
I think first off, with off the plan, it’s a long period. You have a deposit and you usually wait until three years for completion, and a lot of things can happen in that time. The market may rise, the market may fall, and you have to remember, you’re paying not only a developer but a builder, and then usually an agent – and their commissions are more – and sometimes a project marketer.
So, all those middle men’s commissions add up and it proves to be quite an expensive buy.
Kevin: Shannon, are there good tax reasons why you would want to do it?
Shannon: Oh yes, definitely. With the new rules under the Budget, new property gets a level of depreciation that some existing properties don’t.
But buying for tax reasons is probably putting the cart before the horse, Kevin. I think, first and foremost, you want a property with good owner-occupier appeal and a little bit of scarcity. If you’re one of, say, 150 units with the same sort of outlook and layout, there’s not much scarcity for that property, and that’s what goes against you when you buy into those off-the-plan apartments.
Kevin: We hear some horror stories about off the plan in terms of buying with the developers profit in it and by the time you settle, it’s worth less than what you paid for, Shannon.
Shannon: Yes, that’s when there are some top-ups there. With a lot of foreign buyers in these complexes as well, whilst they might forfeit their deposits, it’s going to be hard to go after them legally, with some of them being offshore.
You also run the risk of what’s called a sunset clause. So, in the event, say, you have a real boom market and the developers have sold it to you too cheaply over that one- or two-year period that prices have gone up, in some states and territories, they can actually renegotiate the property and sort of gazump you and resell it for the higher price.
So, you’ve had all your money tied up for all that time, and you don’t actually end up with an apartment.
Kevin: What would be your advice to anyone who does want to buy off the plan? And obviously, there will be people who will. What sort of due diligence should they do, Shannon?
Shannon: Yes, I think new is always an attraction to some people, and it’s more contemporary living. But look, try and keep your numbers down. Go for the more unique and boutique complexes.
A lot of those things are gimmicks, such as your lift, gyms, pools and spas, rooftop cinemas. So, that’s really going to drive up your recurring costs, and I don’t think they get utilized as much as people think they do.
So, a little bit more substance and less style, and try and keep it unique and boutique, and you might do better.
Kevin: What about some of the finishes? The contracts can be quite complex, can’t they?
Shannon: Yes, they can be, Kevin. You have got to watch out for what the finishes are. And once you enter into it, you’re stuck there, and you’re not getting out of it unless you forfeit your deposit, and even then, it’s hard to get out of.
So, you need to get the legal advice and go through all the specifications and clauses to protect your interests.
Kevin: One other point too: I guess not all solicitors are the same, are they? There would be some who would be more skilled at off-the-plan contracts, than others, Shannon?
Shannon: Yes, definitely. And more property-savvy as well. A good part of your team is a solicitor who’s used to the conveyancing laws and what goes on in a negotiation.
Kevin: Good stuff, Shannon Davis. Thanks very much for your time, Shannon.
Shannon: Thanks, Kevin.
An insight to property in super – Ian Rodrigues
Kevin: We’re going to tackle a big topic now. Ian Rodrigues joins me. Ian is the director of Bishop Collins Group, and we’re going to talk about superannuation, having a super fund and residential property.
We’ll focus on residential property, I think, Ian, because you can put a lot into super, but let’s just focus on residential because it’s a pretty broad issue, isn’t it really?
Ian: Superannuation self-managed funds are increasing in popularity. There are so many more of these funds. There are over 550,000 of them in Australia, and they’re growing at a fairly rapid rate.
There are a lot of people voting with their feet and setting up their own fund. One of the first things they come to is “What do I do with it?” and the classic thing would be a term deposit, which is not really a great investment long term. Then they go to look at either property or shares. Residential property for a lot of people is a very comfortable and known asset class.
Kevin: We did it. We did it many years ago, and it’s certainly been a good investment for us. But I thought we might quickly run through, from your perspective and what you’re learning, some of the pros and cons. What do you see as some of the pros, Ian?
Ian: The major benefit for holding an investment in residential property in super is going to be taxation. We have personal tax rates at – call it – 50%, at the top rate and sliding down if you’re on lower incomes. We have a corporate tax rate at 30% at the moment and there is some slight variation to some of that with small business, but superannuation funds are taxed at 15%, and on capital gains currently, it’s 10%. When the fund is in pension phase, the income and capital gains are generally taxed at 0%.
Having an asset that you’re paying no tax on the income and no tax on the gain that may have accrued over 10 or 20 years is a very attractive proposition. Taxation has to be the number one reason.
Kevin: What about asset protection?
Ian: One of the things we do like about superannuation and self-managed funds is that a lot of our clients are business people and facing all sorts of risks from dozens of pieces of legislation and things that make them personally liable.
In the event that you’re facing personal bankruptcy, one of the few things you get to keep apart from the shirt on your back and…
Kevin: The kids.
Ian: …And your kids, yes. The bank seems to mortgage them, don’t they?
One of the few things you get to keep is, in fact, your super. You may potentially lose all of your other assets – you can try protecting them a bit – but super is one thing that in the legislation, you’re allowed to keep. It’s something that is protected by law.
Kevin: That’s a big plus, actually. Off air, you mentioned to me about land tax as well. There could be a benefit there too, is there?
Ian: For the listeners who are feeling the pain of land tax, if they’re investing heavily in one state or just have a few properties, they know how painful that is to get that bill each year. You only get one threshold and that sort of thing in each state. Super funds, again, your self-managed fund, is entitled to another threshold.
You can have a situation where someone is paying land tax in New South Wales, and if they bought another property in their name, they would be taxable on the full value, but in their self-managed fund, they would be entitled to another threshold and probably not paying land tax.
To be honest, land tax isn’t the sole reason. You’re probably in super, but a threshold being worth about $6000 per annum, it’s not an insignificant reason.
Kevin: No, it’s not. Having been through this myself, I know it’s not an easy thing to do to put property in there. Lenders, how are they looking at it right now, Ian?
Ian: Historically, if you asked me this question six months ago, lenders were looking at it. Since that time, there have been a lot of APRA changes and other things just with investor lending generally. At the moment, lenders are still doing it, they’re still keen, they’re in business, but there is a lot more complexity.
I think the best advice I have for clients now is to actually, more than ever, shop around because the lending policies of each lender seem to vary almost monthly of what they will and won’t do. There are some banks that will do super loans but not for residential property. Some won’t do them. Some do them but only if you’re a customer.
There are other lenders out there other than the Big Four as well, so my advice at the moment is to shop around. There is still an active market. They still want to do these deals. But just be realistic. You’re not going to get the discounted home loan rates. You may not get the highest LVRs possible and you may have to look around at places where you just don’t walk into your usual bank to get that loan.
Kevin: Shop around; that’s really good advice. Paperwork, understanding the paperwork, and I guess the other message here too, Ian, is just be very careful who you take advice from. They need to be an expert in this field.
Ian: Absolutely, Kevin. The risk with superannuation lending is that there are probably a dozen things that can go horribly wrong, and a lot of the horribly wrong things are in the paperwork, which is not what the taxpayers should be concerned about; it’s all stuff for their advisors. It can be an inadvertent mistake. It could be just stating the trust deed incorrectly. All of those things can go horribly wrong.
Where the deposit gets paid from is incredibly important. That can end up with paying double stamp duty down the track if you don’t pay the money from the right accounts and get the right names on things.
A lot of these repercussions are minor issues that people say “I paid it out on one account. I can fix that up.” But no, you can’t. It could cost you a lot of money, and sometimes it could stop the whole deal being structured in super. And sometimes these are the things you don’t find out until down the track and everyone is looking at each other.
Kevin: I had someone who relayed a horror story to me. Well, they didn’t relay it to me because they didn’t know that it was a problem. They had purchased a property in their super and they were actually living in it as a holiday home, and I said, “You can’t do that.” When they found out, they went and got some good advice then because they had been told that you could do that. But that’s one of the things you can’t do, isn’t it?
Ian: With holiday houses in super, I have reservations about those, full stop, whether they are actually a great investment anyway. But with any asset in super, the sole purpose test, which is the major test for a super fund, the sole purpose is to provide retirement benefits has been interpreted to be almost entirely black and white.
It would seem to me it’s not logical. It’s just a black and white rule. It means that you cannot rent residential assets to yourself or to associates, which is a very wide definition and would include your family members and sometimes quite further than that.
Kevin: Even business associates, I would imagine.
Ian: It can. If you read the definition of a “Part 8 associate,” it goes for pages. So, the short answer is if you’re thinking of doing anything other than this as a straight investment, you really need to make sure that what you’re contemplating is going to be allowed.
You always have people who think they might play a funny game and not put it through the books and all of that. To me, the problem with that is it isn’t a funny game when you’re sitting down and it’s all gone pear-shaped.
A lot of the penalties on super… The Tax Office don’t have a lot of penalties in-between like a slap on the wrist. They have “make the fund non-complying,” which is the nuclear option, or ignore it. And they don’t have a lot of discretion either. It is a bit of a problem in the legislation that they’re trying to address about having some penalties that are more commensurate with the crime. Otherwise, everyone seems to get the death sentence, so it’s not good.
Kevin: There are some other restrictions, too, with lending in there in terms of your ability to re-gear as well. Is that right, Ian?
Ian: Yes. The single biggest thing your listeners need to be aware of is that it’s great to have the tax, great to have the asset protection, great to have an extra land tax threshold, and all of those things make sense, but the biggest thing practically speaking for an investor is the fact that when you set the loan repayment or the loan at a certain level – so you have a $500,000 property with a $300,000 loan, say – if you pay down that loan, you can never redraw it. Even if the bank would like to give you the money, they can’t because that’s not how these loans work. There is no ability to redraw a loan.
Even if you don’t pay down the $300,000 and you save up your surpluses for a deposit on a second property, one day when that property might be worth $1 million, you cannot re-gear that property and increase the loan. You cannot redraw or increase the loan.
For some investors at their stage of investing, that is a major detriment. For a lot of investors, it’s not an issue whatsoever and the danger for them is that they happily go… When people have a loan, they have a tendency to try and repay it and then not be aware that it can’t be redrawn.
Kevin: In closing, what are the costs like in putting a residential property into super, Ian?
Ian: That’s a very common question, Kevin. A lot of people want to know what it’s all going to cost. As a guide, there are a lot of different people selling super funds with different vested interests than what they’re actually selling you, but if someone was just buying a super fund and doing their own investing, it’s probably going to cost you no more than $5000 to set up the fund and get all of the financial advice that you need to be able to get a super loan.
Providing a self-managed fund and advising on obtaining a super loan is financial advice, so it must come from a licensed person, which can be your accountant. Sometimes they are licensed, but otherwise, it has to be from a licensed person. And most of the banks require a sign-off from that person saying you have been given financial advice.
There are some costs on each deal, so each deal might cost $2000 or $3000 in terms of trust deeds and extra stamp duty that you need to pay on those things. But what you find is that the second one, you don’t have all of those setup costs. There’s a once-off setting up the fund and that type of thing, and then there are those transactional costs for each one.
If those are a big issue for people, then often, the size of the investment and the size of the fund isn’t quite where it needs to be. But for most people, they just need to know roughly what it’s going to cost.
Kevin: That’s a really great insight, Ian. But I think the bottom line here is make sure that you’re dealing with a company who knows what the rules are and what the regulations are because as you said earlier in our chat, if you get it wrong, boy, it can be really, really painful.
Ian: Yes, it can be.
Kevin: My advice: Bishop Collins Group – that’s where Ian is from – you’ll find them at their website, BishopCollins.com.au. Also a great blogspot as well, BishopCollins.blogspot.com.au.
Ian Rodrigues, thank you so much for your time.
Ian: Thanks very much, Kevin.
Is it wise to buy property with friends and relations? – Mark Armstrong
Kevin: It may seem like a good idea to want to buy a property with a friend or relation because you might get on well with them in a friendship. But there’s an old saying that if you want to wreck a friendship, just go into a partnership with the person. Let’s talk about this with Mark Armstrong. Mark is the co-founder of RateMyAgent.com.
Good day, Mark. How are you doing?
Mark: Good, Kevin. How are you?
Kevin: Good, mate. Have you ever been tempted to go into partnership in a property transaction with a friend or relation?
Mark: I actually started… My first investment property that I bought when I was 19 years old, I went in partnership with my brother. And it worked out really well.
Kevin: Tell us some of the things that you went through in that process and where it could have gone horribly wrong.
Mark: There’s an old saying that it’s very easy to get into bed with someone, but it’s very hard to get out of bed the next morning. That’s really what it is when you’re looking to buy a property with someone. It’s not so much the buying of the asset that you really need to focus on; it’s exiting the asset that really needs to be the focus of your attention.
When my brother and I bought our first investment property, we made a commitment to each other that we would never sell the property, and we held onto the property for a good 20 years or so. We did eventually sell it, but the commitment was that we would hold the asset for the long term and then we would use the asset as a point of leverage to do other things that we wanted to down the track.
Kevin: But sometimes things do go wrong, don’t they? Even those agreements, they need to really be put in writing. But shouldn’t you also have an exit strategy, Mark?
Mark: The exit strategy is the most important part. Whether it’s a timeframe that you’re going to hold the asset for a certain amount of time, that’s really important.
Look, I tend to advise people not to do it. Even though I did it with my brother, my standard advice is not to do it, because people go through so many life changes, whether it’s settling down and getting married, having a family, losing a job, getting ill. There is a whole range of things that can happen in your life that can really make any written or verbal agreement obsolete because you’re forced to make decisions that you don’t want to make.
My general rule of thumb is I would say don’t buy with family or friends unless it’s really a financial imperative – you have no other choice because financially, you just can’t do it any other way.
Kevin: But there could be a time when maybe you might use that relationship to actually get some leverage to get in there with an agreement that you’ll buy that person out in a couple of years’ time. That’s probably a different scenario, isn’t it?
Mark: Absolutely. But problems arise like how do you value the property in the future? Obviously, whoever wants to buy it will have a different value to it than the person who wants to sell it. So, there are whole lot of issues there.
I remember working with some people a number of years ago who wanted to buy a property together. I looked at their situation and I said, “You don’t have to buy together. You actually both have the financial capacity to buy individually.”
Their reasoning for buying together, I guess, was because they wanted that support of knowing someone else was in there with them. I just thought that was a mistake, because financially, they could have done it individually and they could have started off their portfolio, buying their first property.
Doing it for the reasons of wanting to be in a partnership with someone is certainly not the right reason to do it because so many things can go wrong.
Kevin: I guess the bottom line is if you find that you need to do this or you still want to do it after listening to that advice, make sure you talk to a solicitor who is skilled at putting an agreement together and understanding that that exit strategy has to be in place before you even get into the agreement.
Mark: Absolutely. My advice to the exit strategy is that it should just be a clean sale of the property, because then there is no discrepancy on value, everyone is working in the same direction, they’re working to sell the property for as much as possible. Otherwise, you can see significant problems arise.
Kevin: Are you talking there about one out, all out?
Mark: Absolutely. That’s really simple. Everyone is following the same path. Everyone is pulling in the same direction. Problems arise when people are pulling in different directions, someone wants to hold and someone wants to sell. But if you make a very clear commitment that we’re going to buy this property, we’re going to hold it for ten years, and then we’re going to sell it, everyone is on the same page and everyone is pulling in the same direction.
Kevin: Hey, Mark. Before I let you go, I mentioned in the intro there that your website, RateMyAgent.com, is in operation. It’s been in operation in Australia for quite some time, very successfully, too. But you just launched into the States, I understand.
Mark: Yes, we launched into the States a few weeks ago. We were in San Francisco at a conference, and we’ve taken the big step into a market that’s a good ten times bigger than the Australian market. And so far, so good. We’ve had a number of agents claim their profiles and requesting reviews, so early signs are that it’s traveling very well.
Kevin: What’s behind the site? How does it work, Mark?
Mark: Rate My Agent is a platform that primarily helps vendors select their agent to sell their property.
A vendor can come into Rate My Agent and they can type any suburb in the country. They can find out which agents are active within those markets. They can see which agent has sold the most property over the last 12 months, which agent has the highest average sale price, total sales value. Then they can drill down into an agent’s profile and read reviews that the agent has received for the sale of those properties.
At the moment, we get around about 4000 reviews posted every week, and it represents a review for one in three properties sold across the country each month.
Kevin: The website is RateMyAgent.com. My guest has been Mark Armstrong. Mark, thank you so much for your time.
Mark: Pleasure. Thanks, Kevin.