Common Mistakes

“The trouble is, you think you have time” – Buddha.

 

 

 

Procrastination – property investment is not a ‘get rich quick scheme’. If that’s the kind of risk profile you have, then you are a speculator, not an investor. Time in the market is crucial to riding out any volatility in rent returns and values around the long term trend line. Many people take so long waiting to ‘jump on the train’ that they miss one after the other and are left back at the starting line for years. Remember the ‘miracle’ of compounding! Starting your investment journey as early as feasible allows you to reduce your risk, minimise outlays and maximise the potential returns.

 

 

Not seeking professional advice – in a highly specialised economy, it pays to leverage off the expertise of qualified, experienced professionals to support your investment decisions. This applies to seeking advice re finance structures (investment broker), legal entities, tax implications and ownership splits (accountant), estate planning and exit strategy (financial planner and accountant) and of course investment property choice, purchase and setup implementation with a property investment advisor.

 

 

Not having a plan – It’s said that ‘it’s a long time on the golf course if you don’t know where the 18th hole is’! It’s the same in life. Do you simply want to wait and see what happens or do you want to take charge and have an influence over the outcomes and options in your life and the lives of your family?

Investing allows you to identify that 18th hole and perhaps enjoy the 19th more!

 

 

Overcommitting  – because property investment is a long term strategy, it’s necessary to make it sustainable for the long term. So the investor should not (and should not be encouraged to) overcommit. Your borrowing capacity may be large, but that doesn’t mean that you should spend to your limit. Borrowing capacity doesn’t necessarily equal your ‘comfort’ range. Ideally, the property should be able to tick away in the background without a significant imposition on your budget or lifestyle. Additionally, not using up all your borrowing capacity allows you to come back and buy again too – it means having more than ‘one pot on the boil’ at a time.

 

 

 

Lack of diversification – this applies to having a mix of asset classes and within the property class, mixing up the locations, types and price points. Allied to the last point about over-commitment, is the consideration of whether it’s wise to buy one expensive property if funds allow, or two lower-priced properties? Typically two lower-priced properties is a better idea because it spreads the location and type risk, and it also increases your liquidity. Property is a relatively illiquid asset – so if you need to access some funds or divest for some reason, you don’t have to exit the market altogether but can do so in part.

 

Assuming that nothing will ever change in the future – it’s vital to ‘stress test’ your choices. Once again, because a property is a long term investment, you need to understand that there are no guarantees in life. Interest rates can go up (or down), and rents are market-determined and therefore can vary from time time, additionally, government policy and regulation, in particular, tax incentives can change and personally, your circumstances are also subject to change and may have an impact on the sustainability of your investment position. Job security, relationship status and health may all throw ‘curve balls’ into the mix over the long haul. It is a reinforcement of the recommendation to invest sustainably and for the long term so that you ride out the ups and downs in the market and life.

“The only ones to get hurt on a roller coaster are the jumpers.” Paul Harvey

 

Inadequate insurance and risk mitigation strategies – keeping in mind that ‘profit is the return to risk’, the savvy investor acknowledges the risks and takes steps to address them as adequately as possible. It starts with using credible and qualified team members in the journey and seeking advice, asking questions, stress testing, making dispassionate decisions, and having adequate insurance in place ( building, landlord’s, contents, perhaps income and life) and not over-committing.

 

Making changes to finances midstream – Lender’s ‘goal posts’ shift all the time, and typically there are many hoops to be jumped through to be approved for a loan. Once a pre-approval is granted, it is recommended not to make any changes to your financial position, such as going out an buying a new car or changing jobs, until the loan is funded. (even formal approval may not be enough to allow changes to financial behaviours). Consistency is particularly crucial for settlements that are a long way off. There is no certainty that lending criteria will remain the same in 6 or 12 months. Once again,  qualified, honest and compliant professionals in the property investment space will make you aware of this risk and help you to decide if it’s a suitable one for you to take.

 

 

Looking over the back fence – this one relates to the idea that you need to buy where you live and where you think you know. Australia is a vast country, and as we have discussed, there is no one property market, there are opportunities across states and regions, in inner, middle and outer ring suburbs in different types and style of houses. You are limiting your options and diversification by not considering the alternatives. It also pertains to the idea that if the property is close to where you live, you can look after it! That is the job of your property manager – engage professionals to do what is best done by them, keeping the emotion out of it. As your portfolio grows, there isn’t time to be doing your job and managing several properties. Property management fees are tax-deductible, a professional expense incurred in running your property investment business.

 

Unreasonable rent expectations – it’s a fact that rents are market-determined. There is no point leaving a property vacant in the hope of finding a tenant who will pay $520pw when the property manager is telling you that $500pw is the highest possible return at this point. Every week the property sits empty it costs you $500; if it is vacant for a month, then it has cost you $2000 or nearly $40pw. You are better off taking a tenant straight away, minimising vacancies and sacrificing the $20pw (or $1040pa) rather than $2000. Be pragmatic and don’t ‘shoot yourself in the foot’!

 

Recordkeeping – To make all the claims you possibly can and therefore minimise the bottom line, meticulous records must be maintained. Those who don’t have a system for recording all their property expenses will more than likely miss out on allowable deductions and cost themselves money! The ATO specifies that the property investor must keep proof of income and expenses and supply them on demand for the last five years. Typically investors use excel spreadsheets and shoeboxes of receipts and scramble at the end of the year to provide a record of the financial year to their accountant to decipher. Alternatively, ASPIRE clients have access to a Portfolio Manager to record, track and visually present their income, expenses and asset position at the click of a button.

 

Not understanding the purpose of bank valuations – Valuations are a measure of the bank’s appetite for risk, which varies over time. There is a difference between a bank valuation (done to protect the bank’s balance sheet) and market valuation. Bank valuations are inherently conservative and vary widely. It is wise to be prepared for some variation in the valuation from the contract price, anywhere between 5-7% is quite routine. Appraisals are very much an ‘inexact science’ at the best of times; they are heavily dependent on individual expertise and opinion. Forgoing an excellent opportunity that stacks up well in all other respects because of a low valuation may be shortsighted.

 

 

Thinking that the lender with the lowest interest rate is best – everyone wants the best deal possible, but the right choice is the lender who will do the deal for you! Some promise low rates but bring in valuations short of the package price, forcing you to contribute more. It’s their informal way of securing themselves. Insisting on saving .25% may save a few thousand over ten years but, if that lender is notorious for conservative valuations or restrictive criteria or is too slow and won’t allow the deal to ‘work’, as an investor you may potentially forgo capital gain for 10 years, which may result in a far higher opportunity cost. Be guided by your broker who knows who’s ‘doing the deals’

 

Not making all the claims you can – make sure you have an accountant who is up to date and thoroughly conversant with property investment tax legislation. Have a professional depreciation report prepared and claim these ‘non-cash’ deductions; they are significant in reducing your burden and are too often overlooked. Stay up to date with ATO rulings on allowable deductions.

 

 

 

 

 

Why the New Year is the ideal time to invest

 

 

Richard Crabb – MD ASPIRE Property Advisor Network | PIPA Board Member

There are a lot of promises we make ourselves at the start of each new year—things like spending more time with friends or getting our health and fitness plans back on track.

These are all perennial favourites, but another that seems to turn up every annum is the evergreen, “THIS is the year I’ll get my financial affairs in order.” And while all these good intentions are important, there’s no denying they become challenging as we settle back into our daily habits. It’s human nature to run to the routine.

We’ll find ourselves marching through the weeks to the beat of a familiar drum. Then, before you know it, Christmas decorations are appearing, and December is upon us once more. What happened to all those resolutions from January?

Well… this year is different because instead of dreaming about your ideal year, we’ve hit the turning of a decade which provides the perfect opportunity to ensure your future looks bright beyond the next 12 months.

In fact, 2020 is the ideal pivot point for motivating you into mapping out an amazing next 10 years in property investing.

The procrastination past

Perhaps, more than in any element of our lives, the unrealised idea of investing for our future is the most tragic missed opportunity.

The reason is the majority of successful investors gain their wealth by stealth. Incremental increases in value that don’t seem like much over short time frames – but add them together across multiple price cycles and you’ll see a monumental uptick in their financial position.

Property investment success works because the gains are consistent. This is why real estate outperforms most other investments vehicles over time.

The tragedy is that these slowly ratcheting capital increases don’t occur for most people because of one simple, but crucial, reason.

They fail to get started in the first place.

The key to success.

There are many reasons why people procrastinate themselves into an inadequate retirement.

For example, some read media reports like they’re gospel and become reactionary in their investment decisions. Anyone who had been scrutinising headlines over the past six months for Sydney would have been bracing themselves as we plummeted headlong toward the bottom of an almighty price crash.

These readers may have included potential investors who thought, ‘Now is not the time. Look at what’s happening!’

Of course, what a difference a few months can make.

As soon as interest rates fell once more and lenders loosened the reigns slightly, the market started to turn up again.

There are now plenty predicting the Sydney market has already bottomed and is due for double-digit price rises.

And those who failed to act a few months ago for fear of further value falls are now being left in the wake of tighter listing numbers and rising prices.

So, my first tip – stop reading daily property articles and believing the trend is set for decades to come.

You should be buying now to take advantage of the market in two price cycles time – or 10 to 20 years. You shouldn’t be thinking, ‘Will I live in regret in 12 months if I buy now?’. Instead think, ‘Will I live in regret in 10 years if don’t buy now?’… and the answer is, invariably, yes.

The next tip is to extend your expectations.

There are plenty of people in 2010 who thought about investing but held back because they couldn’t see a way to make gains in the first couple of years… so they waited.

Those same people will be here in 2020 having the same conversation with themselves. In the meantime, they missed some of the most impressive capital gain runs Australia has seen in its history.

Don’t be another stumbler – remember there’s plenty of wealth to made over a decade, but the key is to act, not wait.

The perfect is the enemy of the great

Another procrastination tool is the eternal hunt for the ‘perfect’ investment.

In truth, finding that unblemished gem is unlikely – and in the meantime, you’ll pass up a raft of opportunities that will pay very handsome dividends over the long-term.

Good property investments are out there and while they may not always be the most ideal home on the market, they will provide the type of returns that investors with staying power enjoy.

Don’t let the hunt for a flawless investment keep you out of the race so long that you gain nothing.

That applies to trying to pick the market cycle as well. In truth, there’s never going to be a ‘perfect time’ to invest because for those with a long-term plan, taking action is the only solution.

You simply can’t win this race if you don’t front up and start.

Advice pays dividends

The smartest way to reduce the risks and boost the benefits is to surround yourself with the right professionals and rely on their advice.

You don’t have to be paralysed by the research required to try and gain expertise in the field, because there are already experts out there that can work with you start the journey.

We are constantly presented with great investment opportunities and have the experience to steer our clients away from the duds.

Act now

So, here we sit at the start of another decade – did you hope to invest in the 2010s and now have non-buyer’s remorse?

If so, don’t go into the 2020s full of good intentions but without a plan for action. Take a moment this year, have a think about what you’d like to achieve and get moving.

Get your mindset right then talk to someone who can help map out a strategy, so you don’t live in regret come the end of 2029. Contact me an I will contact you with a professionally accredited property investment advisor that can assist you – 1300 710 933.

 

Advantages of Property as an Asset Class

Profit is the return to risk

 

but ‘bricks & mortar’

 

is relatively predictable,

 

safe and reliable

 

“Australian residential property outperformed all asset classes for the 10 and 20 years to 31 December 2017”

Source: ASX/Russell Investments

1. Inflation favours tangible assets – inflation is a sustained general increase in the prices of goods and services over time. Unlike real assets such as property, the value of bank deposits can diminish over time due to inflation. Not only do the dollars in the bank potentially buy less than when you put them in, but the interest earned may not compensate for the higher prices over time.

The ‘real interest rate’ =  interest minus inflation.

Think of something you bought from your childhood, perhaps at the school canteen, what did it cost? What would it cost now?

An example of the time value of money effect is demonstrated when lottery winners are persuaded to accept regular monthly payments’ for life’ (read 20 years) rather than a lump sum now, which is customarily a bit smaller.

For example, what would you rather have? $25K per month for 20 years which equals $4.8M or $4.25M now???

 

Take the money NOW!  The $25,000 will buy you less in 10 or 20 years than it does now.

 

 

2. Low volatility over time – records have been kept in Australia since the 1890s. During that time, the overall trend for house prices has been positive, despite variations around the trend.

Aussie 25 Years of housing trends

 www.aussie.com.au/home-loans/property-reports/25years.

 

 

 

3. Real estate ranks between fixed income and equities on the risk-return scale – housing doesn’t provide the lowest risk, but it also doesn’t carry the highest.

 

4. The ‘power of leverage’– Being able to borrow a large proportion of the funds required to invest means that lenders are comfortable with the property as an investment, and you use other people’s money!

A property makes your money work harder.

For example:

$30,000 invested in the bank at 5% pa   =  $1500 capital gain (which is then added to your gross income and taxed)

$30,000 deposit on a $300,000 house at 5% pa   =  $15,000 capital gain (and costs of ownership reduce your taxable income and CGT can be deferred until exit and at a more tax suitable time)

 

5. Government Legislation that allows limited recourse borrowing within a Self Managed Super Fund for a property is an endorsement of the strategy as a defence against the unexpected and sudden erosion of retirement funds.

https://www.moneysmart.gov.au/superannuation-and-retirement/self-managed-super-fund-smsf/smsfs-and-property

 

 

6. Favourable tax treatment. Back in the first Lesson, ‘market failure’ was introduced as an essential concept to understand. In a free-market economy such as Australia, goods and services are produced according to demand and the ability of supply to respond to that demand, in other words, via market forces. While the market is generally efficient, it is not always equitable.

Government modifies the free market by compensating for its ‘failures’ (remember the business cycle)

It provides some goods and services that the market can’t or won’t and restricts the supply of some that it would if it could, such as illicit drugs.

Rather than crowd out (entering the market and increasing competition for funds and resources that the private sector may be competing for) more productive private sector activity, the government provides tax incentives for individuals to invest, thereby encouraging the supply of housing.

New builds, in particular, are promoted because of the multiplier effect on the economy and employment specifically. Building new properties has a ripple effect on consumption that is hard to replicate.

The public sector is typically not as efficient as the private sector. Resources are wasted by big bureaucracy that has social welfare as its agenda rather than self-interest. Consequently, there are some goods and services that the government outsources to the private sector to provide. It also offers incentives to others to do what they cannot do in sufficient numbers or with optimal efficiency – a prime example is housing!

7. Tax breaks in the form of Negative Gearing and Capital Gains Tax Discounts are strong incentives for investors to enter the housing market. Negative Gearing allows investors to claim all the costs of property ownership against their taxable income and provided the property is held for at least 12 months, the CGT payable is discounted by 50%. (dependent on the legal structure)

Depending on rent yields, prevailing interest rates, personal tax brackets and government concessions, it is possible for a property investor to own a property predominately paid for by the tenant and the tax office:

 

Conditions like these promote the entrepreneurial spirit, the building block of the market system, and are an incentive for individuals to create wealth for their retirement, thereby reducing the burden on future generations of taxpayers.

(Remember the ideas about building a business for the future)

8. Tax on any capital gain is deferred until the asset is sold. This is when ‘timing’ becomes more relevant.

9. Rental income is reliable, it isn’t subject to individual’ management performance’, the returns are contracted in a tenancy agreement and are protected by Landlord Insurance, AND  they are

NOT a DIRECT TARGET OF MONETARY POLICY

November2020

 

As we approach retirement, we are encouraged to take less risk, and cash is typically favoured as the least risky asset class of all, but is it really?

Given the RBA’s recent lowering of the official cash rate to a historic low of 0.1%, the returns on fixed-term deposits have fallen to levels that make it impossible to survive on. Self-funded retirees depending on interest on safe, secure bank deposits often disproportionately bear the impact of Monetary Policy adjustments to the cash rate.

Could you survive on current returns to cash?

The consistent demand for housing along with the susceptibility

of cash to lower returns due to interest rate manipulation

 is a powerful recommendation

for having rental income in any investor’s asset mix. 

 

10. Interest rate rises usually mean fewer people buy their own homes and therefore demand for rental properties rises. All things being equal this should translate into higher rents.

Monetary Policy is the Reserve Bank action designed to influence both the availability and cost of finance in the economy. Interest rates are pushed up to slow the economy and curb inflation, and they are eased to boost spending and activity and therefore, employment. So, as economic circumstances change so will the prevailing cost of credit.

The upside of a rate increase is that your tax deductions increase and more people may delay buying their own home and continue to rent and put upward pressure on rents. Remember, ‘profit is the return to risk’ so you do have to take some risks if you are to build wealth for the future but make it a calculated risk.

In really low-interest-rate environments, retirees with assets dependent on bank earnings are adversely affected. When interest rates (and particularly real interest rates, taking inflation into account) are almost negligible, as they are currently, earning your retirement income from rent, even in part, is a very appealing and sensible alternative.

It is relevant here to examine the role of exogenous factors currently influencing the global and Australian economies.

Globalization means there is no escaping the effects of the COVID19 epidemic, both physically and economically.

The following excerpt from the RBA’s media release illustrates the role of the government in managing the economy to moderate the effects of an exogenous ‘shock’ such as a health pandemic.

The RBA has reduced the official cash rate to a record low in the hope of stimulating consumer spending and investment borrowing. (C, I) and the government is prepared to provide stimulus through fiscal policy (G) to maintain employment. It is classic macroeconomic management.

 

11. Investment in property is socially beneficial. Private sector activity is supported through negative gearing and results in a more efficient allocation of resources and the creation of jobs.

 

12. Risks can be mitigated through insurances

 

There are always trade-offs, and with property as an investment vehicle they are:

  1. It’s a long term strategy – property investment is not a strategy that you should come in and out of on a short term basis. That approach amounts to speculation and relies on investors being able to second guess what is going to happen or implementing a ‘crystal ball’ approach which is very risky. Property investment requires a long term commitment.
  2. It is a relatively illiquid asset. Liquidity refers to the ease at which an asset can be transferred into cash at will. (But this also helps to reduce volatility)
  3. It is an asset that you cannot divest from in part! Property is largely an indivisible asset. You can’t sell half a house (assuming it’s not a strata-titled duplex in which case you might be able to or as you will see later in the course, you have individual shares in a property).
  4. Costs such as land tax (a state-based tax levied on land ownership that applies beyond a threshold value that is different in each state) is another reason to diversify.
  5. Capital gains tax is levied on any profits on exit. (can be minimized through expert advice and timing your exit in a lower marginal tax rate period).
  6. Management of a real estate asset also requires ongoing involvement to a greater degree by the investor than it would in other cases.