Where are Interest rates going?

Reading the business press and thinking of fixing your home or investment loan? You are not alone. Around 50% of new loans are set up as fixed.

There are some great variable and fixed rates available.

5.19% variable is now available.

And 4.89% fixed for 2 years with citibank. This includes a free 60 day rate lock. A historical low for rates.

An experienced broker can explain the difference between fixed vs variable, and show you how you may be able to benefit from our market knowledge.

If you are not sure you have the best loan, we can help you look at your options and may be able to help you get a better rate by comparing all that’s available.

Remember that Mercia finance brokers can assist you with car loans, home loans, Lo-Doc home loans for the self employed, construction loans and any other type of mortgage or loan. Our service is free of charge to you the borrower and we have access to all the major lenders in WA.

A Mercia Mortgage broker can give you independent advice and comparisons between all the major lenders.

All these services are provided by our friendly and professional mortgage brokers at no cost to you – so you have nothing to lose and everything to gain.

If you would like to speak to a broker, call Dan Goodridge on 0414 423 340 or e-mail dg@iinet.net.au .

Double Delight – Renovating for Profit in a Rising Market

Purchasing a property, fixing it up and then selling it for a tidy profit can be a solid business plan. But there are times when renovating seems even more appealing, such as when the market is rising. So what are the pros and cons?

It can strike at any time and it affects people from all walks of life. It’s the renovation bug and it becomes particularly active when the real estate market is buoyant and prices are rising.  Seemingly ordinary people wake up one day and decide they want to buy, renovate and flip a property for massive profit.

In Australia, renovating is a popular pastime and has been around since the seventies. We spend tens of billions of dollars on it every year, normally to make improvements to our own home. However, renovating can also be a good pathway to making money if it is done right. Purchasing a property, fixing it up and then selling it for a tidy profit can be a solid business plan. The reason for this is fairly obvious.

Firstly, the potential gains are substantial if the property you are renovating for sale increases in value both from the renovation and the natural increase of the market. I have witnessed firsthand people walk away with over $100,000 profit after a single renovation.

A rising market is also very forgiving, particularly for novice renovators who are likely to make a few mistakes here and there. Even if costs blow out a little or the renovation takes longer than expected, there is a good chance of still making a profit. But renovating for profit in a rising market is certainly not a fool proof strategy for wealth creation.

Whenever someone plans to buy, renovate and sell a property, timing becomes a particularly important issue. Rising markets don’t rise forever so there is a risk that while a property is being renovated, the market turns and values start to fall. Anyone who was renovating for sale as the GFC hit would have definitely been nervous.

Renovations can take time and the schedule can easily blow out without careful planning. There can be delays in obtaining materials, finding the right trades or having to correct previous mistakes. For many novice renovators, the reality is that a renovation almost always takes longer than expected.

Ideally, you would want your property to be ready for sale at the time the market is at its strongest so you can maximise your profit. But nobody knows how long an upward cycle will last or when it will turnaround.

Perhaps the biggest risk when renovating for profit is that of overcapitalising. There is a danger that you will spend money on the renovation that won’t be recouped after sale. Ideally, a renovator would like to gain $2 in value for every $1 spent but there is a point in every renovation where an extra dollar spent doesn’t generate a return and this is often dependant on the location.

For every property in a given location, there is a ceiling price the market is willing to pay. Spending, say, $20,000 on a new kitchen may raise the value of a property by $40,000 but a $50,000 kitchen may only raise the value of the property by the same amount. Renovators must understand how much they can spend on a property given the area, type of property, the expected sale price, the purchase price and the desired profit margin.

Before deciding to purchase a property to flip, astute investors will start their calculations with a likely final sale price in mind. They will then minus the purchase price, all the costs associated with buying, selling and holding the property, and the likely renovation budget. If there is healthy profit left over then they may consider buying the property.

The difficulty of course is being able to estimate all these figures before committing to the strategy, which is why many people end up overcapitalising on a renovation. In a rising market, people tend to become more complacent with their planning and due diligence which leads them into trouble.

Another less risky option than renovating for sale may be to renovate and hold. This strategy helps investors to increase their rental returns, attract better quality tenants as well as boost the value of their property. Executing this strategy still requires sound decision making but the margins aren’t as fine and the pressure isn’t as great as when renovating to sell.

Western Australia Remains in the Fast Lane

Western Australia has once again come out on top as the country’s best performing state when it comes to economic activity, according to the latest CommSec State of the States report.

The report highlights the widening gap between WA and the eastern and southern states.

“Arguably the size of the gap between Western Australia and Tasmania can’t get any greater,” said Craig James, chief economist at CommSec, who expects even more marked divergence among Australia’s regions in the future.

The quarterly State of the States report measures each state on eight separate economic factors, and averages out performance among each.

Second to WA on the economic leader-board is the NT, whose massive growth is underpinned by a single $34 billion natural gas project. However, WA, whose economy has grown by 13 per cent in  a year, is performing better across a range of measures including population growth, investment, construction activity and retail spending.

In particular, WA is the clear leader when it comes to population growth.

“Not only is the annual growth rate of 3.45 per cent the strongest in the nation, it is also more than 48 per cent above the decade average,” said James.

Home prices increased in all states except in Hobart, with the strongest growth being in Darwin, up by 7.3% and in Perth, up by 5.8%.

Acquisitions: Working With a Buyer’s Agent – Part 3

Last issue we looked at what’s involved in sourcing suitable investment properties through both on-market and off-market channels. In this final issue we’ll explain what happens after an offer is placed on a property.

As previously discussed, once the investor is interested in purchasing a particular property, the buyer’s agent will meet with the investor to discuss a ceiling price for the property and devise an optimum negotiation strategy for acquiring the property at the best possible price and with the most favourable terms and conditions.

Critically, when the buyer’s agent submits an offer on behalf of the investor, the offer may include a special clause that essentially provides a set period of time in which to conduct building, termite inspections and other research.

These additional clauses protect the interests of the investor and are a far safer option than relying on the regular clauses provided by selling agents.

As soon as an offer is accepted, the buyer’s agent will put together a comprehensive research report on the property and organise inspections, giving the investor all the information needed to make an informed decision.

Once the investor is satisfied with the outcome of the inspections and the research, the purchase can proceed to settlement. At this point, the investor would typically engage the services of a professional property manager to handle all the leasing and management requirements for the property.

Finance: What’s an Assessment Rate and Why Could it Affect Your Ability to Borrow?

Lenders don’t use the current interest rate when assessing a borrower’s capacity to make payments. Instead, they use what is called an assessment rate, which can impact on a borrower’s ability to get a loan and the amount that can be borrowed.

Before deciding to lend money to someone, say, for the purchase of investment property, the lender will carefully evaluate the borrower’s ability to make the necessary interest payments. The size of these payments, as we all know, is determined by the loan size and its particular interest rate.

But lenders don’t use the current interest rate when assessing a borrower’s capacity to make payments. Instead, they use what is called an assessment rate which is typically between 1 per cent and 2.5 per cent higher than the interest rate on the loan.

Why do lenders use this inflated interest rate? They do it to allow for any future movements in the interest rate or, more specifically, to ensure you can still afford the loan if interest rates increase.

Each lender will set their own assessment rate so the rates will vary from lender to lender. Plus, one lender may have different assessment rates for each of their loan products. Sometimes, for instance, a fixed rate loan will have a lower assessment rate than a variable loan because the interest is locked in for a set period of time. An assessment rate can also vary depending on whether it is for a new or existing loan.

Clearly, assessment rates can impact on a borrower’s ability to get a loan and the amount that can be borrowed. It’s worth noticing, however, that lenders have a whole series of internal lending policies that will determine whether a loan is approved or not, or how much can be borrowed. For instance, it may hinge on what percentage of rental income the lender will accept towards servicing, or policies regarding credit cards.

Assessment rates, which aren’t typically publicised, are one of the reasons why online calculators can be extremely misleading. If users input into an online calculator the current interest rate when assessing their borrowing capacity, they may later be disappointed when their capacity to borrow is much less than expected. It’s worth remembering that online calculators are a sales tool and should only be used to determine a ballpark figure.

Since different lenders have different assessment rates and will offer different amounts, it clearly pays for borrowers to contact an experienced, qualified finance broker who can guide them towards the lender that is most suited to their needs and situation.

Property Management: Mind the Gap

Every investor will inevitably find themselves in a situation where their tenant is vacating for one reason or another. In a perfect world, you would have one tenant move out and another move in on the same day, thereby minimising the “changeover time” when no rent is paid. But this is rarely possible and for good reason.

It’s far more natural for there to be a few days, before a new tenant can occupy the property. For starters, it’s extremely rare that the new tenant’s timetable will be perfectly aligned with the needs of the landlord, given that there is often a notice period that needs to be served with the previous landlord. Sometimes it may just be a slow market or the need to undertake work on the property that extends the changeover time.

While every landlord wants to minimise the changeover time between tenants, there are important processes that need to be followed, which take time. So, what does a property manager do when a tenant vacates? There are many things.

One of the main goals at the end of a tenancy is to make sure the property is adequately cleaned by the vacating tenant and prepared in a suitable condition for the new tenant. This involves conducting the final inspection. The final inspection will enable the property manager to evaluate the condition of the property according to the Property Condition Report (PCR) created at the start of the tenancy.

The property manager will look out for any excessive wear and tear and any areas inside or outside the property that require further cleaning or tidying. The property manager will also make sure that nothing has been wrongly removed or added to property, the correct keys are returned and that items such as appliances are in good working order.

In some cases, the outgoing tenant may have to go back to property and address the issues that were uncovered during the final inspection. After this has occurred, the property will then need a reinspection by the property manager.

When everything has been completed to the satisfaction of the property manager, the bond can be finalised and the appropriate amount returned to the tenant. At this point, an updated PCR can be created for the new tenancy.

While the changeover time allows for key processes to take place, it also provides an opportunity for the landlord to conduct any maintenance or repairs that may be necessary or desired. Some jobs are better done when the property is vacant, especially things like flooring and painting.

Although vacancy periods cost landlords money in terms of lost rent, it’s easy to justify a brief changeover time when you consider the important processes that need to be followed. These processes are ultimately in the interest of the landlord and the long term success of the investment.

Property Tax Tips: Repair or Improvement? Getting it Wrong Could Cost You

It’s one of the most common traps property investors fall into when it comes to tax time: incorrectly claiming property improvements as repairs rather than as a capital cost. So when conducting work on a rental property, how do you know what you can claim as a tax deduction and what you can’t?

Expenses that relate to repairs and maintenance of a rental property will usually be deductible when they are incurred, but any work that is considered an improvement, such as installing a new kitchen, will not be deductible and instead deemed to be a capital item that may be subject to depreciation.

There are a few important points to consider:

• A repair is the replacement or renewal of a worn out or dilapidated part of something, but not the entirety. For example, if some part of the carpet needs to be replaced that would be a repair, but if you replaced the entire carpet throughout the house, that would be an improvement and not immediately deductible (but may be depreciable).
• An item of expenditure is considered to be a repair when it brings something back to its operational efficiency, but does not significantly improve it. For example, a few light fittings may need replacing. Normally this would be considered a repair, but if you put in expensive chandeliers, it would be considered an improvement and not a repair.
• Initial repairs after you buy a property will often be considered capital improvements. The courts consider that these repairs would have been factored into the purchase price and therefore are considered capital in nature.

Generally it is wise not to conduct any repair work for some time after you purchase an investment property, unless it is of course necessary for safety issues. There is no fixed time specified by the law, but if you were to claim a large amount of repairs in your tax return the first year you purchased a property, it could certainly arouse the interest of the Australian Taxation Office.

The Government has announced that it will introduce a $2,000 per-person cap on tax deduction claims for work-related self-education expenses. The cap is proposed to apply from 1 July 2014.

In making the announcement, Treasurer Swan said that without a cap, “it’s possible to make large claims for expenses such as first class airfares, 5-star accommodation and expensive courses”. However, the Treasurer said the Government “will consult with employees and employers to better target this concession while still supporting essential training”.

The ATO has recently announced the following new data-matching programs:

• Employers and WorkCover – the ATO will request and collect names and addresses of employers from state and territory WorkCover sources for the 2011 to 2013 financial years. It says the data will be matched to identify employers who might not be complying with their registration, lodgment and payment obligations under tax law.
• Student and temporary work visa holders – the ATO will collect details of student and temporary work visa holders between the period 1 January 2012 to 30 June 2014 from the Department of Immigration and Citizenship for the 2012, 2013 and 2014 income years. The information will be matched to identify non-compliance with tax obligations.
• Online sellers – the ATO will collect information of sellers who have made sales of $20,000 or more in the 2010–2011 income year through various online selling websites. It says records will be matched to identify non-compliance with lodgment, payment and correct reporting obligations under tax law, including undeclared income and goods and services tax (GST) obligations.

The Australian Securities and Investments Commission (ASIC) has warned people to be aware of property spruikers who might be encouraging them to set up a self managed superannuation fund (SMSF) in order to gear into real property.

The warning comes with the release of ASIC’s review of financial advice provided in the SMSF sector. According to ASIC, the majority of advice reviewed was adequate. However, it noted a number of areas requiring improvement, including the need to better inform investors of the risks associated with investments.

The Government has recently made a number of important announcements affecting superannuation. A key proposal announced is that the Government will change the superannuation law to cap tax-free earnings at $100,000. That is, the tax exemption for earnings on superannuation fund assets supporting income streams will be capped at $100,000 per annum per person from 1 July 2014. A tax rate of 15% will apply to fund earnings above $100,000. According to the Government, the measure would affect around 16,000 individuals who have around $2 million in their superannuation funds and an estimated rate of return of 5%.

However, the Government confirmed that withdrawals will continue to remain tax-free for those aged 60 years and over. Presumably, the proposals will be subject to public consultation before implementation.

A taxpayer company has been unsuccessful before the Administrative Appeals Tribunal (AAT) in a claim to secure the capital gains tax (CGT) concessions for small businesses.

In this case, the AAT affirmed the Commissioner’s decision that the taxpayer did not satisfy the “maximum net asset value” test for the purposes of qualifying for the concessions. The AAT found that the individual who controlled the company could not exclude from the test his interest in a Queensland property, which he claimed was used for “personal use and enjoyment”.

The AAT has recently dismissed an appeal by a florist against the Tax Commissioner’s decision to issue income tax and GST assessments following an ATO audit of her florist business.

The taxpayer had reported that the cost of goods sold in her business represented 83% of her reported business income. The ATO had selected the taxpayer for audit because this figure was outside what it considered to be the industry benchmark range of between 44% and 54%.

In this case, the taxpayer was unable, due to a lack of evidence, to prove to the AAT that the assessments were excessive.

The ATO has announced important fringe benefits tax (FBT) rates and thresholds for the 2013–2014 FBT year that commenced on 1 April 2013. Some of the key rates and thresholds include the following:

• The benchmark interest rate is 6.45% per annum. (It was 7.40% per annum for the 2012–2013 FBT year.)
• The record-keeping exemption threshold is $7,779. (It was $7,642 for the 2012–2013 FBT year.)

The ATO has released a Ruling setting out the minimum information requirements for a tax invoice under the GST law. The Ruling also explains the circumstances in which it is not necessary for the supplier to give a tax invoice, and the circumstances in which an input tax credit is attributable to a tax period without the recipient being required to hold a tax invoice for a creditable acquisition.

However, the Ruling states that the recipient must have records to explain its entitlement to an input tax credit for a creditable acquisition.

Where are Interest rates going?
Reading the business press and thinking of fixing your home or investment loan?
There are some great variable and fixed rates available.

5.35% variable with the Commonwealth Bank

And 4.89% fixed for 2 years with citibank. This includes a free 60 rate lock.

If you are not sure if you have the best loan, we can help you look at your options and may be able to help you get a better rate.
________________________________________

Remember that Mercia finance brokers can assist you with car loans, home loans, Lo-Doc home loans for the self employed, construction loans and any other type of mortgage or loan. Our service is free of charge to you the borrower and we have access to all the major lenders in WA.

A Mercia Mortgage broker can give you independent advice and comparisons between all the major lenders.
All these services are provided by our friendly and professional mortgage brokers at no cost to you – so you have nothing to lose and everything to gain.
If you would like to speak to a broker, call Dan Goodridge on 0414 423 340 or e-mail dg@iinet.net.au

Thinking of Investing in Property Using a SMSF? Be Careful who you Trust

It seems everywhere you look at the moment there are people and businesses proclaiming the benefits of investing in property using a Self Managed Super Fund (SMSF). SMSFs have definitely grown in popularity with property investors, especially since regulations changed in late 2007 allowing funds to borrow money to invest.

This change essentially created a massive pool of money that many property developers and marketers want a piece of. With many companies claiming they can help investors set up a SMSF and manage the entire purchase process, it’s important that investors stay vigilant and put their trust in the right people.

The main trap is assuming that a company promoting the benefits of investing in property via a SMSF is qualified to offer property investment advice, which isn’t the case. While SMSFs are a financial product and heavily regulated, property investment advice isn’t. This means that just about anyone can advise you on where and what to buy without worrying about the consequences.

The risks that come with obtaining inadequate advice are significant, especially when the advice involves a SMSF. As with any form of property investment, there are obvious risks, such as paying too much or acquiring a poor performing asset. But there are other risks such as choosing a type of property that isn’t right for your long term retirement plan. Given the strict nature of SMSFs, it becomes even more important to make the right investment decision as it may be very difficult to correct the problem later on.

Who should investors rely on to guide them through the process of investing in property via a SMSF? Many investors are confused.

A problem in the SMSF space is the ‘promoters’ who take advantage of ill-informed investors. With the natural complexity that comes with investing via a SMSF, it’s easy to see how investors could be vulnerable to unscrupulous operators who have a financial interest in leading investors to a particular type of property.

Property promoters can be very persuasive and it’s clear why they would target people with a SMSF or those looking to set one up. The problem lies in the fact that these promoters will often have either direct or indirect links to a developer who is looking to sell property new or off the plan. On the surface, this property may seem to stack up as a good investment but the reality is that it often turns out to be dud.

In their haste to get a slice of the SMSF pie, some property promoters haven’t fully understood the many regulations governing SMSF investment, especially when borrowing is involved. This can lead to all sorts of problems for the investor. The trustee of a SMSF has various obligations under the law and if the fund is structured or managed incorrectly, problems may arise that can’t corrected without unwinding the fund and selling the asset. There can even be penalties for the trustee.

Another major risk for investors with a SMSF is that their “advisor” hasn’t bothered to understand the investor’s broader financial circumstances and long term goals, making it impossible to determine whether or not the investment decision makes sense.

While property is a long term asset, this isn’t an excuse to be careless with investment decisions, hoping that everything will work out over time. The long term nature of property investment means there is a significant need to make the right decisions as they will likely impact directly on your retirement years when your financial position is more restricted. Property investing with a SMSF is not a get-rich-quick scheme. It takes careful planning, dedication and requires a detailed understanding of the asset in question.

Property investing with or without a SMSF is a significant step and it’s important to get the right advice from the right people. Investors should seek appropriate specialist financial and legal advice to set up a SMSF, then a property investment expert to help identify and secure the right type of property. A finance broker should be employed to assist with obtaining finance and ideally a property manager would take the responsibility for the management of the property.

Investors should also be aware that investing via a SMSF can be quite complex and take longer than it would buying property outside of a fund. So it’s important to get reliable, independent advice before making an offer on a property. And this advice must be consistent with your plan for retirement. Your property advisor should understand your financial obligations and what you want to achieve in retirement before discussing what types of investments can provide for that goal.

Confidence in WA is Rising Along with the Median Price

People’s fears about the economy are fading quickly and being replaced with an increased sense of optimism, as the property market continues to rise.

Consumer confidence has bounced back in Western Australia, according to the latest Curtin Business School-Chamber of Commerce and Industry (CCI) survey.

The survey confirms what many people already suspected, that people’s fears about the economy are fading quickly and being replaced with an increased sense of optimism. In fact, Western Australians are now more optimistic than they have been for nearly two years.

Survey results show that the proportion of households expecting economic conditions to improve in the next three months had effectively doubled since the last survey. Furthermore, the number of households that think economic conditions will get worse has plunged to a record low of 8%.

CCI chief economist John Nicolaou said households were feeling more confident about their finances after almost two years of consolidation through increased savings and paying down debt.

This is a very good sign for the housing market, which is already seing upward movement. According to the Real Estate Institute of Western Australia (REIWA), the median price in Perth hit $500,000 in the December quarter, higher than originally reported and 6.4% higher than the previous year.

Based on preliminary figures for the first 3 months of 2013, REIWA expect the median price will hit at least $510,000 in the March quarter, which was the previous record high from early in 2010.

The rental market also continues to see growth. In the three months to February, REIWA figures show metropolitan rents increased by 4.4%, lifting the overall median from $450 to $470 per week, which is $60 more than the same time last year.

Property Acquisitions: Working with a Buyer’s Agent – Part 2

Last month we discussed the first step in working with a buyer’s agent, which focused on goal setting and the gathering of requirements. With a personalised plan in place, the next step concerns the property search.

This stage involves the buyer’s agent sourcing suitable investment properties through both on-market and off-market channels, focusing on the areas recommended in the first stage. A good buyer’s agent has a detailed understanding of what’s happening in different areas that could potentially impact on property values and will exploit this knowledge for the benefit of the investor.

The buyer’s agent will scan the market for suitable properties, making initial enquiries with real estate agents and visiting home opens, in order to find properties that both meet the criteria and are competitively priced. Buyer’s agents are property experts who keep up to date with price movements and so they can recognise when a property is competitively priced.

Most buyer’s agents will have established relationships with sales agents who will inform them about properties before they are launched to the market.

Depending on the type of property being sourced, a buyer’s agent may also attempt to identify property that may be purchased off market (i.e. not listed with a real estate agent). These off-market properties are purchased directly from vendors and can often be acquired at an excellent price as the seller isn’t paying a sales commission.

After some preliminary research, the buyer’s agent will form a short-list of suitable properties and present the investor with a key summary about each property. This summary will include an appraisal of the property using comparable sales data to determine its market value. The buyer’s agent may also provide information uncovered during initial investigations such as why the seller has decided to sell and the history of the property.

The investor will then review the information and select which of the properties are of interest. Some investors may choose to inspect the property before an offer is placed, others will leave everything to the buyer’s agent. The investor isn’t obligated to proceed and can instruct the buyer’s agent to continue with the search should no property be of interest.

Once there is a property of interest, the buyer’s agent will meet with the investor to discuss a ceiling price for the property and devise an optimum negotiation strategy that will ensure the property is acquired at the best possible price. Representing the best interests of the investor, the buyer’s agent will also look to secure the most favourable terms and conditions.

Next month we’ll explain what happens when an offer is placed on a property.

Does Splitting a Loan Provide the Best of Both Worlds?

One of the major decisions a borrower will have to make is whether to go for a variable rate loan or a loan with a fixed interest rate. But why choose one when you can have both?

There are many different loans available to property buyers, each with different features and advantages, which can make choosing a loan a difficult process. One of the major decisions a borrower will have to make is whether to go for a variable rate loan or a loan with a fixed interest rate. But why choose one when you can have both?

There are many borrowers who are opting to split their loans into two accounts, one on a variable rate and one on a fixed rate. Loans can be split in many ways dependent on the needs of the borrower, such as 60% variable and 40% fixed, but 50/50 splits are most common.

The reason for splitting a loan is to provide the security of a fixed rate home loan with the added flexibility of a variable rate loan. It’s a form of hedging that may be useful in times of economic uncertainty, particularly when interest rates are rising. Someone with a split loan will be less impacted by rate rises as it will only affect a portion of their loan. However, by maintaining a portion of the loan with a variable rate means the borrower still benefits from rate reductions.

Another benefit of a split loan over, say, a 100% fixed loan, is that the borrower still has the flexibility of a variable loan, such as the ability to make additional repayments and redraw (on the variable part). These features aren’t typically available on a fixed loan but can be very useful as the circumstances of the borrower change.

So what are the disadvantages of a split loan? The nature of a split loan means that the borrower, though protected partly from rate increases, doesn’t benefit fully from a rate reduction. This can prove quite costly if rates drop significantly during the term of the fixed portion of the loan.

Also, splitting a loan may incur twice the fees for setting up, managing and later discharging the loan, which borrowers should consider. Clearly, there are a few things to consider when deciding whether to split or not.

As everyone’s situation is different and loans have many subtle differences, the advice of a professional, qualified finance broker should always be sought before making any borrowing decisions.

Property Management: Drugs and Tenants are a Worrying Mix

There have been a number of cases across the country involving drugs or drug labs being found in rental properties, which might have caused investors some concern.

Late last year in Adelaide, a tenant got in trouble with police after the photos used in a real estate ad showed cannabis being grown in two pot plants in the backyard of the house. One would have to assume that the property manager failed to either notice or identify the plants before placing the ad.

There was also a particularly worrying case in Melbourne more recently where the real estate agents themselves were charged with a number of drug-related offences after 25 rental properties they managed were allegedly used to grow hydroponic marijuana.

If you think it should be easy to spot a ‘drug house’, think again. In some cases the properties containing drug labs were actually found to be excellently maintained and even the gardens were in good shape.

One of the questions investors may be asking is regarding insurance. Are you covered by landlord’s insurance if your tenant is found to be illegally producing drugs in your property? It’s a bit of a grey area and something a policy holder should discuss directly with their provider.

But the issue isn’t necessarily to do with “damage” to a property. The clean-up costs involved in dismantling a drug lab can be significant even when there is technically no damage done to the property. Some polices may cover these costs, others won’t.

One thing is certain, that investors should take care when choosing a property management company. In particular, they should make sure the company has a thorough, rigid process for vetting prospective tenants and a policy of conducting regular inspections.

When it comes to the property management companies promoting ridiculously low fees, you have to question how many shortcuts they are taking when it comes to the tenant selection process or the management of your property.

Suburb Snapshot: Belmont

Belmont is located just 7 kilometres east of Perth’s central business district on the southern bank of the Swan River and part of the City of Belmont. It neighbours the suburb of Ascot to the north, Redcliffe to the east, Cloverdale to the south, and Rivervale to the west.

While some associate the suburb with its considerable industrial and commercial district, mainly concentrated in the western part of the suburb, Belmont is also a popular place to live especially in the eastern and northern parts of the suburb.

The suburb’s north-western boundary is Great Eastern Highway, a major road that passes Perth Airport and is home to various motels and other accommodation.

Belmont has two public schools, Belmont Primary School and Belmont City College (formerly Belmont Senior High School), as well as a number of parks and recreational areas, including the popular Centenary Park and Signal Hill Bushland.

Residents of Belmont have a variety of retail options including Belmont Forum, a major shopping complex located in neighbouring Cloverdale, which also includes a cinema and entertainment facilities.

The median house price in Belmont is around $480k but this figure masks the wide range of housing options and price points available in the suburb. There are villas for sale from $350k to 450K, older houses on big blocks from $450k to $550k, townhouses in the mid to high $500k’s, modern homes from $600k to $900k and development sites anywhere from $550k to $900k depending on size and location.

The suburb has a relatively high proportion of renters, with 44% of properties currently being rented, and the median rent is an affordable $300 per week.

In terms of capital growth, Belmont has performed excellently both over the short term and the long term, consistently outperforming the wider Perth market. The growth rate over the past 12 months was an impressive 10.2%, which is in line with the 10 year average of 10.7% per annum.

Belmont has been transforming rapidly since the City of Belmont’s Local Planning Scheme No 15 was gazetted on 1 December 2011. The Scheme and associated Housing Strategy gave parts of the suburb higher zoning to encourage increased housing density and provide opportunities for developers. In fact, the Scheme more than doubles the density target set at State level in Directions 2031 and Beyond.

Also helping to transform Belmont is a major infrastructure project to upgrade Great Eastern Highway between Kooyong Road and Tonkin Highway, which covers the entire north-west border of Belmont. The $30 million project, jointly funded by the State and Federal Governments, will see a 4.2 km section of the highway upgraded to six lanes with a central median, on-road cycling facilities and a continuous pedestrian path. It will also involve upgrades to all major intersections and the introduction of bus priority lanes.

The project, which commenced in late June 2011 and has just been completed, should help to improve safety and connectivity for motorists, pedestrians and cyclists, reduce travel times, and increase the attractiveness of public transport services. It will also enhance the look of the area with new facilities and modern urban design.

Belmont will also benefit, at least in part, from Gateway WA, the largest infrastructure project ever undertaken by Main Roads WA. The $1 billion national priority project aims to improve the safety, attractiveness and efficiency of the main transport areas around the airport and the freight and industrial hubs of Kewdale and Forrestfield. The Gateway WA project incorporates road and bridge improvements, facilities and connections for pedestrians and cyclists, noise walls, landscaping and more.

For many investors, Belmont has been a hotspot for quite a while. With its strategic location between the city and the airport, a forward thinking council and various major projects enhancing the area, it should remain a strong investment option for some time more.

Source: REIWA.com.au, March 2013

Interest rates on the rise?

Reading the business press and thinking of fixing your home or investment loan?

Speak to a Mercia mortgage broker about your options. We have access to some great fixed rates available for those who think rates are on the rise.

Below is an example of a current rate from a major Bank. This loan (with commonwealth Bank) is available with no application fees. That means that now you may be able to re-finance your mortgage to a lower rate, fixed or variable, with no fees or charges.

Fixed Rate Mortgage Loan

These rates are available for investors, owner occupiers, principal and interest and interest only loans. Rates are currently as low as 4.99% fixed for 2 years.

If you have any questions about Family Equity, Reverse Mortgages or any other type of loan including residential loans, investment loans or first home buyers loans call Dan Goodridge on 04144 233 40. Our service is free of charge to you the borrower and we have access to all the major lenders in WA.

All these services are provided by our friendly and professional mortgage brokers at no cost to you – so you have nothing to lose and everything to gain.

If you would like to speak to a broker, call Dan Goodridge on 0414 423 340 or e-mail dg@iinet.net.au

The Government has issued for comment draft legislation proposing to implement its 2012 Budget announcement that it will remove the capital gains tax (CGT) discount for non-resident individuals on taxable Australian property, such as residential and commercial real estate and mining assets.

Under the current law, individual taxpayers are generally entitled to a 50% discount on capital gains made from assets they have held for at least 12 months, regardless of the individual’s residency status. The proposed changes will introduce new residency requirements.

Under the changes, non-residents will still be entitled to a discount on capital gains that accrued prior to 9 May 2012 (ie, the day after the Government’s announcement), provided they obtain a market valuation of the asset as at 8 May 2012.

Note that, if implemented, the changes will apply to affected individuals irrespective of whether the gain resulted from an asset owned by the individual or was a gain from an asset held by a trust and attributed to the individual.

In summary, the effect of the measure will be to:

• retain the full CGT discount for discount capital gains of foreign resident individuals to the extent that the increase in value of the CGT asset occurred prior to 9 May 2012;
• remove the CGT discount for discount capital gains of foreign and temporary resident individuals that accrued after 8 May 2012; and
• apportion the CGT discount for discount capital gains where an individual has been an Australian resident and a foreign or temporary resident during the period after 8 May 2012. The discount percentage will be apportioned to ensure the full 50% discount is applied to periods where the individual was an Australian resident.

The Government has released draft regulations that propose to give effect to an earlier announcement made in October 2012 that it will provide certainty to the beneficiaries of superannuation death benefits. The changes will allow the tax exemption for earnings on assets supporting superannuation income streams to continue following the death of a fund member who was in the pension phase until the deceased member’s benefits have been paid out of the fund. If implemented, the changes will apply from 1 July 2012.

The proposed changes appear to be a response to industry concern with the Tax Commissioner’s draft ruling on superannuation income streams issued in a 2011. In that draft ruling, the Commissioner took the position that a superannuation income stream ceases as soon as the member in receipt of the income stream dies, unless a dependent beneficiary of the deceased is automatically entitled to receive an income stream.

According to the Commissioner’s preliminary view, tax would generally apply to a fund’s investment earnings, including realised capital gains, following the death of a pension member. However, the proposed new regulations will ensure that this is not the case.

In a recent decision, the Administrative Appeals Tribunal (AAT) decided that a taxpayer’s interest in a business was disposed of when a “heads of agreement was executed”, and not when the formal contract of sale was executed.

An agent had testified that it was long-standing practice in the industry for an intending purchaser and vendor to enter into an “in-confidence” period of exclusivity during which the intending purchaser would use professional advisers to carry out due diligence.

Despite evidence suggesting that the industry did not regard the heads of agreement as a binding contract, the AAT was of the view that the parties to the heads of agreement had agreed to the sale and purchase of the business in question. As a result, as it was found that it was the date of the heads of agreement that was the applicable date of the transaction for CGT purposes.

As a result, the taxpayer was not entitled to access the CGT small business concessions because he did not satisfy the relevant test for the concessions just before that date.

The Government has announced the “cents per kilometre” rates for calculating tax deductions for car expenses for the 2012–2013 income year. Note that they are unchanged from 2011–2012 and are as follows:

• Small car (non-rotary engine up to 1600cc, or rotary engine up to 800cc): 63c/km.
• Medium car (non-rotary engine 1601–2600cc, or rotary engine 801–1300cc): 74c/km.
• Large car (non-rotary engine 2601cc and above, or rotary engine 1300cc and above): 75c/km.

With the changes to the living-away-from-home rules (effective from 1 October 2012) affecting employees who are required by their employers to live away from home for work, greater care needs to be taken in assessing the fringe benefits tax (FBT) implications of living-away-from-home allowances (LAFHAs). With a narrower scope for eligibility for concessional treatment and increased substantiation requirements, the level of risk is greater.

The Commissioner has recently determined the amounts that he considers reasonable for food and drink expenses incurred by employees receiving a LAFHA fringe benefit for the FBT year commencing on 1 April 2013. Broadly, if an employee’s food or drink expenses exceed the amount the Commissioner considers reasonable, the employee will have to substantiate all the expenses incurred, or the employer will be liable to FBT on the amount of LAFHA paid to the employee that is in excess of the reasonable amount.

In response to a number of high profile cases lost by the Tax Commissioner, the Government has introduced legislation into Parliament that proposes to ensure the effective operation of the income tax general anti-avoidance law. In those cases, the taxpayers successfully argued that the income tax general anti-avoidance law did not apply as tax was a legitimate consideration in commercial decision-making, and where the tax cost of a transaction was considerable the taxpayer would have done nothing. The changes, once enacted, will apply retrospectively from 16 November 2012.

The changes aim, among other things, to rectify what the Government considers to be perceived weaknesses in the “tax benefit” concept, which have reduced the effectiveness of the law in countering tax avoidance arrangements. Broadly, the amended law will continue to apply where a taxpayer enters into a scheme with a sole or dominant purpose of obtaining a tax benefit. However, in considering alternative postulates (ie what the taxpayers might otherwise have done), tax costs will be disregarded under the amended law.

Consequently, it will be necessary to compare the scheme entered into with other ways of achieving the same commercial outcome, regardless of the tax cost. Eliminating the defence that the taxpayer would otherwise have done nothing will broaden the potential application of the rules significantly.

Mercia’s Mortgage Brokers

With house prices moving it’s even tougher for first home buyers to enter the market. If you want to assist a family member to buy their first home there are a number of thing you can do:

• Provide a gift or loan
• Offer equity in your own home as security
• Use Commonwealth Bank or other banks Family Equity products.

Family Equity is a home buying solution unlike any other, designed to help first home buyers enter the property market. It’s a range of financing options that can help customers secure a home loan, repay a home loan, or a combination of both. The main customer benefit is the ability to enter the property market by relying on guarantors for security and/or servicing support.

A family member has always been able to assist with providing equity or funds for a deposit. What’s good about family equity is it also allows servicing support. This means that if an applicant’s income is not sufficient to service the loan required, a family member (or anyone for that matter) can assist by paying some of the repayments on an ongoing basis. The person providing the equity or servicing support is not required to be on the title of the property being financed. Remember there is a grant and stamp duty incentives from the State Government for first home buyers too.

If you have any questions about Family Equity, Reverse Mortgages or any other type of loan, call Dan Goodridge on 04144 233 40. Our service is free of charge to you the borrower and we have access to all the major lenders in WA.

If you would like to speak to a broker, call Dan Goodridge on 0414 423 340 or e-mail dg@iinet.net.au .

8 Tips for Picking a Winner in a Rising Market

The prospect of capital growth in the Perth property market certainly looks very good at the moment, which is why many investors are eagerly entering the market. But with the lure of potential gains, there is an added risk of complacency.

Investors need to be vigilant with their investment decisions, particularly when it comes to choosing where in Perth to invest, as some areas will inevitably perform better than others.

Pick the right areas and you could accelerate your path to financial freedom; make the wrong decisions however and you may find the market runs away from you. So, how do you pick the areas that will lead the way in a rising market? Here are 8 valuable tips:

#1 – Ask this powerful question
While property investing may at times seem complicated, asking yourself this one simple question will go a long way to helping you pick a winner. When evaluating an area, ask yourself what will cause demand for this area to increase relative to supply. If there is a clear answer, you are on your way to uncovering a potential hotspot.

#2 – Look for signs of gentrification
Look for areas with signs of positive change, such as people spending money on renovating and extending their homes, or the emergence of fashionable new shops. These can indicate that the demographics of an area are changing, which could signal imminent growth.

#3 – Avoid the population growth trap
While Perth’s strong population growth is one of the main drivers for the rising real estate market, don’t fall into the trap of thinking areas with high population growth automatically make good investments. In reality, most areas with high population growth are on the edges of the metropolitan area and have an abundance of free land, which will constrain capital appreciation.

#4 – Infrastructure equals growth
Infrastructure is always a major driver for price growth because it increases the attractiveness and amenities of particular areas. The benefits of infrastructure, however, are generally only recognised after the new infrastructure is in place, which means buying before this happens can generate excellent returns.

#5 – The location
Location should always be an important factor when choosing where to invest, and it’s wise to look for areas with more than one location advantage. Consider the area’s proximity to the city, major employment areas, the water, and key amenities. Is the area within a sought-after school zone? Is it adjacent to a prime suburb and likely to benefit from the ripple effect? Does the area have good transport options?

#6 – The land
It’s important to choose a property with a high proportion of value in the land, which is the part of the property that will appreciate. Properties with the majority of their value tied up in the building are destined to underperform as the building depreciates.

#7 – Follow the money
One way to locate an emerging hotspot is to follow Government spending. When Governments are spending money beautifying main streets and installing new infrastructure it can give an area that additional boost. Similarly, spending by the private sector on things like shopping centre extensions can also cause demand for an area to increase.

#8 – Zoning changes
Finding areas that are being rezoned can prove extremely profitable for investors. When areas are zoned for higher density it creates opportunities to develop property and subsequently increases the value of the land.

Conclusion
Buying an investment property is a big step and not one to be taken lightly. As the market heats up in 2013, it’s important that you avoid the trap of thinking that “any property will do”. By understanding the various factors that drive property values, and getting professional advice, you can make the most of the rising market and set yourself up for the future.

Rental Returns on the Increase
Low interest rates, strong demand by tenants and higher rents mean that rental yields are now more attractive to investors. The median rent for houses has risen by $10 to $470 per week in the 3 months to January, according to the latest rental data from the Real Estate Institute of Western Australia. Median rents for units, apartments, villas and townhouses however were unchanged at $420 per week, meaning Perth’s overall median rent remains stable at $450 per week. The data also shows that there was a 13 per cent climb in the number of new leases from the December quarter, though the vacancy rate remains stable at around 1.9 per cent.  REIWA President David Airey says the large number of people leaving the rental system to buy their first home might be a contributing factor. “It may also be due to the return of some investors who are adding stock to the rental supply,” Mr Airey said. Mr Airey said that low interest rates and the strong demand by tenants meant that rental yields were now more attractive to investors who had been absent from the market in recent years.

Working with a Buyers Agent – Part 1
Here’s a step by step look at what’s involved when you employ the services of a professional buyer’s agent for the purchase of an investment property.

Most people would be familiar with the fundamental role of a buyer’s agent – to help a buyer find, research and acquire a property – but few know the specific steps involved in the process.

In this series, you’ll get a step by step look at what’s involved when you employ the services of a professional buyer’s agent for the purchase of an investment property.

Once you have appointed a buyer’s agent to work on your behalf, there is an important first step which involves discussing and establishing your requirements. This must happen before any property research is undertaken.

For a buyer’s agent to find you the right property, he or she needs to fully understand a number of important things including your current financial position, preferences and plans for the future.

A good buyer’s agent will ask the right questions to help flesh out the main reasons for investing and what you are looking to achieve with the purchase. This is important as any purchase must fit into your long term plan.

Also, he or she will require information regarding your financial situation, other properties or major assets you currently own, how much you are willing to invest and what types of properties you are looking to purchase.

You may have a clear idea of what type of property you want, or preferred locations, however many investors leave this to the suggestions of the buyer’s agent.

The decision of which type of property to search for is influenced by a number of factors, including your budget, goals, risk tolerance and the degree of involvement you want with the property. For instance, some types of property have better prospects for growth but they may also have higher holding costs. Similarly, some properties may offer the potential to add value quickly through renovations and development, while others are more set and forget.

At this initial stage of information gathering, the buyer’s agent may bring in the expertise of a finance broker who will discuss your preferences for finance and offer advice on which structure will suit your plans moving forward.

The success of an investment purchase is not just in the research but also the planning, which is why this first stage is so critical. Only with this direction and foundation can you realistically expect to meet your investment goals within the time-frame you desire.

In the next article we will look at what happens during the property search.

Please Mum and Dad, Can I Borrow Some Equity
There is a loan feature that allows a buyer’s family member to guarantee a portion of the loan, reducing the deposit needed or even eliminating the need for a deposit entirely.

For first time home buyers and investors, one of the biggest obstacles to buying a property is saving for a deposit.

There is however a way for buyers to get into their first property without a deposit by using what is called a family equity loan. In fact, it’s not technically a type of loan but rather a feature that can be added to most regular home loans.

This feature allows the buyer’s family member to guarantee a portion of the loan using existing property as security, reducing the deposit needed or even eliminating the need for a deposit entirely. The guarantor can be a parent, parent-in-law, step-parent or in some case even a grandparent or sibling.

The guarantor can determine what portion of the loan he or she will secure, but it’s normally in the realm of 20 per cent. The guarantor doesn’t need to actually provide the buyer with any cash or make any repayments on the loan.

It’s easy to see how this loan feature can help someone buy a home or invest in residential property sooner, because the buyer can effectively borrow the entire purchase price and costs. Plus, with the added security being provided, the lender may not require Lenders Mortgage Insurance (LMI), which can be costly for a borrower.

Some borrowers have used this feature not just to make a purchase but also to maximise the amount they can borrow and purchase a more expensive property.

Despite the lender having the extra security, the borrower will still need to meet the lender’s borrowing criteria, which may include having stable employment, a clear credit history, and an ability to service the debt.

In rare cases where the borrower defaults on the loan and the newly purchased property gets repossessed, there is a risk to the guarantor. If the sale of the property doesn’t generate enough money to repay the loan, the lender could demand the guarantor pay the shortfall up to the amount that was guaranteed. The good news is that once the borrower has built up enough equity in the property, the guarantor can be removed from the loan.

Garden Maintenance can be a Thorny Issue
Garden maintenance can often lead to issues between a landlord and tenant. So, what exactly is a tenant’s responsibility when it comes to maintaining the garden, and what is the landlord’s responsibility?

Living in a property with a beautiful garden can be a treat, especially in the spring and summer months when the weather is great and we are entertaining outdoors.

The problem with gardens is that they require maintenance. And although some people are happy to spend weekends exercising their green thumbs, for most people garden maintenance is a chore, which is why gardens are so often neglected.

Inevitably, garden maintenance, or the lack thereof, can often lead to issues between a landlord and tenant. So, what exactly is a tenant’s responsibility when it comes to maintaining the garden, and what is the landlord’s responsibility?

Unless the tenancy agreement says otherwise, the tenant is generally responsible for mowing and edging lawns, watering, weeding, pruning, and fertilising. These responsibilities could easily be termed ‘general maintenance’. Ultimately, the tenant is responsible for ensuring the garden is maintained to a standard set at the beginning of the tenancy.

Generally, the landlord is responsible for things such as providing hoses and sprinklers, maintaining the reticulation system, cleaning gutters and tree lopping. However, in some tenancy agreements it is the tenant’s responsibility to replace broken sprinkler heads.

It’s easy to see how uncertainty and issues may arise. For instance, at what point does a tree or shrub require lopping instead of pruning? And although the landlord is generally responsible for keeping gutters clean, it is the tenant’s responsibility to advise the property manager of any potential blockages or water leaks. If an issue is fairly obvious and the tenant fails to report it, the tenant may be liable for any damage caused.

A good property manager will make sure all parties clearly understand their responsibilities, and with the help of a comprehensive Property Condition Report and regular inspections, ensure these responsibilities are met.

Protecting Yourself When Acquiring Your Development Opportunity
You’ve done your research and now you are ready to put an offer in for your development property. It sounds straight forward, but there are some potential traps that you need to avoid.

Although you may have conducted substantial research prior to placing your offer, it’s unlikely that you would have had the time or the opportunity to cover all your bases. With that in mind, it’s an absolute necessity to have a ‘due diligence’ clause in your contract of purchase. This gives you the ability to walk away if you are not satisfied for any reason with the outcome. Despite what some people may believe, a finance clause is not adequate!

You must also remember that sales agents work for the seller, and for that reason their contracts are skewed to suit the seller’s needs and not necessarily yours. A properly written due diligence clause is essential; a poorly written one could cost you tens or even hundreds of thousands of dollars. Using a buyer’s agent is a good way to manage this process as they should have the appropriate clauses to insert into the contract and can also protect your identity and motives for purchasing to give you leverage.

Where possible you should aim to negotiate a reasonable period for due diligence, enough for you to undertake all the extra checks you need to. And also, a longer settlement is also advisable.

Once your offer and all terms and conditions have been accepted, then it’s time for you to get started on your post-acquisition feasibility study. Start by refining your numbers (particularly in light of any new information you acquire), and begin conducting your due diligence. This is your opportunity to look at the property in more depth, find out if there are any nasty surprises, and walk away from the deal if you’re no longer comfortable.

Your due diligence can encompass a number of things. Start by talking more freely with sales agents about realistic sale prices and get the builders on site to ensure your costing estimates are valid. Consider undertaking a soil analysis to ascertain what sort of foundations might be required (amongst other things), investigate the services available and where they are located (such as sewerage lines), and check the title for any restrictive covenants or easements. Talk with surrounding property owners about the site and your plans – this will give you an indication if you’re in for a battle! And don’t forget to liaise with the local council about your plans and their requirements to make sure your proposed development has a strong chance of approval.

There is lots of work to be done once you decide you’re ready to place an offer, it’s definitely not the time to rest on your laurels. But know that if you go into it with your eyes open, you can rest assured that you’ve done all you can to protect yourself and make your development a success