Property Newsletter – April 2014

The key characteristics commonly shared by top property developers

Not everyone has what it takes to plan and undertake a successful property development. There is a lot you need to know, and last month we looked at four of the critical knowledge areas. It’s not just about what you know; having certain character traits can also prove extremely advantageous.

This month we outline some of the key characteristics commonly shared by top property developers. How many do you have?

The best property developers live by the old truism ‘time equals money’. They know that unnecessary delays are to be avoided at all costs, because even a small delay can have disastrous flown-on effects to the schedule and budget. Decisiveness, or the ability to make quick decisions, is therefore an important trait to have.

Ability to spot potential
When searching for a development project, great opportunities are typically few and far between. And when these opportunities do come along, they certainly don’t hang around forever. Successful property developers can spot a good opportunity very quickly and in a matter of moments do a ‘quick feasibility’ to determine whether further investigation is warranted.

Deal making
Securing a development site isn’t always straight-forward. When negotiating with a seller, sometimes the developer needs to think outside the box and come up with a solution that works for all parties – they need to get the right deal done. This may involve, for instance, securing an option to buy the property, buying the site outright, or even entering into a joint venture with the property owner.

The key to making some developments profitable can come down to something as simple as a long settlement or an extended due diligence period.

Solution oriented
In any development, problems will arise that can sap the motivation of even the most motivated developer. It’s the developers who don’t get bogged down with the problems and choose instead to focus on solutions that have greater chance of success.

Big picture focus
Professional developers seem to have an innate ability to see the big picture and recognise ‘the wood through the trees’. They have an unwavering focus and the patience to see their vision gradually become a reality, even if it means making mistakes from time to time.

An understanding of quality vs time
There is a constant battle all property developers face. It’s comes from the reality that producing a better quality product will generally cost more in terms of time and money. With any project, you need to find the right balance, which means carefully understanding the particular market you are targeting. There’s no point in spending extra money in a particular area of the project if the market simply won’t pay for it.

Excellent people skills
The best property developers have excellent communication and interpersonal skills. They can relate to people from all walks of life and quickly build genuine rapport. Think about the variety of people a property developer might deal with, from property sellers, consultants, builders, and tradespeople to neighbours and members of the local council. It takes leadership skills and sometimes a big dose of diplomacy to successfully get the most out of these relationships.

This list provides a useful overview of the personal traits and characteristics that lend themselves to the property development arena, but it is by no means comprehensive.

A property development project is almost always a serious undertaking and not one to be faced unprepared. But if it’s done right, the rewards can be excellent.

For this reason, aspiring property developers without the necessary time and resources should always seek the help of a development manager or team, who can coordinate the entire process and provide valuable advice along the way.

Should you spread your loans amongst different lenders?

One of the financing decisions you’ll have to make as you grow your portfolio is whether to spread your loans amongst different lenders. The alternative option, of course, is to keep your loans with a single lender. So, what are the relative advantages of each of these strategies?

Going with one lender
The biggest advantage of having all your loans with a single lender is that you may benefit from volume-based discounts offered by the lender, depending on the total amount of your borrowing. This could mean slightly cheaper interest rates and reduced fees, potentially saving you money over the period of the loans.

There is also a convenience factor in having all your loans in one place, both in terms of managing your loans and submitting further applications.

Some people will also argue that, with this strategy, your lender will be more willing to lend you further money as they have a complete picture of total borrowings. This, however, is debatable.

Going with multiple lenders
A strong argument for having your loans with different lenders is that you can potentially borrow more money versus the single lender scenario. A lender who is right for your first loan is highly unlikely to be the lender most suited to your 4th or 5th investment property. Lender policies constantly change and spreading your loans makes it more likely you can move to the next property sooner.

It’s not a universal rule but in my experience you can typically do more with multiple lenders, but it does depend on your specific strategy.

One of the great things about spreading your portfolio amongst different lenders is that you can pick which of your properties you want to refinance when releasing equity. If all your loans are with one lender, the lender may require current valuations on all properties. In this case, the growth in one property may be offset by the decline in another, leaving you unable to draw equity.

Using multiple lenders also makes sense from a risk-management point of view. If you default on a loan, it may be more difficult for the lender to get its hands on other properties not under its control.

Spreading your lender exposure also means minimising the negative impact that could result should one lender decide to dramatically change its lending policies.

Despite the potential cost savings of having all your loans with one lender, many investors choose to spread their loans because of the increased flexibility and protection. A good mortgage broker can usually find ways of minimising costs while still utilising different lenders. Ultimately, the choice depends on your overall strategy, risk profile and financial resources, but for property investors looking to build a large portfolio spreading your lenders is the preferred strategy.

The pros and cons of investing in a brand new house and land package

It’s easy to see the appeal of investing in a new house and land package.  Not only does this type of property look amazing in the brochures, it’s an easy option and comes with a host of advantages. However, do these benefits outweigh the negatives? Let’s look at the main pros and cons.

The Main Pros

Tenants love new homes
Tenants typically love brand new property and, let’s face it, why wouldn’t they; everything is in perfect condition, with up-to-date features and modern floor plans. For investors with this type of property, finding a tenant can be fairly easy (depending on the overall supply in an area) and rental returns can be strong.

With new property, there is none of that dreaded maintenance, at least for the first few years. You don’t have to worry about something falling apart after buying the property.

Depreciation benefits
New properties will generally get higher depreciation deductions than older properties, given the high starting value of the building, fixtures and fittings. More deductions means the out-of-pocket cost to hold the property may be lower.

Stamp duty saving
When investing in a new house and land package, you typically only pay stamp duty on the land component, which could mean saving thousands of dollars.

When building a home you can often tailor certain elements to suit your specific needs or to maximise the investment potential.

The Main Cons

Paying for someone else’s profit
When you buy any brand new property, factored into the price is the developer’s profit margin and a proportion of the high marketing costs that come with selling this type of property. These hidden ‘costs’ could be the equivalent of a few years of capital growth, putting you behind the eight ball from day one.

Compromised location
The majority of home and land packages are located on the outskirts of the city, in areas often with abundant supply of land, weaker economic drivers and a lack of infrastructure. Capital growth is therefore often harder to come by.

When buying off the plan, you really don’t know whether the quality of the finishes will meet your expectations, or what the surrounding facilities and other homes will be like. There is also the uncertainty that the final bank valuation won’t stack up. Also you won’t know how many other similar rental properties have been sold to investors in the area.

Land value
Logic dictates that when investing you should seek out a property with a high proportion of land value, as this is what will drive capital growth. With new property, however, most of the value lies in the building component and not the land, which will hamper capital growth as the building depreciates.

A 30 year old property on a good size block in the middle of suburbia might not look too glamorous when compared to a brand new property, but chances are it will make a far better investment over the long term.

Paying without receiving
When building an investment property, you don’t receive any income while it is in the planning stages or under construction. But you will be paying interest on any money you have borrowed by that point.

Building surprises
Building can be a nightmare at the best of times, with construction delays a fairly common occurrence. The biggest surprise for many first-time builders is the amount of extra money that needs to be spent to get the property ready.

Inability to add value
Smart investors know that adding value to a property through renovations is a key strategy for accelerating the wealth-creation process. This option is rarely available with new property.

The bottom line is that while investing in new property can seem appealing, it often proves unsatisfying over the long term due to weaker capital growth. If you are looking at a long-term investment opportunity, more often than not, your best option will be a second hand property.

What exactly is fair wear and tear?

The reality of owning an investment property is that, in all likelihood, the condition of your property will decline over time. This can be hard for some investors to accept, especially when they don’t see their property very often.

All tenanted properties will experience some wear and tear, just as your own home will inevitably show signs that it has been lived in. If the wear and tear is considered to be ‘fair’, the tenant will not be liable for the damage and it cannot be claimed on your landlord’s insurance.

So, what exactly is fair wear and tear? There is no formal definition in the Residential Tenancies Act (1987), but it’s generally considered to be the damage that naturally and inevitably occurs as a result of normal use or ageing.

It sounds relatively straight-forward, but it’s an area of constant friction between landlords and tenants because of differing interpretations.

To clarify, let’s consider an example. Carpets have a limited life-span, probably between five and ten years, depending on a number of factors. Therefore, after a few years of use, you would expect to see signs of foot traffic in some areas. This damage would generally be considered fair wear and tear.

Faded curtains could also be an example of fair wear and tear, as the fading has most likely occurred through ageing and normal use. Other examples could be minor scratches on paintwork or even a lock that has broken because of its age.

What about accidental damage? How is that different from wear and tear? Accidental damage is caused by a sudden and unexpected event, such as spilling red wine on the carpet or damaging a wall while moving furniture. Wear and tear, on the other hand, accumulates over time.

What about neglectful damage? Like wear and tear, this sort of damage happens over time, but through some negligence on the part of the tenant rather than normal use. For instance, allowing mould to form in an area by failing to properly ventilate the property could be considered neglectful damage.

Tenants are normally liable for accidental and neglectful damage.

Clearly, when determining what is and isn’t fair wear and tear, it’s vital to have a comprehensive Property Condition Report. This document, produced at the start of a tenancy, will provide the basis for comparison in assessing any sort of damage.

An established favourite with a promising future

Warwick is located approximately 13km north of the Perth CBD and 5km from the ocean. It’s a suburb with a relatively small population, given the eastern third is devoted to native bushland, known as the Warwick Open Space.

Located within the City of Joondalup, Warwick was predominantly developed in the 1970s and consists mainly of three and four-bedroom brick and tile residences. It is a well-established area surrounded by other established suburbs or infrastructure, making the availability of land there very restricted.

Warwick hugs the Mitchell freeway, which is the lifeblood of the northern suburbs, offering quick and easy access to and from the Perth CBD and Joondalup, whether by car, bus or train. It has a substantial shopping complex with cinema, schools and plenty of parks and sporting facilities.

Part of Warwick’s appeal is that it is just a short drive to many of Perth’s most popular beaches, as well as Hillary’s Boat Harbour, a favourite destination for tourists and locals.

By Perth standards, Warwick is considered an affordable suburb with most properties priced close to the median house price of Perth. It offers good value for money, especially compared to the suburbs located to the west.

According to recent figures from REIWA, the median house price in Warwick is $560,000, representing a growth of 13.9% over the past year, with the highest sale price being $738,000. The median rental price is $440 per week

Warwick is in the midst of a transitional phase, a factor that has caught the eye of many investors. Many homes in the suburb are undergoing expensive renovation and some older properties are being demolished and replaced with modern buildings.

Of particular interest to investors is the fact that Warwick is part of the Joondalup Draft Local Housing Strategy, which aims aim to rezone parts of the suburb to allow for more dense residential housing. Large parts of the suburbs look set to be rezoned to R20/R40 or R20/R60.

According to our analysis, Warwick has a high demand-to-supply ratio, meaning demand is very strong compared to supply. Part of the reason is that it appeals to both owner-occupiers and investors. Owner-occupiers love the location, the amenities and the affordability. Investors love the price tag, larger lot sizes, and the ability to add value to old properties via renovation and development.

The Reserve Bank of Australia has decided to keep interest rates the same

The board met today and decided to keep the cash rate unchanged at 2.5 per cent. This is great news for investors looking for their next investment property.

“The latest housing market statistics are likely to have caused the Reserve Bank some additional deliberation at their latest board meeting,” said RP Data’s head of research Tim Lawless.

The amount of investment in the housing market would be causing them concern, Mr Lawless said.

“In Australia, the economy grew at a below trend pace in 2013. Recent information suggests slightly firmer consumer demand over the summer and foreshadows a solid expansion in housing construction. Some indicators of business conditions and confidence have improved from a year ago and exports are rising.

Glenn Stevens the Governor of the Reserve Bank said “resources sector investment spending is set to decline significantly and, at this stage, signs of improvement in investment intentions in other sectors are only tentative, as firms wait for more evidence of improved conditions before committing to expansion plans. Public spending is scheduled to be subdued. “

Mr Stevens said “monetary policy is appropriately configured to foster sustainable growth in demand and inflation outcomes consistent with the target. On present indications, the most prudent course is likely to be a period of stability in interest rates”.

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