Time is money for development finance

While developers are always mindful of construction costs, it’s just as important to be aware of the costs associated with development finance, particularly when building delays occur.

Many first-time developers often forget that for every day their development is delayed, interest on their loan is still accumulating.

For example, let’s say a developer has a project which is being funded by a $2 million loan and the project hits significant delays at the halfway point.

This delay is likely to cost the developer in the vicinity of $13,000 each month in compounding capitalised interest, which means they pay interest on the interest.

While developments don’t usually experience month-long delays like this, it’s not unusual for delays of a day or two to occur at each step of construction.

The plumber, the tiler, the landscaper not starting early enough or the builder getting in their way.

It’s easy to see how a few days here and there can quickly amount to a month’s worth of downtime.

The cost of delays will vary from each project as it will depend on a number of factors, such as the interest rate, loan amount and drawn funds.

However, the interest on a fully drawn $2 million loan with a typical interest rate is about $13,000 per month capitalised and compounding.

Add to this other holding costs, such as rates, and development finance could end up costing a developer many thousands of dollars extra.

Many investors who want to develop but don’t have the time to manage the project often appoint a development manager who will manage the entire project and keep the builder to their time frames. Momentum Wealth is managing over $170 million in projects for our clients. If you’d like to speak to one of our development specialists please give us a call on 9221 6399 to see how we can help you with your project.

Tax implications for expat property investors

Despite living overseas, many Australian expatriates still regard property investment in their homeland as an attractive option. But what tax implications does this pose?

The tax implications of property investment can differ between Australian expatriates and those residents living in Australia.

Whether an individual is a tax resident under Australian law is dependent on a variety of factors and is unique to each case.

Subsequently, Australian expatriates, or expats as they are more commonly referred to, should seek the professional opinion of an accountant or lawyer who specialises in this area.

However, all income earned in Australia, including property rental income, is subject to tax in Australia.

In the instance where an individual is not an Australian tax resident, but they receive a rental income from an Australian-based property, they are required to prepare and lodge an Australian income tax return.

The non-resident tax rate stands at 33% for all income up to $80,000. This increases to 37% for income between $80,001 and $180,000 and 47% for income over $180,000.

Those individuals considered residents greatly benefit because they enjoy a much lower tax rate for the lower tax brackets.

For residents, tax rates start at 0% for income up to $19,400. This increases to 19% for income earned between $19,401 and $37,000 and 33% for income between $37,001 and $80,000. The rate of taxation after this is the same as a non-resident.

What’s important to note is that residents and non-residents can claim a tax loss if their tax deductible expenses are greater than their Australian taxable income. Residents can claim the loss against their other income. If you are a non-resident for tax purposes you can carry the loss forward to offset against future income.

A wise strategy for an Australian who is moving overseas to work is to accumulate tax losses on Australian property, which can then be offset from their income when they return to work in Australia. This can include any capital gains that are made when the property is sold.

This can be highly beneficial in instances where non-cash tax deductions, including depreciation, are a part of the tax loss.

If you are living abroad and are interested in purchasing an investment property in Australia, keep an eye out for our upcoming property investment eBook for expats.      

Property selection critical for success

Affordability and proximity to the Perth CBD are this suburb’s two main strengths, however investors need to focus on certain pockets to make the best capital gains.

Girrawheen is located within the City of Wanneroo and comprises a population of about 8,300 residents with a relatively young median age of 33 years.

The suburb is 12 kilometres from the Perth CBD, which is accessible via Wanneroo Road, and is comparatively affordable with an average house price of $430,000.

Currently, about 80% of dwellings within the suburb are houses, which is reflective of its zoning – low-density residential (R30 or lower).

However, slated changes to Girrawheen’s housing strategy have recommended an increase in housing density to R20/40 and R20/60 in strategic locations, such as around the suburb’s shopping centres.

Given this, as well as some high concentration of state housing in the suburb, investors need to be particular about the specific pockets to buy in.

Girrawheen’s two major shopping centres are the Summerfield and Newpark precincts, while Warwick Shopping Centre is a short drive away but larger.

About 70% of the properties within the suburb are either fully owned or being purchased with 30% being rented – about the Perth average.

Girraween boasts many parks and ovals including the Warwick Reserve and Leisure Centre on its western boundary.

There are also multiple primary schools within the suburb as well as Girrawheen Senior High School.

Residents can also take advantage of the Joondalup train line with Warwick station only several kilometres from the suburb.

Leasing tips in a tenants’ market

Like many industries, property markets run in cycles according to supply and demand. So what can be done to lease your property in a tenants’ market?

When supply catches up to demand, it’s natural for the rental market to shift in favour of tenants.

While it’s inevitable that at some stage, under the supply and demand model, the momentum will swing back to the advantage of landlords, what can be done in the meantime?

One of the biggest mistakes made by landlords in a tenants market is to refuse to meet market demand.

By failing to adjust rents or contract terms, landlords expose themselves to significant financial losses.

This might mean having to drop the rent or to offer more flexible contracts that will suit tenants, such as a 6-month contract or pet-friendly contract.

A $10 or $20 loss in weekly rent is negligible compared to a property that remains empty for several weeks because it’s overpriced.

Landlords should also present their properties to the highest standards, ensuring they are clean, enjoy plenty of natural light and the gardens are well maintained.

When in-between tenants, it’s a great opportunity to complete renovations or odd jobs that will help attract prospective tenants.

A fresh coat of paint, new carpet, installing modern fixtures and fittings or other cosmetic upgrades will make a property more appealing.

In the event of an expiring lease, negotiations for a new contract should be undertaken well in advance.

Landlords should engage tenants up to 75 days before the lease is due to expire to determine their tenants’ intentions.

From there, landlords can start to negotiate the terms of a new lease, or start planning the search for a new tenant.

How to build your way to wealth – part 1

Property development is regarded by many investors as the Holy Grail because of the huge profits on offer. So what does it take to be a doyen of development?

When done right, property development can deliver handsome rewards for investors.

However, the pitfalls and challenges are great and varied, which means first-time developers need to be extremely cautious about their investment decisions.

In the first part of this three-part series, we outline 10 tips to help property developers mitigate the risks and maximise profits.

1. Know the ins and outs of the industry

Before you even start thinking about development sites or plans, you need to gain a comprehensive understanding of property development. If you’ve decided to oversee the development yourself, there are dozens of people you’ll need to coordinate with throughout the process. It’s wise to know who these people are and the roles that they play

Some of the various specialists include:

• Building inspectors
• Engineers/geotechnicians
• Solicitors
• Surveyors
• Building companies
• Designers/architects
• Town planners
• Local councils

Generally, it’s not advised that individuals oversee their own developments, particularly first-time developers. This can be one of the biggest mistakes to make as many underestimate the requirements and demands of property development and soon find themselves facing massive budget blowouts. Rather than overseeing the development yourself, you can engage the skills of a development manager, who will complete all the leg work for you. Alternatively, you can also participate in a joint venture or a property syndicate, which allow you to gain exposure to a development project with less risk.

2. Understand the market

Equally important as knowing the development industry is understanding the state of the property development market. To do so, you’ll need to consider a range of factors such as the price points of respective suburbs; the demand of particular dwelling types; the stage of the property cycle; and economic drivers of the area, among others.

To gain a comprehensive understanding of the market, research is essential. Look at recent data and statistics about demand and supply and talk to property professionals to obtain first-hand insights. Your knowledge of the market can mean the difference between buying a development site with high-upside growth potential or one that turns out to be a financial flop.

3. Search for a development site

Finding the right development site is the most important step to becoming a successful property developer. The development potential of your site will be dependent upon its size, zoning and location, as well as other factors such as if the site contains easements. When you’ve found a site, you need to consider a number of issues. These include:

• The zoning regulations and subdivision rules. You should obtain a written statement from the relevant council as these can often be misquoted in advertisements.
• If the site is heritage listed. If this is the case it’s usually better to continue your search for a different development site.
• Any structure plans, planning policies, area plans or proposed rezoning for the area that might affect the site.

The second part of this three-part series will be published in the September edition of Property Wealth News, and explain how a feasibility study will you help to avoid investing in a dud development and how to purchase your site like a professional.