Property Newsletter – February 2016

Which way are rates heading in 2016?

After 18 consecutive months of leaving rates on hold, the Reserve Bank of Australia slashed the official cash rate twice in 2015. So what can we expect for the year ahead?

The two rate cuts that we saw in 2015, the first in February and the second in May, were largely expected for the year, it was just a matter of when.

At the time, there were two key reasons for the RBA to drop rates.

Firstly, the national economy had remained stuck in a sluggish mode despite the cash rate sitting at a record low of 2.5% for 18 consecutive months.

Another reason was the stubbornly-high Australian dollar, which was still trading above US$0.80 at the start of 2015.

Now that we’re 12 months on, and the official cash rate sits at 2%, what can we expect in 2016?

Following its December board meeting, the Reserve Bank of Australia said that it was happy to leave rates unchanged because the prospects for an improvement in economic conditions had firmed in recent months.


It also noted that the national economy continued to grow at a moderate pace, and that an improvement in business conditions had flowed through to stronger growth in employment.

This more upbeat outlook would suggest that, should the economic environment continue to improve, the RBA is likely to leave rates on hold for the short term.

This decision would also be supported by the lower Australian dollar, which has been trading just below US$0.70 for the majority of January.

However, the RBA also left the door open for a possible rate cut. During its December board meeting it said that it was comfortable with the current rate of inflation, which would allow it to drop rates if necessary.

By present indications, though, we’re likely to see rates remain on hold.

However, should growth begin to slow, or the RBA feels it necessary to give the national economy a shot in the arm, then we could be in for a drop in rates in 2016 – possibly to 1.75% or even 1.5%.

Either way, the current financial environment provides property investors with access to cheap finance, and presents an opportune time to build their portfolios.

Furthermore, it’s also a good time for property owners with established mortgages to consider refinancing to secure a better deal.

For more information or a review of your current mortgage, please contact out finance team today.

Don’t become another statistic in 2016

Although it’s widely known that building a large property portfolio can create significant personal wealth, a staggering 3 out of 4 investors only own 1 investment property.

Whatever your reasons for becoming a property investor, be it to retire earlier or provide a more financially secure future for your family, simply buying just 1 property will unlikely be enough to achieve your goals.

The truth is that investors will generally have to build a portfolio of at least 3 – 5 properties to generate sufficient wealth – that’s provided these are high-performing properties as well.

To some, this might sound like a big undertaking but with the correct strategy, financial structures and by acquiring the right properties, it’s within reach of most investors over the longer term.

Despite this, statistics from the Australian Taxation Office show that 72% of property investors own just 1 investment property.

The reasons why investors never go on to acquire successive properties vary significantly.

Some lose sight of the big picture, they might become distracted by particular life circumstances or they may choose to go on an overseas holiday or buy a new car instead of investing.

Others may even believe that they’ll be okay owning just 1 investment property because they’ll also have superannuation as well as the government pension to live off.

However, for many people superannuation alone will not provide them with the lifestyle they want.

Furthermore, your government pension starts reducing when you reach specific income or asset thresholds.

For singles, the pension will start reducing when your annual income is greater than $4,212, while couples can only earn $7,488 annually before their pension is affected.

Alternatively, your pension begins reducing when you have assets over $205,500 for singles, and $291,500 for couples.

Whichever test results in the lowest pension payable is the one that the government will apply.

In 2016, don’t become another statistic. If your property portfolio is still relatively small, start taking the necessary steps needed to build a larger property portfolio that will allow you to retire comfortably.

Property development: selling vs holding

It’s a question that’s hotly debated among property investors – should I sell or hold my residential property development? So what is the best strategy to take?

Unfortunately, the answer isn’t always straightforward. The decision whether to sell or hold a development is dependent on a number of factors, such as market conditions, type of development, your financial position as well as your goals.

Your goals for undertaking the development in the first place should play a big part in determining your decision.

Do you want to increase rental returns? Maybe you want to make a cash profit? Or perhaps you want to refinance the development and utilise the equity in the property?

It’s important to be clear on your goals from the outset as this can have a major influence on many aspects of the development.

In most cases in smaller developments, it’s best to hold some or all of the development, provided it’s financially feasible for you to do so and the development is in a good location with long-term growth fundamentals.

This is because when you sell a development, you automatically lose a large portion of the profits through sales agent fees, marketing, income tax (from the cash profit you’ve made) and GST.

Alternatively, investors may be able to develop and sell a portion of the project. For example, in a 6-unit development, the investor may sell 3 units and hold the other 3.

If you do decide to sell, it’s important to hold a good understanding of the market. Selling in a downturn may significantly reduce your profits and it might be better to hold the development until the next upswing in the cycle.

The number 1 rule for a successful leasing

Regardless of rental market conditions, all property investors should follow this 1 rule to ensure they can successfully lease their property.

When it comes time to finding a new tenant for your investment property, there are a number of jobs you and your property manager will need to take care of.

This includes creating a holistic marketing strategy, tending to any maintenance issues, ensuring you comply with the necessary legal requirements and presenting the property in an appealing manner, among others.

However, there is one rule that, if not followed, will make it difficult for you to lease your property – even if you engage the best property manager in Australia.

That is to be realistic about the weekly rental rate that your property can achieve.

While we would all like to receive more rental income, the reality is that your property will only achieve what the market is prepared to pay.

Before you set the rent, ask yourself the following questions:

1) What’s the level of demand for rental properties in the market at present? Is it high or low?

2) How much rental income are comparable properties in the area achieving?

3) What’s the vacancy rate in the area?

4) What’s the length of time that properties are remaining on the market?

A good property manager will complete this research for you to determine a realistic rental price.

Remember, if your asking price is too high, your property may sit vacant for an extended period of time and you’ll end up losing more money than if you’d initially set the rent at a more realistic price.

Riverside suburb boasts premium appeal

This tightly-held suburb borders the Swan River, is in close proximity to major employment hubs and will greatly benefit from a soon-to-be completed makeover of its local activity centre.

East Fremantle comprises a population of about 7,000 residents with a median age of 42 years.

73.1% of the properties in the suburb are fully owned or being purchased with just 24.2% of the stock available for rent, which is below the Perth average of 29.2%.

One of the suburb’s main drawcards is its large frontage on the Swan River and adjoining parks and facilities along the foreshore.

Its local activity centre, Richmond Quarter, has been undergoing a major redevelopment and will feature a new vibrant, mixed-use hub including residential apartments, office space and restaurants.

The state government recently announced that it planned to sell the Leeuwin Barracks site, which sits on the riverfront in East Fremantle.

The land is expected to fetch up to $100 million and be redeveloped by real estate developers for premium housing.

East Fremantle is also conveniently located just 2 kilometres from Fremantle and 17km from the Perth CBD.

With 71% of dwellings listed as houses, the suburb comprises a blend of property, from houses built in the early 1900s to modern new constructions.

The average house price sits at $1.2 million and the area is zoned mostly low density residential (R12.5 to R20) with higher zoning along Canning Highway.

37.1% of the population also identify as working professionals, which is almost twice the Perth average of 19.9%, and is reflective of the affluent residential population.

There are two primary schools in the suburb – Richmond Primary and East Fremantle Primary.

What are the top investment destinations for 2016?

Momentum Wealth kicks off its 2016 seminar series later this month with a look at what’s in store for property investors in the year ahead.

Our first seminar for the year, ‘National Property Market 2016’, will explain the best investment destinations, how to find an investment property that will outperform the market and the danger spots to avoid, among other investment strategies.

Following the seminar, attendees will also have the opportunity to speak with our consultants over drinks and canapes.

More than 180 property enthusiasts attended last year’s event and we’re expecting another big crowd in 2016.

The seminar comes at a time when a number of property markets around Australia are nearing significant turning points, with some coming off the boil while others are expected to experience an upswing.

In the midst of these shifting markets, it’s crucial for investors to stay informed and understand the various factors that will influence these markets in the year ahead.

To secure your seat for the evening, simply follow this link. Tickets are only $29 per person or $39 for a pair.

We look forward to seeing you there!

Property syndicates: Why join forces?

It might seem unusual to pool your money with a group of people you’ve never met, but there are a number of advantages to joining forces to invest in property.

Whether it be a residential property development or the acquisition of a commercial property, both investment vehicles can deliver great returns to investors.

However, both of these options also share a common problem – they’re both highly capital intensive.

The reality is that many investors simply don’t have the financial capacity to pursue these investment options by themselves.

For example, a good-quality commercial property would typically cost at least $2 million to purchase and usually require a loan-to-value ratio of 65-70%.

Likewise, while small-scale residential developments are typically feasible, most investors wouldn’t be able to finance a boutique apartment development, which could cost anywhere from $2 million – $7 million to complete.

However, a property syndicate is a practical option that allows investors to gain exposure to these larger assets but at a fraction of the cost.

The advantage of these larger assets, such as residential developments and commercial property, is that they typically provide investors with higher returns or profits and access to better quality investments than they could achieve on their own.

By investing in these assets via a syndicate, you’ll also have peace of mind that the investments are managed/developed by an experienced team, provided you engage a reputable company with a good track record.

When investing in a commercial property trust, another advantage for investors is that they’re generally not liable for the trusts’ loans and won’t be subject to commercial loan reviews or personal guarantees.

While property syndicates aren’t suited to every investor, they should be at least considered to determine if they fit into your property investment plan and are aligned with your investment goals.

Momentum Wealth regularly offers opportunities to investors to participate in property syndicates. Find out more by contacting our corporate property services team.

Are you suited to commercial investments?

Acquiring the right commercial property will prove to be a great investment asset, however what type of investors are suited to commercial and why?

Despite much of the media coverage focusing on the residential market, commercial property can play an important role in anyone’s property portfolio.

However, it’s typically only suited to investors who have reached a certain point in their investment journey.

So who are these investors?

To put it simply, commercial property is usually suited to investors who want more cash flow.

Generally, commercial property offers net yields of between 7-9%, compared to residential property of between 3-4%, and therefore provides investors with a handy stream of income.

Those about to retire should consider investing in commercial property as a means of substituting their salary once they’ve finished work.

However, you don’t necessarily need to be nearing retirement to consider commercial.

Investors who have already built a sizeable portfolio of residential properties should also consider commercial as a means of diversification.

As a general rule of thumb, investors should hold at least 4-5 residential properties before buying commercial assets. However, each investors’ situation is unique and advice should be taken from a reputable property investment advisor.

Investors considering investing in commercial property should also possess the following:

  • Hold substantial equity as commercial property is a higher price point
  • Understand the risks and returns as these are different from residential property
  • Is comfortable with longer vacancy periods, which is typical in the commercial market
  • Has the time to do significant research to find a good commercial property (or willing to appoint a buyer’s agent to do the work for them)

An alternative to direct investment is to consider investing via a syndicate or unit trust, where you own a smaller piece of the property but you have the ability to diversify and spread your risk through a wider number of properties.

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