Property Newsletter – July 2016

Property Finance Strategies: Webinar

Did you miss our recent webinar on the best property finance strategies for investors? Don’t worry, you can still listen to the recording here.

Momentum Wealth recently launched our Foundation Series Webinars, which are free, bite-sized sessions of practical and relevant strategies to help investors make smarter, more informed decisions to build their wealth through property.

The first webinar in the series, Property Finance Strategies – Maximising your Opportunities, was held on Thursday, June 23.

The webinar provided listeners with some of the best finance techniques and structures to optimise their property portfolios.

The webinar included:

  • Key finance strategies for property investors: looking beyond interest rates
  • Understanding lending criteria: how to use it to your advantage
  • Cross collateralisation: what every property investor should know
  • If you missed the webinar, simply follow this link where you can listen to the session at your leisure.

Keep an eye out for the next session in our Foundation Series Webinars later in 2016.

Capital growth vs cash flow – what’s better?

It’s a common question among property investors; what’s better, capital growth or cash flow?

Generally speaking, there are 2 models of property investment that are available to investors.

  1. To buy properties that will increase in price above market rates of return (i.e. high capital gains)
  2. To buy properties that offer rental returns above market rates of return (i.e. high cash flow)

In residential property investment, it’s not often that you’ll find properties that offer high levels of both capital gains and cash flow. Generally properties with high growth expectations come with lower rental yields.

Therefore, investors will need to focus on properties that provide one over the other.

What’s the better option, capital growth or cash flow?

It all depends on your current circumstances, but there are a few considerations to take into account to know where you fit.

Do you want to increase your personal wealth, or do you want a source of income?

If you want to significantly grow your personal wealth, then you should choose a capital growth strategy.

As a general rule of thumb, capital growth is best for investors aged between 20 and 60, who are still accumulating their wealth.

Buying high growth properties will allow these investors to capture the benefits of compound growth as their properties rise in value and amass significant personal wealth.

As you near retirement, you should‘ve created the wealth required to live the type of lifestyle you want.

However, you’ll also require a source of income if you’re no longer working.

This is when a cash flow strategy is necessary as investors can utilise the rental returns as a means of passive income.

It’s important that investors work with a property investment advisor who can advise you on the most suitable properties for your own circumstances and stage of life.

Water connections fees slashed for developers

Investors developing property in Western Australia have been handed a welcomed gift with the cost of water connection being slashed by nearly half.

Under the changes, the state’s water supplier, Water Corporation, will reduce charges applied to providing water to new developments or subdivisions by 47%.

For a standard lot, the cost would be reduced from $4,064 to $2,150 per lot – a saving of approximately $1,914.

The reduction is great news for all property investors with the impost being a considerable cost, particularly on smaller developers.

The savings has been slightly offset, however, with wastewater charges to increase by 71%, from $1,363 to $2,334 – an additional $971.

The changes, which took effect on July 1, 2016, were foreshadowed in the 2016/17 State Budget which was released in May.

The changes reflect a reduction in costs incurred by the Water Corporation, which has been working closely with industry to reach the outcome.

5 tips to manage a rent reduction

Ebbs and flows are a natural part of any property market, but how do you manage a rent reduction when forced to find a new tenant in a downturn?

When the market cools and you need to find a new tenant, more often than not the only way to lease your investment property will be to reduce the rent.

While no investor wants to lower their rent, it’s best to be realistic otherwise you may face much larger consequences.

Here are 5 tips to help manage a rent reduction.

  1. Take a long-term view. While rental income is needed to service your debts, the main goal of property investment, for most, is capital gains. Typically, a drop in rent won’t make a big difference to your wealth goals over the long term.
  2. Don’t chase the market down. If you price your property too high at the start, the market may drop further and then you’ll need to lower your price even more. It’s best to be realistic up front when you are leasing.
  3. Think about the bigger picture. If you refuse to adjust your rent to the market conditions, you’re more likely to lose more money through a longer vacancy period. By adjusting your rent appropriately, you should lease the property much faster.
  4. Put a rent reduction into context. If interest rates have dropped in line with property market conditions, you’re likely to be paying less on your loan, so a lower rent may not hurt your hip pocket as much as it may seem.
  5. Utilise your cash buffers. Investors should have adequate cash buffers that they can access to service their loans when their properties are vacant. Ideally, investors should have enough funds to service their debts for at least 2 months.

If you’re a relatively new property investor and only ever seen your rents rise, then accepting a rent cut can be a bitter pill to swallow.

However, seasoned investors will know that ebbs and flows are a normal part of property and it’s best to adjust rental prices accordingly and wait for the next upswing in the market.

Suburb Snapshot: Warwick

Recently being rezoned to accommodate higher density housing, Warwick boasts good access to the Joondalup train line, great amenities and is in close proximity to the Perth CBD.

Located in the City of Joondalup, Warwick is 13 kilometres northwest of the Perth city centre and has a population of about 3,800 with a median age of 42 years.

More than 81% of properties are either fully owned or being purchased with just 15.5% of properties being rented.

One of the suburb’s main features is its access to Warwick train station on the Joondalup train line as well as the main arterial roads, Mitchell Freeway, Warwick Road and Wanneroo Road.

Until recently the suburb was zoned mostly low density residential R20. However, under the City of Joondalup Local Housing Strategy, significant areas of the suburb have been rezoned to medium density with land around Warwick train station and Warwick Grove Shopping Centre being rezoned R20/60 and R20/40.

The suburb is dominated by stand-alone dwellings with houses making up 91% of stock in the suburb, followed by 4% duplex, villas and townhouses and 5% flats, units and apartments.

With the introduction of higher R-codes, this composition will start to change, however, as older stock is replaced with medium density dwellings.

Residents can enjoy significant parklands with the large Warwick Open Space to the east of the suburb, as well as Hawker Park and Ellersdale Reserve.

Both Hawker Park Primary School and Warwick Senior High School are located within the suburb as well.

Of Warwick’s population, about 23% of people employed over the age of 15 identify as professionals (WA average is 19.9%) while clerical and administrative workers make up 16.9% of the residents and 15.5% are technicians and trade workers.

Show me the money!

Residential development syndicates can be a lucrative investment. But how long does it take to receive returns from a syndicate?

No doubt you’ll be aware that syndicates can be a great investment to create significant wealth in a short period of time.

So how long does it take to receive my returns once I’ve invested in a residential development syndicate?

The answer will be dependent upon two main factors – the company overseeing the syndicate and the size of the development.

At Momentum Wealth, we typically offer syndicates that complete boutique apartment developments, which can be classified as complexes of 50 units or less.

These types of developments provide a more niche product in the market and generally carry less risk than much larger projects that comprise hundreds of apartments.

One of the key criteria we seek to meet when completing residential development syndicates is to return investors’ distributions as quickly as possible.

For our boutique apartment developments, we typically provide a timeframe of around 30 – 36 months in which investors will receive their returns. That is, from when an investor initially commits their funds through to planning, development and sales. However, this varies from syndicate to syndicate.

It’s important to do your research before committing to a syndicate to ensure the company is capable of executing exactly what they’re promising. Do they have a good track record of delivering such projects and have they stuck to budgets and timeframes in previous syndicates?

By failing to complete adequate research you may be left waiting longer than expected for your returns, or worse, you may not receive them at all.

Case Study: Overseas buyer mandates tight deadline

Part of the benefit of engaging a good commercial property buyer’s agent is their ability to foresee and address challenges before they arise.

This was particularly evident in a recent deal for an overseas client that contacted us to find him an industrial property in the Perth metropolitan area.

The client, an English-born Australian resident living in Qatar, provided a specific mandate to our consultants for a small industrial property for private use that comprised:

– Highest possible trusses – Sea container access – The ability for light fabrication – 180-200sqm in size – General industrial zoning – Located in the northern industrial belt – Under $400,000 +GST

The client also had one more directive – he needed to secure the property in just 4 weeks’ time.

With this criteria and the looming deadline in mind, our consultants launched a short 2-week request for proposal campaign and liaised with their extensive network of commercial selling agents, property managers and fund managers.

At the end of the campaign, our consultants compiled a shortlist of potential properties, which we inspected, appraised and provided a detailed price comparison guide before recommending a premise in Malaga, about 13 kilometres north of the Perth CBD.

With the client happy to proceed with the acquisition, our consultants were on a tight deadline to negotiate the deal, and to make matters more challenging settlement was likely to fall in a key holiday period, which may have delayed proceedings.

We also liaised with the selling agent and the vendor to confirm they were organised for a quick settlement and managed the client across 3 time zones so he was prepared to travel to the Australian consulate in Dubai to submit the necessary paperwork on time.

With the lender’s valuation coming in as expected, the client’s finance was approved and settlement proceeded.

After the vendor placed the property on the market for $395,000 +GST, we were able to secure the premise for $365,000 +GST and get the deal across the line.

Needless to say, our client was extremely happy with the outcome, particularly given the tight deadline.

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