Property Newsletter – March 2013

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.

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

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