Scents and aromas have been shown to have an effect on people’s moods and emotions, but will filling your house with a beautiful aroma increase its value?
Scents and aromas have been shown to have an effect on people’s moods and emotions, but will filling your house with a beautiful aroma increase its value?
What are the critical success factors for investors to go from one or two properties, to 10, 20 or 50 properties? What else do you need in your DNA?
Mortgagee sales can be a prime opportunity for investors to buy into high-growth markets at a steep discount, but there are also dangers associated with targeting these properties without preliminary research.
According to director of Crawford Realty Ryan Crawford, when a homeowner stops making mortgage payments, the bank or lender has the power to take possession of that property.
“The banks are forced to repossess these homes and sell them to recoup what losses they can,” he explains.
The bank or lender, known as the ‘mortgagee’, will issue notices demanding payment of the outstanding amount, explains Propertybuyer managing director Rich Harvey.
“If you fail to make good those payments, then the bank may eventually take possession of your property,” he says.
John Kovacs is the director of NMD Data, a website that lists mortgagee sales in Australia. He says, once the bank is awarded control by the Supreme Court, the property will usually be listed for sale with a local agent.
Each state has different laws regulating the transfer of land. In both Victoria and New South Wales, for example, the mortgagee has the option of selling the property either at private sale or public auction.
However, the lender will almost always choose to take the auction route in order to keep the process as fair as possible for all parties involved, Mr Harvey believes.
“The lender would never want to have a situation where it's seen to be putting a client into a corner,” he says.
“They like to make it a public auction where it's a fair, open and transparent process and there's open bidding.”
Mr Kovacs says banks have a legal obligation to act in a fair and reasonable manner towards the original owners of the property. The public auction is an attempt by the bank to limit the possibility of being taken to court.
Even at an auction, however, the mortgagee could potentially be penalised for setting the reserve price at an unreasonable level.
In one case in Victoria, a six-bedroom home in Braybrook valued at $630,000 was auctioned off for just $1,000. The property had been seized by the sheriff after the owner defaulted on a debt. When the case came before the Supreme Court, the sale was overturned.
However, this type of incident is relatively rare, Mr Kovacs says.
“I've been in this industry now for the past eight years and I personally haven't heard of any shonky dealings,” he says.
Mr Harvey agrees, saying agents who act unethically are unlikely to last long in the industry.
From the buyer’s perspective, purchasing a repossessed property works in the same way as any other property sale. Mr Crawford says the only major variation tends to be on the terms in the sales contract. Buyers may find they have less rights or flexibility than under normal circumstances.
“The main difference will be the conditions of the sale, and prospective buyers should familiarise themselves with these prior to bidding,” Mr Crawford says.
In some cases, he explains, the bank may remove certain rights buyers have under a standard contract, such as the builder’s guarantee.
Mr Harvey suggests buyers may also be required to put down a minimum deposit of 10 per cent and the settlement date is often pushed out as far as 42 days.
“Another condition of the sale will be that there's no negotiation on the terms of the sale,” he says.
Mr Crawford reminds investors that every contract is different and should be carefully considered.
“The rights a buyer may or may not have will depend on the bank's own conditions, so legal advice should be sought when considering a mortgagee sale,” he says.
Lenders are not in the business of owning property. They're in the business of lending money.
While mortgagees have a responsibility to act in good faith towards the original owner, this does not necessarily mean getting the best possible price. As a result, this type of auction often offers investors a chance to purchase a property at well below market value.
In Mr Harvey’s experience, properties sold by the mortgagee will often go for “below a song”.
Last year, he attended a mortgagee auction in Kurrajong for a large acreage property. Although the home was valued at $500,000, it eventually sold for around $295,000.
Both Mr Crawford and Mr Kovacs say investors can often pick up properties at 10 to 15 per cent under their market value.
However, Mr Kovacs says it depends on current market conditions.
“If you've got a property market that is booming and doing really well then of course you'll get a good price for the mortgagee repossession,” he says.
“But if the economy and the property market are slowly sliding, you can pick up some really good bargains.”
In Mr Kovacs’ view, this occurs because lenders are interested in recouping their losses rather than achieving the highest sales price. Their primary objective is to find a buyer who will pay enough to cover the outstanding debt and any associated costs.
“Lenders are not in the business of owning property. They're in the business of lending money,” he says.
In addition, mortgagees have no personal or sentimental motivation to chase the maximum sale price.
“They have the added advantage that they're not emotionally attached to these properties,” Mr Kovacs says.
Any profit made from the sale above and beyond what the bank is owed will be returned to the original owner. As such, the bank does not benefit from pushing up the price.
“Normally the bank will set the reserve at a reasonable level. But they're not there to try and make money for the vendor, they're there to try and recover their losses,” Mr Harvey says.
In his experience, some lenders will even set the reserve price at the amount owing to them. These are the most favourable circumstances for investors.
“That's where there's an opportunity for investors to get in and pick up something below market value,” he says.
Apart from enabling you to save money, buying at a discount also gives investors a safety blanket.
Investors who pay 10 to 15 per cent under what the property is worth have a buffer if growth falters in that area.
“It's a very smart way of buying. It gives you that leverage,” Mr Kovacs says.
“If property prices do fall, say by five, six, seven or even 10 per cent, you’re still relatively secure.”
In fact, buying a property at below market value creates instant equity in the property, Mr Crawford explains.
Ultimately, Mr Harvey says investors need to look at the fundamentals and remove emotion from the process when buying repossessed properties.
“I think some people might feel like they're taking advantage of someone else's situation,” he says.
“The reality is that if it's a mortgagee sale, the property has to be sold. It's going to go to some buyer regardless of whether it's an investor or someone else.”
Mr Kovacs has a similar philosophy: “These properties need to be sold. That's the bottom line. Someone will buy them. And why shouldn't it be you?”
Just because it’s a mortgagee sale doesn’t mean it’s a good investment.
While repossessed properties can often be bought on the cheap, paying less is not always the best strategy for building wealth.
“Just because it’s a mortgagee sale doesn’t mean it’s a good investment,” Mr Harvey says.
He has found mortgagee sales tend to happen more frequently in lower socioeconomic areas. While a $30,000 discount may sound appealing, some of these areas are unlikely to ever significantly grow in value.
“That's not to say it's not a good investment area, but you have to look at the quality and the long-term value of the property you're buying,” he says.
Investors also need to consider whether the property has negative aspects that might hold back future growth, such as a nearby highway or petrol station.
“It could have something fundamentally wrong with it that's causing the value to be depressed,” Mr Harvey says.
Mr Crawford also urges caution, warning investors that properties that have been neglected for some time may require renovations.
“Avoid any property that requires significant work, unless you are very confident it will deliver a return,” he advises.
“It's not a bargain if it requires significant renovation or replacement items, or if it's in an area with poor rental yields and growth prospects.”
Another downside of mortgagee sales may be their growing popularity among the investor market. As more people understand the possibilities presented by this type of investment, competition has become fierce.
“It really attracts bees around the honeypot,” Mr Harvey says. “Everyone thinks they're going to get a deal.”
At an auction with high investor turnout, the price may actually get pushed up above the existing value of the property.
“Everyone thinks they're getting a bargain and they don't do their homework on comparable sales,” he says.
To avoid being caught out, Mr Crawford suggests going into the auction with a clear strategy in place.
“As with any investment, it's essential you set yourself a purchase limit,” he says.
Before bidding, investors need to gather information about the property, the area and a relevant sales history.
“Thoroughly research the area and investigate what similar properties have sold for so you know what the market value should be. Then don't pay any more than that,” Mr Crawford suggests.
These tactics can help investors get a great deal rather than a rip off.
These properties need to be sold. That's the bottom line. Someone will buy them. And why shouldn't it be you?
Investors wanting to buy into the mortgagee sales market may have to do a little groundwork.
One way to identify these properties is to visit one of the websites listing mortgagee sales across Australia. Alternatively, a search for ‘mortgagee sale’ on a property portal is likely to return listings in this category.
Another alternative is to talk to a buyer’s agent, Mr Harvey suggests.
“We have a vast network able to tap into those sorts of properties for our clients so we can get advance notice when they're about to come up,” he says.
As a final option, Mr Kovacs says mortgagee sales will generally identify a bank, lender or public body as the vendor on sales paperwork.
Not every mortgagee sale will be a good investment. Properties still need to perform, either on rental returns or capital growth. However, when the right property comes along, investors can add to their portfolio at a fraction of the usual cost.
The proportion of distressed stock found outside of capital cities in 2013
The percentage of distressed listings located in Queensland last year
1 in 5
The number of commercial properties advertised in the national press that were receivers’ sales
(Source: Landmark White)
To seize a property, a mortgagee must file a Writ of Possession in the Supreme Court of the relevant state. In New South Wales in January and February, 270 Writs of Possession were received by the court. However, only 36 per cent of these writs were carried out. According to the NSW attorney-general’s department, the debt is frequently paid out before the order can be executed.
Economic news coming out of the United States of America is mixed to say the least.
Within a week we might hear about employment rates recovering and housing starts improving, while also reading about the looming threat of the United States defaulting on its debts and the disastrous effects this could have on the world economy.
This varied news, however, is unsurprising when you think about the sheer scale of the nation. The country has the fourth largest land surface area in the world, almost 20,000 kilometres of coastline and is home to over 313 million people.
In addition, the country has the largest economy, with its gross domestic product (GDP) amounting to $16.2 trillion in 2013.
Australia, on the other hand, is ranked sixth in the world when it comes to land size, has over 25,000 kilometres of coastline, but only around 23 million people.
Our economy, which has experienced 21 years of uninterrupted growth, still operates on a much smaller scale than our US counterparts. Australia’s GDP in January 2013 was around $1.57 trillion.
Given its size, the USA therefore has a number of micro-economies and property markets all operating at the same time. To simply look at ‘whether the economy is recovering’ or ‘how the property market is performing’ may be too simplistic.
Indeed, one of the biggest mistakes investors make when approaching the US market, according to wHeregroup director Todd Hunter, is thinking of the market as a single entity.
“People tend to think in very general terms,” he says. “It’s like saying ‘What’s the Australian market like?’”
Australia has over 500 Local Government Areas (LGAs), so Mr Hunter says it isn’t wise to think of Australia as a single property market – let alone the USA.
“Looking at the USA broadly, yes it’s definitely recovering, but you need to look more closely at the various towns and cities,” says Mr Hunter. “You look at some property markets in Texas and they’re red hot at the moment. Properties are selling within hours – not days – within hours.
“But then you have other places like Detroit in Michigan that are completely dead.”
US Invest’s chief investment analyst, Lachlan McPherson, agrees and says if Australians are going to succeed in the US property market, they need to understand it.
“The biggest thing they need to do is understand the market they’re investing in,” he says. “The market is huge. There are 50 different states, all of which have their own micro- economies.
“So I think the first analysis that needs to be done needs to be from a macro-perspective: Why are you investing there? What’s the future? What is the economy driven by? And why is it going to grow in the future?”
This is not a strategy for those who like to ‘drive by’, ‘see’, ‘touch’ or ‘check in on’ their investment properties.
Australians who are considering investing in the US property market need to be aware that they’re not simply mimicking the Australian investment process but with US dollars, according to Mr McPherson.
Instead, there are new prices, processes and procedures to deal with. These differences can be intimidating for property investors, especially when combined with the changing fortunes of the Australian dollar.
In October 2010, the Australian dollar achieved parity with the US dollar for the first time since it became a freely traded currency. This value was short lived – indeed it only traded above US$1 for a few seconds.
Over the next year though, the Australian dollar fluctuated, occasionally going beyond parity for extended periods of time.
The Australian dollar has now settled below parity, but Mr McPherson says investors would be wrong to think they have ‘missed the boat’ simply because the dollar isn’t at the record highs.
“I think the [Australian] dollar is probably the biggest misconception,” he says. “If we look at the [Australian] dollar on a long-term average, it’s actually still very strong. Long term, most economists predict the [Australian] dollar will sit around [US]80 cents, so even getting in now, there is still tremendous opportunity.”
Darren Wallis, CEO of G.J. Gardner Homes, agrees and says for a long time the Australian dollar was probably overvalued. He believes the dollar is still in a good position and investors can now capitalise on Australia’s strong international position.
Don’t buy too cheap. What’s super cheap is super cheap for a reason. Anything less than US $50,000 is unlikely to be a good investment.
Investing in the US property market is not for everyone.
Dallas, Texas – a market which Mr Hunter identifies as having immense potential – is more than 15,000 kilometres from Sydney, Australia, so this is not a strategy for those who like to ‘drive by’, ‘see’, ‘touch’ or ‘check in on’ their investment properties.
Investing in an international market is more suited to those who are looking to diversify their assets and leverage off a different economy.
“I think the US market is particularly suited to investors who currently have assets in Australia, whether they are shares or property,” says Mr McPherson.
“By investing in the USA, they’re instantly leveraging themselves to another economy. They’re diversifying their assets away from the Australian economy and they’re able to instantly benefit from the recovery of the US economy.”
Mr McPherson says the US market could still suit some first-time Australian investors, but he says they’re likely to see fewer benefits.
“First-time investors could still get a great investment in the United States. But the investors who are going to benefit most from this strategy are existing Australian investors who need to diversify their risk,” he says.
Indeed, he argues that sections of the US property market may even be in a stronger position than Australia.
“Every economy has risks, but I think if we were to compare Australia and the USA, Australia may even be more susceptible to a decline in house prices than the USA,” Mr McPherson continues.
“Australia is seeing capital growth in house prices and has been for decades, yet there hasn’t been a correction. The economy is under pressure, yet house prices are still at record levels.
“Now if we look at the USA, a lot of the house prices are still below construction costs, so that’s why it makes so much sense to be investing in the market because you’re acquiring assets that are below what they cost to build and are far below what they were worth prior to the financial crisis.”
Sam Saggers, director of Positive Real Estate, warns that despite the appealing prices, you need to do your due diligence.
He says Australian investors are often left underwhelmed by their US investment escapades. These investors, he says, are attracted to the potential high returns and profits – but are often left frustrated.
“After the global financial crisis [GFC] hit, many Australian investors flocked to the USA in order to capitalise on the capitulation of the housing market there. However, investors were met with limited success,” he says.
Property in the USA is becoming an increasingly popular asset for Australians with a self-managed super fund (SMSF) – but is an international property market too risky for your super?
Australian investors who are managing their own super are looking to get “more bang for their buck”, according to US Invest’s Lachlan McPherson.
He says many SMSF trustees in Australia are keen to diversify into property, but they don’t want to tie too much of their fund to a single asset.
The advantage of US property, he explains, is that prices are lower. You can thus have a property in your SMSF without taking up too much of the fund.
“At the end of the day, in the USA, you can do it with a lower sum of money.
“It’s a great way for Australians to diversify their investments. For too long, we just haven’t been getting the types of returns we’re expecting from our super, so I take my hat off to those people who are taking it into their own hands and getting a piece of the US market, which will really help them grow their fund.”
Mr McPherson says some of the international risks can be mitigated if investors look in the right areas.
“More so than ever with superannuation funds, investors should be taking a more conservative approach to areas they’re investing in,” he says.
“Low purchase price, high yielding properties probably will not be the best strategy for someone investing with their SMSF. If you invest in a working class area like Dallas, for example, where employment is very strong, housing price affordability is excellent and the population is growing by 10 per cent each year, that’s the sort of conservative investment you want for your SMSF.
“If you’re investing in your SMSF, the one thing I can say is ‘be conservative’.”
He says that even though there are definitely bargains to be found, not every cheap property is a good deal.
“The United States has cities with populations larger than the whole population of Australia,” he says. “Many look like great investment options, but there are a lot of bad areas in cities and you can’t know where they are without having boots on the ground.
“A real estate agent will generally not tell you that you are buying in a bad area. As a rule, I believe that the cheap properties that look like a steal are in suburbs you wouldn’t walk through.”
The US property market offers savvy investors some great opportunities – but not all ‘cheap’ areas are going to offer you rewards.
In July of this year, Detroit became the largest US city to file for bankruptcy and it remains plagued by high unemployment and abandoned buildings. Mr McPherson says investors need to do extensive research on international markets and think about their own risk profile.
“There have been a lot of companies selling US properties all over Australia and a lot of people have been burnt. It’s given the United States a bit of a bad reputation. It’s not that it’s a bad place to invest, but you have to remember the streets aren’t paved with gold,” he says.
“You have to do your research, you have to understand the market and invest wisely.”
Mr Hunter points to a number of areas in Texas that are presenting solid opportunities for informed investors.
“If you look at places like San Antonio, Dallas and Houston, growth has definitely already occurred and there is more growth on the horizon,” he explains.
“That’s largely due to employment because they have low tax rates and low company tax rates.”
Mr McPherson says there are similar opportunities in Atlanta, Georgia.
“Atlanta was hit very hard by the financial crisis, so it’s a very affordable market now. But it has a very strong, diverse range of industries supporting it,” he continues.
He says companies such as Coca- Cola, Delta and UPS have headquarters in Atlanta and offer good, stable employment opportunities for residents.
Mr McPherson also highlights Charlotte as somewhere investors should pay close attention to.
The city in North Carolina is now the second largest banking centre in the USA, after New York City.
Mr Hunter says wherever you decide to invest, you should steer clear of properties built before 1980.
“Pre-1980 lead-based paint was used on houses,” he says. “In a few states now, if you buy a property from that era, you actually have to get the property repainted internally and then get certification to say that you can now let the property.”
Mr Hunter says investors should also keep in mind that the structure and demographics of US cities differ greatly from those of Australian cities.
Generally speaking, he says, the outer suburbs are more desirable to families than the inner city.
“It’s often the exact opposite of somewhere like Sydney, where people want to live in the heart of the city and close to the CBD,” he explains.
Mr McPherson says investors should also ideally be looking for properties between US$150,00 to US$160,000.
“That’s the area of the market where we still see great value, but you’re still investing in quality areas and more often than not, you’re investing with great tenants,” he says.
“You get working families in quality areas near good schools – and you’re not going to get that in lower-end properties.
“There are great opportunities for Australians in this section of the US market because it’s difficult to get into the housing market in Sydney unless you have a significant amount of savings.”
Budget airlines, instant communication and access to international data are making it easier than ever to buy property overseas. The global marketplace can offer limitless possibilities – but with more opportunity comes greater risk.
Todd Hunter, director of wHeregroup, sums up the appeal of investing overseas with one word: “opportunities”.
In particular, Mr Hunter believes entry price points are a major incentive luring investors to markets like New Zealand or the United States.
“You can pick up some pretty good quality houses in both of these places for a bit cheaper than you would in Australia,” he says.
When buying overseas, investors can benefit from currency fluctuations that will stretch their dollar further. Mr Hunter explains that when the Australian dollar falls, any rent and capital gains earned overseas are instantly magnified. On the flip side, when the dollar is high against a foreign currency, you can get more for your money in the overseas country.
“You can take advantage of the exchange rates. The property market doesn't have to do fantastically well for you to make money,” Mr Hunter says.
Director of Cash Flow Gold Jason Simpson has found investors are drawn to overseas markets, particularly the United States, by the promise of a high rental income stream.
“In relation to residential income, net cash flow of anywhere from nine to 14 per cent is a fairly obtainable passive income in some US markets. With commercial property, north of 20 per cent is reasonable,” he says.
Similarly, some regions are experiencing rapid capital growth, particularly those now in recovery after the global financial crisis.
“Equity and growth in the US is far higher than here in Australia. With the global financial crisis recently, we've seen homes in Georgia increase by 300 per cent in the last four years,” Mr Simpson says.
If you can do your own research and avoid high pressure, you're 99 per cent of the way to getting a great deal.
Understanding the local area is vital, whether buying next door or on a different continent. However, venturing into new territory may require some additional preparation.
Firstly, Positive Real Estate’s Sam Saggers suggests investors work out what it is they want to achieve – whether cash flow or capital gains – and how much risk they are prepared to take on.
Mr Saggers also encourages investors to consider how similar the country is to Australia and how easy it is to access.
“If I was to choose an international property market to invest in, I would definitely consider how often I could go there, whether they have a similar culture to Australia, whether they have a similar banking system, the ease of funding and if I could repatriate the money without huge tax implications,” he says.
Mr Saggers also emphasises the importance of societal factors. Working out how residents live and what they value helps investors choose an area where people actually want to live.
“It takes a little bit of research to understand what the locals want, where you find that social fabric of the community and what's important to someone locally,” he says.
Finally, Mr Saggers suggests taking a cue from Chinese or Indian investors, who tend to closely follow international trends.
“The Chinese are a good gauge of where to invest internationally. Look where they’re looking,” he says.
Mr Hunter changes his research criteria depending on the country in question. In the US, for example, he believes it is vital to study employment ratios in each area; in other locations, it might be security or natural disaster that tops the list of considerations.
Economic considerations also come into play, according to Mr Simpson. He suggests zeroing in on areas that are bouncing back from hard financial times.
Factors like employment, strong economic growth or the presence of large companies could indicate a pick-up in activity is on the horizon.
“You want to look at an area that has been hit hard and that has the potential to come back strong,” he says.
Once you have identified your area, Mr Simpson suggests jumping on a plane and visiting local real estate agents. He believes investors should speak to a minimum of two independent agents about any potential purchase.
“At the end of the day, it's going to cost you around $3,000 or $4,000 and three or four days out of your life, but you could potentially save around $100,000. Get on a plane and get over there,” he says.
Mr Hunter encourages investors to verify any information provided by agents with their own research. For investors who want extra guidance, Mr Hunter advises working with a trustworthy buyer’s agent, ideally someone who has already invested in the region.
In addition, a tax consultant with experience in international exchanges can be invaluable.
“There is international tax law that you have to consider. There are certain countries where Australians can't invest,” Mr Hunter warns.
He also advises investors may need to put certain legal structures in place to protect themselves from litigation, and to account for local banking arrangements.
Investing in an international context means working with the unfamiliar and unknown.
One of the biggest dangers in any marketplace is over paying. Mr Saggers believes international investors often end up spending more than the locals, including in Australia. The mistake, he believes, is failing to understand local market trends and preferences.
He also urges investors to steer clear of deals that seem too good to be true – high rental yields can come at a price and may indicate an unstable marketplace.
“If you want a cash-flow return, you can go up to Papua New Guinea and buy yourself a property for about $400,000. You get about $2,000 a week for it, which means you're getting a 20 per cent return,” he says.
“But is Papua New Guinea a stable country? Is there a lot of crime in Papua New Guinea? Is there a big resale market?”
Ultimately, he believes the higher the danger, the higher the return.
“That's why the yields in London aren't high or the yields in Sydney aren't high; they're reliable marketplaces,” he says
In Mr Simpson’s experience, investors must also be wary of buying “flipped” properties. This is a practice whereby investors buy neglected houses in distressed areas, do superficial renovations and then sell them for a dramatically marked-up price.
“That's seriously the number one concern for anybody buying in the US,” he says.
Another danger is that property spruikers target the international market, pushing people to buy in areas with little growth potential.
“Generally those people will have high pressure salespeople and they won't disclose all the information, such as the full address. If you feel like you're being hassled to buy or under any pressure, just walk away,” Mr Simpson says.
Currency arbitrage can also work against international investments by devaluing income when the Australian dollar climbs. Mr Saggers says investors need to carefully judge when to trade currencies to maximise their profit.
Another culture’s approach to property management may also be difficult for Australians to comprehend. For example, Mr Saggers has found American property managers tend to treat their role more like debt collection than management. In Mr Hunter’s experience, many offices overseas collect rent manually, in cash.
Unless investors are prepared for these pitfalls, they may find themselves running into trouble with their international purchase.
You can take advantage of the exchange rates. The property market doesn't have to do fantastically well for you to make money.
International investment is open to anyone with the right cash and advice behind them, according to Mr Simpson.
“If you can do your own research and avoid high pressure, you're 99 per cent of the way to getting a great deal,” he says.
At the other end of the spectrum, Mr Saggers tends to think international investing is best left to professional, highly experienced investors.
“You've got the battler, who really shouldn't be putting their money overseas but has maybe $50,000 or $100,000 and likes the concept of buying to get the return. I've never met anyone [like this] it has worked for,” he says.
He believes people with substantial cash assets could do very well buying into successful international hubs, like London or New York.
“To be honest, if you've got the money to play in that space, it’s well worth looking into,” he says.
Mr Hunter takes a more moderate position. He believes international investing offers excellent opportunities, even at the cheaper end of the price scale, but says it is not ideal for a first-time investor.
“It's not that overseas is any more difficult, but I would say you would want to have some real estate transaction experience before you venture over,” he says.
He also believes the best deals are available for investors looking to buy more than five properties.
“It’s not about doing a one-off transaction because it can become expensive with set-up costs and ongoing costs. Those costs can then be dispersed through multiple properties,” Mr Hunter says.
International markets are rife with opportunities. Investors prepared to take the risk may find they have the world on a platter.
New Zealand has a lot of points in its favour, including a similar culture to Australia, an interlinked banking system and a favourable exchange rate.
“You could actually use the same principles you use here but just use New Zealand as a stepping stone to good returns,” Positive Real Estate’s Sam Saggers suggests.
In his experience, some regional towns offer investors returns of 10 per cent or higher.
Director of wHeregroup Todd Hunter also has New Zealand on his radar, saying the country’s economy appears to be bouncing back. The low entry price points are a major drawcard, but he warns earthquakes are an issue when buying in this region.
Cash Flow Gold’s Jason Simpson singles out the state of Georgia as a current hotspot due to its strong economy and rapid value growth. wHeregroup’s Todd Hunter also has an eye on Georgia since recent changes to tax law have boosted the local economy.
Michigan is another spot to watch, according to both Mr Simpson and Mr Hunter.
Mr Hunter sees Detroit’s poor financial situation as a chance to buy into the bottom of the market. However, he warns that some areas of the city have a high crime rate.
“When you hear about how Detroit's gone bad, to me that was an eye opener that Detroit is probably a good place to invest now. But there are some very ordinary places in Detroit and some good places,” he says.
People who love the tropical island lifestyle can combine business and pleasure by investing in Bali. While an unusual investment destination, more opportunities are popping up in this region.
“In recent years, Bali has emerged as one of the top destinations, not only for holidays but also for investment,” says Ayana Residences director of sales Mariusz Mierzejewski.
He suggests changes to the government in Bali, as well as upgrades to local infrastructure, have made the island an investor-friendly destination.
In addition, the number of visitors is expected to triple when a new airport is built.
“There are more and more foreign investors buying land, houses and apartments and doing business in Bali, which actually drives the prices higher. We have seen prices increasing in Bali in the past five years in the double digits,” Mr Mierzejewski says.
By choosing a “lifestyle investment”, he says investors can earn rental income as well as having access to a holiday home.
Positive Real Estate’s Sam Saggers believes the best profits are found in major cosmopolitan hubs, like London, New York, Singapore or Hong Kong. The price point for these cities can be quite high but they also come with impressive growth potential.
“Manhattan just went through a global low. The market has been going very strong. People are buying apartments and making $200,000 or $300,000 in a short period of time,” he says.
“Hong Kong has always been a strong performer. London, everyone buys there internationally.”
While Mr Saggers acknowledges the price point is out for reach of many investors, he believes those who can afford a foothold in these markets are likely to see excellent returns.
With recent speculation that the pension age is going to keep rising and constant reminders from finance experts that Australians are approaching retirement woefully underprepared, many people are wondering how they can take control of their financial future.
Australians are increasingly realising they are unlikely to be able to rely on the government for financial assistance in their old age. Indeed, director of wHeregroup Todd Hunter says it’s time for a wake-up call.
“For people our age, there won’t be a pension,” he says. “It’s a mathematical impossibility for there to be a pension on a growing, expanding and ageing population, with only a limited income coming in. It just won’t be there. You will have to support your own retirement.”
Many people recognise this inevitability but don’t know what to do about it. In fact, Mr Hunter says a vast number of people in the workforce at the moment are relying on death to fund their retirement life.
“There is a tonne of people out there who are expecting an inheritance and they think that will be their retirement,” he says. “There is also a lot of ignorance out there that will catch up with people later in life. People turn a blind eye and assume it will all be okay, but it doesn’t work that way.”
Ben Kingsley, director of Empower Wealth and chair of the Property Investment Professionals of Australia (PIPA), says most people don’t realise they have a problem until it’s too late. In addition, projections about the future value of money, changing economies and inflation can confuse and frustrate people, he says.
Despite the confusion, Mr Kingsley says investors who want to live a stress-free retirement need to take control now.
So the experts (and the figures) are telling us we need to do more. We need to take control. We need to build wealth. We need to be prepared. But where do you even start?
It’s a mathematical impossibility for there to be a pension on a growing, expanding and ageing population, with only a limited income coming in.
The calculations around how much money you’ll need in order to retire can be overwhelming, but Philippe Brach, CEO of Multifocus Properties & Finance, says you just have to work backwards.
In today’s dollars, you establish how much you’d like at your disposal per annum.
He says if someone wants to retire on $100,000 per year, this is the equivalent to having $2 million sitting in the bank generating five per cent interest every year.
“So if you don’t have the money in the bank, you need to translate that into properties and the value of your portfolio. So you’d be looking at having a minimum of $2 million in equity in your portfolio after you’ve paid the capital gains on the sale of your properties,” he explains.
In order to have $2 million after selling costs and taxes, Mr Brach says investors should be aiming for $3 million in equity in their portfolio when they approach retirement.
“The actual size of your portfolio, in terms of number of properties, doesn’t matter – you need to focus on how much equity you can build today,” he says.
Mr Brach says an alternative approach is to hang on to some properties and generate a passive income from a combination of rental earnings and the sales proceeds of the rest of your portfolio.
Mr Hunter says, realistically, if investors want to have a passive income when they reach retirement, they can do this through income in the form of rent payments or they can live off the proceeds of selling their portfolio. Either way though, he says investors need to be debt free when they stop working.
The approach investors end up taking will largely depend on how much time they have, according to Mr Kingsley.
“The reality is if we have enough time then we go through what we call an accumulation phase. This is where we use debt to build our asset base much more quickly than we could without that leverage. That’s why property is such a powerful consideration for people who are looking to build wealth and income for retirement – because you’re able to borrow to control a bigger asset,” he says.
To simplify the numbers, Mr Kingsley gives the example of two investments, both returning 10 per cent per annum.
“Person one invests that $100,000 and they get a $10,000 return that year,” he explains. “The other person has $100,000 but they buy a property at $500,000 by borrowing $400,000. Now they get their 10 per cent return on $500,000 – so it’s a $50,000 gross return. Of course, we do have to cover the debt that we’ve just borrowed. If we assume that the interest on that $400,000 is at six per cent, then that would cost $24,000. So you take the $24,000 from your $50,000 gross return and you’re left with $26,000. So your cash-on-cash return is 26 per cent – as opposed to person one who got 10 per cent.
“You’re accelerating your position by taking on a debt or leverage position.”
Damian Collins, managing director of Momentum Wealth, agrees that property offers investors unique opportunities to create wealth for retirement, particularly because they can manufacture growth.
“Building a property investment portfolio is a great way to get to your retirement goals,” he says.
“You need to look at your current situation, your long-term objectives and your timeframe and then from there develop a specific property investment strategy that will enable you to reach your goals. There’s not a one-strategy-fits-all.”
Mr Collins says if you’re getting started early – in your 20s or 30s – you should focus on growth “because growth is what gives you the equity”.
“Most people can’t save another deposit once they’ve bought their first investment property, so they’re relying on equity from their home or investment. So you’ve really got to focus on growth and getting those high performance properties that are going to outperform the market,” he says.
Once you get closer to retirement, Mr Collins recommends investors look at bigger deals and projects.
“As you get towards that 10-year period from retirement, you start focusing more on the cash flow from the properties. You’re no longer buying the properties for the growth – you’re buying them for the yield,” he explains.
“So start looking at things you can do, like granny flats or commercial property. A lot of people don’t think about commercial property, but even if you can’t do it on your own, you could do it through a syndicate and get very strong yields. I think a lot of investors get caught up in a residential mentality. Commercial, as part of a larger portfolio, definitely has a place.”
The actual size of your portfolio, in terms of number of properties, doesn’t matter – you need to focus on how much equity you can build today.
A passive income of $60,000 a year may be less than your current income – but it’s far more than most Australians get per year once they stop working.
Mr Collins says most property investors can aim even higher than $60,000 a year, but if you achieved this number, you’d be doing better than most.
“We work on a blended net yield of five per cent,” he explains. “Your standard city higher-growth properties are only going to get you roughly net three per cent. Hopefully though you’ll be able to add to those through redevelopment or granny flats and get those yields up to maybe sixes and sevens. So it’s about blending your portfolio.
“If you want $60,000 on a five per cent net yield, then you need $1.2 million in your portfolio, free and clear of debt. So you need $1.2 million straight out.”
Mr Collins says this could be achieved with as little as three properties – a realistic goal for many non-professional investors.
Mr Kingsley says doing calculations to establish future figures can be complicated, but investors are able to simplify the sums to plan for their future.
“The reason most people can’t do these calculations is because the calculations are very complex when you bring in all the moving parts. You’ve got to bring in inflation, you’ve got to bring in taxation, you’ve got to bring in the actual income scales – that’s why projections of capital gains and also the rental yield you’re going to get aren’t easy projections,” he says.
“Looking at it in today’s dollar terms, a nice, simple way of looking at it is to assume property can return a 4.5 per cent longer-term yielding average. So that would mean if we wanted to get to $60,000, we’d need around $1.3 million worth of property.”
So despite the complexities in the numbers, both Mr Collins and Mr Kingsley calculated that around $1.2 million to $1.3 million in property would help generate a $60,000 passive income, which could then of course be supplemented by superannuation.
Adrian Rivish, head coach for South Australia and Western Australia at Positive Real Estate, says a passive income of between $60,000 and $70,000 through property can be achieved two ways – “neither of which is right or wrong”.
The first option is to accumulate six properties, which he says can be done in as little as six years. Over time, these properties will become positively geared (even if they didn’t start out that way) and retiring investors can then live off the proceeds of the rental income.
The alternative is to start at the cheaper end of the property market and “trade up”. This involves building your portfolio aggressively and then selling down parts of it to fund bigger purchases.
“So you start with the cheaper end because your financial position won’t allow you to go to the nicer blue-chip ones,” he says. “You build and you build, then you sell, you build, you build, then you sell. Then by the time you retire you don’t necessarily have to hang on to all of your properties. You could even sell down until you’re left with just three.”
Mr Rivish says if investors end up with three debt-free properties at the end, you can safely assume they will generate around $25,000 in rent each – a total of $75,000. There is, of course, going to be tax payable on this income, which Mr Rivish said would ultimately leave investors with around $60,000 to $65,000.
You’ve really got to focus on growth and getting those high performance properties that are going to outperform the market.
One of the greatest concerns for people approaching retirement with insufficient savings or non-existent portfolios is: do I have time?
Even if your savings seems insignificant, you don’t want to lose it all in a desperate scramble to build last-minute wealth.
Mr Kingsley, however, says if you’re in your mid-50s it’s not too late to take control of your own future.
“If you want to be at the mercy of getting government assistance in retirement, then you don’t need to do anything,” he says. “But if you want to be in control of your own destiny, then the reality is you’ve got to start looking at the future. You’ve got to start planning for tomorrow.”
Mr Kingsley says for people in their mid-50s with no retirement plan, inaction can be the easiest option, but it’s not going to yield any results.
“If you don’t do anything, the situation is going to be even worse. But at the same time, you don’t want to risk the farm. Some people, especially when they’re in their mid-50s, get caught up in get-rich-quick schemes or high-risk investments that can potentially backfire. They panic and think they need to do an accelerated activity when in reality it might not have been the most sensible approach for them,” he says.
Mr Brach says older investors may need to be more aggressive and make fewer mistakes, but with the right advice and astute purchases, they can build a healthy, last-minute retirement.
“I started when I was 36 because that’s when I got into Australia and realised what negative gearing was all about,” he says.
“If you start later, you just need to be cleverer. When you’re younger you’ve got plenty of time. When you’re in your mid-40s though, you have less time to rely on property value growth so you can’t really afford to make a mistake.
“I started when I was 36 and I now have about $3 million in equity in my portfolio and I’m 52. So it’s definitely doable.”
Resi’s finance specialist and consumer advocate, Lisa Montgomery, says if the shrinking timeframe between now and your inevitable retirement has reduced your risk appetite, even a small action is better than nothing at all.
“The one thing that I like to say to people who are considering investing in property is: whatever you do, do something. A lot of the time we fall foul to procrastination; we look for the perfect property in the perfect place.
“In building a portfolio, you’re going to have some properties that are going to be better investments for you than others – but whatever you do, do something.”
You build and you build, then you sell, you build, you build, then you sell … by the time you retire you don’t necessarily have to hang on to all of your properties.
The Australian Securities and Investments Commission’s (ASIC) MoneySmart guide says that for a single person to have a ‘comfortable’ retirement they would require $41,830 in annual living costs. If they retire at 65 and live to be 85, MoneySmart recommends a superannuation lump sum payment of $544,000.
For a couple, MoneySmart estimates ‘comfortable’ living expenses at $57,195 per year, requiring a lump sum payment of $744,000.
MoneySmart says that this is a generic guide and individuals can work out how much they will require in retirement by assuming they need 67 per cent of their current income each year during their non-working life in order to maintain the same lifestyle.
Many money experts and financial planners contend that in reality, the amount required will be much higher – and that most Australians are falling woefully short of this goal.
Indeed, figures from the Australian Bureau of Statistics (ABS) show that in 2010, males aged 55-59 had an average superannuation balance of $166,298. For women, the picture was even grimmer, with the average female aged 55-59 having just $90,783 in superannuation.
The ABS figures show men and women in all age brackets are falling short of their retirement requirements, with females aged 45-49 having just $46,315 in their super on average. Men in the same age bracket had an average of $89,047.
People in this age bracket likely haven’t been receiving employer contributions to their superannuation for their entire working lives, but the fact remains that most Australians won’t have enough when they retire to maintain their current lifestyles.
If soon-to-be retirees are hoping to supplement their superannuation with government assistance (in the form of the Age Pension), Australian Super points out that, as at March 2014, this is only $21,912 per annum for a single person and $33,035 for couples.
Philippe Brach, CEO of Multifocus Properties & Finance, says these figures are concerning, but hardly surprising.
“Around 84 per cent of people in Australia will actually retire on less than $21,000 a year. It’s pretty frightening,” he says. “Nobody thinks about retirement until it’s too late.”
Even if your savings seems insignificant, you don’t want to lose it all in a desperate scramble to build last-minute wealth.
One of the easiest ways to ensure you’re debt free at retirement age, or at least approaching financial freedom, is by taking control of your loans.
Resi’s finance specialist and consumer advocate, Lisa Montgomery, says paying down your home loans ahead of time will help you accelerate your wealth creation – and it doesn’t need to break the bank.
“It’s amazing. Once you start to do the calculations and understand what accelerated payments can do, you’ll wonder why you didn’t do it before,” she says.
Ms Montgomery says a greater number of Australians are heeding this advice and taking advantage of the current economic climate.
“It’s encouraging that since we’ve been in this interest rate cycle from November 2011, where the cash rate has dropped by 2.25 per cent – and about 1.85 per cent of that has been passed onto borrowers – we’ve seen a change in borrower behaviour,” she explains.
Ms Montgomery says recent statistics indicate over 70 per cent of borrowers are currently in front of their mortgage repayments, and around 20 per cent are in front by two years.
“Just by paying an extra $10 a week you can take years and thousands off your loan. Just $10 a week,” she says.
“My tip to borrowers it to have a look at some of these calculators on websites to see what accelerated payments can do.
“Borrowers should also recognise that a mortgage is the lowest interest rate and most flexible credit account that you have. You might have other debt that is at a higher interest rate. If that’s the case, use your mortgage to consolidate that debt and pay off the higher interest debt.
“You’ll be amazed at what you can achieve.”
Investors who are using property to build their wealth for retirement and help supplement the shortfall in their superannuation shouldn’t overlook the possibility of combining the two forces – property and super – according to wHeregroup’s Todd Hunter.
If nothing else he says, it’s a tax-effective way to build your retirement portfolio.
“People who are building an income outside of super will continue to pay tax on that money. Money generated by your super, as it stands in the legislation now, will be tax free when you retire,” he explains.
“So even if you have a $60,000 passive income from property outside of your super fund, that won’t equate to $1,200 a week. It will actually be far less because you will be paying tax on that money. You need to consider the tax implications.”
Mr Hunter has his own property portfolio but also one inside his self-managed super fund (SMSF), which will help fund his retirement.
“I own my office in my super fund, a block of land and two houses in the US,” he says.
“My office is a commercial building so there is very little wear and tear and the shop fit-out is relatively easy to upgrade. So I’ll obtain a really nice income when I retire from the rent that comes in from the office.
“Then there are the US properties that are paying fantastic yields – around 20 per cent. It’s not huge dollars though. As a dollar figure it won’t set the world on fire, but by combining it with my external portfolio, I’m building towards a solid retirement.”
A lot of property investors say they got into the game to build a stable financial future – and there is no shortage of reasons for deciding to take this path.
In 2013, there were numerous examples of news reports that highlighted the financial issues associated with Australia's ageing population: too many workers will retire without enough money in their superannuation, the current pension may be unsustainable if more people come to rely on the state and, with the average life expectancy constantly climbing, many people underestimate just how much it's going to cost to live once they stop work.
It's therefore easy to see why people turn to property to build their wealth for retirement. However, according to Sam Saggers, director of Positive Real Estate, sometimes investors can lose sight of their end goal and forget to ensure they are always planning for their retirement.
"If you're investing in property in order to build wealth for your future, you always need to keep retirement in mind," he says. "I mean, at the end of the day, buying real estate shouldn't be for kicks and giggles – we're all looking to get out of the rat race and it's just a matter of how fast you can do that."
So how quickly can you retire? Can you use property to supercharge your wealth and stop work at a younger age? How much risk would you need to take on board to be in a position where you could retire at 40? How much luck would you need on your side? How many properties will you need? What income will need to be generated by your portfolio on an ongoing basis? Is it even possible to achieve if you haven't started yet?
One of the most important steps in preparing for an early retirement, or indeed any form of retirement, is planning and setting goals.
Even though life events – children, marriage, divorce, changes to the economy or your work situation – can make your initial plans look like pipe dream fantasies, having goals will help you structure your investments and give you numbers to work towards.
Sounds simple, but if you don't have a clear picture of what you're trying to achieve, it's unlikely you'll know when to act, when to sit tight, when to cash in and when you're on the right track.
Margaret Lomas, founder of Destiny Financial Solutions, says part of keeping your 'eye on the prize' is knowing why you're investing and tailoring your strategy to achieve those goals.
"It all depends on why you are investing," she says. "Some people are investing so they can accumulate funds to get into a home of their own. Some people are investing so they can make their lifestyle today better. Other people are investing purely so they can create an income to retire upon.
"If that's the case, they should be investing in a diversified range of assets, not just property. You can't just invest in property and hope that's all you're going to need to retire on. You've got to have a strategy that involves a suitable investment in superannuation as well as investing in your other asset classes – otherwise you're probably not going to achieve the outcome you'd like."
Part of this planning also involves incorporating costs and accounting for the realities of investing in and maintaining properties.
"A lot of people overestimate the amount of cash flow that property is going to give them because they underestimate the costs," says Ms Lomas.
"People think if they have $1 million worth of property then it will return them $50,000 – which in theory is true – but then you've got the costs to maintain that property as well, which is going to be probably another one per cent.
"I think the biggest error some people make is not effectively establishing the true costs of holding a portfolio."
If part of your retirement strategy is to liquidate your portfolio and live off the sales proceeds or invest it in term deposits, there are still costs some investors forget to account for, such as capital gains tax, according to Ms Lomas.
She says you don't need a concrete and rigid exit plan when you get started because markets, circumstances and goals change, but she says investors need to have at least thought about how they might get out, so they can make plans around their tax liabilities and get an understanding of what their true net position might be.
Mr Saggers says an essential part of planning for an early retirement is looking at the property market and establishing how much time you're going to be able to give your portfolio to grow. Will you be rushed and panicking if the property cycle doesn't go as you'd envisaged? Or do you have time to wait out a downturn and then let your property values appreciate again?
"I think one of the opportunities for people is to actually start by measuring how far they are from retirement and then link it to property cycles," he says.
"Typically, a property cycle will go for anywhere between seven and 13 years. At the moment, it's probably fair to say property cycles are getting longer. In other words, property isn't necessarily doubling every 10 years anymore; it's probably more like every 15 years.
"So if you were in your 20s and you were looking to retire at 40 – let's say that's 15 years away – well you're going to have to secure a few assets in different marketplaces so that you can be there for long enough for those properties to well and truly increase in value over time."
If you're investing in property in order to build wealth for your future, you always need to keep retirement in mind.
With this in mind, your asset selection becomes crucial.
Mr Saggers, however, says retiring at 40 doesn't necessarily have to be about taking huge risks and hoping it all works out. Instead, he says if you carefully select your properties and focus on slowly, steadily and sustainably building your portfolio, you "can be the hare and win the race".
"I tend to say that if you were to find one property every year for 10 years and you spent on average around $300,000 per property, then after 10 years of purchasing, you actually end up with around $3.6 million worth of property," he says.
Mr Saggers concedes this strategy would leave most investors with an extensive amount of debt, but he says that doesn't necessarily mean you have to delay your retirement plans.
"You can imagine that your debt on that would be relatively high, so over time as your properties increase in value you'd have to work out which ones you're going to eliminate to reduce your debt and which ones you're going to keep to essentially live off,” he explains.
"After 10 years of purchasing, you'd probably then sit on those assets for another five years. If you had a portfolio worth about $3.6 million, your equity position would be about $1.6 million."
Mr Saggers says in this example, you'd need to establish if $1.6 million would be enough to carry you through retirement, but he says even if that's the minimum you achieve, you'd be in a much better position than when you started – "it's certainly better than most people's superannuation bucket".
The key to picking properties that will help you build up your retirement nest egg is knowing which properties will enable you to recycle your deposit more quickly than others in the marketplace.
"If you want to speed up your retirement by buying real estate, it's very important to choose real estate that will recycle your deposit very quickly," he says.
"For example, if you were to put a $50,000 deposit into a property, you want to get that $50,000 out of that property in the form of equity very quickly."
This step, he says, need not be complicated. Instead, it's all about educating yourself on the property market and understanding how different strategies and tactics can add value to your portfolio.
"This is where property strategy really comes into play – buying in the right marketplaces and knowing how to add value to real estate,” he says. “The whole point of things like renovations or doing a subdivision project or looking for the next hotspot suburb should link back to how fast you can get your money in and out of a property deal.
"The faster you can do that, the faster you can then buy your next property. That should then allow you to buy one property a year for the next 10 years. That's how people end up doing it – they choose assets that have good rents, but more importantly, fast recycle times."
Mr Saggers says no property strategy is without its risks, but the more you diversify your portfolio, the safer your overall position should be – particularly if you can afford to stay in the market during a downturn.
"It just comes down to market capitalisation, which isn't a theory of real estate; it's a theory of basic economics. If you put your money in 10 different marketplaces and you've got a market cap of $3.6 million over 10 years, it's going to start to perform,” he says. “When the market goes for a ride, you go with it."
You can't just decide that 60 doesn't suit you so you'll retire at 40, unless you're prepared to make the moves you need to make that happen.
Retiring at 40 is only possible for those willing to be aggressive, according to director of wHeregroup Todd Hunter.
"They have to be fairly aggressive in their strategy and very well focused. To be able to achieve this you need to be a great saver," he says.
He says 'aggressive' does not equate to excessive or unsustainable risk taking, which is where many people go wrong when trying to speed up their retirement and thus their asset acquisition.
"Aggression in purchasing property isn't about ridiculous risk taking, but about getting out there and buying more properties. There's no point in being 'aggressive' by buying stupid properties in bad areas and taking on big risks,” he says.
"For me, being aggressive is about buying in multiples."
Mr Hunter currently has 40 properties and has just secured his first property in the USA. He says he never loses sight of his retirement plans, particularly when he is investing via his self-managed super fund (SMSF).
"I own my office in my SMSF and I'm relatively aggressive in paying the loan down. I've worked on that quite hard so that if I move my business out of the building and rent it out to someone else, the mortgage will be quite small and I can have a nice income from that," he explains.
Mr Hunter says he also plans to continue to buy properties in the USA through his SMSF, which should put him well on his way to the figure he is chasing for retirement.
His portfolio outside of his SMSF runs two ways, he says.
"I have a bunch of properties that I will keep and I have a bunch of properties that I will sell to turnover to continue to buy more properties and grab the profits to do more renovations," he says.
He says this way he doesn't have to get additional loans to finance the renovations that will ultimately lead to a more valuable portfolio.
"Once the renovations are sorted, I will become fairly aggressive at paying down my investment debts to build up that passive income quicker and quicker," he says.
Ms Lomas, however, reminds investors who are approaching retirement or who want to speed up the process that there is often a direct correlation between fast rewards and bigger risks.
"You can't just decide that 60 doesn't suit you so you'll retire at 40, unless you're prepared to make the moves you need to in order to make that happen," she says.
"You need to recognise that it's not going to happen for everyone because some people are investing to the best capacity they can and aren't prepared to take on any more risks."
Ms Lomas says it's all about balance and planning. She also cautions those who are already close to retirement not to do anything rash in the hope of cutting back on the final few years in the workforce.
Younger people have room to move, plan and endure a few bumps in the road if things don't go to plan, she says. Those with less time, however, don't want to risk losing everything.
"I don't recommend someone who is a little bit closer to retirement should start taking higher risks. It's better to end up with something a little bit more assured and slightly lower than something that might just disappear altogether," she advises.
Buying real estate shouldn't be for kicks and giggles – we're all looking to get out of the rat race and it's just a matter of how fast you can do that.
One of the biggest problems people encounter when planning for retirement is knowing how much money they will need, particularly when you factor in the changing value of money over time.
In September 2013, a report by Deloitte found increasing life spans and the devastating effects of the global financial crisis (GFC) on some people's superannuation funds meant many people were inadequately financially prepared for retirement.
Indeed, the superannuation guarantee wasn't introduced until 1992. Even then, employers only contributed three per cent of an employee’s salary. This figure was increased to four per cent for employers with an annual payroll of over $1 million.
It's no surprise then that some people will be forced into a retirement where they won't achieve the lifestyle they were seeking.
Deloitte's report, however, highlighted that even those who will have the benefit of compulsory superannuation contributions from their employer for their whole working lives may still struggle to have enough savings for the retirement they're expecting.
Ms Lomas says a large part of the problem is that people believe they can retire on far less per annum than they've been accustomed to during their working lives, and this isn't always the case.
"Contrary to popular belief, you're not going to need any less to live on when you retire," she says. "You might think you will, but you won't. The only real difference is, for example, if you have a bunch of kids who you expect to be grown up by the time you retire – then you can make adjustments for the costs of having kids.
"But apart from that, your own lifestyle is going to pretty much stay the same, or hopefully even improve.
"If you have kids and debt at the moment, when it comes to retirement you'll probably need around 60 per cent of what you currently live on. As a net figure, that's really what you should be aiming for, but people constantly miscalculate this."
This seemingly simple idea, however, can become complicated when you're trying to establish how much your money will be worth in 10 to 15 years’ time.
Yet, Ms Lomas says the calculation can quite easily be worked out online.
"There are plenty of calculations online based on the time value of money going on what the CPI has been over the last 10 or 15 years. We have a pretty steady CPI – in the main it moves within a certain range,” she says.
"So you just have to work out the amount you need, which is usually around 60 per cent of what you live on now per annum, and then just extrapolate that and project that forward."
She says part of this process is working out the income you will need your portfolio to generate and what proportion of your assets will need to be debt free in order to achieve this.
"Generally speaking, property is going to return around five per cent to you – with some doing three per cent and some doing seven per cent,” she says.
"If, for example, you work out that you need $100,000 to live on per annum, then you're obviously going to need $2 million worth of debt-free assets. That could be a $4 million portfolio with $2 million worth of borrowing, where the other $2 million is debt free.
"It's just about working backwards."
Mr Hunter, however, warns investors that the normal or predictable financial rules may not apply in the future.
"It can be very difficult to work out how much you're going to need in 10 or 20 years' time," he says. "Normal CPI rules don't apply anymore. We've seen electricity prices double in the last few years for most people. That is well and truly beyond CPI, so how do you factor in those things that could occur in the future? It is pretty difficult.
"Some experts believe $750 a week is what a single person currently needs to retire on. So if that's the case, in 20 years' time, what is it? Is it going to be $1,500 or $2,000 a week?"
Mr Hunter says one of the biggest risks for younger investors trying to build towards a quicker retirement is losing sight of their goals and assuming the desired figure will just be achieved 'in time'.
"You've got to work towards a number like that, but it's certainly not easy to achieve. You've got to work towards it and plan for it,” he says.
"Some investors' motivations fly out the window about two years after they begin investing. Also, keep in mind that goals change, babies come along, houses get upgraded and new cars get bought."
Mr Hunter, who is working towards achieving $5,000 per week in retirement for himself and his partner, says given the changing value of money and the uncertain future of the pension, young investors shouldn't take their eye off the prize.
"If you know you have a while until retirement, it can be easy to let go of that motivation,” he admits, “but if you want to achieve something that most people don't – such as retirement at 40 – then relaxing isn't really an option."
‘I will have a $2.5 million portfolio when I turn 40’
Jim Hall, 36, started investing in property in 2007 after years of procrastination. He purchased a home with his partner, Michelle, in Petersham in Sydney’s inner west and was then able to release equity to purchase an undervalued property in Eagle Vale for $247,500.
Jim now has five properties, including his home, and is currently refinancing in order to continue purchasing.
He admits he will not achieve his original goal – to have 10 properties by the end of 2013 – but says he is on track to have a $2.5 million portfolio by the time he turns 40.
“Obviously things change and don’t always go to plan,” he says. “We realised we needed to move house and it’s better to do it now. This has obviously delayed my acquisition of investment properties, so my immediate goals have changed – but not my overall strategy and not my overall end goals.”
Jim says his deposits for previous purchases have all been funded by savings and equity he has extracted from the family home. He therefore still has plenty of room to invest using equity from his investment portfolio.
“I haven’t used any of the equity I’ve built up in the investment properties yet,” he says. “So, for example, I have a property in St Andrew’s in Sydney’s south west, which I bought for $250,000. We spent about $80,000 doing a renovation and it has recently been revalued at $450,000.
“Over the next 12 months, I’m going to use as much equity as I can from the investment properties. I’m hopeful that over the next 12 months I should be able to get another four properties.”
Due to his young family and the associated ongoing expenses, Jim says he requires properties that offer strong rental yields. His strategy has therefore centred on purchasing undervalued properties in Sydney’s west. He says his next purchases will probably be in comparable regions in Queensland, such as Logan.
He has also focused on growing the portfolio quickly rather than building up large deposits.
“My investment properties have largely been high loan-to-value ratio (LVR) loans – around 95 per cent. The strategy was to get as many properties as possible, rather than using 20 per cent deposits and then having to wait around for more savings or equity to become available,” he explains.
Jim’s portfolio is currently worth $1.3 million and his family home is valued at around $1 million. He is confident he will have $2.5 million worth of investment properties by the time he turns 40. However, he concedes if he was to retire at 40, he would have to start taking far greater risks.
“I’m not aiming to retire at 40,” he says. “By that age I just want to be in a position where I have built up a healthy portfolio. It won’t be debt free, but it will build the foundations so that I can begin paying it down and eventually have a stable retirement.”
He says when people are building up their retirement nest egg via property, they need to remember they won’t always make fast money.
“It’s the very early days of property investing for me. Sometimes you want to make a quick buck and that can be the hardest thing,” he admits. “But once you move past that and see your portfolio growing, it’s very easy to get the property bug.”
Avoiding costly mistakes.
Paul Glossop, 31, started investing in 2010 and already has a portfolio of five properties valued at over $2 million.
He and his wife, Kim, are using property to build up their wealth for retirement and to create a nest egg in case they can’t rely on superannuation.
“My wife is Canadian, so part of our potential long-term strategy is to maybe move back to Canada,” he says. “So we’re not just looking at short-term value growth. Rental returns are obviously important at the moment, but we also need to look for capital gains down the track. We want to make sure we have the ability to have something as a nest egg because we’re not necessarily going to be investing in super if we move back to Canada.”
According to Paul, structuring your finances correctly is essential to building your portfolio quickly, especially for those looking to speed up their retirement.
Investors also need to realise they are likely to make mistakes.
“The worst decision I made was to buy a dilapidated house in Muswellbrook in New South Wales mid-way through 2012 as a renovation project,” he says. “In hindsight, it was a terrible time to buy there and it was also a challenge for me because I renovated it myself. It’s four hours from my home, so that meant every waking moment I had spare I was driving to Muswellbrook, doing a couple of days work and driving back.
“I did that for about two months’ worth of weekends. In return, I am left with a house that has not appreciated beyond what I spent on it.”
Paul says investors can reduce the risks of such mistakes by learning as much as they can about the market.
“Good advice is a hugely important factor,” he says. “Advice and understanding the numbers and understanding the market will make a huge difference to your success.”
For many investors, saving for a deposit is a nightmare. Just thinking about repeating the process is enough to turn you off purchasing your next property.
Once you start building your portfolio, however, your options for sourcing the funds for your next investment greatly expand. In fact, you may already be sitting on another deposit hidden somewhere in your existing portfolio.
Drawing out that equity can help you to leapfrog into your next property. The strategy sounds straightforward enough, but there are many considerations along the way.
Monique Wakelin, co-founder of Wakelin Property Advisory, says investors with the right strategy can leverage off their existing portfolio to save time.
“If you’ve got a good investment property, the growth in equity should be well and truly surpassing what you could save in your after tax dollars in a reasonable period of time,” she explains.
“It’s a question of choosing properties that have a greater propensity for capital growth. If you get the property selection right, then you will build your equity more quickly, which means you can acquire your next asset faster.”
Investors must also structure their loans properly and be prepared to put in the hard yards to manufacture some equity. Used correctly, equity can be a powerful tool to accelerate your property investment goals.
The amount of equity available in your property is calculated by subtracting any loan balances owed from the property’s current value. For example, if your property is worth $500,000, and you have $300,000 left to pay on your mortgage, your equity is $200,000.
In order to unlock this equity, investors can refinance their mortgage. The bank will first carry out a valuation to determine how much your property is worth. They will then calculate a loan-to-value ratio (LVR) to withhold some of your equity as security.
Astute Dee Why’s Sam Ayliffe goes one step further and considers ‘useable equity’. He calculates this at 80 per cent LVR, so investors can avoid paying lender’s mortgage insurance (LMI).
|BANK VALUATION OF THE PROPERTY||BANKS LEND AT 80% LVR||CURRENT MORTGAGE||AVAILABLE EQUITY (80% LVR - CURRENT MORTGAGE)|
In the case above, 80 per cent of the $500,000 property is $400,000. With the outstanding loan subtracted, this leaves the investor with $100,000 of ‘useable equity’.
Even though some investors may be able to borrow up to 95 per cent LVR, Aussie Home Loans’ Ross Le Quesne warns that this allows less margin for error if the market shifts.
Investors, he explains, need to be careful how much they leverage when they apply for the loan increase. If the market were to drop by 10 per cent, the investor may be unable to sell the property without having to raise additional funds, he warns.
Investors looking to refinance should sit down with a professional broker and consider the available options.
One method is to structure your loan as a line of credit (LOC). This way, you will have a pre-approved credit amount on your usable equity and you will only need to pay interest on the amount you use.
Investors will typically have the line of credit linked to one property. The equity in that property will then be used as the deposit mechanism for all future purchases, Ms Wakelin explains.
“Then what they do is use a small amount of equity in that one property as a deposit, and they use the next property as the major loan. So it’s one property, one loan,” she says.
Ms Wakelin believes this method is low risk and gives the investor more control over their loans and assets.
Having separate loans also gives investors the flexibility to switch lenders and take advantage of the market-leading interest rates, says Mr Ayliffe.
“Some will take a higher rental income percentage, some will enable you to leverage off fixed rates for investors, some will have higher negative gearing than others, so it really does mean that you can pick and choose the lenders,” he adds.
As growth will vary across your portfolio, having your loans spread between various lenders means you can also take advantage of your better performing properties and potentially leverage into more properties sooner.
“If you then want to go into a very busy portfolio – aiming for 10 properties or more – that’s when you can really look at splitting lenders because certain properties will have different equity levels,” Mr Ayliffe continues. “Sydney will move differently to Melbourne and Brisbane, Adelaide and the regionals.”
Alternatively, investors can consider cross-collaterisation – using two or more properties as security for the loan. This means investors can effectively buy an investment property without a deposit.
Resi CEO Angelo Malizis explains that some people are asset rich but cash poor. In these situations, some investors use the family home as security to borrow the 20 per cent deposit needed to purchase their investment property.
According to Mr Ayliffe, having a few properties secured together generally allows investors to obtain a better interest rate.
The downside, however, is that if the investment loses value or if you fall behind on loan repayments, you risk losing both the family home and the investment property.
Having the properties cross-collaterised could also limit the amount you’re able to borrow.
Unlike individually secured properties, where the investor can access equity from one investment regardless of how the other one is performing, Mr Le Quesne explains the value of both properties will be taken into consideration if they are cross-collaterised.
Having additional equity is great, but do your sums to make sure you can afford to pay the additional interest on the equity and keep a buffer for a rainy day.
Mr Malizis says just because an investor has been repaying their loan for several years, doesn’t necessarily mean they have built equity. Instead, he explains, there are other ways investors can create equity.
“The most common mechanism people use to create equity is to get ahead of the amortization curve. That is, to make more than the minimum principal and interest repayment on their home,” he says.
Similarly, investors who have interest-only loans, typically during the first 10 years of the loan, can also create equity by making additional repayments.
The alternative is to carry out a valuation on your property if you believe it has improved in value.
With positive signs that the property market is improving, property values should be on the up in the coming years, Mr Malizis says.
Even if investors are only making the minimum payments on their home loans, “They may find their property has increased by $30,000 or $40,000 or $50,000 in value, and the bank would be happy to allow them to borrow 80 per cent of that increase,” he says.
There are two types of property investors, according to Paul Wilson, CEO at Educating Property Investors: the passive and the active. The passive investor will wait to ride the capital growth wave, but the active investor will manufacture the growth regardless of market movements.
Active investors, however, have to be careful not to overcapitalise and overcommit, he warns.
If you are taking on a project to manufacture equity, you need to do your research up front, understand all the expenses, have a clear plan to avoid going over budget and cover all your bases, Mr Wilson says.
Investors also need to make sure there is enough of a buffer and be realistic about what they are likely to achieve.
He points to one renovation that is simultaneously creating income and cash flow.
“I’m converting a two-bedroom one-bathroom property into a three-bedroom two-bathroom property. That automatically increases the value of the property by at least $50,000, and it’s only cost me about $20,000 to do,” Mr Wilson explains.
On top of this, it boosts the income generated from the rent and increases the serviceability as well, he adds.
Mr Le Quesne says he has found investors can generally recycle their equity more quickly if they renovate their property shortly after they purchase it.
“That changes the nature of the property, and the valuer is more likely to say ‘Yes, I can see where you’ve increased value’,” he says, adding that the investor can also show the valuer before and after shots of the property.
Even though the investor may have purchased well, the valuer is unlikely to provide a valuation of $30,000 to $40,000 above the purchase price six months later because they will be using comparative sales, Mr Le Quesne explains.
Despite this, performing your due diligence and providing valuers with your own set of comparable sales can make a difference.
“If the client can make it as easy as possible for the valuer, they’re more likely to get a favourable and on-market result,” Mr Le Quesne advises.
To make this process easier, you can build your own property investment team to help you with the different stages of unlocking your equity.
Mr Ayliffe explains there are a number of professionals who can help you take the best course of action.
“Your professional broker will structure the loan correctly for you and get you market-leading interest rates, your financial planner will give you the advice around what you’re doing to make sure you know you’re heading in the right direction for your future, and then your accountant will make sure the right deductions are claimed for you,” he says.
Before rushing to unlock equity, investors need to be aware of the common pitfalls.
The most common misconception around drawing equity out of an investment property is that no matter what the funds are used for, it will be tax deductible, Ms Wakelin says.
“That’s a fundamental mistake people make – they don’t realise it’s the purpose of the borrowing that determines the tax deductibility,” she says.
Investors also need to consider whether they are capable of repaying the interest on the additional amount they are borrowing.
“Whilst you may be making an investment property purchase and the interest is tax deductible, you still need to come up with some of the cash,” Mr Malizis says.
“Investors should do their sums to determine if they can afford to pay off the increased loan and the interest attaining to that increased loan.”
Rather than speculating and overcommitting, he recommends investors should keep a buffer.
“Having additional equity is great, but do your sums to make sure you can afford to pay the additional interest on the equity, and keep a buffer for a rainy day,” he advises.
To ensure the refinance is approved, Mr Le Quesne also recommends investors don’t apply for a refinance during a renovation.
“When you come to do a loan increase, you don’t want to be halfway through a renovation.
“Banks don’t like incomplete security properties, so you’re better off applying prior to doing a renovation because if a valuer goes out there and sees the property is not complete, you won’t get the finance,” he says.
Mr Wilson advises investors to plan ahead and use their equity in a way that won’t threaten their financial stability.
Investors should consider a budget, risk profile and strategy that will serve their future financial goals and enable them to continue to build their equity.
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