our-portfolio

We've purchased again - and it's a cracker

By Phillip Tarrant
Woodridge investment property

After a one-year buying hiatus, Smart Property Investment has secured its latest property – one that delivers good rental returns and capital growth potential.

One of the barometers I use to determine how well we’ve purchased is the sometimes questionable language my friends and colleagues use when I tell them the purchase price.

The more profane the words and the more personalised the well-intended sledging, the better I’ve done.

This is exactly the case for our most recent purchase. I’m very pleased with the result. We made our last buy in December 2012 – a five-bedroom property in Mount Kuring-gai in the upper northern suburbs of Sydney. It’s the most expensive property in our portfolio, generating $700 a week in rent, with a gross rental yield of just over five per cent.

We’ve built up equity in the property, which we can extract to help finance another one. Indeed, the last year has treated our portfolio well, with good increases in valuations across the board that we can capitalise on when necessary.

Unfulfilled potential

After a surge in buying in 2011 and 2012, we drew a blank last year. While we undertook a number of renovations on existing properties – including our one-weekend project in Mount Druitt – I must admit a level of frustration in not adding to our portfolio.

The more profane the words and the more personalised the well-intended sledging, the better I’ve done

There were a number of reasons for this, which I’ve written about in previous articles. Nevertheless, we did miss out on some buying opportunities that would have been great performers in our portfolio.

We’ve waited too long, but we have been productive in the interim by building up Smart Property Investment as well as working on other important parts of our business.

One of our biggest restrictions in growing our portfolio is a limitation of time – I’ve got to dedicate my resources and attention to a number of areas, which means the portfolio can sometimes sit on the back burner. I bet you also find yourself in a similar situation at times.

This is one of the major reasons I draw on the knowledge and expertise of a team of property investment professionals – they keep the momentum going.

While we haven’t purchased for a while, there’s been a lot going on in the background.

Our broker, Ross Le Quesne, and his team from Aussie have had their work cut out over the past few months working with our accountant and lenders to refinance some properties in order to extract funds, while securing pre-approvals to prepare us for the next stage of our portfolio growth.

Their assistance has been invaluable. While often not the most exciting part of property investing, it’s absolutely critical to keep yourself ‘borrowing ready’, which means up-to-date tax returns and financials, good document administration, as well as a true understanding of your financial positioning, your serviceability profile and your capacity to borrow.

For us, since we invest in a trust structure, our financials are a little more complex than a traditional PAYG employee and require a little more work when preparing to secure finance. However, no matter what structure you use to invest, there’s a fair amount of work involved to keep everything current, so don’t let this become an obstacle to investing in property.

If you let your administration slide, it can become even more work to get yourself back into a position where you can easily secure finance. My advice is to keep it on your radar and be constantly doing the preparation and administration work. Chip away at it when you have time, so that when you’re ready to invest again you’ve got the scope to move quickly.

Time to buy

I’ve been writing for a while about our plans to invest in Brisbane. We like the market up there – some suburbs are performing very well at the moment.
Investing there also adds a level of diversity to our portfolio because it’s very NSW orientated right now. We’re also copping a lot of land tax in NSW, so a shift interstate will alleviate some of those issues.

Brisbane property has been in the news quite a lot over the last few years, largely as a result of the floods. I don’t like investing in flood-prone areas; while prices can be lower and rental yields still strong, I’m always concerned about the exit (i.e. when it’s time to sell), which is always front of mind for any investment I make.

There are a number of areas in Brisbane that fall into the ¬flood-prone category, and this helps dictate our target areas.

However, in terms of strategy when investing in Brisbane, we hold true to the strategy we’ve engaged when purchasing other properties in our portfolio: buying under market value properties with scope for improvement, plus strong cash flow and capital growth potential.

This takes into account areas with good employment and population growth, a demand for rental accommodation, strong infrastructure (or planned infrastructure), healthy and diversified local economies, plus a raft of other indicators.

While there is a variety in our portfolio in terms of the value of properties – values range from $250,000 to $750,000 – by and large, a majority of the properties are around the $250,000 to $380,000 mark.

This lower entry point is something I’m comfortable with and helps establish the type of properties – and the locations – I want to invest in.

When viewing opportunities in Brisbane, we therefore had guidelines for establishing the areas with properties meeting these parameters. We could also use these metrics and considerations to determine particular suburbs to target.

So where did we end up buying?

Logan City. In particular, the suburb of Woodridge. Contracts are now signed, finance is unconditional and we’re waiting for settlement.

A stellar result

We’ve worked hard to make this last purchase. As well as the process of preparing refinances to free up some capital, and then securing finance for the new purchase, our buyer’s agent has been scouring the area for the perfect property that aligns with our portfolio growth plans but also ticks all the boxes in terms of our investment strategy.

Steve Waters and his team from Right Property Group have outdone themselves on this last property.

Not only have they got a team on the ground in Logan that knows the city inside out, their relationships with the agents give them a considerable advantage – something we’ve capitalised on.

So did we meet our objective of buying an under market value property? We sure did! We purchased the two-bedroom, brick townhouse in Woodridge for just $145,000 – not a bad price considering the last sale in this complex for a like-for-like property was conducted in March 2012 for $187,000, according to RP Data!

One of the reasons we were able to achieve this is that this particular property never hit the open market.

Mr Waters had been cultivating a relationship with the agent who sold it for some time, and has worked on a number of other deals with them. He was aware that this property would come on the market at some point – it was part of a deceased estate – and the first action the agent took upon securing the listing to sell the property was to call Mr Waters.

We had to move quickly, however, to secure it. A quick phone call advised us of the opportunity and we were confidently able to say ‘yes’, taking into consideration the research the Right Property Group team has already undertaken, plus their extensive experience in the area.

We actually had a window of just five minutes to give Mr Waters an answer, but considering I was prepared, with all our ducks in a line in terms of being finance ready, we could make that call.

One of the reasons we were able to achieve this price is that this particular property never hit the open market

According to Mr Waters, it’s one of the best buys he’s had in the area. On his account, the market most likely bottomed in Logan City around 12 months ago, and there’s been steady upwards price increases since then.

He’s noticed the shift from being actively pursued by real estate agents looking to sell, to a situation where buyers now often exceed sellers – which is always a positive dynamic when considering buying activity and the expected corresponding upwards pressure on prices.

This property is a clean slate in terms of the body corporate, with a healthy sinking fund. There’s no internal litigation or disharmony among tenants. The building and the complex are also in good nick, with no major repairs undertaken at any point since construction.

We should expect a rent of around $260 a week, with a yield upwards of eight per cent – not bad for a property just 20 minutes from the CBD. Importantly, there’s also scope to add value.

We’ve yet to undertake a full assessment of the renovation potential – we’ll report on this in next month’s column – but some small repairs are required, according to the pest and building report we had completed.

The decision will be, to put it in Mr Waters’ vocabulary, to give the property a “haircut and a shave”, or actually undertake more thorough renos. This will depend on the potential for increasing the rent and value of the property.

I’m happy we’ve made our recent purchase after such a long hiatus, and excited about the prospects of this property. Join us next month as we outline our plans for renovation and get the project underway.

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The practice of property investment firms sharing undisclosed kickbacks among the supply chain involved in development sales will be outlawed in NSW on 1 July this year under the Real Estate Reform being handed down by regulators in NSW.

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Property commentator and valuer, Suburbanite’s Anna Porter, said the reform will address conflicts of interest.

She said they arise when a mortgage broker, accountant or financial planner receives part of the commission from the property firm, who receive their fees from the developer or seller.

“This puts the broker into a position by which they are being paid on both sides of the fence,” she said.

“Until now this has been a grey area and there was nothing stopping this practice.” 

Ms Porter said this has been a common practice in the industry.

"Some well-known mortgage broking firms openly admit to receiving $5,000–$10,000 per referral in their pocket.”

She also said this process has been going on for decades.

"Property investment firms commonly pass some of their commission on to the mortgage broker, accountant or financial planner as a reward to them for passing on the referral. This means that many brokers or financial service providers are making significant amounts of money just to refer on to a property firm, often totalling hundreds of thousands of dollars a year," Anna Porter said.

Ms Porter said the Property, Stock and Business Agents Amendment (Property Industry Reform) Bill 2017 will be in force from July this year, and will prohibit this practice unless the broker or referring partner also holds a real estate industry license.

"Under the new laws, if the broker takes a referral fee from the property firm, they will have to be a licensed real estate agent and also hold a corporation’s license,” she said. 

“Subsequently, every transaction that they receive a referral fee from, they will be putting their license up against the transaction and taking full liability for the conduct, practices and outcome of that transaction, even if they have little to do with the transaction; they are a party to it financially and therefore take as much risk as everyone else in the transaction.”

Mr Porter said where a referrer holds a real estate license, and receives a part of the sale commission, they may find themselves in breach of the ethical requirements under the act.

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New data from Mortgage Choice shows that property buyers continue to choose variable rate home loan products, as demand for fixed rate home loans fell for the eighth consecutive month. 

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According to the company’s latest national home loan approval data, variable rate home loans accounted for over 82 per cent of all home loans written throughout May 2018 — up over 2 per cent from the month prior, and almost 7 per cent higher than the 12-month average.

Mortgage Choice CEO, Susan Mitchell, said this trend will continue as borrowers develop apathy towards the RBA’s stagnant cash rate.

“Indeed, we continue to see borrowers opt for the flexible nature of variable rate home loans which may offer a redraw facility, offset accounts and the ability to make extra repayments. These features are not typically associated with fixed rate loans.

“While a fixed rate product provides repayment certainty, variable home loan rates have been relatively stable for a prolonged period of time giving borrowers little incentive to fix.”

This week’s Housing Finance data from the Australian Bureau of Statistics found that 52,116 home loans were approved throughout April, down 1.4 per cent from the previous month.

Ms Mitchell said she is unsurprised that the value of investment loans dipped — falling 0.9 of a percentage point to $10.7 billion in April.

She said this could reflect tighter lending standards and serviceability policies.

“However, May data may show an increase in investment loans following APRA lifting the cap on investor loan growth at the end of April,” said Ms Mitchell.

Ms Mitchell also noted that the number of first home buyer commitments as a percentage of total owner-occupied housing finance commitments rose to 17.6 per cent in April 2018, from 13.7 per cent in January 2018.

“This increase is significant and first home buyers seem to be propping up the market.”

Ms Mitchell said she expected home loan demand would be maintained.

“[Due to] a combination of factors, such as historically low interest rates, easing property prices and access to FHOGs.”

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Buyer ‘apathy’ behind mortgage preferences
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  string(150) "

The Australian property market is arguably in a softening phase, and this can have both positive and negative effects for property investors.

" ["fulltext"]=> string(2963) "

In this episode of the Smart Property Investment show, Real Estate Gym’s Tom Panos joins host Phil Tarrant to discuss how investors can take advantage of this decreasing market by leveraging off of the reduced urgency in the sales process.  He also discusses the importance of researching up to date sales data before investing and looks at the state of the Australian property market as a whole.

With many property investors also selling property throughout their journey Tom reveals the best months to buy property in Australia, shares his thoughts on why an auction is not always the best method of sale and how as a purchasing decision it can lead to over-paying.

If you like this episode, show your support by rating us or leaving a review on iTunes (The Smart Property Investment Show) and by following Smart Property Investment on social media: FacebookTwitter and LinkedIn.

If you have any questions about what you heard today, any topics of interest you have in mind, or if you’d like to lend your voice to the show, email [email protected] for more insights!

RELATED AREAS OF INTEREST:

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An auctioneer’s advice for investors that are always beaten at auctions

 

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The benefits of investing in a decreasing property market

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