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How to Invest Wisely

By Aus Property Professionals

Promoted by Aus Property Professionals

If you’re looking to get into property investment, here’s the lowdown from Aus Property Professionals director Lloyd Edge!

WHY INVEST?

Property investment is ideal for:

Wealth-building

Financial freedom

Extra income

Children’s education

Big ticket purchases (eg. car, travel)

Retirement income

KNOW YOUR BUDGET

Here’s how to find out where you stand financially, now and into the future:

Calculate your average monthly income. Not only your wage/salary, but also any extra income from part-time work or other investments.

Deduct your average* monthly outgoings. Not only essentials such as food, utilities (eg. electricity, gas and water), medical, car and home contents insurance, car or public transport expenses and phone, but also non-essentials like holidays, club memberships, restaurants, sporting events and entertainment. Consider whether these are more important than building your long-term financial future.

If you currently pay rent, then don’t include it – you won’t have to pay rent after you move into your home! However include council rates, fixed utility charges (eg. electricity, gas and water supply), and an allowance for maintenance and repairs that your landlord normally pays.

* apportion expenses that you pay quarterly or annually.

Keep a ‘rainy day’ cash buffer so that you can continue making your loan repayments even if there’s a temporary downward blip in your income or upward blip in your expenses.

PROPERTY INVESTING MYTHS

Here are four popular myths about investing in property:

MYTH #1: Buy your own home first

Owning your home used to be ‘The Great Australian Dream’, but not today. Your top priority doesn’t have to be paying off the mortgage on your principle place of residence (PPOR in property industry jargon).

Here’s why . . .

A home loan weakens your serviceability* with mortgage lenders. And unlike an investment property loan, it increases your cost of living without earning income.

More often than not, buying a home means you have to live in an area below your expectations. I know this from personal experience early in my investing career!

Typically it costs more to buy a home than to live in rented accommodation while using your capital to invest.

Mortgage payments on your PPOR will hinder your borrowing capacity, and hurt your ability to grow your investment portfolio.

The best way to accelerate your wealth creation – and then buy your dream home – is to keep your living expenses as low as possible while you establish an investment portfolio.

MYTH #2: All debt is bad

Like Myth #1, this is another hangover from the past that isn’t conducive to fast and effective wealth creation.

There isn’t just one kind of debt. There’s ‘necessary debt’, ‘good debt’ and ‘bad debt’, and it’s important to know the differences between them.

BAD DEBT

This is money borrowed to buy non-essentials that decrease in value, such as fancy cars, recreational vehicles, clothes and electronic gadgets.

Worse, the interest rates for a personal loan or credit card are usually much higher than a loan to buy a home or investment property. And the repayments come straight out of your pocket because the interest isn’t tax-deductible.

If you spend your surplus money on ‘lifestyle’ items without putting a solid financial strategy in place, then you’re liable to be living on the pension after you retire.

NECESSARY DEBT

The most common example of this type of debt is a home loan. The interest payments aren’t tax-deductible, but the property isn’t included in government assets tests and the debt provides a roof over your head.

If your home has made a solid capital gain after you’ve repaid the loan, then this debt can still turn out to be a good investment.

GOOD DEBT

This type of debt enables you to buy assets that are likely to increase in value, such as investment properties.

The interest on the loan is tax-deductible because it’s a business expense, and the rental income helps to repay the debt.

You can also claim depreciation and use negative gearing (ie. the costs of buying the property are bigger than the rent income) to make the tax department contribute to the repayments.

Good debt uses gearing to maximise your financial return while staying within your financial limits. Interest-only loans are popular because you can secure a high-value asset for a minimum outlay while collecting the full return (rent).

The equity in your existing assets (the loan money you’ve repaid) and their capital growth can be used to obtain more loans to build your portfolio quicker without affecting your cash flow. Buying multiple properties means multiple capital growth and cash flow opportunities.

On the other hand, bad debt is borrowing money for things that don’t earn you any income, such as flash cars, electronic gadgets, holidays and other non-essentials.

With smart investing, you can pay off the debt on your home loan a lot quicker than if you were relying solely on your salary.

By understanding how to use debt effectively and prudently, you can reach your wealth creation goals sooner.

MYTH #3: Invest in property to reduce your tax

The most important reason to invest in property is to create wealth – not minimise your expenses!

Negative gearing a property is only worthwhile if you’re confident that the average annual capital gain will adequately outweigh the total purchase cost.

There is a tax benefit while the expenses are bigger than the income, but you have to pay the taxman when the gearing turns positive or when you achieve a capital gain on the sale.

So invest for wealth, and if you use negative gearing make sure that you buy in an area with strong prospects of long-term growth.

MYTH #4: Making money from property is a sure thing

As with every form of investment, there’s no guarantee that buying a property will always be worthwhile.

Property values in capital cities and rural regions ebb and flow over time, and they don’t all follow the same trend. In recent years Sydney values have risen very strongly, Melbourne has been reasonably strong, and the other capital cities have only risen slightly or in some cases fallen.

It’s the same with different types of property. For instance, the current oversupply of apartments in Melbourne has made speculators regret buying in a segment that experts predicted was likely to weaken.

Thorough research and the right strategy are the keys to minimising the risks, if not avoiding them entirely.


LLOYD EDGE

Director, Aus Property Professionals

Contact us today!

Call 1800 1 INVEST (1800 146 837)

Email us – [email protected]

Website – www.auspropertyprofessionals.com.au

 

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  string(88) "‘Common’ referrer practice of being paid on both sides of the fence coming to an end"
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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
object(stdClass)#1197 (52) {
  ["id"]=>
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  ["title"]=>
  string(57) "The benefits of investing in a decreasing property market"
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The Australian property market is arguably in a softening phase, and this can have both positive and negative effects for property investors.

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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!

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The benefits of investing in a decreasing property market

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