Investing

Things To Consider Before Investing?

Preparation checklist for investing

Property investment is a lengthy and involved process. To ensure you have considered all that is required before making the big purchase, we’ve outlined the steps you need to take.

1.  Commit yourself

A property investment must be a long term commitment in order for it to be worthwhile, so the very first step is to evaluate your budget, constraints and future obligations.

“Consider your future as far ahead as you can,” says Katrina Rowlands, Home Loan Consultant and Partner of Mortgage Success. “You need to ensure that your ability, commitment and financial capability can withstand a minimum of five to ten years, as that’s what generally brings premium results.”

2. Seek Professional advice

The next step is to seek professional advice. It is your opportunity to ask as many questions needed to alleviate any uncertainty you may have.

“Whether you’re chasing a great rental return, maximum capital growth or tax effectiveness, speaking to a broker will help you make the correct property investment choice,” says Rowlands.

Having an accountant, financial planner, solicitor and property manager on your team will also assist in ensuring that you’ve made the right choice.

3. Personal advice

Talking to friends, family and acquaintances who have, or are currently considering investing, provides a fantastic world of advice, advises Rowlands.

“Anecdotal truths is least impacted by gain, so you can learn a lot from their advice and also from their mistakes.”

4. Paperwork

As well as proof of your current income, employment, debts and loans, gather any paperwork that helps support your character in the application. For example, if you have been a long-term tenant, get a 12 month tenancy legibility that proves your ability to make regular repayments. Before applying for a loan, minimise your current debt load, and if possible reduce the limit on any credit cards you have, as this is perceived by lenders as potential for debt.

It is also advisable to have a fully assessed pre-approval before you start your search, as this will allow you to make an offer once you’ve found a property you like.

5. Key things to consider

Rowlands recommends choosing a property based on whether or not you feel like you could live in it. “It’s not an emotional decision, it’s still a business decision. But you also have to adopt the mindset that you could be selling to an owner/occupier down the track, which could be an emotional purchase.”

If however you plan to rent the property, your decision should be based on what would appeal to the type of individual who wants to reside in the area.

Buying A Tenanted Investment Property?

There are plenty of upsides to buying an investment property that already has a tenant, as well as a raft of risks. Here’s how to minimise them.

Purchasing an investment property that already has a tenant means you collect rent from day one, with no vacant period and no lease fees to find a new tenant. The lease just carries on as it did before you purchased the property. Sound good? Of course it does. There are some possible problems to be aware of though.

It’s very important to check whether the lease on your prospective investment is current or the tenants are on an expired lease. If the tenants are off-lease, they can give a short period of notice and vacate the property, so those upsides mentioned above could come to nought.

A current lease, on the other hand, offers security, it also means that you are stuck with the lease, its conditions (or lack thereof), the current rental return and the tenants.

There are steps you can take to minimise your risk:

• Make sure the bond has been lodged properly. Your agent will arrange for the bond guarantee to be transferred into your name on settlement.
• Check the property condition report, making sure that it is a complete and accurate record of the property as you inspected it.
• Ensure there are no rental arrears. If there are, or if a landlord has agreed that rental arrears can be taken out of a bond payment, stipulate that this amount is deducted from the purchase settlement amount.
• Ask the leasing agent about the tenants and their payment record. You cannot demand that you meet the tenants, but attending the open house will give you a sense of how they live in the property. If possible, sight the tenants’ original application for the property and rental ledger.
• Look at the yield for rental properties in the area and compare them to yours. You won’t be able to increase the rent until the end of the lease.
• Be aware of any concessions or conditions that are either in the lease or have been agreed with the landlord or property manager, because these will become your responsibility. For example, does rent include electricity or other utilities? Has the landlord agreed to install a new oven or paint a room?

Of course, if you love a property but have doubts about the tenants, the lease or the managing agent, all is not lost. You can easily change the managing agent when you settle. You can also make vacant possession of the property a condition of settlement. You may need to wait until the lease expires to settle, but you aren’t taking on the previous owners’ problems and responsibilities.

If your only problem with a tenanted property is the rental yield, keep in mind that increasing rent on a good, long-term tenant may well drive them away anyway, so do your sums. Work out whether the amount you’d like to increase the rent by equates to more over the year than the lease fee plus any rent lost if your property is vacant for a few weeks.

Investing in Commercial Premises through an SMSF

Some of the most important decisions a business owner will make are about their premises: whether to rent or buy, where to base the business and even the style of the property are important to get right. For those with an SMSF, there is one more option to consider: landing business premises and an investment property at the same time.

Figuring out whether buying your commercial premises through your self-managed super fund (SMSF) is an option that’s suitable for you is imperative to the success of your investment.

There can be many gains through purchasing commercial property through your SMSF, including creating a certain level of freedom by smart use of resources.

“It frees up capital for the business owner. They are unlocking super to do more for them,” explains Chan & Naylor Wealth Planning National Partner David Hasib.

Further to this, the property is protected against insolvency. Depending on the type of business, this can be particularly appealing.

“There’s a tremendous level of protection of assets within super, so it ticks the asset protection box for a lot of SMEs that may be subject to litigation due to the nature of what they do,” Hasib says.

Then there are the tax benefits.

“While it is in accumulation phase, income tax is only $0.15 in the dollar. In retirement, as the law stands, its zero,” Hasib says. This means that the money accumulated in an SMSF through the investment does not get taxed.

On the flip side of the shiny self-management coin, Hasib offers a word of warning regarding obligation. “There is an absolute element of responsibility on compliance matters. You are the trustee of an SMSF and you need to understand what those responsibilities entail,” he warns.

You must pay commercial rates for rent through a prearranged lease agreement and, although having a protected asset is great for some businesses, it also means that equity is locked within the fund. You can’t take earnings elsewhere.

Having a SMSF means you can’t give all of this work to someone else to do for you, but you can seek advice.

Should I Have Fixed Rate, Variable Rate Or Split Rate?

That depends on who ‘you’ are.

When you take out a mortgage or home loan, you can choose to have an interest rate this is fixed, variable, or split (a combination of the two). There is no right or wrong option – it all depends on your circumstances.

Fixed rate home loans

With the fixed rate home loan, the interest rate on your mortgage doesn’t change for an agreed period (usually 1-5 years) – no matter what happens to official interest rates.

Variable rate home loans

With the variable rate home loan, the interest rate on your mortgage can change. If official interest rates go down, your interest rates go down too. However, if the Reserve Bank increases interest rates, your home loan rate will probably rise too.

Split rate home loans

A split rate mortgage combines elements of the fixed rate and variable rate options. e.g. You can have 80% of your home loan at a fixed rate , while the remaining 20% is at an interest rate that varies with the market.

Which home loan interest rate option is best?

Because it is absolutely predictable, the fixed rate home loan can give you greater confidence that you can meet your mortgage repayments regardless of changing economic conditions. The disadvantage is that it generally lacks flexibility.

If official interest rates fall, the variable rate home loan can save you money, but you need to consider the risk that your mortgage payments could rise in the future. If you are contemplating a low introductory or honeymoon rate for an initial period you will save initially, but you must find out what the rate will be when the ‘honeymoon’ is over. The lowest initial interest rate doesn’t always mean the better deal.

The split rate home loan gives you some of the benefits of both fixed rate and variable rate loans. You won’t save as much as a full variable rate loan if interest rates fall, but neither will you be as exposed if interest rates rise.

Home loan interest rates: you need to know more

To understand more about which home loan interest rate option is appropriate for you, talk to us today.

Finance Broker Or Bank?

When you’re looking for a home loan, you could go to a finance broker or to a bank. While a bank will only offer you its own products, a finance broker is an industry expert who will take the guesswork out of finding the mortgage product that suits you and your needs.

It’s understandable that finance brokers are now the number one choice for consumers who are seeking a home loan or to refinance an existing loan. Businesses are also engaging finance brokers to help them with their finance needs from car and equipment leasing to loans to help their businesses expand.

What can a finance broker do for you?

The leg-work

Finance Brokers already know the industry, the lenders, their products and their requirements, saving you a lot of time and energy on research. They will also put the time into finding out about your particular credit situation and have a wealth of experience to draw on to help you simplify it.

Translate industry jargon

Finance brokers are able to make sense of what loan documents and lenders are saying – put it into lay-person’s language, so to speak.

Get you what you want

Advisers will determine your borrowing needs and fiscal ability, and choose the only an appropriate product to suit your requirements.

Give you a broader choice

Being brokers, finance brokers have to offer a larger selection of loan products. While a bank can only offer you its own products, finance brokers can help you choose from a selection of loans provided by different lenders.

Help you compare apples, oranges and the whole fruit basket

Finance brokers have the knowledge and tools to compare often hundreds of products and you get a loan suitable for your circumstances and needs.

Find you a good deal

Loan providers are always spruiking a special deal or two, and these could make a big difference to your repayments or success rate. A finance broker will know which of the deals on the market at the moment will be appropriate for you.

Act as your advocate

A good finance broker wants the best for you, the client. They will be your cheer squad, middle-man, team player and coach throughout the process.

They’re in it for the long haul

A finance broker won’t just love you and leave you – they will oversee and manage the loan’s progression right through to the end on your behalf. By the way, ‘the end’ isn’t when you sign the documents and buy your property; you can expect your finance broker to keep track of you and your changing needs, helping you should you need to switch products or wish to purchase another property.