In­vestors nail­ing mar­ket

The Weekend Post - Real Estate - - Front Page - Paul Clitheroe

PROP­ERTY in­vestors are dom­i­nat­ing the spring real es­tate mar­ket, ac­count­ing for al­most h a l f o f t oday’s new mort­gages.

The low in­ter­est rates we’re see­ing are un­doubt­edly driv­ing a large part of in­vestor in­ter­est but any­one think­ing of buy­ing a rental prop­erty needs to con­sider a broader range of is­sues than cheap fi­nanc­ing.

Ac­cord­ing to hous­ing fi­nance data from the Aus­tralian Bureau of Sta­tis­tics, in­vestor fi­nance com­mit­ments ac­counted for 45 per cent of all new home loan dol­lars set­tled in July (ex­clud­ing re­fi­nancers), ahead of up­graders (44 per cent) and firsthome buy­ers (11 per cent).

That’s a sig­nif­i­cant rush of in­vestors, and while it may be mak­ing life dif­fi­cult for first-home buy­ers, who of­ten com­pete in the same lower price brack­ets as in­vestors, the key is­sue is that some in­vestors may not be tak­ing a long-term out­look. And that’s crit­i­cal when it comes to res­i­den­tial real es­tate.

You see, the en­try and exit costs for prop­erty are high, es­pe­cially com­pared to other as­set classes such as shares. In­vestors face ex­penses such as stamp duty, le­gal fees and agent’s com­mis­sion on the sale of a place, which usu­ally all add up to many thou­sands.

In fact, you could be look­ing at buy­ing costs to­talling up to about 5 per cent of the prop­erty’s value, with exit costs com­pris­ing a fur­ther 3–4 per cent of the prop­erty’s sale price. It means a prop­erty may need to ap­pre­ci­ate by as much as 9 per cent be­fore you break even – let alone make a cap­i­tal gain on the place.

It can take time for prop­erty val­ues to rise by this much. In the mean­time, in­ter­est rates are likely to change from to­day’s lev­els. Sure, they could fall fur­ther. But at some point they will also rise.

So while it makes sense to look for a prop­erty with ten­ant ap­peal in a sub­urb with po­ten­tial for cap­i­tal growth, it’s also im­por­tant to crunch the num­bers and check any rental prop­erty you’re con­sid­er­ing is still a vi­able op­tion if in­ter­est rates rose a few per­cent­age points in the fu­ture.

Re­mem­ber, if you take out a vari­able rate loan, the rate you pay could vary from month to month. Yet, as a land­lord you may only be able to raise the rent once a lease has for­mally ex­pired, and that could be ev­ery six or 12 months, de­pend­ing on the term.

Bear in mind, too, rental prop­er­ties have on­go­ing costs. Th­ese usu­ally in­clude build­ing insurance, prop­erty man­age­ment fees, coun­cil rates or strata levies, and main­te­nance – and, of course, un­ex­pected re­pair bills.

I of­ten hear peo­ple say, ‘‘But I can claim all th­ese ex­penses as a tax de­duc­tion’’. That may be true; how­ever, you have to pay the cost in the first place to claim the tax break.

Don’t get me wrong, a well­con­sid­ered prop­erty can be an ex­cel­lent in­vest­ment. Just be sure to do your num­bers care­fully to de­cide if your fi­nances can han­dle an in­vest­ment prop­erty if in­ter­est rates were to rise.

Pic­ture: THINKSTOCK

Num­ber crunch: Con­sider the costs and par­ties in­volved be­fore in­vest­ing.

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