CAT | Finance
“While every person’s situation is unique and different, more people than ever before can potentially be benefitting from this ‘perfect storm’ of lending opportunities,” said Smartline executive director Joe Sirianni.
Sirianni said some of the factors in borrowers’ favour include:
Low interest rates/assessment rates: Variable interest rates are generally around the mid 5% mark, and fixed home loans are available as low as 4.89%. This compares with the long-term average variable rate in Australia of about 7%.
Smaller deposits/larger loan sizes: During the GFC, most lenders increased the required deposit size from 5% of the purchase cost of the property, to 10% which was a serious impediment to many, primarily first home buyers. Most lenders are now happy to accept a 5% deposit and some will even allow you to add the cost of lenders mortgage insurance, meaning you can effectively borrow up to 98% or 99%.
More flexibility on credit history blemishes: While it continues to be important to ensure that you keep your credit history as “clean” as possible and avoid making too many credit applications, some lenders are more flexible in regards to any credit history blemishes. During the GFC, an outstanding payment on a mobile phone account from five years ago could see you refused a home loan. Now, some lenders will accept a low level of credit defaults.
Greater interest rate discounts: While interest rate discounts offered by lenders used to be quite standard, in the past 12-18 months banks have increasingly started to use a matrix to determine the level of interest rate discount they will provide. The larger the size of the loan and the lower loan to valuation ratio, the better the rate you can secure. For example, a $700,000 loan at 60% LVR will attract a better interest rate than a $400,000 loan with a 90% LVR.
Researchers led by Dr Suzy Moat, senior research fellow at Warwick Business School, found that changes in how often financially related pages were viewed on Wikipedia could have been linked to subsequent movements of the Dow Jones Industrial Average.
Their historic analysis detected increases in views of financially related Wikipedia pages before stock market falls.
Moat said the results provide evidence that online data may allow us to gain a new understanding of the early stages of decision making. “[It gives] an insight into how people gather information before they decide to take action in the real world,” she said.
Wikipedia is a popular online encyclopaedia that all internet users can view and edit. Crucially, Wikipedia does not only make its contents freely available, but also data on how often people view and edit its pages.
The researchers looked at how often pages describing companies listed in the Dow Jones Industrial Average, such as Procter & Gamble, Bank of America, and The Walt Disney Company, were viewed between December 2007 and April 2012.
They found that a simple trading strategy based on changes in the frequency of views would have led to significant profits of up to 141%.
Similarly, a strategy based on views of 285 pages relating to general financial topics, such as macroeconomics, capital and wealth, would have also generated profits of up to 297%.
A buy and hold strategy during this period would have led to only a 3% profit.
“We know that humans are more concerned about losing £5 than they are about missing an opportunity to gain £5,” Moat said. “If investors spend more time and effort gathering information before making what they consider to be a bigger decision, then we might expect to see people looking for more financial information before stocks are sold at lower prices, in line with our results.”
The research team had previously found links between Google searches and stock market movements.
If you’re a prospective investor, or even a seasoned property buyer, and the concept elicits scepticism, you’re not alone. Most investors never consider ‘no-money-down’ or ‘little-money-down’ deals because they believe they are impossible.
It’s a pause for thought. Since most investors never get beyond one or two investment properties and this remains one of the limiting beliefs they cling to, you have to ask yourself if following what the rest of the crowd is thinking is really a smart thing to do. Maybe the concept deserves another thought?
After all, there could be any number of reasons you could be interested in buying property with limited funds. You could be a low-income earner or buried in day-to-day expenses. You could be earning a decent salary but struggle to save up enough capital to get your investment ventures off the ground. You could even have a poor appetite for risk and simply want to use as little cash as possible. Regardless of what situation you’re in, these deals can work – provided they have two ingredients.
“First, you have to have knowledge. Then you have to have focus,” says property developer Nhan Nguyen.
Nguyen has been investing in property for over 10 years and has built up a successful property development business from the ground up by specializing in no-money-down deals. His knack for getting projects off the ground without using any of his own cash has earned him the moniker “the no-money-down man” and he believes that without knowledge and focus, investing with limited funds is as impossible as many say it is.
“The key to making a lot of the projects I’ve worked on a success is having the willingness to pitch in hard work. You don’t take no for answer. Some people think that you need to be a professional developer or only be working part-time to use a no-money-down strategy, but that’s not true. What you really need is focus – the commitment to making the project work and the balls to take it on.
“Of course, even before that, you need knowledge. Some of the strategies you can use may seem simple, but you have to understand how they work in real life. You can’t just know about the strategy, you have to learn how to apply it.”
For the uninitiated, what Nguyen suggests may seem easier said than done. It’s one thing to know that you need practical knowledge, but how do you actually acquire it?
According to Nguyen, the trick is thinking big, but starting small. “A lot of people want to do big projects and get into big things quickly. It’s better to start out small.”
Learning about OPM
When trying to wrap your head around the concept of a no-money-down deal, it is important to realise that no-money-down does not mean that no money gets put down at all. It means none of your money. What you’re aiming to do is use other people’s money (OPM) to organise you deals or to net you a buy and hold investment.
This requires some creative thinking. “How can you get other people’s money to pay for your investment? That’s basically the trick to investing with a small amount of funds,” says Victoria property developer Ross Hunter.
Hunter says that you can work other people’s money into your deals in two ways: they can either give you funds directly, such as through a joint venture, or you can access it by using the market. The latter entails getting future buyers of the property to provide you with your start-up capital. Again, this could be directly (through the exchange of contracts) or it could be indirectly (through the bank). Either way, the no-money-down investor is using their ability to research a market, coupled with a nose for sniffing out opportunities, to get into a deal they would otherwise have been left out of.
There are multiple strategies to get into a property deal without putting much money down. Most depend on your appetite for risk and your personal skills. Here are briefly some of your options for accomplishing this:
Little- or no-money-down strategies
1. Buying off the plan
Strategy: Buy a property before it is built and, provided it increases in value by the time it is constructed, borrow against the new value to fund your deposit
Requires: An area where property prices are likely to surge in the future
Buying property off the plan, as in, before the property has been built, can be a clever way to purchase with little funding – although it can also be highly risky.Self-taught property investment powerhouse Ian Hosking Richards has been purchasing off the plan for years and says it has helped fast track the size of his portfolio.
Hosking Richards says the benefit of buying this way is that if the value of the property increases rapidly in between the exchange of contracts and development, an investor can use this newly acquired equity to fund part or all of their deposit.
“Using this strategy, I can borrow against the instant equity to fund the purchase,” says Hosking Richards. “The key is to buy into a growing market and borrow against the end valuation.”
Hosking Richards adds that investors have to tread carefully when using this approach. The strategy only works when an off the plan property is purchased at a good price and in a growing market. The development also needs to have a long lead time.
2. Joint Ventures
Strategy: Get a partner to sponsor the upfront costs of the purchase and split the proceeds
Requires: A partner you can trust, who, in turn, trusts you with their money
“If you want to buy into a good deal, and you don’t have the capacity to complete it, then finding a joint venture partner can provide the missing link,” says Real Wealth Australia’s Helen Collier Kogtevs.
Collier Kogtevs says that in a typical joint venture there are two types of partners: equity partners and finance partners. Equity partners usually pay the deposit and buying costs, the finance partner gets the loan from the bank.
This means that if you’re able to secure a mortgage, but lack savings, a joint venture can be a great way to purchase a property. The catch is that you’ll have to share the proceeds of the deal, but as Collier Kogtevs points out, owning part of something is better than owning part of nothing.
“[My] joint venture partnerships have been fantastic,” she says. “They’ve allowed me to accelerate the growth of my portfolio when I had little or no more equity to use as deposits to buy property.”
Property author Jennie Brown has also had great experiences with joint ventures and has used this strategy to purchase property many times over. She says the key to making these projects work is having everyone in the venture on the same page. She recommends setting out a clear budget and timeframe for how long you and your partner will hold the property.
3. Option agreements
Strategy: Get the vendor to agree to an option agreement, where you have the right, but not the obligation to buy the property. Find a way to increase the property value and onsell it for a profit
Requires: A vendor who will agree to an option agreement, usually a distressed seller
When a buyer and seller agree to an option, it means the buyer will pay the seller a specified amount – usually a couple of thousand dollars, depending on the property – to acquire the right to purchase the property at an agreed price until a certain date.
This amount, say $4,000, will usually be credited against the purchase price of the property should the buyer purchase the property. If the buyer does not exercise the option, the seller retains the payment.
During the option period, the buyer has the option and exclusive right (but not the obligation) to buy the seller’s property. Before signing the option, there will usually be a contract of sale already drawn up, which means that if the option is exercised it will be under terms already agreed to.
An investor can use these types of agreements to raise finance if they can find some way to increase the property’s value. This way they can sell the option to purchase to another buyer who is willing to buy the property at its new value and net the profit.
It’s a risky strategy and relies on the investor having two skills: the ability to add value to the property in a cost effective way (such as a cosmetic renovation), as well as the ability to negotiate a fairly low purchase price for the option.
The other issue is that few vendors will be willing to agree to an option unless they have had some trouble selling their properties.
In the past three years Perth-based Emma Celis has managed to negotiate a number of property purchases with favourable results, scoring great discounts on all. Following each negotiation, her strategy has been to manufacture capital growth through renovation projects, aiming to significantly increase the value of her investments.
Emma believes making these projects a success comes down to thorough planning. “By using various databases and carefully watching your chosen suburb, any investor can quickly attune to the market and be familiar with what a property there is truly worth,” she says.
She cites one of her best deals, a 4-bedroom house in Cloverdale, WA, as an example of how a keen eye on the market can get you ahead.
“The house required significant repair work after a fire and was listed online at $372k. Because I wanted to do a renovation on the property, my figures indicated I needed to buy it at or below $345k to make a profit. Luckily, I think the agent was aware the listed price was too high and had already warned his vendor some discounting might be required.
“My strategy was to go in low-ball so I had plenty of room to move. I put two offers on the table: $300k cash with 30 day settlement, or $320k subject to finance, four months settlement and allowing tradespeople access during the settlement period.”
Emma adds that the second option was also subject to a building and pest inspection. To back up her case, she showed a number of recent sales in the area to reinforce her estimation of the land value and spoke at length about the derelict condition of the house.
The sales agent eventually came back to Emma saying the vendor preferred the second option, but only for $330,000, not $320,000.
Emma remained steadfast. “I responded that the only way I would consider that figure was to push settlement six months and commence the renovation early,” she says.
The vendor accepted the original offer of $320,000.
Emma adds that some of the attributes of the house sweetened the deal further. “It was listed as 3-bed, 1-bath, but when I inspected it I discovered a fourth bedroom had been added. The agent hadn’t bothered to list it because he had simply taken the data off old property info from RP Data.
“Following the building inspection I also managed to negotiate a further $5,000 off the purchase price. I did this by expressing my dissatisfaction with the building report and advising the sales agent there were more repairs required than first thought.”
This meant that Emma’s eventual purchase price was $315,000, $57,000 below the listed price. She went on to renovate the property and after five months scored a $53,000 profit.
While acknowledging that the deal wouldn’t have been possible without great negotiating skills, she admits that sometimes she hasn’t been able to negotiate as low a price.
“I used similar tactics on a 3-bedroom house in Beckenham, WA, but wasn’t as successful negotiating a significant discount off the advertised price.”
Emma says the house was advertised between $395,000 and $415,000, and being suitable for a subdivision project, she offered $390,000. The vendor counter offered at $415,000 but Emma declined to make another offer, telling the vendor she was not interested in that price.
The sales agent contacted her five days later. “He asked what my best and final offer would be. I told him the only way I would consider anything over $395k would be if the vendor allowed a six month settlement, authority to act on subdivision and allowed some renovation to take place. I also wanted the property to be tenanted.”
The vendor accepted the offer with reasonably standard clauses and subject to surveyor reports. After being satisfied with the surveyor’s and building report, Emma managed to negotiate a further $5,000 off the price by turning the offer unconditional. This left her final purchase price at $390,000.
“I’ve gained the confidence to negotiate through practice and education. I will always know the final walkaway price I’m willing to pay on an investment property prior to writing that first offer. Even in a hot, competitive scenario I will not write up my best offer first.
“I also know that it may take writing offers on 10 or more properties before I get one accepted, but I have confidence in my figures and know it will be profitable. I also believe that using the right written clauses and wording in your offers is critical. This allows you to take a property off the market while you complete due diligence but you can still walk away if necessary.”
She has one parting shot of wisdom. “Remember the price listed on the advertisement does not need to influence the price you offer, no matter what the agent tries to tell you.”
A major property developer has identified an area in north-western Sydney – on the cusp between Putney and North Ryde – as an emerging hotbed of real estate activity, putting its chips on the area becoming increasingly popular among buyers.
Frasers Property Group Monday unveiled landscaping plans for a master community at Putney Hill, which the company’s marketing material claims will include flowering parks and exotic gardens.
This comes after buyer’s advocacy group Secret Agent recently confirmed in its Secret Agent Report that property within close proximity of parkland generally shows stronger sales prices than properties that are not.
The study reviewed the performance of prices in key suburbs around Melbourne and found that parkland properties outperformed average growth rates – irrespective of whether they had direct parkland views or not.
Frasers’ vision for the Putney area includes a 4,400 square metre, wildlife-friendly bushland park to compliment newly constructed apartments, as well as lush rainforest style gardens with native and exotic flora. There will also be community rooftop gardens with activated spaces where residents can grow vegetables and herbs.
Frasers Property group sales manager Adam Sparkes explained that Putney Hill’s park offering has been motivated by the popularity that parks have shown among buyers.
“Most of the young professionals and families buying homes at Putney Hill lead busy lives, so coming home to an array of lush, green spaces is exactly what they need to relax and unwind,” he said.
The company’s first offering of houses in this development have all been sold, but other off-the-plan opportunities are available for completion in 2014.
Government intentions to revisit new taxes on superannuation payouts for retirees could set up Australia’s retirement infrastructure for a massive failure, says Accounting Group Chan & Naylor.
“During recent weeks of political tax grab barracking the government has successfully managed to stigmatise Australian retirees who have managed to set aside their own monies for independent retirement while simultaneously eroding public confidence in super as a mechanism to plan for the future,” says Ken Raiss, Chan & Naylor director.
Raiss believes the government’s plan to tax super funds with over $1m will create an ‘us and them’ perception likely to lull future retirees into a false sense of security of what constitutes a comfortable retirement.
“$1m in today’s terms is a considerable sum, [but] for a married couple with 30 years of retirement ahead of them… this nest egg begins to look worryingly inadequate especially when inflation erodes your buying power,” Raiss says.
According to Chan & Naylor’s forecast, the equivalent value of a $1m pension fund in today’s currency will need to be at least $2.5m in 30 years.
“Australians are going to need more retirement income and the government of the day is doing surprisingly little to help,” Raiss says.
Raiss further argues that other factors are discouraging Australians from maximising their future retirement income.
“The myriad of ever changing rules and limited concession opportunities, particularly those that are associated with the increasingly popular SMSF sector, means that many people are shunning investing in their super and instead putting their money into more risky investments or simply spending it.”
A group particularly at risk is relatively affluent Australians in the 50 years bracket who have paid off their mortgage and children’s education and are now looking at ways of investing for their retirement.
With disposable income and the high likelihood of inheritance, this group may shy away from investing in their super due to unrealistic contribution caps and severe penalties for breaching arbitrary limits, says Raiss.
He warns that to avoid a crisis where retirees run out of money halfway through their retirements future governments must restore public confidence in super.
Canberra’s property stability is proving a major strength but most investors are unlikely to take notice – and that’s the city’s tragedy.
Much to the chagrin of people who live there, Canberra has developed something of a reputation as a place where, apart from politics, nothing much good or bad happens.
True or not, it’s a sentiment that has found its way into the property market. Prices show that Canberra is the wallflower of Australia’s capital city markets: property values neither plummet or skyrocket, they simply coast along. In good times and bad, Canberra property never makes the headlines.
This is the city’s major tragedy. A quick look at ACT property stats tells us why. Australia’s capital is home to just 360,000 people and is a smaller market than a lot of the major suburbs in bigger cities. The Gold Coast’s Surfers Paradise alone had more unit sales than the whole of the Australian Capital Territory in 2012.
Despite its size, the market is robust. Over 2011, Canberra showed the highest value growth among all capital cities. The official figure was only roughly 0.5% growth, according to Residex, but this was as every other capital city sank backwards. Brisbane , Adelaide and Perth house and unit prices, by comparison, each fell by around 5%.
2012 was a similar story for Canberra. The best performer among capital cities was Darwin houses (8.1%), but apart from that the only other capital cities that saw growth (Sydney and Perth) recorded figures less than 1%. Canberra growth was at 0%. Meanwhile, Australia’s four remaining capital cities all shrank back in median property values.
“Canberra is a very dense housing market,” says APM senior economist Andrew Wilson. “It doesn’t have a real top or bottom end and doesn’t have the same fluctuations that you see in other cities.”
Wilson says that what keeps the Canberra property market ticking is higher-than-average incomes and an ongoing shortage of land. “It does have a shortage of accommodation and there are constraints to the release of new land because of the cost of infrastructure development, among other things,” he says.
Wilson adds that the release of land is further slowed by mechanisms such as ballots, which contribute to the ongoing land shortage. Demand from first homebuyers tends to be good too, keeping the market active. It’s the age-old equation of supply and demand and this is what has kept the Canberra market resilient.
Unemployment and population figures also bode well for the ACT. Estimates by the ABS have the city unemployment rate at 3.9%, among the lowest in the country, while population growth has been above the Australian average at 1.9%.
It may not feel like it, considering the high property prices in some of Australia’s cities, but housing is becoming more affordable on the back of interest rate cuts, a growth in earnings and weak price developments.
The Housing Industry Association (HIA) claims that its HIA-CBA Housing Affordability Index increased 5.5% over the December quarter, representing an 18.4% advance on the same period of 2011.
HIA senior economist Shane Garrett said the figures represent the eighth consecutive quarter of increase, bringing affordability close to levels not seen since the height of the GFC in 2009.
“For regional areas, affordability is at levels last seen during the early 2000’s… Affordability is on the increase in every part of the country. This has been driven by the weakness of price developments as well as the two cash rate reductions effected by the RBA in the final quarter.”
He said continued growth in earnings also contributed to the increase, but noted that “affordability would be even more favourable to householders had recent RBA rate cuts been passed on fully by lenders.”
The HIA-CBA Housing Affordability Report recorded improved affordability in all seven capital city indices as well as improvements in the six indices tracking the non-metro regions of each state (Northern Territory is not included in the analysis).
With a bright pink two-storey house on its eastern-side, while everywhere the pavement grass looks trim enough to putt on. The intersection of Cinel Crescent and Carandon Drive in Truganina is quirky, but hardly remarkable. At the centre of the roundabout is a small garden, distinctive only because its modest designer made it almost too small to spot.
To the keener observer, however, the view from the roundabout says a lot about what is happening in the western fringes of Melbourne. That’s because no matter which direction you look down Cinel Crescent or Carandon Drive, every house is newly built. It’s the same in the streets that run parallel and perpendicular and it’s the same even further afield in Tarneit and Wyndham Vale, other suburbs on Melbourne’s western fringe.
That’s the problem. With the stellar rate of building that was initiated in Melbourne across 2010, much of the city property market remains heavily oversupplied with new dwellings. Out west is where this is most immediately apparent.
In Truganina, where new houses rule the market, the proportion of all properties up for sale remains just above 6%, according to DSRscore.com.au. In nearby Wyndham Vale and Tarneit, that figure is closer to 4%. To put these numbers into perspective, the average suburb in any Australian city normally has roughly 1% of its properties up for sale at any given time.
The rabbit hole goes deeper
Vacancy rates in western suburbs are ringing their own alarm bells. A vacancy rate of around 3% normally indicates a market in balance – where the supply of rental properties meets the demand for them – but all of the three suburbs above are experiencing vacancies edging close to 5%, according to December DSRscore.com.au numbers.
Michael Yardney, director of Metropole Property Strategists, says this situation is hardly a surprise. “While the overall Melbourne property market is recovering, there are some parts of the market that are oversupplied and likely to fall further in price. With too many vacant house and land packages in the western suburbs, rents and values in these areas are unlikely to rise for some time,” he says.
Yardney believes that the situation on the western fringes of Melbourne is a sharp reminder of how dangerous it is to think of Melbourne as one, single property market. “Recently released figures suggest that the Melbourne property market could have bottomed around May 2012 … but it’s a little like me putting one hand in a bucket of ice water and the other in a bucket of hot water and saying that on average the temperature is fine.”
Empower Wealth director Bryce Holdaway agrees that general comments and statistics about the Melbourne market are not always helpful in showing what is happening on the ground, and this shows why even though 2013 may be a better year than 2012 for much of Melbourne, the city won’t be without areas that struggle.
“Melbourne is made up of hundreds of submarkets,” he says. “It is a large metropolis with a big population base and a wide and varied job market. Different parts of the city have different community needs.”
If the western fringes of Melbourne remain a risky prospect for investing, Holdaway says that, conversely, the best opportunities are probably in the inner city. “Now is a fantastic time to be buying the city’s blue chip real estate,” he says. “You can secure it on terms much more favourable [than in the past] and if you look for property with some kind of scarcity value there’s a greater possibility of getting an outperform result.”
5, 10 or even 16% rental yield sound tempting. RP Data’s revelation that it is possible to get 16% rental yields in one of Australia’s emerging housing markets has some commentators urging investors to get active, while others are not so sure.
For years, property investing has been the enclave of those with plenty of cash to spare, but some observers believe this is starting to change.
After reviewing suburb statistics commissioned from RP Data, Aussie Home Loans executive chairman John Symond said there are at least half a dozen suburbs in each capital city where rental yields are greater than the cost to repay the mortgage.
“It’s the perfect time for the average Australian to consider a move into property investment if they have some money saved. Both fixed rates and variable rates are the lowest they have been in years, with interest rates below 5%.”
Housing prices in some areas are historically low, according to the research, but are starting to move back up and Symond claims investors can earn rental yields of between 5% and 10% in some areas and as high as a 16% in Bellamack, Darwin.
However, Northern Territories broker franchise principle, Tony Schelling, said he is concerned the data may be slightly skewed.
“Bellamack has had some pretty new homes, so 16.9% -you’d have to have very, very low cost housing. The average house in the area is probably $600,000 and they’re getting about $1,000 per week for rent. I think the figure does seem a little high.”
Schelling said he didn’t want to question RP Data, but said it’s possible for figures to occasionally become ‘adjusted’ by limited sales.
Otherwise, he largely agreed with Symond, adding that local rental yields are high, especially for units.
“Darwin in particular has opportunities for those who have a focus on investment and unlike towns like Gladstone in Queensland, which also have high rental yields… Darwin has a multi-stream economy.”