Whats Happening in Finance and Property Investment

Great Interest Rates at the moment

John Smith - Thursday, November 20, 2014

The banks are really fighting each other for your business at the moment.

Rates on offer are very low, however it does depend on the bank you are going to.

Some are offering extremely low fixed rates but their variable rates are higher, and some their variable rates are low, but fixed rates are high.

Make sure you crunch the numbers and review your objectives before choosing or ask a broker to do it for you.

Up, Down, and all around for Interest Rates - what is happening!

John Smith - Thursday, November 20, 2014

Lots and lots of talk in the media about where people see interest rates heading. No wonder everyone is confused.

Also some weird calls from economists, like one that said interest rates would rise next year and then fall again after that.

Funny how the futures market shows exactly the opposite for the next 18 months.

I will try not to be cynical, when I see it is someone associated with  providing home loans and their fixed rates are higher than their variable rate.

As I was saying the Futures implied yield curve for the next 18 months shows a slight downward curve until August 2015, however it is about 0.07% so I  doubt the RBA will drop rates by the normal 25 basis points or 0.25% unless something else triggers it.The market knows the RBA don't want to overheat the property market any more than it is, and raising interest rates will kill off any economic recovery.

Then the curve rises again up to April 2016, but only by about 0.095%, so in essence where we are now.

In other words for the next 18 months 'The Market' does not see any change to official rates, so I have to wonder where these so called economists are getting their information, especially as this is the data that the banks use to hedge themselves for any movements.

I also suggest the rise at the end of the curve is more about risk, than expectation. You see the further we go into the future the more risk there is that the curve is wrong, and so you have to pay more for your hedge.

What Banks Don't tell brokers

John Smith - Wednesday, November 19, 2014

With all the competition in the market at the moment, if your interest rate seems high, then you should be talking to your broker about it.

You see, as a broker, we may have organised the loan for you originally however banks do not keep us up to date with the rates you are currently paying. Two to three years down the track, your rate may be higher than what is currently being offered in the market.

If they don't tell the broker, then the broker is unlikely to go an reprice a deal in your favour, as we are unaware of what you are paying now.

Secondly many clients are unaware of the exact rate they are paying. I know as investors, many of you are very aware, but it is worth it to regularly check.

...and do yourself a favour and ask your broker if he can get you a better deal.

Sick to death of so called property education or mentoring companies..

John Smith - Wednesday, November 19, 2014

There I was in August promising you an email in September, and now I rise my head, its November. Wow! how things can just change overnight. Whereas I was looking to tell you about boosting your property portfolio, an offer came along, to actually be involved in the process as you may have read above.

You see for some time now I was getting sick of seeing clients portfolios come to a grinding halt as they bought negative geared property and what they thought was cash flow property. Most of these purchases were under the guise of some education or property mentoring program. In actual fact, they were just lead generators for selling property and even worse some people will $10,000 to $15,000 for membership in these mentoring programs.

In fact I had one such client who I was arranging an increase of a loan so he could use the cash, for a new purchase. His mentor who works for a real estate company had told him the value of the clients existing property investment was higher, and with that cash he could buy this fantastic deal they had.

Now banks are tougher on cash out and due to valuation issues as well, the client could not get as much as he needed.

Next minute, the mentor is suggesting he sell the property, so he can buy this new fantastic property.

Seriously how do you go from keeping the current investment property and getting some cash out against it, to selling it, all within one week. Where is the real advice in that.

There is none, because its all about selling more property.

Well now as of a few weeks ago and again prompted by what went on above, I now have a new business partner. You can read more here.


Cross Collateralisation - What you don't know can hurt you.

John Smith - Wednesday, August 20, 2014

For a long time property spruiker's have used  the fear of cross collateralisation to get you to use their finance staff, which means they also have your financial details and that allows them to qualify you for property purchases.

Overall I am not against this, as cross collateralisation can be a problem, however in the majority of the cases the spruiker's and their finance staff only half understand the cross collateralisation risk.

There are actually two types of cross collateralisation -

1) The first cross collateralisation that everyone talks about, is where the bank or lender agrees to give you a larger than 80% loan to purchase a second property, however they actually link the loan to your first property, so the total LVR (Loan to Value Ratio) is actually lower than 80%. Normally any loan larger than 80% attracts an LMI (Lender's Mortgage Insurance) fee which can be quite high.
1st Property worth $100,000
2nd Property buying for $100,000
Loan of $90,000
Instead of paying LMI, the bank cross collateralises the two properties, so now its a $90,000 loan against $200,000 worth of securities, which represents a 45% LVR.

Its fantastic you have avoided the LMI, however it causes real problems if-

a) You want to sell one of the properties and you are expecting a certian amount of cash back. Because they are cross collateralised the lender has the choice of how much cash you will get. They may decide to pay off the loan instead, of you getting most of the cash. They have the choice, you don't.

b) You see a good rate with another lender, or want to get further cash out of your property, so you go to refinance one of your properties, and the next minute your new lender advises you that the old lender wants to repay all of the existing loan, even though you intended to leave that loan and one security with the old lender.

And yes I have seen this happen quite  few times, and also cases where the borrower did not even know the lender had cross collateralised the properties.

2) The second not rarely known about cross collateralisation, is just using the same bank for all of your property loans. Even though each property may have it's own loan completely separate from every other property, there is still a form of cross collateralisation within the loan documentation call the "All Monies Clause"

The "All Monies Clause" basically say this - "All debts are secured by all properties" or "A default on one property is a default on all properties"

In other words if you are late with a payment or default on any loan, then basically you are in breach of all loans, and the bank has the right to sell whichever property they deem to be the best property to sell to get their money back. That may be your own home!

In fact if you had a credit card with that same lender, and you failed to make your payments, then that is a debt to the lender, and all loans are then in breach.

Summary: Cross collateralisation is something you should try to avoid, however a little cross collateralisation is OK if unavoidable. Don't go overboard trying to avoid it to your financial detriment. If there are some large costs involved, wait until you need to do something, where breaking the cross collateralisation now makes sense.

Most affordable inner suburbs within 10Km's of capital cities

John Smith - Wednesday, August 20, 2014

RP Data just released a list of the most affordable suburbs within 10Kms of each capital city.

Here is the list - just click here: June 2014 Most affordable inner city suburbs

And while I am talking about RP Data, I recently advertised to my local market by mail, offering a free property report. I think they may have thought I was a Real Estate agent wanting to sell their property, and may have filed my advertisement in the bin.

I then realised that I should offer the same to my newsletter subscribers. So here it is - if you would like a free property report please click here - Free Property Report



Whats happening in the economy Aug 2014

John Smith - Wednesday, August 20, 2014

Its been an interesting few weeks with unemployment hitting 6.4% and the Australian Misery Index sitting at 9 (The unemployment figure added to inflation rates) the highest it has been since the GFC.

If you talk to people everyone seems gloomy about the economy at large, as the bush telegraph takes its toll. Lets face it, with the speed of communication and the likes of facebook and twitter, we are in constant communication with people all of the time, so we are bombarded by gloomy messages especially from the media, who make their living from telling you bad things.

BUT should we all really be that gloomy?

It looks like Interest rates won't be increasing anytime soon, with the market expecting them to stay level for the next 18 months, and the RBA saying that they are comfortable with the current rates. Why are they comfortable? Because they are treading a fine line right at the moment. The RBA won't want to kill off economic growth by increasing interest rates, and won't want to overheat the market by decreasing interest rates. They like the rates where they are right now!

The stock market is up about 4.3% since the beginning of the year, up 9.2% over the last 12 months, and up 25% over the last 5 years.

Australian property prices in capital cities from June 2013 to June 2014 show growth -

  • Sydney 15.6%
  • Melbourne 9.3%
  • Brisbane 6.8%
  • Adelaide 5.6%
  • Perth 3.6%
  • Hobart 4.3%
  • Darwin 3.4%
  • Canberra 2.2%

Its true that rental vacancies have risen in all capital cities except Hobart, but are still at about normal vacancies rates of 2.3% (Hobart at 1.6%)

If you are out of work, you may not be happy, or if you took part time work as that is all you could find, then you may find costs a little too high, but at the end of the day even if you inflated the unemployment figures by a further 13.6% to cover those that have given up or doing part time work, that still means 80% of people are still employed.

Long periods of time in a low interest rate environment have always led to booms, and I don't think this will be any different. Make sure you don't let the doomsayers hold you back.

Depreciation Tips on Residential Investment Properties

John Smith - Tuesday, August 19, 2014

After talking to an property investor client recently about ways to increase cash flow, I felt it would be a good idea to provide some insights into depreciation on residential property investments.

Before I do here is a disclaimer (the price of our litigious society): Keep in mind this is a guide and you should not rely on, or attempt to benefit from this information, without talking to a qualified tax accountant or quantity surveyor.

Depreciation that can be claimed on a residential investment property is made up of two main items or categories. The first is the building or "Capital works" and the second is "Fixtures and Fittings". I also discuss scrapping, which is replacing fixtures or fittings, how to increase your cash flow by claiming deductions early, and provide some information on Quantity Surveyors.

  1. Capital Works Depreciation
  2. Fixtures and Fittings Depreciation
  3. Scrapping
  4. Increasing Cash Flow
  5. Quantity Surveyor Vs your Accountant

1) Capital Works Depreciation -
If your residential property was built after the 17th July 1985, or there were structural improvements (fences, sealed driveways, etc) made after the 26th February 1992, then there is a good chance you can claim depreciation on the construction costs relating to the building or improvements.

Now there is a little sting associated with Capital Works deductions. The amount claimed, reduces the amount you actually bought the property for (the Cost Base), which increases your capital gains. In simple numbers, if you bought a property for $100,000 and claimed $10,000 in capital works deductions, your cost base becomes $90,000. If you sold the property for $150,000 then capital gains would need to be paid on $60,000 being the sale price of $150,000 less the cost base of $90,000.

At least after 12 months your capital gains are halved, so there is still a benefit!

2) Fixtures and Fittings Depreciation -
Fixtures and fittings are all the items within an investment property that are removable, like carpet, hot water systems, etc. There are currently two methods for claiming the depreciation - (a) The Diminishing Value and (b) Prime Cost.

The diminishing value method is a lot faster than the prime cost method, in fact in the first 5 years its about 67% vs 47% depreciation available to be claimed. After 15 years both methods are approaching the 100% mark. The point here is that the diminishing method allows higher claims at the beginning, while the prime method has more constant claims over time and therefore higher claims at a later period.

Which method you want to use is up to you and based on your investment strategy - talk to your accountant. Keep in mind once you choose a method you can't change it for that property.

3) Scrapping -
Its amazing that more investors don't know about scrapping. When renovating, old fixtures and fittings like carpet, or bathroom cabinets usually get thrown out, however quite often they have a value. Before you renovate you should get a scrapping schedule from a quantity surveyor, because you are entitled to claim a deduction for the full cost of the items you are scrapping or throwing away. After the renovation you should get a new depreciation schedule done - make sure you keep your receipts!!

4) Increasing Cash Flow -
Normally depreciation is only claimed at the end of the year, and the investor gets a nice chunk of tax back. But why wait!! Now you can claim it back early by reducing the tax you pay out of your salary. Talk to your accountant about a "PAYG Withholding Variation" form. How does it work - Your accountant calculates your expected deductions, and lodges the form with the tax department. The tax department then advises your employee to reduce the tax you pay, which is reflected in your payslip and the cash you receive.

5) Quantity Surveyor Vs your Accountant -
A quantity surveyor is authorised by the tax department to determine the value of your fixtures and fittings, as long as they are also a Registered Tax Agent, whereas your accountant is not. Although an accountant can produce a depreciation schedule, it is restricted to certain items, and a quantity surveyor can depreciate many more items. Ask your accountant to make sure, or talk to a quantity surveyor, who after a few questions can usually tell you over the phone whether its worth doing.

Summary - At the end of the day, there will be some sort of depreciation you can claim. Make sure you maximise the benefits of owning an investment property.

Budget axes tax break for first home owners

John Smith - Friday, May 16, 2014

After backing away from making any changes to negative gearing, the Government has decided to axe First Home Savers Accounts, as announced in the budget.

The accounts were designed to allow first home owners  to deposit money into the account and the Government would make a contribution of 17% of what you had deposited.

Unfortunately the accounts never really took off as you could not touch any of the money for 4 years. As part of the axing of these accounts, from July 2015 all restrictions will be lifted, and you can use the money for whatever, although you may have to talk to your tax accountant, just in case the Government sees the 17% contribution as interest earned and tax is payable.

Not bad overall, if you have one of those accounts, however before you go running to open one now, any new accounts opened since the budget speech, are not entitled to the contribution.

Badgerys Creek Airport - An opportunity for property investors

John Smith - Friday, April 18, 2014

With the announcement of the start of construction of Sydney's second airport at Badgerys Creek in 2016, this could be a great opportunity for prices to take off in the western suburbs, especially as it is expected to create 60,000 new jobs when completed, and those people need to live somewhere.

But make sure you don't buy  in the flight path. To help here are some images of the expected noise and areas affected.

Here is the Governments expected transport, growth and employment areas.

Click Here

Here is a map of the expected noise levels and the areas that will be affected.

Click Here

Note the map was done in 1985, and planes are a lot quieter now, so some of those areas at the outer edges, may not notice as much.

Here is a larger map, showing areas around the airport not affected by noise.

Click Here

As you can see Penrith and Liverpool, both large population centres will directly benefit, as will the suburbs around them.

Keep in mind, with anything that is political, there are risks, but considering this has been on the drawing board for 20+ years, and the major political parties are behind it, there is a good chance it will go ahead.