FAQ

1. WILL PROPERTY PRICES KEEP RISING

It is easy to look back on charts and see how real estate values have risen over the years, but is this going to continue?
Property values are basically driven by supply and demand and a number of factors would suggest that property values will continue to rise for certain types of property.

These include:

Despite the fact that Australia's population is not increasing at the same rate as it did in the past, there is still a steady growth in the total population requiring accommodation as new families are being formed.
With changing lifestyles, today marriage is not the only option and more people are living on their own. This creates the need for more accommodation, but of a different type.
With 1 in 3 marriages ending in divorce, couples that previously only required one household now require two, creating further demand on housing.
Australia's population is aging, but gone are the day when parents moved in with their children or into a granny flat. Now many retired couples are moving into a retirement village or into their own small unit or townhouse which is extending the need for this type of housing.
The "baby boomers" are now looking for a different lifestyle as their children grow up and leave home. Many are leaving their quarter acre block in the suburbs and downsize into a townhouse near or in the city. They are looking for a different lifestyle with easy access to restaurants and entertainment, no gardens to keep and no grass to mow. They travel a lot and are looking for accommodation that they can lock up and go away for holidays without worrying about security.

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2. WHAT IF REAL ESTATE PRICES STAGNATE?

It is true that real estate prices don't go up year after year.
In fact, for some time during each real estate cycle, prices drop. That is why you must consider property investing as a long-term project.

If you are in it for the long term, then what happens to property values from one Christmas to the next should not concern you, as you know that history shows that over the long term, you should achieve around 10% averaged annual growth in the value of your property. That is if you have chosen the right type of property in the right area.

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3. ISN'T MANAGING A RENTAL PROPERTY A BIG HASSLE?

No! Maintaining control of your investments does not necessarily mean active involvement.
The great thing about property investment is that you can do as little or as much as you want to. You can do all the maintenance and bookwork yourself, or you can employ someone to do it all for you. And these expenses are tax deductible anyway.

A good property manager can do most things for you from paying the rates to arranging for the shower to be fixed or making insurance claims if necessary. The degree of involvement is entirely up to you.

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4. WHAT IF I HAVE NO DEPOSIT FOR A PROPERTY?

While cash is not really necessary if you want to invest in real estate, you will need to have sufficient assets against which you can borrow the deposit for a property. Often some equity in your own home is all that is required to allow you to borrow the full value of your investment plus the additional acquisition costs.

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5. IS PROPERTY INVESTMENT STILL OK IF INFLATION LEVELS CHANGE?

Over the years the capital growth in property values has on average been between 2% and 4% higher than the rate of inflation. To get the most out of your property investment it's not so much the absolute capital growth rate that is important, but rather the growth relative to inflation.

During periods of high inflation such as during the 1980's property proved to be an excellent hedge against inflation. During this period, interest rates were high but rents kept rising which helped investors service their loans. At the same time property prices kept rising at a rate a couple of percent above inflation.

Inflation has been low over the last years and is likely to remain so for the next few years. But so are interest rates and this makes property affordable.

The positive cashflow that can be obtained during periods of lower inflation and low interest rates together with property's capital gains still makes property an excellent investment.

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6. WHAT IF THE TENANT LEAVES OR DAMAGES MY PROPERTY?

If you own investment property, it is inevitable that you will have tenants who leave and that it might take a week or two to find another tenant. If you are using a real estate agent to manage your property, they will charge a commission for reletting your property. This will usually be equivalent to about the first week's rental. Some agents may also expect reimbursement of advertising costs etc but you should be informed of this at the time.

There is no reason to get upset about this. It is just an everyday part of property investing. When you do your budgets, factor in a vacancy periods of say 2 weeks per year.

"OK, I know I will occasionally have a vacancy. But what about the tenant who suddenly moves out without notice and leaves me in the lurch" or "what about all the damage to my property" you are asking.

There are ways of protecting yourself against this. I recommend using a good property manager to manage your properties who has strict criteria and carefully selects your tenants. You can also take out landlord insurance to cover you for losses caused by accidental and malicious damage by tenants and for default of rental payments.

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7. WITH AN INTEREST ONLY LOAN, WHEN DO I ACTUALLY GET TO OWN THE PROPERTY?

Whether you ever get to "own" the property outright is not really relevant.
What is important is that your equity in the property rises over time. Eventually the debt will be insignificant compared to the property value. Reducing the principal reduces the interest claimable and you'll then pay tax on the rent. So why pay it out?

The only loans you should pay out while you are building wealth are those that are not tax deductible - such as the loan on your own home or car.

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8. WHAT IF INTEREST RATES RISE?

The good news is that when interest rates rise, it usually means that the economy is moving ahead and your property is going up in value. And so are the rents.

The bad new is that your costs, especially the cost of the money that you have borrowed to buy the property, which is measured by the interest rate you are paying, are also increasing.
You can protect yourself from this by borrowing using a fixed interest loan. When you first take out your loan, establish with your bank that you want to have the flexibility to "lock in" the interest rate on all or on a percentage of your loan. If you are worried about interest rate

increases, consider this option, because while you may pay a little more for a fixed interest rate loan initially, if the rates do rise, you are insulated against rising repayments and your financial mentor will be able to advise you on this.

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9. WONT THERE BE A GLUT OF VACANT PROPERTIES WHEN EVERYONE BUYS RENTAL PROPERTIES?

Unfortunately, despite the fact that the knowledge of the benefits of investing in property is freely available for those who want to take advantage of it, the truth about human nature is that only a small percentage of the people who read the books or go to the seminars will ever take the step towards becoming financially independent.

Currently about 30% of Australians rent residential property and the numbers are predicted to increase over the years.

Property prices increase faster than inflation and therefore wages, which means that property prices and the deposit required to purchase a property are rising beyond the reach of more and more Australians. This allows us to safely project an increased demand for rental properties well into the future.

What you have to ensure is that you own the kind of property that these tenants will want to rent in the future. You need to buy a property that will be in continuing strong demand by both tenants and owners in the future. You also need to ensure that there is not an over supply of the type of property you are considering buying - for example at present there seems to be an oversupply of CBD apartments in Melbourne and Sydney causing high vacancy rates.

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10. MUM AND DAD BROUGHT ME UP TO BELIEVE THAT I SHOULDN'T BORROW MONEY. WERE THEY WRONG?

Yes and no? The golden rule of borrowing money is to only borrow for appreciating assets such as property, not for consumables that depreciate in value. So your parents were right in teaching you not to borrow money for cars or the latest TV or Hi-Fi system which ultimately are worthless.

What they probably did not understand and therefore couldn't teach you was that debt, if used to buy appreciating assets such as property or shares, is a most important tool in building wealth.

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11. WHY HASN'T MY ACCOUNTANT TOLD ME EVERYTHING ABOUT INVESTING IN PROPERTY?

While accountants are specialists in their area of expertise - accounting, they are usually not specialists in wealth creation and property investing. While most should be able to answer all of your questions relating to the taxation aspects or property investing competently, they may not necessarily be creative in guiding your wealth creation program.

As you become a more proficient property investor, you are going to need to build a good team around you and this includes an account and a solicitor who have an expertise in the property market.

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12. I HAVE $100,000 EQUITY IN MY HOME. HOW MUCH CAN I AFFORD TO BORROW TO BUY MORE PROPERTY?

It's not just a case of how much equity in your property you have to borrow against, it's just as important to consider your ability to service the loan and this depends upon your surplus cashflow.

Your lender is going to want to be sure that if you borrow funds, especially if you intend to negatively gear your investment, you have sufficient surplus cashflow to "service your debt", which is bankers speak for pay the interest on your loan.

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13. SHOULD I BUY A PROPERTY IN PARTNERSHIP WITH A FRIEND?

Usually my answer to this is NO.

If the investment is worthwhile, do it yourself. If you can't afford it on your own, look for an investment that you can afford.

You see....different people will have different ideas on investments. Even if you initially go into the investment with the same aims in mind, over time either your needs or those of your friends will change. One of you may want to sell the property because of divorce, or changed family circumstances, or financial needs, or even bankruptcy.

What if your friend needs to sell the property and you do not want to? And you don't want to pay the capital gains tax that will be necessary if you sell, but you can't afford to buy him out.....it's a recipe for disaster.

However, if this is the only way that you will be able to afford to get started in property investing, then have a go. But beware of the pitfalls. To minimise the potential problems later, get your solicitor to draft a partnership or unit holder's agreement. This should set out the procedures if one party wants to sell and the other one doesn't, how the property will be valued under these circumstances and how it will be sold.

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14. POSITION, POSITION, POSITION.

Should I buy prestige properties in prime positions?

While property in prime locations does experience strong capital growth, even in some prime geographic locations, certain properties will make poor investments. What you should aim to buy is a property that will be in continued strong demand by both tenants and owners.
Do remember to take into account all factors such as infrastructure, demographics and rentability.

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