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For a non investment property you will struggle to find a professional who will be able to tell you the best bang for buck renovation ideas – as it’s generally either style or pure profit.
It is fairly simple to establish however – spend the money on what you like updating the property whilst also looking at what else is selling in the area. You will quickly established what is required/standard/above spec in your area and can renovate accordingly. For example if the suburb had every house selling their houses with stone benchtops you would not put in a laminate benchtop in a new kitchen. Likewise if it were the other way around you may be overcapitalising.
Corey Batt | Precision Funding
http://www.precisionfunding.com.au
Email Me | Phone MeInvestment Focused Finance Strategist - servicing Australia-wide
Frankston has definitely had a lot of ongoing interest for a number of years now – with a major run up over the last 24 months.
The trend follows most of metro Melbourne – I would be looking at similar priced arounds in the Western suburbs to compare against, as Frankston does have a bit of variability in medians. (there was a slight drop in the last decade at certain points, particularly 2011-12)
Corey Batt | Precision Funding
http://www.precisionfunding.com.au
Email Me | Phone MeInvestment Focused Finance Strategist - servicing Australia-wide
So long as you fit the overall potential lenders policies, there is likely potentially options for you to get a new 30 year loan with 5-10 years IO which will give you that last leg of breathing space to have further rental growth, debt erosion and potentially sell some down to give you a more effective cash flow position.
Corey Batt | Precision Funding
http://www.precisionfunding.com.au
Email Me | Phone MeInvestment Focused Finance Strategist - servicing Australia-wide
Hi Pollyanna,
This is something that many investment focussed brokers are working on daily to assist clients from falling off a cliff with their effective cash flow.
The main issue itself isn’t so much interest only renewals – but that the lenders borrowing capacities for investors in the last 18 months have dropped significantly, so those who were previously approved with IO periods no longer qualify, so they cannot easily refinance with their existing lenders for a new IO period.
If you’ve only spoken with the big 4 banks re; IO extensions, it would be worth speaking with an investment focussed finance strategist who can look at your options. There’s a number of lenders who work specifically with investors in this space who have substantially higher borrowing capacity calculators which enable refinance and extension of IO periods beyond what you may be receiving.
In the end however it’s only possible to kick the can down the road so far, there is a point at which everyone will need to plan what their retirement strategy is – whether this is through debt reduction, partial sale to reduce debts, rolling over to P&I with a substantial cash flow to mitigate the repayments etc. Those in the 55-65 yr old space are the ones most likely to be affected by this, as lenders new servicing + age policies can trap people into P&I repayments which they were not factoring for 10+ years.
Corey Batt | Precision Funding
http://www.precisionfunding.com.au
Email Me | Phone MeInvestment Focused Finance Strategist - servicing Australia-wide
You will definitely want to avoid cross collateralisation (using one property to secure anothers debt) – as this is poor structuring and can be avoided so you don’t put yourself at unnecessary risk.
Paying cash for the investment wouldn’t be the best move, you would likely want to finance the purchase to at least 80% LVR, then retain the remaining funds for the PPOR. This way you would have a smaller PPOR mortgage and higher on the tax deductible investment loan than if you paid cash for the investment – making your overall tax/cash flow position more effective.
Even better would be to make a purchase of your PPOR first using all of your cash, then setting up a new equity release split against the PPOR after settlement to cover the deposit of the investment property, allowing you to borrow 100% for the purchase of the investment property and making the non deductible home loan as small as possible.
The aim of the game in structuring investment vs personal residential loans is whereever possible to make the non deductible residential loan smaller where you could otherwise have the investment loan larger – otherwise you’re reducing your tax effectiveness and increasing the ‘bad debt’ of your own home loan more than necessary.
Best to chat to your accountant who can explain the tax implications of what you’re trying to achieve.
Corey Batt | Precision Funding
http://www.precisionfunding.com.au
Email Me | Phone MeInvestment Focused Finance Strategist - servicing Australia-wide
Poor advice, poor structure (cross collateralised), poor results. Your banker has really done a dousy on you.
As noted above, the ATO looks at the purpose of the funds, not what they’re attached to. Simply shuffling the money around will not increase deductions, but will potentially pollute your loans and make your ability to claim deductions become more difficult.
If I were you I would be getting my situation looked at it to see about removing that cross collateralisation and any other mistakes the banker has likely done while you can, before it becomes a problem in the future.
Corey Batt | Precision Funding
http://www.precisionfunding.com.au
Email Me | Phone MeInvestment Focused Finance Strategist - servicing Australia-wide
Tony has hit the nail on the head – flipping in Australia is seldom profitable, and is a step backwards from a renovation-revaluation strategy which allows you to grow your net worth quicker without losing a significant amount of profit each time to fees, taxes etc. I’ve written about this previously here: http://www.precisionfunding.com.au/11366/
Corey Batt | Precision Funding
http://www.precisionfunding.com.au
Email Me | Phone MeInvestment Focused Finance Strategist - servicing Australia-wide
Hey Symo,
To be honest, I’d probably avoid all of the options you’ve suggested. Apartments in Adelaide aren’t up for a good track record of growth over the coming years with the considerable supply coming on stifling any chance of growth.
We actually ran a webinar speaking about the Adelaide market, statistics etc last last year – here’s a vid which might help in terms of ideas for types of investments: https://www.youtube.com/watch?v=63TAuulMW9c&t
Corey Batt | Precision Funding
http://www.precisionfunding.com.au
Email Me | Phone MeInvestment Focused Finance Strategist - servicing Australia-wide
Really? I can entirely accept that may be the case, and evidently is, but how do you approach the market as an investor if you cant work out your capacity? Do you just put in an offer and work out if the banks will lend later?
It may seem like a stupid question, but my experience is purely owner occupier so its all a bit different.
I can very easily set up a budget and work out my capacity for repayments but that means nothing to banks and their lending criteria.You speak with an investment focused finance strategist PRIOR to looking at any properties or making any offers.
That’s their job, you don’t go in blind and you don’t DIY if you want to have results which don’t have you chewing your nails and pulling your hair out for no benefit.
Corey Batt | Precision Funding
http://www.precisionfunding.com.au
Email Me | Phone MeInvestment Focused Finance Strategist - servicing Australia-wide
You’ll find that it won’t be in the ballmark however – as FYI some of those variables can be tweaked slightly between lenders which will change your capacity by upwards of 2-300%. Basically trying to just do an excel function calculation is going to give you something which is guaranteed to be unreliable to the point of useless.
Corey Batt | Precision Funding
http://www.precisionfunding.com.au
Email Me | Phone MeInvestment Focused Finance Strategist - servicing Australia-wide
In reality Gus it’s best to speak with a broker so they can run your figures through the exact lender calculators. Richard’s given you a rough example of one of the types of calculators some lenders use – but in reality most lenders calculators will have 40-100 variables.
Anything else is going to be inaccurate to the point of useless.
Corey Batt | Precision Funding
http://www.precisionfunding.com.au
Email Me | Phone MeInvestment Focused Finance Strategist - servicing Australia-wide
It won’t increase your borrowing capacity – it’ll more often than not *decrease* your borrowing capacity as lenders will then exclude any taxation benefits from the investment debt contained within the structure.
Not disclosing that you’re a guarantor for other loans is nonsense and a great way to get in trouble with the lender if caught.
Corey Batt | Precision Funding
http://www.precisionfunding.com.au
Email Me | Phone MeInvestment Focused Finance Strategist - servicing Australia-wide
For anyone interested – the recording for this webinar has been released and can be accessible here:
Corey Batt | Precision Funding
http://www.precisionfunding.com.au
Email Me | Phone MeInvestment Focused Finance Strategist - servicing Australia-wide
Tasteful renovations to remove ‘problems’ – ie people wanting a functioning house from day 1, not something which requires repairs. Balancing cost vs value increase is essential that you don’t overcapitalise as theres no point burning money.
David raises good point, once you have a respectable home having well staged home can help entice buyers by giving them a visual view of the best the property can be in.
Corey Batt | Precision Funding
http://www.precisionfunding.com.au
Email Me | Phone MeInvestment Focused Finance Strategist - servicing Australia-wide
I’m in discussions with Precision Private Wealth for my planning. They’re pro property, have a ton of knowledge on smsf info, etc
They’re based in Adelaide but I’ve sorted everything by phone and email so wouldn’t really matter if I was elsewhere I don’t think.Correct Dave, we’ve got clients all over Australia.
Details of Precision Private Wealth can be found here: http://precisionpw.com.au/
From the sounds of the original poster though, it actually sounds like the best initial port of call would be an investment focussed mortgage broker who can advise them of their capacity to actually purchase, as this will dictate the options available to them!
Corey Batt | Precision Funding
http://www.precisionfunding.com.au
Email Me | Phone MeInvestment Focused Finance Strategist - servicing Australia-wide
Consider that generally lower socio-economic areas have higher rental property ownership than other areas – generally you will find more investors there!
Yields are usually higher and as you’ve noted – lower entry costs which keeps a steady stream of people looking at them as investments. My entire portfolio would fall into the lower socio/working class areas as the numbers stacked up for each purchase, haven’t had any troubles with this.
Azanatta91 has mentioned a good point – you may not want to limit yourself just to metro Melbourne if you feel your budget is constrained. In the 300-400k range that puts you near median capital city prices in some other markets, so you can balance entry price vs perceived risk of an area if you feel low socio-economic areas are ‘risky’.
Corey Batt | Precision Funding
http://www.precisionfunding.com.au
Email Me | Phone MeInvestment Focused Finance Strategist - servicing Australia-wide
With a budget of 220k you will be certainly limited. It may be worth considering your options in regional/interstate at the same time – there’s no harm in looking at the comparisons. In general try to stick to supply constrained property (ie don’t buy units in an area where they’re building more and more units, or houses in a new estate/next to a new estate if theres new supply coming on, it just floods the area and reduces growth potential).
I’d much prefer 2 bedder investments than 1 bedder any day – it appeals to a slightly larger market than 1 bedders, but houses always trump units.
Corey Batt | Precision Funding
http://www.precisionfunding.com.au
Email Me | Phone MeInvestment Focused Finance Strategist - servicing Australia-wide
It’s generally very unlikely that you will have a term deposit at a higher interest rate than the interest rate of your home loan – so best to stick with parking the funds in your offset account.
Corey Batt | Precision Funding
http://www.precisionfunding.com.au
Email Me | Phone MeInvestment Focused Finance Strategist - servicing Australia-wide
So – a property where there is a lot of supply (competition increasing), capital values reducing, rents crashing and no get out clause.
The only thing worse I can think of is buying in a mining town.
Corey Batt | Precision Funding
http://www.precisionfunding.com.au
Email Me | Phone MeInvestment Focused Finance Strategist - servicing Australia-wide
Thanks terry.
This is very helpful. I am trying to set up an entity to get my first loan.
My affordability is a proble for me so i am thinking of setting up a pty ltd toincrease my affordability with my lender.
Thanks.If affordability is a problem it’s likely that adding the trust in will reduce it even further. The scenarios Terry has given above largely shows fringe scenarios which a trust could provide niche benefit (and in quite a number of those scenarios a trust is not required to use those benefits).
You’re more likely to hinder than help your borrowing capacity to increase your borrowing capacity by utilising a trust for any vanilla non credit impairment/change in circumstances deal.
Corey Batt | Precision Funding
http://www.precisionfunding.com.au
Email Me | Phone MeInvestment Focused Finance Strategist - servicing Australia-wide
