34 - Getting started, again

RepeatAs mentioned, we’re looking at doing it all again with a second investment property build on the cards. It’s not so much that the first property has already performed that well (it’s done neither well nor badly—it’s far to early to tell) but we’ve still got unused equity sitting in our family home and, hopefully—if the banks agree, some borrowing capacity. To be clear on this point, we’re not “duplicating” just yet.

Having been through the first IP build with Open Corp, we’re comfortable with the process and the principles. The land purchase, construction, and tenant selection for that property went very, very smoothly and I don’t think we could have expected more in a first purchase/build. I’d be very happy if we can match our first experience a second time around.

Sure, it would be great to see some strong initial growth in the Brisbane market but I’m confident that growth will come—if not in the next few years then in the next ten. The tenants only moved into the house in September and, very simply, we’re in this for the long-term: if the growth takes time, I don’t really care when it comes (assuming it will come eventually, of course!). Remember the Brisbane market has been flat for some time now (years) and everyone in the Australia was saying “it’s Brisbane’s turn in 2015”)… which didn’t happen. Now it’s a question of “when”. The sooner the better as that growth can then be leveraged to duplicate with no dependence on our family home.

Growth aside, the holding costs for the first IP are almost negligible (a final reckoning will come at tax time but even then we’ll have only a partial picture with the wife having been on maternity leave for most of this financial year).

Having been busy back at work myself for the last quarter, we’re looking to Open Corp again. As noted, I’m confident in their process but not so much in my ability to implement their process. It’s also a risk management thing to my mind, especially with these crucial first purchases. Open Corp have pointed us to Melbourne and identified some initial areas and properties to looks at.

I’ve meanwhile been speaking with our broker from Mortgage Choice, Nathan, to start the finance pre-approval wheels turning. Nathan and I met to go through a pre-assessment completed by Mortgage Choice, which gave us a rough indication of what we might (or might not) be able to borrow and which lenders might be in the mix.

In our case, we had only one lender to consider (one of the big four) following the recent belt tightening by the banks and the banking sector regulators and so we’re moving forward on that basis. As with the IP#1 pre-approval, we had to submit pay slips, credit card statements, bank account and mortgage statements, drivers licenses and passports, and the tenancy agreement for the first investment property.

All just a formality—or so it should be—but it all got a little bit hairy since my employment contract runs out early next year and I haven’t (yet) been offered a new contract. My wife already has contracts signed for when she returns to work from maternity leave and, interestingly, while the bank wouldn’t consider her future income, they were insistent on sighting her contracts. They also requested a letter from my employer stating my current arrangements and that they would (in principle) be on-going.

Mortgage Choice tells me we had a particularly hard bank-side assessor (especially for a pre-approval, thought I!) but we prevailed in the end. I find there’s no point in stressing about financing as the ultimate decision is beyond my control. It’s more a case of follow the bouncing ball, supply the information requested in a timely matter, and hope for the best!

We’re now back to Open Corp and waiting for a block to come available before our pre-approval expires in thirty days.

I suppose a disclaimer is also worth posting: I'm just a guy, I'm not an accountant, lawyer, solicitor, tax agent, mortgage broker, banker, financial adviser, insurance agent, land developer, builder, government agent, or anything else so I disclaim your application of anything I write here is to be applied at your own risk. What I write may be incorrect and you are best to seek your own professional advice (tax, legal, financial, and otherwise) before entering into contracts or spending your money. Your situation is unique to you and what I write here reflects my experience only. This content is not professional advice and is not tailored to your situation. I'm learning too and expect to make many, many mistakes along the way.

Enjoy,

Michael

33 – Gifts

Christmas Gift

With Christmas fast approaching, the question occurred to me “should we send our tenants a gift?” I debated the same question in September when the current tenants moved in but I didn’t really have a chance to act as I was only just back to work full time and somewhat preoccupied with finalising the construct/inspect/handover/tenant process. At the time, the property manager said some landlords do house warming gifts (bottle of wine, movie voucher, etc) and others don’t. The property manager would have actually organised something for us.

Personally, I can’t make up my mind between keeping a “professional distance” to avoid issues that might otherwise come up and fostering a relationship to encourage the longevity of the tenancy. I suspect there is a middle ground. I’d like our tenants to connect the concept of their home to our house to encourage them to respect and care for the property—which of course they may do anyway. Of course the extra prompting from a gift if they turn out to be bad or “mid-tier” tenants!

We’ve never met these tenants but their first inspection went well (the next is due soon) and they’ve been reliable if not slightly ahead on their rent. That said, they’re not a typical two adult/two child family and, being reasonably young, I don’t expect their household to remain intact for more than a few years as their personal situations evolve due to work, relationships, life events, etc. Of course that’s no reason not to be generous.

An impromptu discussion at the office among co-workers who have been renters themselves and some of who are also new landlords in their own right indicated some of us have received Christmas gifts from landlords and others haven’t. I’ve written in the past about our close relationship with one of our landlords, from who we received an occasional Christmas card. As per the image above, it seems some landlords will go so far as free rent—which is extremely generous (but perhaps not a great business decision).

I haven’t made up my mind about this yet and, knowing us, we’ll barely have time to think about gifts for each other and our immediate family let alone interstate tenants. I’d love to send them a card at the very least but I wonder if that would be considered a bit miserly.

I suppose a disclaimer is also worth posting: I'm just a guy, I'm not an accountant, lawyer, solicitor, tax agent, mortgage broker, banker, financial adviser, insurance agent, land developer, builder, government agent, or anything else so I disclaim your application of anything I write here is to be applied at your own risk. What I write may be incorrect and you are best to seek your own professional advice (tax, legal, financial, and otherwise) before entering into contracts or spending your money. Your situation is unique to you and what I write here reflects my experience only. This content is not professional advice and is not tailored to your situation. I'm learning too and expect to make many, many mistakes along the way.

Enjoy,

Michael

32 - Preparing for the Second Build

Two-HousesIt’s been a little quiet here but for good reason: I’ve been back to work after a few years as a stay-at-home dad. In other words, Gemma is on maternity leave following the birth of our second child and her paid leave recently ran out.

Now if you’re a bank or lender, you’d probably worry about loan serviceability with neither of us working, two dependent children, a PPOR loan, and an investment loan to repay. According to our mortgage broker, Nathan, women on maternity leave statistically don’t always go back to work. So to keep things ticking over I’m back to the bad ol’ 9-5.

Of course serviceability only matters if we were to apply for another loan. The existing loans are already in place (and being repaid) so the banks don’t care what we get up to.

And that point naturally leads to the announcement that we’re looking at a second investment build. Having now been back at work full time for a few months, we may even be eligible to borrow again sooner rather than later, which is great.

As with the first IP, we’ve got unused or “lazy” equity in our PPOR. What that means is the value of our family home is worth more than what we owe the bank, thanks in part to appreciating property prices and the fact we’ve gone to great lengths to pay down the loan and thereby save on interest charges. That equity can now be used to fund the deposit and costs on an investment property through a line of credit secured against our family home.

Rounding up, we used around $70k of this equity to cover the 10% deposit and other costs for IP #1, meaning we didn’t pay lender’s mortgage insurance on the 90% main loan. I’ve got a pessimistic spreadsheet showing me, worst case, how much it costs to hold this property with tenants in place and that works out to around $4k/year for the first few years; I’m meanwhile looking at the actuals and so far the costs versus incoming rent are more or less balancing out. Open Corp suggests holding costs are typically around $50-60/week.

Of course with Gemma not working this year (IP #1 is in her name) we’ll have to defer any tax benefits so it’s hard to get a true picture of holding costs.

Nonetheless, with the IP#1 build behind us, tenants installed, and actual holding cost data now available, I’m feeling comfortable about repeating the process.

Because the first build with Open Corp was so smooth and because I’m working full-time and have little time to spare researching the market, area, and property, I’m planning on going through Open Corp again despite the costs. At the moment we’re looking at a build in Melbourne and Mortgage Choice tells me we should be able to borrow what we need. I’m planning on using the same team, with state-specific replacements for certain roles of course (e.g. settlement).

I’ll note my intention at this stage is not to own a dozen properties, as some firms may suggest. I’ll do what we can afford to do and can do comfortably. Open Corp suggests five or six properties may generate the cash flow and create the equity needed to live comfortably in retirement but even that will come in time as the equity in IP#1 (and IP#2) grows and becomes accessible.

I suppose a disclaimer is also worth posting: I'm just a guy, I'm not an accountant, lawyer, solicitor, tax agent, mortgage broker, banker, financial adviser, insurance agent, land developer, builder, government agent, or anything else so I disclaim your application of anything I write here is to be applied at your own risk. What I write may be incorrect and you are best to seek your own professional advice (tax, legal, financial, and otherwise) before entering into contracts or spending your money. Your situation is unique to you and what I write here reflects my experience only. This content is not professional advice and is not tailored to your situation. I'm learning too and expect to make many, many mistakes along the way.

Enjoy,

Michael

31 – Thoughts on Upsizing

small-house-big-houseA couple of houses recently went up for sale on our street and when I saw the home open signs this weekend past I thought I’d take our daughter for a walk and go have a nosey. And then I got to thinking—which never ends well!

We looked at two houses: the first quite new (modern but lived in, on a rear lot like our PPOR) and the second quite old (not quite a “bonus house” but almost, on a large block with the potential for subdivision). Our neighbour’s owner-built house is also unofficially on the market. Give or take a few hundred thousand dollars, we could sell up and buy one of these places instead.

We had a project builder construct our family home in 2008 to one of the builder’s stock plans which we butchered to suit our requirements. After construction, we did a lot of work ourselves, including the painting, the tiling, the carpets, the skirting boards, the window coverings, light fittings, having the driveway poured, the pergolas and decking, the reticulation, the gardens, the paving, the fencing, air conditioning, the ducted vacuum, etc, etc. By my estimation, there’s about $95k of equity (materials, trades, and my free blood, sweat, and tears!) we’ve bolted on to the original $290k build price.

But here’s the thing: while our living areas are of a good size, the four bedrooms are modest (i.e. small) and we both feel we’ll outgrow this house in time as our children grow (funny what kids do to you…). Although this house was designed to be our “forever house” and we absolutely love the location in relation to the city, shops, and beaches and we can’t think of any place better than our particular block and its valley views, we built to our short-term requirements as DINKs, to a budget, and to a medium specification. I said to Gemma recently I feel like we built the wrong house on the right block.

Our house has served us well in the seven or eight years of living in it and it’s home. We’ve built strong relationships with our neighbours and the feel safe and happy in our local community. Gemma’s always insisted we spend an arbitrary minimum of ten years in our living in this house given our personal investment—as in, let’s enjoy the space we’ve had a significant hand in crafting and creating.

I’m not a status symbol type of person and having a large house in a nice area is not on my list of necessities. I do appreciate light and space, however; we can control the former to an extent but are bound by bricks and concrete when it comes to the latter (unless we extend) with our current house. I’ve also got a long list of must-have and wish list requirements for the next family house build… the things that to my mind would make the space in which we live more liveable.

Beyond that it’s just a matter of accommodating the kids’ friends when they have a sleepover, having storage to hide the clutter of daily life, and better flows and ambience.

I’d love to build again and probably would go through the pain of doing a lot of the finish work myself. I’d employ an architect this time around and wouldn’t go near the project builders.

Will the next house be our forever home? Perhaps the idea is a silly one and we’d be better off thinking about matching our home to our current life stage requirements. Of course Gemma and I are both Cancerians and therefore homebodies so just bury me in the back yard, thank you very much!

I suppose a disclaimer is also worth posting: I'm just a guy, I'm not an accountant, lawyer, solicitor, tax agent, mortgage broker, banker, financial adviser, insurance agent, land developer, builder, government agent, or anything else so I disclaim your application of anything I write here is to be applied at your own risk. What I write may be incorrect and you are best to seek your own professional advice (tax, legal, financial, and otherwise) before entering into contracts or spending your money. Your situation is unique to you and what I write here reflects my experience only. This content is not professional advice and is not tailored to your situation. I'm learning too and expect to make many, many mistakes along the way.

Enjoy,

Michael

30 – Progress Update: Done!

image2And that’s the end of the beginning, so to speak.

Since land settlement in March (only six months ago), we’ve built a house and found tenants. The grunt work to secure financing happened before all of that, of course, so make it nine months all up if you exclude our dithering at the beginning of the process.

I spoke to our Client Liaison Manager at Open Corporations earlier this week—the final phone call to say “it’s all done”—and today we received a fitting gift from Open Corp in the form of the Monopoly game.

From here we transition into the various guarantee phases with Open Wealth (rental and maintenance) and start on the pathway to long-term property value appreciation. Hopefully the property will become positively geared one day in the near future (I’ll post a financial overview of our current situation in an upcoming post). The next few years will certainly be enlightening as I interpret the numbers come tax time and we do our best to ensure we’re keeping the ATO happy.

It’s impossible to accurately predict what the future holds for our family and our country and whether this will prove to have been a sound investment. Will negative gearing laws have been abolished and would that really affect us much anyway? Will more significant tax reforms have come into play? What will population statistics show? What will the employment landscape look like. Will China be at war with the West? Will the upwards trend in property values that started in the 70’s continue at the same pace or fall back? Will there be a shift towards a preference for apartments over houses?

Going on the history, it will have been a wise investment and become an asset but I’m not going to assume history will repeat because there’s no guarantee. For now, however, I think we’re on the right track and I’ll leave it to the goodwill of time to smooth out any short-term lumps and bumps. The hope, of course, is to one day retire—if not live—off the income from this and other (as yet to be acquired) properties.

Of course Brisbane hasn’t seen much in terms of significant growth for a little while now so it will be very interesting to see if we do get that initial growth as the property clock advances and the cycle peaks in the next few years.

I suppose a disclaimer is also worth posting: I'm just a guy, I'm not an accountant, lawyer, solicitor, tax agent, mortgage broker, banker, financial adviser, insurance agent, land developer, builder, government agent, or anything else so I disclaim your application of anything I write here is to be applied at your own risk. What I write may be incorrect and you are best to seek your own professional advice (tax, legal, financial, and otherwise) before entering into contracts or spending your money. Your situation is unique to you and what I write here reflects my experience only. This content is not professional advice and is not tailored to your situation. I'm learning too and expect to make many, many mistakes along the way.

Enjoy,

Michael

29 – Pets Allowed?

RileyOf all the varied decisions we’ve had to make of late, we also had to consider whether to allow our first tenants to keep pets. Queue the cat lady.

By way of a preface to this post, we’ve always been “dog people”, had pets in the properties we’ve tenanted, and keep a dog and a cat in our own home—so we know all about animals. The dog in the photo is Riley. She's a ridgeback cross Rottweiler, around ten years old now (the photo was taken when she was younger). We also have a cat, who thinks he's a dog—and he's almost as big, named Ted. This crux of this post is our personal story about how we acquired Riley without permission while renting and our experience as pet owners (in case you’re not). I discuss some other considerations further down.

Ten or twelve years ago, we were living in in Adelaide near the university where we both studied. We found a house through the university's accommodation board after landing in Adelaide from Perth, days after I emigrated to Australia (a sordid tale, those first few weeks in Adelaide).

The landlord, Grant, worked next door as a steel fabricator and the house was ancient—or felt that way to us. Think green and yellow motif in the kitchen, gold threadbare carpets, a toilet in the sagging rear addition that was so cold on a winter’s night you might as well have been in an outdoor dunny, and ceilings that stretched to infinity. Our view from the front veranda was an old Colourbond fence across the street, what I would come to call an "ugly tree" on the verge, and Grant's crane through the twisted chain link fence separating the house from his factory. Grant started early—7am at the latest—and steel deliveries would often arrive around that time with a flatbed truck reversing down his drive which ran alongside the boundary of the rental property—and the master bedroom—with only inches to spare.

The house was close to the university and shops, it was clean, and it served us well given the affordable weekly rental of $125. Despite the occasional late night and weekend, Grant was a good neighbour and it was convenient having our landlord next door when it came time to pay the rent. Upon meeting Grant, we told him we had an old cat to deal with but, to quote me, "she'd be dead soon", and he was okay with that.

We spent four years in Adelaide, in the same rental. I think our rent increased once by five or ten dollars—a very good thing too as we had no money to our name (I was studying as an international student and we simply had nothing behind us despite menial part-time jobs, a meagre Centrelink allowance, and a simple existence).

At the start of our last year in Adelaide we woke up one overcast Saturday morning and started talking about dogs. We'd both had dogs we loved growing up. The wife said, hypothetically, she'd really like a Ridgeback. I said I'd really like a Rottweiler. We decided to drive down to the RSPCA that morning "just to look." We came home with 10 week-old Riley: a laughable sack of brown, wrinkly skin and a Ridgeback-Rottweiler cross.

Sunday we spent playing with Riley and thinking through how we might explain this situation to Grant. We thought he may not be too keen on the idea but we knew he had a family dog of his own. The rent was due on Monday so we had to go over anyway and he would have seen Riley in the garden if we weren't upfront things. We took Riley with us in the hope of persuading our landlord with puppy cuteness. Of course she was happy as any puppy can be be out for a walk, not knowing how much trouble her new parents might be in.

Grant met us at the roller door of his shed. The sun typically came up behind the shed and, walking up the workshop’s driveway it was often impossible to see what was going on inside, through the deep shadows beyond the door.

As we approached and my eyes adjusted to the dimness I saw an inquisitive smile on Grant's face and a raised eyebrow. He asked us what we'd done as we both cringed slightly and avoided eye contact.

Grant told us she'd dig holes in the grass and I promised him we'd look after the place. By this point he'd bent over to scratch her ears. All the necessary exchanges, of course—there was really no negotiation required and Grant's smile said it all.

And so we had a dog. The surprise was sprung upon our landlord but at least he was on board. The puppy dug holes every so often and I dutifully filled them in. She peed and pooped on the kitchen floor, where we left her the first few days when we had to go off to uni; when we arrived home, we washed the tired lino floor after collecting the mess and the freshly shredded newspaper we’d left down. She ate our phone once, while in that kitchen. She pulled laundry from the clothesline, once outside more regularly, and we arrived home one afternoon to find wifey’s unmentionables strewn across the front lawn. Thankfully she was quiet about it all and never barked much.

Grant would park his ute in a little garage at the corner of the factory lot and open the side gate first most mornings. As Riley slept outside in Adelaide, she'd come to greet him through the chain link fence every morning, sauntering sheepishly past our corner bedroom window to say hello. Or so we thought: we peeked at the two of them one morning from behind the curtain and realised Grant was actually sneaking Riley treats.

When we left Adelaide to move to Perth, Grant asked for a picture of Riley. Obviously we lucked out as Grant could have told us to get rid of the dog or cancelled the lease when we brought her home.

We still have Riley today. She still digs holes and sheds fur and tracks mud and sand into the house. She’s older now and drools brown slobber through her old teeth. As work progressed on our first investment property we discussed whether it would be wise to allow prospective tenants to have pets. The house and all of its fittings, including the carpets and gardens, are brand new. We can’t ask tenants for a pet bond in Queensland but I suppose we could charge a premium rent if the market would tolerate it (Open Wealth’s rental guarantee might not, however). Allowing pets has the potential to widen the market of applicants and might also help install a long-term tenant at that.

We've read horror stories about the smell that lingered even after the carpets were pulled out. We know from first hand experience dogs and cats have oils on their fur that gets left behind on every doorway and corner they rub past. Fur gets into everything. Cats have claws that pick at carpets. Dogs dig holes. And they all get poop and occasionally vomit on floor coverings and walls. They sometimes bleed (another story). They sometimes claw at doors. They sometimes chew wood. They sometimes dig up new gardens. They bark (and meow). Even a fish tank might leak and a snake might eat the kids. Is any premium really worth it? It would likely be hard work to evict a cat lady and insurance might or not might not cover some of these problems.

We've loved our pets. They cause us no end of heartache at times but they're good value nonetheless and the kids love them. I don't think a new house is the best place for tenants with pets—from my perspective as a landlord, anyway. Maybe in ten years when the place has been bumped through by several shorter term tenants and is due for a fresh coat of paint and new carpets.

Nonetheless, our property manager at Century 21, Kerry West, indicated most of the applicants looking for a 4x2 house in the area have pets (think family: mum, dad, and two or three kids plus cat or dog or both). Kerry further suggested a family without a pet on move-in day might seek to acquire a pet later on, which would likely be a juvenile animal instead the mature animal(s) we might get upfront. All valid points we hadn’t considered.

And so we left the Pets Allowed box ticked on the appointment form and agreed to wait and see what happens. In the end, the first application through (which we accepted) is from a trio of roommates with no pets and the lease formally stipulates no pets.

If the tenants come to us in time asking to have a pet (or having acquired one) I can’t say I’ll be as sympathetic as Grant was with us but I can’t say that I’d say no either. At the very least there would the cost of replacing the tenants if they chose to leave in order to find a more accommodating rental. We certainly understand the benefits of having pets in our lives and it would be hard to begrudge someone else that luxury.

I suppose a disclaimer is also worth posting: I'm just a guy, I'm not an accountant, lawyer, solicitor, tax agent, mortgage broker, banker, financial adviser, insurance agent, land developer, builder, government agent, or anything else so I disclaim your application of anything I write here is to be applied at your own risk. What I write may be incorrect and you are best to seek your own professional advice (tax, legal, financial, and otherwise) before entering into contracts or spending your money. Your situation is unique to you and what I write here reflects my experience only. This content is not professional advice and is not tailored to your situation. I'm learning too and expect to make many, many mistakes along the way.

Enjoy,

Michael

28 - To Inspect or Not to Inspect?

Defect-cor1_2

One of the inclusions of building an investment property with Open Wealth Corporation is a travel “allowance”, of sorts, funded from the development management fee paid at the beginning of the process. The question facing us now is whether we take advantage of those funds and see the property and the house for the first time with our own eyes.

Open Wealth offered us the opportunity to fly to Queensland from WA to inspect the area when we were considering a purchase and again at land settlement. With construction now complete, and no tenant in the house as yet, we recently received a final offer to have a look. In our case, we’ll be reimbursed $400 for costs to get to Brisbane and back, which is money that will otherwise go back to Open Wealth. As a return flight to Brisbane from Perth costs $538 at a minimum, we’ve been asking ourselves whether we spend the extra money and inspect the build or not.

Were it not for the money (and possibly the time), the question would be a silly one and the answer would be “of course! We’ve just built a new house so why wouldn’t we want to see it?!?”

The obvious response is to remain emotionally detached from what is a purely financial investment. We have no plans of ever living in Queensland or in this property and as long as it can be successfully rented to fund the cost of holding the true asset—the land—we shouldn’t care if the front door is pink or what the view out the front window looks like. We don’t actually need to see it in person.

The practical man inside of me, however, has a slightly different opinion on such things. Including our family home, this is the second house we’ve now had constructed by a project builder. From experience with our first build, we know some things will have been overlooked and some things will have been delivered to an unacceptably low standard. These defects, if not addressed during the builder’s warranty period, have the potential to translate into a significant cost to us in the future.

I’ve previously noted Open Wealth conduct a number of inspections throughout the build and the first and second practical completion inspections have already occurred. A small number of defects were logged and the builder addressed those defects promptly. The defect list seemed well-considered and detailed. To that end, my visit is likely redundant but for the $200 and a day out I’d rather be certain—I don’t have laser vision but it’s pretty close and I’m a stickler for details.

I’d also like to photograph the house inside out before tenants move in. Open Wealth will again be providing us with professional photographs of the completed house and the property manager will take dozens of photographs for the baseline property inspection report before the first tenant moves in. Like I said, stickler for details.

Beyond the basic house inspection, Open Wealth will supply me with a driver for the day and suggested I have a look around the local area. I’ve never been to Brisbane before and, if we opt to build again, having a better (albeit very quick) feel for the city and state will be helpful. I’ll also be meeting the builder’s site manager and one of the property managers from Century 21 and it will be great to have that personal contact.

As we’ve got two young kids at home it’s going to be a quick one: fly over in the morning and fly home that night. I’m hopeful it will be worthwhile.

I suppose a disclaimer is also worth posting: I'm just a guy, I'm not an accountant, lawyer, solicitor, tax agent, mortgage broker, banker, financial adviser, insurance agent, land developer, builder, government agent, or anything else so I disclaim your application of anything I write here is to be applied at your own risk. What I write may be incorrect and you are best to seek your own professional advice (tax, legal, financial, and otherwise) before entering into contracts or spending your money. Your situation is unique to you and what I write here reflects my experience only. This content is not professional advice and is not tailored to your situation. I'm learning too and expect to make many, many mistakes along the way.

Enjoy,

Michael

27 - Appointing a Property Manager

Hoarding

The first step in transitioning our newly-built Queensland investment property to an income-generating asset—rather than a financial liability—is to find a rent-paying tenant. But let’s not jump ahead because first it’s time to find a good property manager.

As we reside in Western Australia, managing an interstate investment property ourselves would be challenging but not impossible.

Travel costs to inspect an investment property are tax deductible once the property is income generating but not before. Once a property is tenanted, the ATO allows its owners to deduct travel costs twice per year but be careful because if you and your spouse are joint owners and travel together that’s your two trips (and if you’re thinking about making the trip into a holiday opportunity, think again: you may not be able to deduct all—or any—of your costs). It’s also worthwhile attaching a dollar amount to your time and asking yourself if that time can be spent more productively.

Then there’s Queensland law, in our case, which entitles a property owner to only four inspections per year. That number includes regular, scheduled inspections by the property manager.

To my mind, hiring a licensed property manager to manage an investment property offers another layer of risk management—an insurance of sorts—and is yet another cost of “doing business” as a property investor. We could play the role ourselves but it doesn’t seem to be a good idea apart from the cost savings, which are tax deductible anyway. Speaking of insurance, some insurance companies offering landlord insurance require the insured property be managed by a professional property manager.

In theory, even an average property manager will know the area (and rent benchmarks for that area) and may have a database of possible applicants ready to go. The property manager will advertise the property, schedule and host open for inspections, screen applicants, conduct rent inspections, and manage maintenance. We also have the option of having the property manager arrange payment of some charges, such as rates, the water connection, cleaning, landlord insurance, etc from rents collected. Of course a property manager also deals with rent collection and bond monies and can represent you at tribunal (for an additional fee) if necessary.

Importantly, a property manager offers a layer of separation between you and your tenants to avoid getting too personal and keep things business-like.

Expect to pay between 7 and 10 percent for a property manager. In our case that breaks down as commission of 5.5% of one week’s rent (including GST) plus a 2.2% management fee.

I’ve heard it suggested finding a good property manager is imperative but perhaps not the easiest thing to do. There are countless property managers for hire out there and a much smaller selection of really good ones.

Open Wealth recommended us to West Property Group (Century 21) and I spoke with Kerry West, the proprietor, who was extremely helpful and patient as we talked about everything from insurance to rent expectations to annual rent increases to pet bonds and so on. Kerry is a property investor herself and having someone representing you who understands what you’re trying to achieve is a big plus in my view.

Notably, Open Wealth include a rental guarantee with their properties, the terms of which mandate the property is to be managed through the agent they nominate.

Our success is linked with that of Open Wealth, in a way, so it’s obviously good for Open Wealth to have their client’s properties managed by good managers, with the added bonus that we receive a slightly discounted management rate. At the end of the day, this property is a turn-key investment and I’m happy to accept Open Wealth’s advice as we move from acquisition and construction to “commissioning”.

There were a few minor differences between property management norms in WA and Queensland that surprised us.

We’ve previously rented in Perth and, as tenants, had to pay the letting fee ourselves; in Queensland, the landlord pays the letting fee (of 110% of one week’s rent—inc GST). 

Apparently the area attracts many families with pets. In WA, as pet owning tenants, we paid a pet bond. In Queensland it’s not legal to charge a pet bond. I’ll be writing more about pets in an upcoming post.

Given the rental guarantee, the geographic distance between Perth and Brisbane, and our lack of experience as landlords, appointing a professional property manager is the right thing do in our case, at least for now. Hopefully they earn their keep and attract a quality tenant at a good weekly rent!

I suppose a disclaimer is also worth posting: I'm just a guy, I'm not an accountant, lawyer, solicitor, tax agent, mortgage broker, banker, financial adviser, insurance agent, land developer, builder, government agent, or anything else so I disclaim your application of anything I write here is to be applied at your own risk. What I write may be incorrect and you are best to seek your own professional advice (tax, legal, financial, and otherwise) before entering into contracts or spending your money. Your situation is unique to you and what I write here reflects my experience only. This content is not professional advice and is not tailored to your situation. I'm learning too and expect to make many, many mistakes along the way.

Enjoy,

Michael

26 – Progress Update: Final Stage

3_2015-07-31 10-50-47-606

It’s hard to believe how quickly it’s all happened but construction of our first investment property is complete (well, “practically complete” anyway). As with all of these milestones and progress update posts, we received another—the final—invoice and we’ve been scrambling ever since to ensure everything is in order.

The builder’s Invoices are due within seven days of receipt (communicated to us through Open Wealth) so the first order of business was to authorise payment by the bank. This payment also required proof of insurance, which had to be purchased. Our client liaison manager at Open Wealth forewarned us about this one to avoid any delays so I’d been comparing insurance products when the call the came in to let me know the last invoice had been issued. Even still, it caught me off guard a little bit as I wasn’t expecting everything to be finished until the end of August. The bank is also doing a final inspection/valuation so this payment will likely take a little longer than most. 

As it’s now time to move into the next phase of this project, tenants, it was also time to select a property manager and get my head around all of the services covered, our options, and the necessary paperwork. I’ll write about that in an upcoming post but the house is on the market and seeking a good tenant.

Finally, there’s now the critical decision as to whether we fly over to Brisbane to have a look, ideally in the next few weeks before the house in tenanted. We’re only entitled to inspect the property, legally, four times a year (including official property inspections by the property manager). Open Wealth contributes $400 towards travel so it seems silly not to take advantage of that offer (the $400 ultimately comes out of the development management fee we pay to Open Wealth at the beginning of the process—we could have gone over earlier, i.e. at land settlement).

We’re ultimately very keen to stay emotionally detached from this property. That said, while I’m confident the build was executed well and has been fully inspected, I’d very much like to do my own, thorough inspection and snap a million photos of all the nooks and crannies while it’s new and before tenants arrive. The property manager will also provide evidentiary photos before tenants move in but I’ve got eagle eyes and want to ensure all the defects are spotted so they can be addressed by the builder now.

Speaking of which, Open Wealth will have now completed their first inspections and the builder will have the next few weeks to address any issues. If all goes well, we’ll have a tenant lined up by the time we handover formally.

The pictures below look great—if not slightly out of date as the fencing and gardens obviously aren’t complete. Gotta love the security screens—at least they should stop tenants from coming and going through the windows!

3_2015-07-31 10-50-55-7313_2015-07-31 10-51-05-2783_2015-07-31 10-51-05-7623_2015-07-31 10-51-23-2313_2015-07-31 10-51-22-9183_2015-07-31 10-50-46-840

I suppose a disclaimer is also worth posting: I'm just a guy, I'm not an accountant, lawyer, solicitor, tax agent, mortgage broker, banker, financial adviser, insurance agent, land developer, builder, government agent, or anything else so I disclaim your application of anything I write here is to be applied at your own risk. What I write may be incorrect and you are best to seek your own professional advice (tax, legal, financial, and otherwise) before entering into contracts or spending your money. Your situation is unique to you and what I write here reflects my experience only. This content is not professional advice and is not tailored to your situation. I'm learning too and expect to make many, many mistakes along the way.

Enjoy,

Michael

25 – Insurance for Landlords

insuranceAs we move progressively closer to the “launch” of our first investment property, our handler at Open Wealth noted we should start looking at insurance options. I seem to write a lot about insurance!

For our family home, we have building insurance because the bank requires it and this is the same for an investment property, of course. Although the building itself is a depreciating asset, it’s what allows us to generate revenue on the land (an appreciating asset) and would be expensive to repair or rebuild in the event of fire, flood, impact from space debris (!), etc, etc.

We also have contents insurance to cover the things inside the house like the furniture, clothing, pots and pans, and the TV. Notably, our insurance company classifies window and floor coverings under the banner of contents insurance.

As landlords we have a few more things to consider, such as malicious damage by a tenant and lost rental income for reasons like the tenant not paying rent. We also need public liability insurance to cover things like a tenant injuring himself because he tripped over a crack in our driveway, for example. In general, these things come under the heading of “landlord insurance”.

When I initially started comparing insurance products, I assumed we’d need standard building (and possibly contents) cover and then bolt on a landlord insurance product through the same insurer or another insurer. I was surprised to find that many insurers selling landlord insurance already bundle building and landlord under the heading of Landlord Insurance, and typically include public liability insurance as part of that offering. These products also tend to cover window and floor coverings too—either through the building component of the policy or through a modest contents component.

As usual, the pricing and inclusions for insurance from the various providers varies widely. I’ve received quotes ranging in cost from $600 to nearly $2000 for our 4x2 single storey IP. Some insurers will include removal of rubbish and motor burnout while others do not. Some insurers include theft by a tenant while others list it as optional. Most insurers will deduct the bond from any claim payment for themselves—but not all. Some insurers will insure you only if the property is managed by a licensed property manager and has a fixed term lease in place—i.e. not a periodic lease; others offer flexibility on these points. The only way to get to the point of a like for like comparison is to read the (lengthy—and boring) product disclosure statements for each product you may be considering. Needless to say, the last few evenings at our house have been painfully dry!

I’ve also investigated having a broker recommend a suitable insurance product and thus far Queensland Insurance Services has supplied me with a few quotes after I submitted a fact finder document to them.

One nice feature offered by some insurers like Allianz and CGU is the option to pay monthly, instead of annually, at no extra cost. Normally I’d prefer the convenience (and cost savings) of paying annually for personal bills but when it comes to an investment property I’m thinking more about cashflow—especially in these early days when the property will be negatively geared.

In terms of paying for running costs like these, we’ve got a few options. The easiest would be to have the property manager deduct the payment amount from rents collected and then make the payment on our behalf. I haven’t set this up yet but likely will once I’ve got a grip on it all. An alternative would be to pay costs from the line of credit account we have associated with this property—and into which rental income and tax variations are paid.

I’m still in the process of exploring insurance companies in Queensland. As we’re insured through GIO in Western Australia, I’d hoped to insure this property in Queensland with them as well to obtain a multi-policy discount. Unfortunately GIO don’t offer insurance in Queensland—despite the fact their parent company, Suncorp—does. Which is frustrating.

Mortgage Choice referred me to Allianz and they’ve come back with a strong quote; I’d initially written them off because their online quote system told me they don’t insure for flood but the rep I spoke to following the Mortgage Choice referral was able to add flood cover. I’ve also had a look at RACQ but they don’t offer landlord insurance.

Suncorp seems to be very similar to GIO here but they are a little pricey. I’ve also looked at Commbank, Terri Sheer (owned by Suncorp—also a little expensive but recommended to me by our newly-appointed property manager, who gets a $22 kickback if we sign up), CGU (very cheap but offering a strong insurance product as far as I can tell), and QBE.

As I do with all of my insurance purchases, I’ll increase the basic excess to at least $1000. I’m not sure if this is a wise move or not for the small cost savings. That’s the unfortunate thing about tenants: they’re largely outside of your control in your house (er, investment property)!

One final aspect to consider when selecting an insurer is how likely they’ll be to pay a claim. This will likely come down to experience and anecdotal evidence from jaded (or maybe the odd happy) customers who post about their experience online.

Insurance, despite being awkward and boring, is one of those things required to manage risk. You pay the premium in the hope you’ll never need to make a claim.

I suppose a disclaimer is also worth posting: I'm just a guy, I'm not an accountant, lawyer, solicitor, tax agent, mortgage broker, banker, financial adviser, insurance agent, land developer, builder, government agent, or anything else so I disclaim your application of anything I write here is to be applied at your own risk. What I write may be incorrect and you are best to seek your own professional advice (tax, legal, financial, and otherwise) before entering into contracts or spending your money. Your situation is unique to you and what I write here reflects my experience only. This content is not professional advice and is not tailored to your situation. I'm learning too and expect to make many, many mistakes along the way.

Enjoy,

Michael

24 – Teaching the Kids About Money

Kids_money_lemonadeI grew up watching my mother balancing the cheque book (manually) at the kitchen table. She worked as a bank teller before she had us kids and she’d regularly fret about being out by a penny or a few cents. I’ve written previously about some of the key financial nuggets my mom implanted in my mind—mainly the old line “every penny counts!” and the idea that you can call up and challenge the banks if they’re not being helpful.

My father was an economist working for the Canadian federal government and although he did not regale us with the highs and lows of economic social policy, he was an educated man with a lot of common sense. My dad was a newspaper subscriber and we had the Ottawa Citizen delivered daily, which of course contained a business section which I’d infrequently leaf through.

Every night over dinner we’d talk about school and friends and some news but we’d also talk about family. Specifically, both of my parents were open, in simple terms, with us about the family’s financial situation. Money was never a “dirty” subject within the confines of our immediate family and we always received an honest answer when we curiously put up the question “how much money do you make, dad?”

My sister and I both received a modest allowance and when we were older we were also paid to mow the lawn—a sweaty, two-hour job in the Canadian summer humidity and blackflies! We had piggy banks and bank accounts from an early age and would occasionally buy a few savings bonds. Our parents covered our basic needs in terms of clothing, shelter, and food but if we wanted something special, we were encouraged to save our money until we could afford it. We also had to buy our lunch at school one day a week and did so from a young age—I remember buying my lunch in second grade.

My first allowance was a quarter: 25c.

Beyond those basics, the financial education I received at home was minimal. Some of these core tenets I’ve noted today form the foundation of my financial sensibility but I plan to raise the benchmark considerably with my children.

Growing up, for example, I knew my dad earned a “salary” of x dollars and my parents had a mortgage on the family home. I knew my paternal grandmother gave my parents a chunk of money when she downsized and I knew our family home (land and house) was bought and built for $60k in the early 70’s. I was also vaguely aware the inheritance received following the death of my maternal grandmother allowed my parents to pay off the mortgage. I was told we were a middle class family and my mom returned to work when my sister and I were older because she wanted to not because she had to. Beyond that, I was not taught about the relationship between income (salary) and expenses (mortgage, cars, and other costs). I knew my parents were cautious and somewhat frugal—definitely not flashy in their spending—but I didn’t know why; I always assumed it was because we were balancing on the knife-edge of affordability.

With our kids—the newborn and a clever toddler—I’m starting them young. Both kids have their own bank account (high interest accounts at 5% interest currently with deposit/withdrawal limitations imposed by the bank). Interest is paid monthly and I make a point to take a moment on the first day of every month to show our eldest her bank account and note how much interest she’s earned “for doing nothing” (as I put it!).

I pay each child, despite being very young, a weekly allowance (currently paid monthly into each account and rounded up slightly to $25/month). Although I don’t want to train her that working is the only way to earn money, I remind her that she needs to her earn her allowance by helping me vacuum, for instance (with her toy vacuum). We also receive the occasional cheque from family in Canada for birthdays and Christmas and that money typically goes into accounts. My 3yo already has a fair chunk of money to her name and earns monthly interest of about $10 (which stays in the account to earn interest).

I’ll note here I typically wouldn’t recommend an adult save their money in a bank account or even a high interest savings account. Although the risk is theoretically low, the interest rates are typically low too and the interest earned is counted as taxable income. And then inflation quietly takes most of whatever gain is left. In the kid’s case, the interest rate at 5% is higher than our mortgage interest rate, for example, and there are no bank fees or income tax. At the end of the day, this is an accessible learning exercise for the kids; if they eventually have the savings to fund a house deposit (possibly as a team) I’d encourage them to go that route but they may opt to travel or study or start a business instead.

I also talk to our oldest child about money. My goal is to create in her a clever, shrewd consumer able to work the system to her advantage, rather than be taken advantage. I typically take her grocery shopping with me each week and I explain to her how I compare prices. I’ve taken her to the accountant in the past and she’s sat beside me when the mobile mortgage broker has come out to the house (she colours…). She comes with me to the bank to deposit cheques and when we opened her brother’s bank account. She can count to ten and I’m slowly teaching her to add.

The core message I’ll be teaching our children is money can set you free but you have to be prudent and sensible in your financial dealings. This may work for us—will it make us wealthy? I can’t say but my hope is it won’t leave us poor. In either case, I hope our children will learn from our successes and our mistakes and my intention is to be as generally transparent on the subject of money as I am other subjects. Instead being taught to be a worker/consumer, my intention is to teach my children to think and behave wisely about money.

I suppose a disclaimer is also worth posting: I'm just a guy, I'm not an accountant, lawyer, solicitor, tax agent, mortgage broker, banker, financial adviser, insurance agent, land developer, builder, government agent, or anything else so I disclaim your application of anything I write here is to be applied at your own risk. What I write may be incorrect and you are best to seek your own professional advice (tax, legal, financial, and otherwise) before entering into contracts or spending your money. Your situation is unique to you and what I write here reflects my experience only. This content is not professional advice and is not tailored to your situation. I'm learning too and expect to make many, many mistakes along the way.

Enjoy,

Michael

23 – Progress Update: Fixing Stage Complete

fixing 2On Monday came the “enclosed” invoice for a not-insignificant chunk of cash; today the “fixing” stage invoice arrived for about half that amount again. Apparently the builder was hanging on to invoices around the end of financial year period.

If nothing else, it seems like progress is moving quickly now (quicker than it really is!). In either case, we’re now nearing the end of the construction phase with “practical completion” the last outstanding invoice.

Stacey, our Client Liason Manager at Open Wealth, called this morning to let me know the fixing stage invoice would be sent through and we also spoke briefly about inspections, insurance, and property management. Notably, the real estate agency recommended by Open Wealth will send us an updated rental appraisal. The initial appraisal we received late last year was (a conservative) $380/week and I’m curious to see whether this has moved up or down (Open Wealth suggested the actual rental income on many of their builds in this estate is closer to the $410/week mark—I based my forecasts on the $380 figure). As more new product becomes available in this estate, and on the back the health of the national economy, I’ll be interested to see where we land—hopefully above the $380 benchmark and also in relation to the higher $410 figure.

It’s hard to believe we’re already nearing the point when a tenant will move in and the property will become income generating. Although I’d obviously prefer to be on the ground supervising the details of the build and feeling in-tune with this aspect of the process, I’m also comfortable knowing we don’t need to be there—that we’ve put our trust in Open Wealth and paid them to stand in our place while we undertake more productive activities.

Fixing 1fixing 3fixing 4

With this stage complete, items like the plastering, tiling, kitchen, and laundry have been ticked off. With the next milestone, tap ware, sinks, shower screen, light fittings, air conditioners, blinds, and kitchen appliances go in, the carpet will be laid and the house painted, feature walls will be rendered and the driveway poured, the letterbox will be built, and the house will be cleaned.

Meanwhile, the property manager will be rounding up potential tenants for short-listing by Open Wealth and, ultimately, selection by us. The builder will have two weeks to address any issues found during inspection (following the practical completion milestone) and it may be possible (I’d guess likely—given the rental guarantee) there will be a few pre-handover inspections before any formal open for inspections take place after handover.

I suppose a disclaimer is also worth posting: I'm just a guy, I'm not an accountant, lawyer, solicitor, tax agent, mortgage broker, banker, financial adviser, insurance agent, land developer, builder, government agent, or anything else so I disclaim your application of anything I write here is to be applied at your own risk. What I write may be incorrect and you are best to seek your own professional advice (tax, legal, financial, and otherwise) before entering into contracts or spending your money. Your situation is unique to you and what I write here reflects my experience only. This content is not professional advice and is not tailored to your situation. I'm learning too and expect to make many, many mistakes along the way.

Enjoy,

Michael

22 – Progress Update: Enclosed Stage Complete

enclosed 2We recently hit the 50% mark with construction of our first investment property and are now at the “enclosed” (aka “lockup”) stage. This milestone also brought with it the largest invoice of nearly $80,000 so it’s definitely starting to feel real now.

Without a doubt it will be a great sense of accomplishment to have a tenant installed (hopefully) within the next few months. It will also be a relief knowing the rental income will cover the majority of the holding costs—especially while we’re negatively geared in the early years.

As “enclosed”, the roof is on, the windows and doors have been installed, and the external cladding is on—so the outer shell is in place. During the next phase (“fixing”), the internal plaster will go up, the internal doors will be hung, the kitchen, laundry, and bathroom fixtures will be installed, and the wet areas will be tiled. I outlined the various stage milestones in my previous progress update, if you need some context.

Open Wealth supplied us with these exterior photos. I’d love to see more of the rough interior to get a better sense of the space but those pictures will come in due course.

When we built our family home I snapped hundreds of photos in my excitement and to document the process for family overseas. I also snapped what I thought might be important areas of the construction that would eventually be covered over by brickwork and plaster, etc (for example the bulkhead in our lounge room covers the edge of a drain from the shower upstairs—it’s an extensive bulkhead that’s largely empty, which may have come in handy for an air conditioning unit if it had been 10mm deeper).

enclosed 4enclosed 6

Now I need to follow up that bank error from the last milestone…

I suppose a disclaimer is also worth posting: I'm just a guy, I'm not an accountant, lawyer, solicitor, tax agent, mortgage broker, banker, financial adviser, insurance agent, land developer, builder, government agent, or anything else so I disclaim your application of anything I write here is to be applied at your own risk. What I write may be incorrect and you are best to seek your own professional advice (tax, legal, financial, and otherwise) before entering into contracts or spending your money. Your situation is unique to you and what I write here reflects my experience only. This content is not professional advice and is not tailored to your situation. I'm learning too and expect to make many, many mistakes along the way.

Enjoy,

Michael

21 – Tax Time

PAPERWORK 040317 AFR PHOTO BY VIRGINIA STAR Generic pic of an income tax assessment form for year ending  30 june , tax return , wages , taxes , tax office , ATO , tax file number , accountancy , accountants , afrphotos.com AFR FIRST ONLY USE SPECIALX 24147<br /><br />** LOCKED FOR AFR BUDGET SPECIAL - 10-5-2005 **I’ve spent the last few days (on and off) gathering together everything needed by our accountant to complete our tax returns. This year’s tax return is more involved than normal because we have the purchase of our first investment property to consider and my wife’s life insurance—part of which may be tax deductible.

We’ve had an accountant prepare our tax returns for many years now—initially because it all seemed a little complicated and now because it is a little complicated.

Back then we had income from one or two employers, bank interest, HECS debts, and deductions like professional memberships and insurances, training, mobile phones, internet, stationary, uniforms, and depreciation of office equipment and furniture. I wasn’t sure how my income and tax returns related to my wife’s and vice versa.

These days, we’ve got more of the same plus private health insurance, life insurance, the investment property establishment costs (any IP is an interesting mess in its own right when it comes to taxation), dependent children, and the occasional minor offset to me as a non-earning stay-at-home parent. And of course the tax laws are always changing in many of these areas, making it hard to keep on top of what we can and cannot do, legally. Next year we’ll have the IP income or loss, interest and running costs to deduct, building and fittings depreciation, and so on.

The first accountant we worked with claimed he would be able to to cover his costs and we always found that to be the case… in other words, he was able to include valid deductions that we probably wouldn’t have considered (plus he didn’t charge us much). 

That first year our intention was to use his return as a template for subsequent years but it seemed just as easy to go back to him and so we did.

Although I wouldn’t recommend using your accountant as your financial adviser, our first accountant was the only financial professional we relied on at that point in time and he was able to offer some useful tips. For example, he highlighted the benefits of having private health insurance instead of paying roughly the same amount for the Medicare Levy (of course our insurance premiums increased as we started planning a family and it seems like the Medicare Levy doubled at some point along the way too…).

Now days our accountant is a key member of our broader financial team and we’ve “upgraded” to an accounting firm that deals regularly with clients who own investment properties (WSC Group—I’ve written about them before in the context of financial advice and insurance). WSC were recommended to us by Open Wealth and they’ve offered an outstanding service thus far—note they’re not directly affiliated with Open Wealth.

We pay for the expertise of an accountant but did you know accounting costs can be deducted the following year? Our first accountant also claimed he’d never had the ATO question a return he submitted (I assume tax return audits are fairly random but having a professional submit your return can’t hurt). While I probably could do our taxes, I’d prefer to know the return is correct and, more importantly, that I’ve claimed all of the deductions I can to reduce our taxable income.

If you’re considering the purchase of an investment property, or hold an investment property today, do you know how your quantity surveyor’s report relates to the depreciation of your building and fittings—and therefore you tax return? I’m estimating those two deductions alone will be worth nearly $10,000 in the first year. Don’t know what a quantity surveyor’s report is? Ask your accountant!

I forwarded 7MBs of PDFs to our accountant this morning so that’s my job done for now, hopefully.

I suppose a disclaimer is also worth posting: I'm just a guy, I'm not an accountant, lawyer, solicitor, tax agent, mortgage broker, banker, financial adviser, insurance agent, land developer, builder, government agent, or anything else so I disclaim your application of anything I write here is to be applied at your own risk. What I write may be incorrect and you are best to seek your own professional advice (tax, legal, financial, and otherwise) before entering into contracts or spending your money. Your situation is unique to you and what I write here reflects my experience only. This content is not professional advice and is not tailored to your situation. I'm learning too and expect to make many, many mistakes along the way.

Enjoy,

Michael

20 - The saga of a sliding door, seven years later

Slider - Lintel Sag DimensionsThis post doesn’t really belong on this blog but I wanted to share my experience dealing with a builder’s defect more than seven years out from practical completion, particularly as we’ll soon have our first investment property build complete and under warranty. I’ve written in the past about pushing your lenders and insurers; this post is about pushing your builder and their suppliers.

As regular readers of this blog will know, we built our family home through 2006-2008. The house was constructed by one of the project builders here in WA, Don Russell Homes. The house is a two-storey double brick and tile construction, typical of many homes built in Western Australia to modern standards. The block on which we built was originally sloping so we retained and filled with sand prior to the builder compacting and commencing construction. We took up residence in mid-2008.

One notable feature—and the subject of this post—is the double sliding door at the rear of the house which opens on to our back garden. The door opening is 3500mm wide and is filled by two fixed panes at either end and the two doors in the middle which slide open over each fixed pane. A galvanised steel lintel spans the window opening and the door frame is powder-coated aluminium. The windows throughout our house were manufactured by Jason Windows.

During our practical completion inspection near the end of the build, I flagged to our site manager a problem with the sliding action of one of the doors. This was noted on the PCI report and I subsequently listed it in my communications with the builder. Essentially one of the doors would catch and stick as it travelled along the track.

The builder’s initial solution to this problem was to lubricate the door track. This worked as a temporary solution (long enough for the fix-it man to make his get away!) but was not a lasting solution for an unsheltered external door which catches the weather coming from the Western coast. The external garden was also still a sandpit at this stage and of course sand and lube don’t mix very well. It was apparent to me there was either a problem with the door wheels, the frame, or the track and it was the responsibility of the builder to address.

In addition to our PCI report we listed a large number of issues (forty, actually) on our 16-week “liability issues” report, which we submitted a few months after move-in day. A number of these were major issues which required the builder’s attention and watered down some of the lesser issues like a sticky door. Other than lube, there was also no quick fix for this problem by the builder’s trusty fix-it man and it should have been referred back to the window company. It eventually fell off the radar as Don Russell’s maintenance division became less and less communicative and as time wore on.

Over the next few years the problem got worse and I assumed the door wheels were clogged with or damaged by the sand and needed to be replaced. After I tried to change the wheels myself in 2010 without success (the doors, including the fixed panels, need to be completely removed to change the wheels, my wife arranged for a window maintenance firm to come out. Jason Windows do not offer a maintenance service.

The maintenance firm suggested, to our surprise, the wheels were fine but the door would need to be cut down to better fit the opening. The gap was so minimal, the metal of door frame itself was riding directly on the track. We never received a quote for the work and the issue once again slipped off the radar as life marched forward for us. I telephoned a sliding door repair company from the Yellow Pages at one point and it was suggested this is a common problem with the lintel having sagged but, again, the fellow was reluctant to come out to inspect and quote.

In retrospect, I should have flagged this as a warranty issue to Jason Windows while the door was still under warranty but the path for resolution under warranty of a supplier’s product when you’ve previously dealt exclusively with the builder is not well defined. It’s also not terribly obvious (to me) if windows form part of the structure and are therefore covered by structural warranties—it’s likely they do not.

In recent years the door became virtually unusable. Both doors now stuck as they “slid” open or closed and on a hot day would take a proper shove to move.

I finally contacted the Sliding Door Doctor and a window manufacturing company. The Sliding Door Doctor quoted $600 to repair the door whereas the window company quoted around $6,000 to replace the doors. Both groups reiterated the “sagged lintel” idea, based on the measurements from top to bottom across the door opening (see the opening image above). The Door Doctor also pointed out the top locking plate was missing—likely removed when the door was installed as the door wouldn’t have fit with it in place!

As there are no other signs of a sagged lintel (cracks to the brickwork) I concluded the lintel was likely bent when it was installed or the door opening measurements were incorrectly supplied to the window company/the door was built too large by the manufacturer.

At this point, after picking my jaw up off the floor (I expected a replacement door set to cost around $2,000-3,000) I decided enough was enough and attempted afresh to contact the service department at Don Russell. My emails and calls were ignored for weeks if not months and I finally went in to the builder’s office in person to ask to see the Service Manager. He wasn’t in and I asked to see his superior… who also “wasn’t in”.

The receptionist must have sensed my frustration and as I noted down contact details for the Service Manager’s manager (the Construction Manager), I was offered details for the Operations Manager. Only by writing to this individual did I finally receive a response from Don Russell.

In my letter to the Operations Manager I complained about the lack of response I’d received from the Service department and included the log of my failed contact attempts. I included my measurements (illustrated above) and photographs showing the sagged lintel. I made a video of me opening the door to demonstrate the severity of the problem—which I posted on YouTube (as a semi-private video). I included a copy of the original PCI report and the 16-week liability issues report.

And I demanded the issue be addressed at the builder’s expense.

After another brief delay, the Operations Manager replied to tell me the Service Manager would be in touch, which I took as a good sign. The Don Russell Service Manager and the Jason Windows Service Manager eventually came out to the house together to inspect the problem. During this appointment the builder’s Service Manager vehemently declared the lintel not to be sagged. The Jason Windows representative was simply aghast at the idea we’d lived with this problem for such a long time. The issue of cost did come up before I suggested it would be dealt with between the two companies and it was not mentioned again.

After another few months of manufacturing delays, the original door stiles were replaced to lock to each other (instead of using a lock rod system), the track was properly secured to the lintel, the door frames were filed down slightly, and the wheels were replaced. The doors now slide much better than they ever have before and, while not perfect, are functional.

Yes it was embarrassing and annoying to have to chase the builder on this matter after such a lengthy time period. This is time lost I could have spent on other more prosperous activities if the builder had done their job properly in the first place. Thankfully both Don Russell and Jason Windows were sympathetic to the situation and did the right thing by their mutual customer.

As a last resort I could have raised this problem with our house insurance company but we have a high excess and I’d prefer not to have that black mark on our insurance file for something that wasn’t, originally, our fault.

At the end of the day, I felt I had a case to be heard and was finally able to get my point across to someone with the authority to see the problem resolved. I’m thankful to both companies for addressing this problem and, more than anything, glad to see the end of it!

I suppose a disclaimer is also worth posting: I'm just a guy, I'm not an accountant, lawyer, solicitor, tax agent, mortgage broker, banker, financial adviser, insurance agent, land developer, builder, government agent, or anything else so I disclaim your application of anything I write here is to be applied at your own risk. What I write may be incorrect and you are best to seek your own professional advice (tax, legal, financial, and otherwise) before entering into contracts or spending your money. Your situation is unique to you and what I write here reflects my experience only. This content is not professional advice and is not tailored to your situation. I'm learning too and expect to make many, many mistakes along the way.

Enjoy,

Michael

19 – Bank Error

When our last progress payment came due for the frame stage, our mortgage broker (Mortgage Choice) sent us a form to be signed, authorising the bank to draw down against our mortgage for the amount of that invoice. This was the first construction invoice paid by the bank as they asked us to pay the first invoice for the base stage.

Our invoices to date have come through on a Thursday and payment is due within seven days. Our builder has previously returned a receipt to us within a day of payment so I became suspicious something had gone awry when I hadn’t received a receipt by Tuesday.

After following up with Mortgage Choice, I was informed the bank (one of the big four) had paid the builder, in a single payment, both the amount for the frame stage invoice and the builder’s 5% deposit. This would have been great if we were still back in December when the deposit was due but, as we’re now in May and I’d already paid the deposit myself from our line of credit, I raised an eyebrow.

Specifically, why did the bank pay an invoice we hadn’t authorised them to pay? That invoice was issued before land settlement and before this mortgage was finalised.

In speaking with the builder, they confirmed they weren’t sure what to do with this extra money, hence the delay with the receipt, and we agreed it would be credited against the next stage invoice. This plan was also communicated back to the bank, presumably through the builder to Open Wealth and then through Open Wealth to the mortgage broker (did anyone say “Chinese whispers”?).

And then it dawned on me: would the bank—one of the big four Australian banks, as mentioned, with annual profits in the billions and who charged me interest when they overdrew our transaction account during the land settlement process—reimburse the interest charged on the amount that was paid in error?

Simple question.

I put this one to Mortgage Choice and their initial response was ‘no’. Obviously I wasn’t happy with that answer and asked them to please explain.

They followed up with the bank and [after a few days passed] I was informed there will be an adjustment to compensate for this error once the next invoice is been paid.

The math is simple and the funds are not significant but it’s the principle of the matter, gosh darn it! And I hate it when banks steal my money!!
  • 5% builder’s deposit = ~$11k
  • Annual interest rate = ~5%
  • Annual interest = $550 ($45/month)
  • Estimated time to next invoice: 1-2 months
  • Money that’s better in my pocket: yes
I’ve written in the past about keeping an eye on your banks and insurance companies. Here’s yet another example to reinforce the point. Hopefully future progress payments run more smoothly.

I suppose a disclaimer is also worth posting: I'm just a guy, I'm not an accountant, lawyer, solicitor, tax agent, mortgage broker, banker, financial adviser, insurance agent, land developer, builder, government agent, or anything else so I disclaim your application of anything I write here is to be applied at your own risk. What I write may be incorrect and you are best to seek your own professional advice (tax, legal, financial, and otherwise) before entering into contracts or spending your money. Your situation is unique to you and what I write here reflects my experience only. This content is not professional advice and is not tailored to your situation. I'm learning too and expect to make many, many mistakes along the way.

Enjoy,


Michael

18 – Progress Update: Frame Stage Complete

Frame 4Things are moving thick and fast now: last week we were invoiced for the base stage (the slab pour); this week the frame is up and construction has reached the frame stage complete milestone. We received a corresponding invoice for $33k precisely one week after the base stage invoice. Seeing the house truly out of the ground is inspiring.

It’s funny, I should be used to the speed of timber frame construction. I originate from Canada and have a very keen boyhood memory of peering through the school bus window at a construction site one morning as the framers were starting on the ground floor… by that afternoon, on the way home, the second storey frames were already up! I suppose I’ve become accustomed to the slower pace of double brick construction here in WA. I must say I like our brick construction here in Perth as it’s sturdy but it also a slow process by comparison.

Frame 2Frame 3

To recap then, this is where we are in the broader construction process, showing indicative time estimates for each phase (and with corresponding percentage-based invoices attached to each milestone completed):

  1. Base: 2 weeks. Complete.
  2. Frame: 2 weeks. Complete.
  3. Enclosed (lock up): 3 weeks.
  4. Fixing: 4 weeks.
  5. Final: 4 weeks (note this stage isn’t included within our build contract but is depicted on an indicative progress flow chart supplied to me by Open Wealth—I include here for the timing information).
  6. Practical Completion: 6 weeks.

Indicative Progress Flow

I suppose a disclaimer is also worth posting: I'm just a guy, I'm not an accountant, lawyer, solicitor, tax agent, mortgage broker, banker, financial adviser, insurance agent, land developer, builder, government agent, or anything else so I disclaim your application of anything I write here is to be applied at your own risk. What I write may be incorrect and you are best to seek your own professional advice (tax, legal, financial, and otherwise) before entering into contracts or spending your money. Your situation is unique to you and what I write here reflects my experience only. This content is not professional advice and is not tailored to your situation. I'm learning too and expect to make many, many mistakes along the way.

Enjoy,

Michael