tag:blogger.com,1999:blog-1810961197870937942024-03-04T20:23:31.089-08:00Property InvestmentLearn. Do. Share > Adventures in Australian residential property investment recountedMichael Haneshttp://www.blogger.com/profile/01877569030107816208noreply@blogger.comBlogger52125tag:blogger.com,1999:blog-181096119787093794.post-1553378673845271062017-09-18T22:37:00.001-07:002017-09-18T22:37:34.004-07:0049 - Cash savings cost you money<p><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjQ_QuvrkcDdKikFolaRU2fX_tfaiLii3fuiFileDJQDVKraluMFXFRklSmqySkWaLtzxVYsICMkWYLM1TPFSMrcnsvmo93S_lGZ0wYO_vGmHrTsMpxWMMtuGGZ8n2m6jwOOaEC8pd77tI/s1600-h/damaged-note%255B4%255D"><img title="damaged-note" style="border-top: 0px; border-right: 0px; background-image: none; border-bottom: 0px; float: left; padding-top: 0px; padding-left: 0px; margin: 0px 12px 12px 0px; border-left: 0px; display: inline; padding-right: 0px" border="0" alt="damaged-note" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhVSU3WEs5oiYamz1B15UOjPuPDL9wE8c5P1kZPiO7HJc97ug8VFHcXANG4PuYfsUe_UvMs0r1i2kFflfc4Z8D8OYQskTI8sLuG5cwPg2aNVw__E_rHqjLtxoQilfEj7U4iElkRD6Em3Ec/?imgmax=800" width="260" align="left" height="164"></a>Interest earned has a nasty sting in its tail: it's considered taxable income. Save some cash in a savings account (or term deposit or similar) and interest earned will be included in your taxable income and taxed at your marginal tax rate. <p>Don't forget to take out inflation too (which was not inconsiderable at 1.9% for 2016/17). <p>Here's the simple workup: <ul> <li>Invest $10k @ 5% p.a to earn $500</li> <li>Assuming your income is $87-180k, your income will be taxed at roughly $0.37 per $1 earned. As such, the ATO takes $185 of your $500. </li> <li>The cost of inflation, calculated on the principal of $10k @ 1.9% p.a., is a further $190 (in other words, your $10k is now worth $9,810 in real terms).</li> <li>Instead of earning $500, you've only earned $125 (or achieved a rate of return of 1.25%)</li></ul> <p>Current interest rates are already low and a 5% interest rate is probably unrealistic. Most <em>60-month</em> term deposit rates are earning less than 3%. <p>If you're saving cash, you'd better have a very generous interest rate or a very low income—or you're probably going backwards. Let’s not get started on the opportunity cost of not putting those savings into a better-performing (and safer) investment. <p>Given the above example again, if you’re earning 2.5% interest, your actually working at a net negative interest rate of –0.33% at a cost of $32.50. As a bonus exercise for the reader, compound these examples over multiple years. <p>If you have a mortgage, get an offset account and stash your money in there <em>right now</em>. Either way, get a good accountant who can help you legally maximise your deductions. <p>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 not selling anything and I do not receive any form of commission or incentive payments for any companies or individuals I endorse. I'm learning too and expect to make many, many mistakes along the way. <p>Enjoy, <p>Michael Michael Haneshttp://www.blogger.com/profile/01877569030107816208noreply@blogger.com0tag:blogger.com,1999:blog-181096119787093794.post-79562018697357144412017-09-07T22:01:00.001-07:002017-09-07T22:04:12.241-07:0048 - Making Money Lazy<p><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh65WGafqZ31y5Di2Lgve2zaO5os_0UA8VoF1CnEl1axS6EP5MzaSYCuJ7Ldz99VVf5EaydmPnIKaqgW2Iexpujr63Akeyiz_6xCoWTMBHatDiw5Xl_FCh592s2aKb-fW7HU2jSIQ01n98/s1600-h/Lazy%255B2%255D"><img title="Lazy" style="border-top: 0px; border-right: 0px; background-image: none; border-bottom: 0px; float: left; padding-top: 0px; padding-left: 0px; margin: 0px 12px 12px 0px; border-left: 0px; display: inline; padding-right: 0px" border="0" alt="Lazy" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg7iV_j6G1pCuJgUEYihAwH-iLdBXE1CO7WqeEWAQNtsojxCrAcVCaueEmTGMPdrtr-FXmuDxbIF4zHehsuikJyJUoXo0iGoTONUn7JEP_g0Cu1yd4QWv4a7UA6N88lbPglclY7Thz13NY/?imgmax=800" width="244" align="left" height="164"></a>Up until lately we’ve been on a roll: a few years back the equity loan was approved against our family home—putting that “lazy money” to work for us, and we were approved for and built our first two investment properties using the bank’s money. </p> <p>But things are tight these days in the banking and credit sector and, with only one income, our ability to service additional loans is viewed as risky by the big lenders. Which of course sucks because we have a sizeable “rainy day” fund, the wife is in a well-paid job, and we have a very strong history of paying our bills on time and saving. </p> <p>In other words, we still have income coming in but no option (currently) to invest it in additional properties without tying up our own funds. Our mortgage broker said “no” :’(</p> <p>This situation leads to the holding pattern which is Plan B: reducing interest payable on the investment property loans. In other words, we’ve started stashing our spare cash in the offset accounts attached to the interest-only investment loans. This cash is therefore fluid—it can be withdrawn at any moment—and, because we’re using the offset accounts instead of paying down the loan as principal and interest (or paying into redraw), interest on the full loan amount remains deductible if and when we do withdrawn cash in the future. </p> <p>While I’d prefer to be building our property portfolio (the median house price moves forever upwards) using the bank’s money and tax-deductible debt to achieve long-term growth, at least we’re saving interest. In fact this is the exact strategy we adopted with our PPOR—but of course, interest on that debt was <em>not</em> not tax-deductible and there were different variables at work there. </p> <p>The biggest problem I have now is our money could be working harder. Although it could be said we’re retiring debt (sort of), this is good debt and I don’t want to retire it… I want to use our money to borrow other people’s money so it can be put to work for us! Interest rates are low and likely to stay that way for the near-term and if we could buy again now, at today’s median house price or just below, we could achieve cheap capital growth over the next few years. </p> <p>We’ll review things again in six month intervals—both serviceability but also capital growth of our existing investment properties, which may allow us to leverage that equity to fund a larger deposit for IP #3. But that’s not how I’d prefer to do it. </p> <p>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 not selling anything and I do not receive any form of commission or incentive payments for any companies or individuals I endorse. I'm learning too and expect to make many, many mistakes along the way. <p>Enjoy, <p>Michael</p>Michael Haneshttp://www.blogger.com/profile/01877569030107816208noreply@blogger.com0tag:blogger.com,1999:blog-181096119787093794.post-51698556919125101192017-06-15T22:41:00.001-07:002017-06-21T05:35:36.115-07:0047 – How we saved 1 million dollars tax free<p><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj6NwNrXIVuELDnwpKC2Gzoc0d_atiTEU8rtd2e2WhAe07x97X_BZnuGC5pTX9PWFqEv3LwcItat8ao6XpIo2d1mg2KEY4qS-xCVZb3CH8bj4gOKoveaMYXTk-hSSB8lM5oRiOFCFI-_lU/s1600-h/Userer%255B2%255D"><img title="Userer" style="border-left-width: 0px; border-right-width: 0px; background-image: none; border-bottom-width: 0px; float: left; padding-top: 0px; padding-left: 0px; margin: 0px 12px 12px 0px; display: inline; padding-right: 0px; border-top-width: 0px" border="0" alt="Userer" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhT9w88N3MFB-hcRycUYk7ggLtE-mCPbZczvwnpckFj9P5lN5uuT4LXdmAaJpSm94vMkqT96gSkfGcnuk_x2oXwzqUFlDVzvF3IWNtcQF7QWn6nMjzvM4L3xUt7o75yBRb9ACg47Zi2OKQ/?imgmax=800" width="222" align="left" height="244"></a>You may not have realised but the mortgage on your family home is one of the most flexible and safest “investment” vehicles available to you. </p> <p>Let’s start at the beginning, with the basics. Say you take out an owner-occupier, principal and interest home loan from a bank for $750,000; the loan is for thirty years with a variable interest rate of 5.25%. </p> <p>As an owner-occupier you’ll live in the home (note different factors, such as tax deductibility, are at play with an investment loan). Your interest rate will rise or fall depending on several factors, including the <a href="http://www.rba.gov.au/statistics/cash-rate/">RBA’s official cash rate</a>, regulatory changes—such as those implemented by <a href="http://www.theaustralian.com.au/business/property/investor-lending-apra-announces-new-curbs-on-interestonly-loans/news-story/ee7902b3db3aeab9906140255cafbaf9">APRA in recent years</a>, market conditions, and the business outlook of the bank itself (such as exposure to business issues in other industries or countries). </p> <p>As a principal and interest loan, you’ll start by paying off the interest (mainly) and your regular repayments will likely be about $4,100/month. You’ll pay that amount every month for thirty years. After 360 payments, you’ll have paid off the principal amount of $750k and nearly $750k again in interest. </p> <p>So in a nutshell, <strong>your house will cost you twice as much as the price of the house itself if you take on a mortgage</strong> (I’m glossing over deposits and stamp duty, of course). That’s a lot of money! </p> <p>This is why my #1 tip is to pay off your mortgage as soon as you can. To achieve this, negotiate annually with your bank to secure the best interest rate you can and move banks if you’re not happy; employ an offset account (don’t use redraw) to ensure all of your cash is being used to reduce the principal owing; switch to fortnightly or weekly repayments; throw everything you’ve got at your mortgage until it’s at least well under control if not obliterated—and by this I mean scrimp and save and defer buying the things you want for a few years. </p> <p>Many banks and financial institutions offer interactive, visual calculators which demonstrate how changes in interest rates and repayment frequency will affect the total cost of your loan. Check out <a href="https://www.canstar.com.au/calculators/home-loan-repayments-calculator/">this calculator from CANSTAR</a>, as one example. It was the looming threat of having to pay thousands of dollars every month, illustrated in a calculator like this, and the idea that our house would cost twice as much in interest, that drove me to our strategy of removing our home loan from our lives. </p> <p><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgCgHriLW-JZk1onm_4MET-IM6Og-g1on8c3m2tbv0GlVepBFlgjLyaabzx63dcg1Et0sLpk6vUC-ptzRraU5aU8YysNWJxcfT9PNqMQNPG-5u51iEDGmtWjTijs7WL02pRf3JutU2KMas/s1600-h/Repayment+Calculator%255B6%255D"><img title="Repayment Calculator" style="border-left-width: 0px; border-right-width: 0px; background-image: none; border-bottom-width: 0px; float: none; padding-top: 0px; padding-left: 0px; margin-left: auto; display: block; padding-right: 0px; border-top-width: 0px; margin-right: auto" border="0" alt="Repayment Calculator" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEi3l7kz7ueISJTVWZb5jVaHlA10C5dqzSc9NwMNxoFNHWZUi8KCC1kJ-YrRXwTAZY1Lhdpfa4GJnTJykiMSdX3rWRs2v49vY30j54WcJaSiUbipkUipjjFmzvbc1_hh4pKxHowQU1rfSJ0/?imgmax=800" width="435" height="398"></a></p> <p>If you’ve got money squirrelled away elsewhere, it’s probably time to liquidate and toss it into you offset account. If you’re using a high interest savings account, the ATO will treat your earned savings as taxable income (which will be taxed at your marginal tax rate). The same goes for capital gains income from other investment vehicles such as stocks. Don’t forget your savings are also being eroded by inflation at a rate of ~3% every year—meaning your cash loses 3% of its value once every year to the point where you position is probably moving backwards. </p> <p>Ask yourself if your other investments are earning you a return of 5% p.a. or more, after CPI and tax—where the 5% figure is taken from interest rate on your mortgage. You’ll likely find they’re not. Don’t forget to consider your risk exposure with these investments: when the next dotcom crash or GFC arrives, will your investments hold their current value? </p> <p>By contrast, you live in your home and, while it’s not an income-producing asset, it is a huge (albeit generally low-risk) liability which will undermine your ability to purchase strong assets if not reduced. That said, no matter what happens, your house will provide you with shelter and warmth and privacy even if it drops in value or the worst happens: it’s something you can use. </p> <p>Suppose you are taming the bear that is your mortgage: you’re chipping away at it using an offset account and making extra repayments. Meanwhile, the value of the security—the land on which your house sits—has likely increased in value. If you need a large amount of cash for that rainy day emergency, it’s immediately accessible to you from your offset account or by redrawing. In other words, your mortgage as a “reverse investment” (if that makes sense!) is not only low-risk but it’s fluid in that it can be rapidly converted into cash.</p> <p>With the passage of time and increase in value of your property, you may now be able to take out a line of credit, effectively a mini-mortgage secured against the difference between the current value of your property and its original value or what’s been paid down (the equity but this is also called your “lazy money”—set it to work for you!). You could go silly and use this to fund a holiday or buy a fancy car but that would undo your hard work. Instead, use that available money to pay a deposit and costs for your first investment property. Welcome to the world of leverage. </p> <p>The above is exactly what we did and we effectively paid down our mortgage in full in about eight years (ours was largely a dual-income family on average salaries for the majority of that time). From the line of credit, we’ve been able to extend ourselves into two investment properties, all the while <em>saving</em> somewhere between $500k – $1m in interest (depending on future interest rates), paying no additional tax, and watching the value of what is now <em>our</em> home increase rather than moving backwards, as cash would have. </p> <p>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 not selling anything and I do not receive any form of commission or incentive payments for any companies or individuals I endorse. I'm learning too and expect to make many, many mistakes along the way. <p>Enjoy, <p>Michael</p>Michael Haneshttp://www.blogger.com/profile/01877569030107816208noreply@blogger.com0tag:blogger.com,1999:blog-181096119787093794.post-48521083989494912632017-03-12T21:39:00.001-07:002017-03-14T04:29:16.200-07:0046 – Holiday Homes Make Poor Investments<p><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjY-2YnZNa3O0qNl7gjw4uRguytujHRkY3w4RVpoZGfnGHrS8RsiffmVR1NhHrSlUnqsSBxPNvRN9RVIKFCD4TZcLxl2ibgD3IGQG3UntZD8CCkyVUsdZULItK31IZXTG8V75oVp0ihM8Y/s1600-h/Holiday%252520Home%25255B2%25255D.jpg"><img title="" style="border-top: 0px; border-right: 0px; background-image: none; border-bottom: 0px; float: left; padding-top: 0px; padding-left: 0px; margin: 0px 12px 12px 0px; border-left: 0px; display: inline; padding-right: 0px" border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg-wsx9tabvTReMvWUkr9y3fnRWY4dE5EEoJ50aPGe0WiAIeRhIGjIM2If8gvfyBrq4vR-u5QOPxvL-jpjJWAFCzW_gwn2xeDDyxdAzP3LTXEuyHhkuFi-VMGFPnLNc5ks0KPIlBRuroHc/?imgmax=800" width="244" align="left" height="183"></a>We spent last weekend five hours South of Perth in Albany, WA. With the kids in tow, we rented a cutesy old cottage for they duration so they’d have their own rooms and space to run around. </p> <p>Being away in this context soon got me thinking about the many reasons why we veered away from holiday homes/apartments as an investment. With family frequently visiting from intrastate and overseas, a property that could be rented out is when not in use was hugely appealing to us at first glance but many reasons led us to reconsider. </p> <p>When we first started looking seriously at property investment, one of my first thoughts was to purchase a holiday apartment. I figured something with a few bedrooms in nearby Scarborough might not cost too much and “Scarbs” is an increasingly vibrant area in Perth. It’s also a good spot for visiting tourists with its expansive beaches and nearby amenities. I’ll note this was before I came to prefer land (i.e. a house on a block of land) over apartments and decided to invest for long-term growth rather than cash flow—in short, don’t buy an apartment because the land content ratio is too low…). In general, you’ll likely pay a premium to buy in a holiday location—which may not relate to long-term capital growth. In other words, are you better off buying into a highly-priced holiday location or doing your research to buy into a cheaper suburb that’s likely to grow faster and produce a better return on investment in the long run? </p> <p>We also had to ask ourselves whether we buy something local for the sake of the visiting relies or choose something further afield in a more interesting (to us) location—either out of town or in another state. If we wanted to make use of the property ourselves, would a “holiday at home” (er, a property in Perth, where we live) be all that desirable? </p> <p>Regardless of location, the ability to produce an income will always be at the mercy of the local short-term rental market and tourism conditions. Although I’m no expert in this area, I’ll hazard a guess that sites like Air BnB are eating into the traditional short stay markets. </p> <p>With a normal rental, you have the surety (in a way) of a guaranteed weekly rent for the term of the lease. With a holiday home, you might have a higher nightly rate but the uncertainty of whether the property will be full one night and vacant the next—which, on average, may or may not equate to the same income as a regular rental. Averages are useful but may hide seasonal ups and downs and corresponding cash flow troughs throughout the financial year. </p> <p>Unlike a typical suburban house rental where we’re renting a property to a tenant as a place to <em>live</em>, as their <em>home</em>, with a holiday home we’re dealing with a different set of variables. How closely are holiday makers vetted? How do we insure the property? Will neighbours object to the comings and goings of visitors at unusual hours? What happens if China crashes and the Chinese tourists suddenly dry up? We had a global recession not all that long ago; are the Yanks still flying in to little old Perth at the same rate they were before the dot com and housing market crashes? </p> <p>At the very least, you’ll need to estimate vacancy, affix a nightly rental price tag that fits the market and attracts the right kind of holiday makers or travellers, and then consider marketing costs (for your online listing, membership with the local tourism body or visitor centre, etc) and cleaning costs. Of course the property will also need to be furnished with not only furniture and appliances but linens, cookware, books/DVDs, artwork, etc. Other running costs will include electricity, water, gardening, and possibly cable and internet, as well as the usual rates and insurances.</p> <p>Don’t forget, if you want to use the property yourself, the ATO will require you to exclude the period when the property was not available for rent as a percentage of any deductions you might want to claim (i.e. negative gearing). On the upside, you may be able to claim a higher rate of depreciation (4% p.a. over 25 years instead of 2.5% p.a. over 40 years). </p> <p>If you want to use the property yourself during peak periods, then you’ll likely have to forego any income the property would otherwise generate during that time. </p> <p>The property we rented in Albany, although lovely in an historic kind of way and very practical for our young family, has zero appeal to me from a practical and maintenance standpoint. Although the main house felt sturdy and sound, the back extension (these places always have a back extension, right?!?) had a definite lilt to it despite being the newer construction. </p> <p>Then my wife plugged in the kettle for her morning tea but it wouldn’t switch on because she’d unwittingly tripped the circuit. Of course we just thought the kettle was a dud—until it came time for a shower and we had no hot water from the instant gas system with its electric ignition. It took a very upset wife and a call to the neighbouring manager, at 8:30am on a Sunday morning, to sort that one out. </p> <p>We’ve been living in a relatively new house in Perth for going on a decade now and although it’s been a pretty easy run there are always things to deal with—we’ve already had to replace the hot water tank, for example. I cannot begin to imagine the countless number of ongoing issues to be found with an older house. On the one hand, it’s established and “bedded in” but how soon until the roof needs replacing or the foundation restumping? Insects and damp or mould may be problematic in older houses and the electrics may be shady. </p> <p>Although I’d love to have a nearby holiday home for the relatives or a beach shack down south that we can use periodically, as an <em>investment</em> we’ll be sticking with suburban houses for now and fork out for a week or two in that holiday rental when we want to get away. </p> <p>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 not selling anything and I do not receive any form of commission or incentive payments for any companies or individuals I endorse. I'm learning too and expect to make many, many mistakes along the way. <p>Enjoy, <p>Michael</p>Michael Haneshttp://www.blogger.com/profile/01877569030107816208noreply@blogger.com0tag:blogger.com,1999:blog-181096119787093794.post-53189805674811512142017-01-13T20:02:00.001-08:002017-01-13T20:07:53.440-08:0045 - Financial Exercise<p><a href="http://blogs.wsj.com/japanrealtime/2015/05/08/robot-suits-to-help-bank-employees-deliver-heavy-cash-stacks/"><img title="BN-IH953_bankro_G_20150508035010" style="border-top: 0px; border-right: 0px; background-image: none; border-bottom: 0px; float: left; padding-top: 0px; padding-left: 0px; margin: 0px 12px 12px 0px; border-left: 0px; display: inline; padding-right: 0px" border="0" alt="BN-IH953_bankro_G_20150508035010" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgaIcFPoagGIXzujZ9D3UbNaVKSQu-wJQ8IbCUpEOLBL7T1facUnzzAqKJXYYK0rzfS6FQbFTJk2YQjE6xn83RKWcjzDGhu4KcUdC6xIV6JcSJYnHZrC4RADpypP-no921a4ESW2iGx3J0/?imgmax=800" width="244" align="left" height="169"></a>There’s very little I can share with you about physical exercise—other than the fact that I avoid it and any “workout” of mine is entirely coincidental… think mowing the lawn and carrying the kids around. I know exercise is good for me but I prefer to flex my financial management and discipline muscles instead. </p> <p>Of course since we can’t easily practice buying real investments without making costly mistakes, what follows is an overview (from simple to hard(er)) of what I do regularly to keep my mind on the money, so to speak. </p> <h1>Check your accounts regularly</h1> <p>I regularly log in to the web sites for our bank and credit card accounts to review the list of recent transactions. I quickly scan for high dollar value debit transactions: anything more than $100. I ask myself whether I recognise the transaction (i.e. did I buy something?) and check the transaction description and date. I also check for credits like refunds and payments to make sure everything is as I think it should be. </p> <p>It’s also worthwhile keeping an eye for really small transactions ($1.00) as this may be a fraudster probing the account. </p> <p>I also check our monthly statements when they arrive—especially for any interest charges. </p> <h1>Review and revise your financial goals </h1> <p>I set our financial goals annually. I list the goals for the year ahead and then short, medium, and long-term objectives. In our case, short-term is defined as 0-2 years, medium-term is 2-10 years, long-term is 10-30 years+. I review our goals every so often as a reminder to keep my train of thought on track. </p> <p>Have you written down your financial goals? If not, do this now: </p> <ol> <li>Spend five minutes thinking about your future. Brainstorm—think small or large but just think. Think about next year and think about how you’re going to retire and then die. </li> <li>Write down at least one or two financial goals that will help you to achieve your future reality. </li> <li>Edit later. </li></ol> <p>Drafting your financial goals is vitally important to shape and inform everything else you do in life. Your goals and objectives form the foundation of your financial existence and ultimately shape your personal existence. </p> <p>Start small and build, reviewing what you wrote down and editing periodically to cull things that no longer make sense and add things that do. </p> <h1>Save your receipts and keep a log book of costs</h1> <p>The office supply store sells a basic accordion-style folder for about $5 containing a pocket for every month of the year and a few to spare. I buy a new one each year. </p> <p>I always ask for a receipt when I purchase something and file it by month. For online transactions, I print to PDF and save the PDF in a similar manner.</p> <p>At month end, I pull out the receipts for the current month and record, at a minimum, the date, supplier, amount, and any relevant notes. I use an Excel spreadsheet for this purpose and add a new row for each receipt. </p> <p>On my log I categorise each transaction by type (e.g. grocery, petrol, utility, clothing, children, communications, vehicle, entertainment, etc) and sub-type for each of those types (e.g. utility includes gas, water, and electricity). I also include a Yes/No field to indicate if the expense should be flagged to the accountant to be tax deducted, and note how the payment was made (cash, card, PayPal, etc). </p> <p>Because I’m a geek and an ex-manager, I have an Excel pivot table sitting over that data, which allows me to dynamically filter this information by time/type/tax deductible/etc in order to consolidate and analyse our expenditure. For example, let’s say I want to know if we’re spending a little bit more or a lot more on gas or electricity… since last year or last season or since we had the kids. The pivot table tells me this. It also gives me a nice overview of how our annual expenditure breaks down into the categories I’ve specified. </p> <p>Now when you apply for a loan and you’re asked how much your family spends each month, you can amaze and impress by providing an exact dollar figure to two decimal places! </p> <p>In separate logs, I also track things like income (salary), credit cards, and specific things I want to manage closely throughout the year. For a very macro-level view of our situation, I can now see how much we earn to how much we spend (I express this as a ratio) and how much we’re saving. </p> <p>Do you know how much you’re spending? If so, how and how precise is your understanding? </p> <h1>Budget</h1> <p>Using the information I have from our receipts helps me to budget more accurately. </p> <p>with our combined income (earned income—i.e. salaries, government payments, superannuation, investment returns, etc), I divide that number by all the big ticket things that make life expensive. </p> <p>An annual budget is a good starting point but life tends to work in monthly, fortnightly, or weekly intervals and a budget will likely be more meaningful if you if think short-term. If you’re working electronically, I find it easiest to plan at the week or fortnightly level and then aggregate those figures as monthly or annual figures. </p> <p>Starting with some of the aggregate numbers from my log and our financial goals and objectives for the year, I can decide where we need to cut costs and where we want to spend (or save) more. If you’re working with a calendar, you can then plot how to achieve that by ramping up or down on specific costs over time (but I feed this information back to our financial goals and objectives). </p> <p>Some areas of a budget will be easy. If you’re saving for a home deposit or something else like a trip, put a dollar figure against that item and adjust later if you need to. For things like savings and paying off debt, I’m aggressive and stretch ourselves to prioritise these items. </p> <p>Some areas seemingly won’t provide much wiggle room. We all need food, shelter, clothing, petrol, and things like utilities, phone, and maybe internet. I’ll occasionally look at those areas in detail to see you if I can <a href="http://property.mediawhole.com/2015/03/11-bank-deals.html">find a better deal</a> on our energy or mobile phone plans, for example. </p> <p>The online ASIC Budget Planner at <a title="https://www.moneysmart.gov.au/tools-and-resources/calculators-and-apps/budget-planner" href="https://www.moneysmart.gov.au/tools-and-resources/calculators-and-apps/budget-planner">https://www.moneysmart.gov.au/tools-and-resources/calculators-and-apps/budget-planner</a> is a great place to start if you’ve never laid out a budget for yourself. </p> <p>Once you have a budget in place, your receipt log allows you to determine how you’re tracking to budget and where any variances sit. </p> <h1>Research</h1> <p>I regularly review the official interest rate and the interest rates applicable to our various loans. The cash rate is pretty boring these days (for now) but the interest rates at the lender end are constantly jittering around and there’s always the question of whether it’s time to refinance for a better deal. </p> <p>realestate.com.au allows you to subscribe to a feed of new real estate listings for a specific criteria and I receive regular updates from that channel for the suburb where our family home is located and the Brisbane suburb where IP#1 sits. I don’t use this information other than to keep tabs on the market and, as buy and hold investors, we have no intentions of selling. I am interested, however, in house prices both from an equity point of view and to understand our return on investment position. Of course the advertised price for a property rarely tracks it’s sale price. </p> <p>You can also do the same thing with the rental market and properties sold. </p> <p>The more I’ve learnt about property investing, the more interested I’ve become in the things that impact it and to that end I at least try to read about some of these demographic and economic indicators (for example, the free <a href="http://www.corelogic.com.au/reports/chart-pack.html">Monthly Housing and Economic Chart Packs</a> produced by CoreLogic). I supplement some of this summary-level information with detail from the ABS, such as <a href="http://www.abs.gov.au/ausstats/abs@.nsf/mf/3101.0">population growth</a> and and <a href="http://www.abs.gov.au/ausstats/abs@.nsf/mf/6202.0">unemployment</a>. </p> <p>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 not selling anything and I do not receive any form of commission or incentive payments for any companies or individuals I endorse. I'm learning too and expect to make many, many mistakes along the way.</p> <p>Enjoy, <p>Michael</p>Michael Haneshttp://www.blogger.com/profile/01877569030107816208noreply@blogger.com0tag:blogger.com,1999:blog-181096119787093794.post-64810646203301966632016-10-16T08:06:00.001-07:002016-10-21T20:01:01.688-07:0044 - Re-letting IP#1<p><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiqf-5ZqkUjK8klnQ4fA3ITs1oE4VhBa7HqdZGD3Vp_dXsU0ecpZW0gs5PlfT1wLZVUy04CPvuxLvBSmU7lAQ9Mp4bigeLeE_LwABb-DW7x8RAnOgPyyORqnugDQ6qdBSrsfpKpvoddiQw/s1600-h/For%252520rent%25255B3%25255D.jpg"><img title="For rent" style="border-left-width: 0px; border-right-width: 0px; background-image: none; border-bottom-width: 0px; float: left; padding-top: 0px; padding-left: 0px; margin: 0px 12px 12px 0px; display: inline; padding-right: 0px; border-top-width: 0px" border="0" alt="For rent" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgJ0M1KVfM0knYC-BJajPCNY4zvk0SEsv2UvYXU6ndjMKcAU33CccVSGrG8mqkKK9ueUC7bmIH_CTyOy4lBvTe73232QwncR38NXHobOZy5zmv39FeuE73qepTPDMvl1UwLjxLDsP0c7Yg/?imgmax=800" width="244" align="left" height="184"></a>Our Brisbane tenants vacated the property in early September at the conclusion of their lease. No clear motivation for their departure was supplied to us by the property manager, apart from the girlfriend being pregnant. I wonder if the $5/month rent increase we applied when <a href="http://property.mediawhole.com/2016/03/38-surprise-unexpected-changes.html">the lease was renewed/reworked</a> was partly to blame but I suspect the tenancy simply ran its course. The local Griffin rental market is currently oversupplied and rents have fallen slightly. </p> <p>The outgoing tenants willingly tidied up and addressed a handful of issues that required attention (a chipped kitchen tile, dog faeces in the back garden, some cleaning residue on the walls). Having the house empty was also a good opportunity for the builder to rectify a roofing defect and related ceiling damage from a recent water leak. </p> <p>The property was not producing income during this vacancy period but my (admittedly pessimistic) budgeting plans anticipate a four-week annual vacancy period. </p> <p>While home inspections were not widely attended before the last tenants vacated, interest picked up gradually from September. The property manager tells me the local rental market is oversupplied with new developments recently coming online and we eventually dropped the weekly rent from $415 initially to $410 and then to $405 as the weeks went by. Every $5 decrease translates into an additional loss for the investment of $260 per annum—less than I would have thought. </p> <p>The “competition” (i.e. rentals <em>exactly </em>like or very similar to ours) were including a free week of rent and/or other incentives like six months of free gardening services. Our PM also suggested we could upgrade the <a href="http://www.realestate.com.au">realestate.com.au</a> advertisement to feature/highlight our property but the rent decrease seemed the obvious way to go as it impacts the tenant’s bottom line. </p> <p>We had a diverse range of applications through while the property was vacant: </p> <ul> <li>An ideal first application came from a mum and dad couple with two older, pre-teen boys and no pets. Dad was working away but mum was not employed and is, presumably, a homemaker. Unfortunately the neighbour’s aggressive dog growling through the fence scared them off (a friend initially inspected the property on their behalf as they were all living North); one of the sons was reported as having a disability and being afraid of dogs. <li>We then received a second application from a mother with an older daughter, who herself has a 2yo and a newborn baby. They have a large breed dog, only 12 months old. It wasn’t clear whether mum was effectively planning to serve as guarantor for her daughter but they could service the rent payments between them. Kids and <a href="http://property.mediawhole.com/2015/08/29-pets-allowed.html">dogs</a> don’t make for ideal tenants in my mind but that’s exactly the market we’re targeting with this style of property (4x2) in this location (outer-ring suburb). The pair were ready to go immediately on a six or twelve-month lease but, between my prompt reply to the real estate agent and their following up with the applicants, the applicants had accepted another property. <li>On the back of the second application falling through, we received a third application from a very young couple (late teens/early twenties) with no rental history and very little rental affordability (<30%). Although without kids, they too have an active dog. As our only option, we discussed the risks with the property manager who thought the affordability risks were high. Meanwhile, my wife and I were both thinking back to when we were the same age, with very little income, a cat (and eventually a dog); we stayed in our first rental for four years, paid the rent on time every week, kept the property clean, and caused no damage. The PM discussed having a parent join the application as a guarantor but this couple also found an alternative rental before anything further happened. </li></ul> <p>Between applications and twice-weekly home opens, the property manager was working to see what could be done about the dog next door. The ranger was called and inspected the situation but decided the neighbour’s property is adequately fenced and the dog could not be labelled ‘menacing’. The ranger did speak with the owners and it was agreed a barrier could be placed against the fence to prevent the dog from getting as close to the boundary. Our PM also spoke to the neighbour’s PM about the situation and was told the dog would be brought inside during home opens (and is friendly once it gets to know someone). </p> <p>We finally received a fourth application for a couple with two kids under five and two dogs—an older large breed dog and a younger small dog. They were requesting a 12-month lease commencing within the coming days. We approved their application and an executed lease document soon came back. At last!</p> <p>The property was physically vacant for six weeks—and someone likely kicked a hole in the letterbox during that time, just for good measure—but the new tenants are hopefully in and happy as of last Friday. </p> <p>Given the length of time the property was vacant, I consulted my <a href="http://property.mediawhole.com/2015/01/4-risky-business.html">risk matrix</a> for some hints as to what to do next—should the vacancy period continue. My mitigation and contingency strategies were minimal (‘review property manager’ and ‘review financial controls’) but, following this experience, I added ‘review market supply’, ‘offer incentives’ and ‘promote advertisement’. I also increased the Probability rating from Remote to Occasional. Fortunately, we’re not cash flow investors and have sufficient cash buffers to weather an extended vacancy. </p> <p>Although I naively expected our first tenants to stay on for another year at least, I likely need to adjust my expectations to assume a tenant will stay somewhere between 6-12 months. A 12-month lease gives us some surety but also locks us in to a rental amount and the tenant, who may or may not be problematic. </p> <p>In terms of lessons learnt, I created a Landlord’s Vacating Tenants Checklist. This checklist differs from the standard checklist which might be supplied to the outgoing tenant or used by the property manager during the exit inspection in that it lists the things <em>I</em> need to check and do to a) ensure the tenants have done the right thing and b) ensure the property manager has done the right thing. More about the checklist and b) soon. </p> <p>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 not selling anything and I do not receive any form of commission or incentive payments for any companies or individuals I endorse. I'm learning too and expect to make many, many mistakes along the way. <p>Enjoy, <p>Michael Michael Haneshttp://www.blogger.com/profile/01877569030107816208noreply@blogger.com0tag:blogger.com,1999:blog-181096119787093794.post-73019804526786834812016-07-13T05:53:00.001-07:002016-07-15T05:30:34.579-07:0043 - Recapping the IP#2 land purchase<p><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgiMcczBSYaIutnK-lMZ1nSlfmG52aS6AobHxWL1s29eaWwuFNiBU5PPkd3-SDBQRzbCpiqW6qUCvLkAe787q2ZP-Yw_k9YogfhyHsaWohmK0BscGw4wAUI4n75zdW0Q5DJnlNKzTfO9IM/s1600-h/Torture%25255B2%25255D.jpg"><img title="Torture" style="border-left-width: 0px; border-right-width: 0px; background-image: none; border-bottom-width: 0px; float: left; padding-top: 0px; padding-left: 0px; margin: 0px 12px 12px 0px; display: inline; padding-right: 0px; border-top-width: 0px" border="0" alt="Torture" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhPTJncU1RskI1xxCZTAnk3gRnksllyjnAbOZ5b4QVSfYTUy99ZdI9NXQB_njObTZgLkpS9kPEriXCZGH7F5Ed7_iYOdLF3r_4oKlRY91uu-dDXialdg0JMVxZ5mEBewi0iRWyXNFCqj0E/?imgmax=800" width="189" align="left" height="244"></a>What a roller coaster ride we’ve had “just” to buy a plot of land over the last six months! We’re nearly there now and I wanted to briefly highlight some of the issues we encountered in securing the block of land and finance. In summary, the land titles have registered and we’re finally approaching settlement.</p> <p>If you’re interested in the details, I’ve linked to earlier posts below. </p> <p><strong>Step 1: Difficult finance pre-approval</strong></p> <p>We kicked off towards the end of 2015 when I asked our mortgage broker to look into finance pre-approval following my return to work several months prior. Although the wife was on maternity leave, I’d nonetheless been tinkering with the idea of a second investment build. The broker deemed <a href="http://property.mediawhole.com/search?updated-max=2016-03-02T21:21:00-08:00&max-results=3&start=3&by-date=false">our bank-appointed credit assessor to be unreasonably pernickety</a> but finance was provisionally approved on the basis of servicing via my income alone. </p> <p>I then needed to <a href="http://property.mediawhole.com/2016/03/37-few-reasons-for-investing-in-property.html">convince dear wife</a> a second investment build is a good idea and gave Open Corp the okay to proceed once we reached agreement. </p> <p><strong>Step 2: Property selection do-over</strong></p> <p>All was looking rosy with the first property selected for us by Open Corp until the vendor mysteriously sat on the signed land contract for some weeks. It turned out <a href="http://property.mediawhole.com/2016/03/39-gazumped.html">we’d been gazumped</a> by a large buyer who apparently bought out all remaining blocks in the release—including those blocks with unexecuted contracts. </p> <p>By this point, our bank pre-approval was due to expire but Open Corp quickly found us a similar, alternate property in a neighbouring estate. It was slightly larger, with a correspondingly larger price tag. In the interest of time, we nominated Open Corp to purchase the property on our behalf. </p> <p><strong>Step 3: Short valuation</strong></p> <p>The Valex-appointed valuation company contracted by the bank to value this second block came back with an ill-considered <a href="http://property.mediawhole.com/2016/04/40-short-valuation.html">short valuation</a>. We were told by Open Corp and otherwise of the view the property value was in line with the contract price. Appeals to the valuer (Peter Jones from <a href="http://www.cjalee.com.au/">Lee Property</a>) and the bank to review or reconsider a similar valuation that came in at cost for a similar property in the same estate fell on deaf ears. In brief, the valuer considered an inappropriate set of comparable properties and didn’t do his job. Unfortunately, there would be no getting around this and we’ll need to contribute the shortfall from our equity loan. </p> <p><strong>Step 4: Finance do-over</strong></p> <p>Throughout the valuation shenanigans, the contract I was on at work came to an abrupt end and left us as a no income, two kids (NITK—my acronym?) household—not all that appealing to a lender when it comes to their evaluation of a client’s ability to make loan repayments. The wife was still on maternity leave and, although she had a contract to resume work (and was actually on leave—maternity <em>leave</em>), the initial finance application was based on my income alone because our mortgage broker didn’t think her potential income would be considered. With my last pay stub showing the drop off in hours, it was difficult to prove to the bank we could afford this loan. For good measure, my overarching head contract also ran out!</p> <p>Meanwhile, our deadline for finance approval with the land vendor was due to expire. A one-week extension was approved, provided the deposit was paid in full by the original due date. I wasn’t terribly comfortable paying the deposit until finance was unconditional but both Open Corp and our (independent) mortgage broker confirmed it was fully refundable. </p> <p>Through a tip from another mortgage broker, I persuaded our broker to approach the bank about taking into account the wife’s signed work contract, commencing on her return to work from maternity leave and well before settlement. I’d been told the bank we were working with had recently softened their stance on maternity leave. Of course we first had to find the wife’s contract, which was buried in her work emails as an attachment she couldn’t access remotely. Her maternity leave had also been paid upfront so she had no recent pay slips.</p> <p>The final hurdle was the build contract, signed by nomination, which the bank wouldn’t accept. A new contract was couriered out to us and signed in a hurry before being couriered back to be executed anew by the builder. </p> <p>With the build contract sorted, the maternity leave strategy delivered and finance was <em>finally</em> approved. </p> <p><strong>Step 5: Deposits</strong></p> <p>Although the Open Corp land deposit is normally $2,000, our land contract stipulated the typical 5% deposit. As mentioned above, the extension required us to pay the balance before finance was unconditionally approved. </p> <p>The builder’s deposit (5% of the build price) also came due just after finance approval and the balance of Open Corp’s fee was also payable. </p> <p>It’s at this point—when significant amounts of money are moving out of the account—that it all starts to get real. Of course land titles haven’t yet registered and settlement hasn’t yet come about. Perhaps more importantly, in terms of getting a paying tenant through the doors, construction hasn’t yet started. </p> <p><strong>Step 6: Finance re-do over</strong></p> <p>A final twist to the finance saw our request for an LMI waiver come through shortly after signing the first loan documents, which necessitated the inconvenience having the loan documents signed again. We weren’t sure how this was going to play out before this point so it was a happy surprise, at least.</p> <p><strong>Step 7: Certified ID</strong></p> <p>As a final poke in the eye, I heard from Open Corp—two days before our anticipated settlement date—to say the solicitor needed a certified copy of our ID. On very short notice, the wife was fortunately able to find a Justice of the Peace at the hospital who could certify her ID… the head pharmacist, he was paged and materialised from a sterile room in a full biohazard suit to help her out!</p> <p>Subject to the bank, settlement is scheduled this week.</p> <p><strong><font color="#ff0000">Update (bonus Step 8!)</font></strong></p> <p>Wow, we’ll never cut a break with this one! </p> <p>We settled on Thursday morning at midday but first had a call from our Eastern states solicitor at 7am to say the bank wanted a $25,000 owner contribution (the day before it was $0). That amount was not only more than I could transfer online given our daily transfer limit but it was also more than the bank’s first-line call centre rep could manage for us. </p> <p>I asked to speak with the rep’s supervisor and, after going through some additional identification questions and a nuclear launch sequence involving call backs and temporary passcodes, I was able to make the transfer. </p> <p>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 not selling anything and I do not receive any form of commission or incentive payments for any companies or individuals I endorse. I'm learning too and expect to make many, many mistakes along the way. <p>Enjoy, <p>Michael</p>Michael Haneshttp://www.blogger.com/profile/01877569030107816208noreply@blogger.com0tag:blogger.com,1999:blog-181096119787093794.post-83621970146148395332016-06-15T19:39:00.001-07:002016-06-16T23:51:54.436-07:0042 - Tenant Churn<p><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg6opK0Fb8wpDK9WW6bDC_ptYkXqwQs0SOERQNDsAKWJqr8nw7_6wBfCCOytOFfMPH-DEFoAAy3caDI_tI-g1gStaAep_3eDVx8S1m0XGChO5ZLg4scJYESRrn7YtaDWB7FbNRg5BDN4b8/s1600-h/suitcase%25255B2%25255D.jpg"><img title="suitcase" style="border-left-width: 0px; border-right-width: 0px; background-image: none; border-bottom-width: 0px; float: left; padding-top: 0px; padding-left: 0px; margin: 0px 12px 12px 0px; display: inline; padding-right: 0px; border-top-width: 0px" border="0" alt="suitcase" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhdeu5AnOJwcebyPVV4ZLf6sd3qNCc5GCnh9LSCYKaOvEpB4SaYzKjTnudmtyu16jqTgS3fzcXnhqT2hbxbLg0r66At_7kx7HGWFfITreamh1rfex5TOscWboQ4Ya-wsNw29Mi0_HRpfsg/?imgmax=800" width="244" align="left" height="184"></a>The property management firm (Century 21) managing our Brisbane property contacted us recently seeking our instructions regarding the renewal of the current 6-month lease, which runs out in the next few months. </p> <p>It was noted the current rent is at the high end for the area, with a nearby estate also coming online—increasing rental supply. The agent reminded me the last (and first inspection since this lease began) was acceptable, and mentioned monies owed by the tenant are generally within tolerances. </p> <p>The agent additionally mentioned a contractor reported two dogs at the property, one being a small puppy. Although I’d not formally rejected the tenant’s <a href="http://property.mediawhole.com/2016/03/38-surprise-unexpected-changes.html">pet request</a>, I hadn’t approved it either. </p> <p>Despite being annoyed about the dogs—mainly the dishonesty of the matter, I proposed another six month lease at the same rate and approved the pet request as there seemed to be no option not to. I asked that our dissatisfaction about the dogs be conveyed to the tenants and requested the tenant raise any other issues now so they might be cleared up. It’s frustrating when the adults you lease a property to behave like three year-olds but if they’re paying the rent, that’s a good thing. </p> <p>After all of that, the property manager came back with a response from the tenant and they won’t be renewing the lease. We haven’t been given a reason why but the agent was going to enquire.</p> <p>Open Corp have noted a preference to lease to families due to the stability they offer as tenants (kids in school, general stability, other life pressures which preclude moving house, etc) but we approved the original trio of adult tenants as they had no kids, no pets, and were the first and only application we received. We also pretty much had to approve the application to secure the Open Corp 12-month rental guarantee at the original rent we desired. </p> <p>Having the lease turn over means the property will need to be advertised and we’ll need to pay a new letting fee to the property manager. Of course there may also be a vacancy period. I’ve budgeted for both the costs of an annual letting fee and four week vacancy period. Although very much not preferable, I’m confident we have an adequate financial buffer to cover any gaps. Nonetheless, I also include long-term vacancy as a <a href="http://property.mediawhole.com/2015/01/4-risky-business.html">risk</a> on my property investment risk register. </p> <p>Admittedly, from the point we transitioned this property from acquisition and commissioning to tenancy, my expectations around the time a tenant will remain in place were likely too high. My only frame of reference for this was as tenants ourselves: we spent <em>four years</em> in the Adelaide house and a couple of years in a Perth rental. I hoped to get two years out of the original Brisbane lease but will adjust downwards future expectations on the back of this experience. Although I dislike the idea of churning tenants and the wear and tear a house takes in the process, as long as we have tenants in place to contribute rent towards the holding costs, I suppose I can’t care too much… everything else can be repaired! I’d be curious to know the average tenancy duration across different types of rentals in different areas… </p> <p>It’s easy to trick yourself into believing being a landlord should be a set and forget exercise once the initial setup is complete. The books, magazines, and online resources (such as this blog) tend to focus on matters such as types of investment, types of property, location principles, ownership structures, financing, tax structures, and so on; the day-to-day landlording is typically glossed over by promoting the use of a property manager or improving the property to “manufacture wealth.” </p> <p>The last twelve months have offered me an enormous experience as a newly-minted landlord but this role still feels very foreign to us and the mandatory, ad hoc decision making requirement when you least have the headspace to spare can honestly be a hassle. I’ll endeavour to write more about this aspect in future posts. </p> <p>The property will be advertised about six weeks out from the end of the lease; it will be interesting to gauge the market and find out who we get next as tenants. I’ve intentionally remained very anonymous with these tenants but am <a href="http://property.mediawhole.com/2015/12/33-gifts.html">rethinking our approach</a> the next time around to experiment with a more personal approach (while keeping the PM in their role). </p> <p>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 not selling anything and I do not receive any form of commission or incentive payments for any companies or individuals I endorse. I'm learning too and expect to make many, many mistakes along the way.</p> <p>Enjoy, <p>Michael Michael Haneshttp://www.blogger.com/profile/01877569030107816208noreply@blogger.com0tag:blogger.com,1999:blog-181096119787093794.post-10117138427075542182016-05-25T05:06:00.001-07:002016-05-25T22:54:58.222-07:0041 – Why bother reviewing your bank interest rate<p>I write <a href="http://property.mediawhole.com/2015/03/11-bank-deals.html">constantly</a> here about reviewing your interest rates (and <a href="http://property.mediawhole.com/2015/02/8-insurance-deals.html">insurance premiums</a>, etc) but that’s because I’m constantly astounded by how willing large organisations are to take us all for a ride with very subtle interest rate movements and other fees. </p> <p>I recently noticed the interest rate advertised online for our PPOR and line of credit were a little way from the actual interest rates we’ve been paying. I thought the interest rates on these products would keep pace with <em>both</em> RBA rate changes <em>and </em>changes to the original product but of course that’s not always the case with RBA rate and perhaps not so much the case regarding changes to the loan product. </p> <p>So I contacted the bank and, after chatting with a representative from the retention department, the rate on our PPOR loan was reduced by .20% (they couldn’t move the LOC rate). </p> <p>It’s worth noting the rate advertised online is for new loans and the rep I spoke with told me they can’t “match” that rate as our loan was established at a certain point in time when interest rates were likely higher (i.e. when the bank “bought” the money they lent to us). I was told we’d have to refinance to achieve the lower rate. </p> <p>The rep also mentioned the interest rate isn’t adjusted automatically as the product itself changes and it’s best to review the interest rate every twelve months or so and give the bank a call if necessary—good advice. </p> <p>So what does .20% actually mean to us in dollar terms, I wondered? Is it $10 per annum and hardly worth bothering about or is $1000 (or more) per annum? I don’t like to wonder these things, I like to know with certainty so I put together a spreadsheet to multiply a given daily interest rate (or part thereof) by a specified amount for a specific timeframe (i.e. 30 days, 1 year, 2 years, etc). </p> <p>Working off a principal amount of $500,000 (let’s call that the national medium house price, roughly speaking), I was surprised at the results. </p> <p>For example, let’s say I’m comparing two loan products with an interest rate of 4% and 4.5% p.a. respectively. How much does that extra 0.5% cost per year? From my table (below), intersect the 0.5% column and the 365 (days) row and you can see the answer is $2,500. That’s a lot of money to unburden yourself of every year for no benefit. If you’re capitalising that charge it’s also going to compound in the bank’s favour!</p> <p>The table shows two sets of columns. The first set with the dark headings shows part percentages up to 1%; the right-most columns with the lighter shading show a range of current rates, increasing at 0.5% intervals. </p> <p>Have a look and compare the rates on your loans and then talk to your bank—or refinance if you have to (talk to a mortgage broker).</p> <p>Click the image to see a a full-size version of the table. </p> <p><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgESP7u3ntCJmlm0kvWU1PmXiXIo2_7NiUDjYsT77MwDKSdlo-jrf_ZF0j7lxVJ3OEr2E-fipOIyafrGIEa-v35kO7W0nTQGyaIWOrNKa42Gl-g01uBM5DU7OyDkrPMCftQ-et9j-Co8VE/s1600-h/Interest%252520Rate%252520Table%25255B5%25255D.jpg"><img title="Interest Rate Table" style="border-top: 0px; border-right: 0px; background-image: none; border-bottom: 0px; padding-top: 0px; padding-left: 0px; border-left: 0px; display: inline; padding-right: 0px" border="0" alt="Interest Rate Table" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhkaKFMfhAmXI9hxxI7eyqQHKGPvVOS1U439FiTPHnrAxbcK6X7tAvFqiELp35A2_yR8oOwn4jZ5bNu5G07ZrPaQ8AV40F8OZs3LgoGvuOHlo5835mFVigXMEqZhrvKLLJ8NxGEFEWn5hE/?imgmax=800" width="672" height="130"></a></p> <p>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 not selling anything and I do not receive any form of commission or incentive payments for any companies or individuals I endorse. I'm learning too and expect to make many, many mistakes along the way. <p>Enjoy, <p>Michael Michael Haneshttp://www.blogger.com/profile/01877569030107816208noreply@blogger.com0tag:blogger.com,1999:blog-181096119787093794.post-9434117343352172212016-04-12T04:46:00.001-07:002016-05-24T22:48:17.115-07:0040 – Short Valuation<p><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhGV7ivJTVQEV_TTJDKzVKPyko2M45vbO6illhqWq07oLC0L-Tj-nvClHZpNR5dyUcCugFTeG9NhvYkdty_XWhev4gzxP5xtqZTeDVUImzXl-d5g5yhZfGrZLJMRr4s7XfU8ynYwdOynRc/s1600-h/Fruit%25255B2%25255D.png"><img title="Fruit" style="border-left-width: 0px; border-right-width: 0px; background-image: none; border-bottom-width: 0px; float: left; padding-top: 0px; padding-left: 0px; margin: 0px 12px 0px 0px; display: inline; padding-right: 0px; border-top-width: 0px" border="0" alt="Fruit" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgRHiD7GwRCoTGTn7iGxUaS8CtWihQAS3RJAOpM2RiQZSlaxN6KaTwrlkMla6oZm5onBlUl97p0pzlXTXa8VBTKNHWiWKVPK_D1HsVzw0YkgFhUqq0Oq1OGOd1Fw150ZNGDWrrAt3snL2Y/?imgmax=800" width="244" align="left" height="184"></a>It’s just one problem after <a href="http://property.mediawhole.com/2016/03/39-gazumped.html">another</a> with the finance application for the second investment property. </p> <p>Most recently, the valuation ordered by the bank came back under the contract price (short), specifically citing a discrepancy between the construction price and comparable build costs of around $35k. Annoyingly, the replacement value (which might be used when nominating an insured amount, for example) is noted as being above the contract price. </p> <p>Our mortgage broker asked me to take this up with Open Corp, who note <a href="http://www.opencorp.com.au/news/getting-a-bank-valuation-property-wod-ep-193/">several points</a> when it comes to valuations: </p> <ul> <li>No two valuers will value a property at the same price. The valuation comes down to the valuer’s experience, knowledge of the area, and subjective interpretation of comparable sales and the area’s price point. Of course, the valuer is attempting to (efficiently) compare houses on different streets, of different designs, built of different materials in different eras, and in a changing market—this isn’t apples and apples stuff. <li>The properties we buy from Open Corp are full turn-key house and land packages, constructed as investment properties (i.e. to house tenants). The internal finishes are of a high quality to attract tenants and because they’re often hard-wearing. The house is 100% complete and includes landscaping, fencing, washing line, letter box, etc. I previously questioned Michael Beresford from Open Corp on the cost difference between the standard house and land packages for sale on realestate.com.au and the properties in the same development being sold by Open Corp and he made the same point in the context of that conversation. </li></ul> <p>Open Corp supplied me with a valuation for a similar, smaller property in the same area which did come back at the contract price. As plan A, I asked Mortgage Choice to submit this alternate valuation to the bank, requesting it be substituted for the original. This would in part be a test of the mortgage broker’s relationship with the bank but would more likely come down to the individual personalities at the bank’s end—more subjectivity—and in conjunction with whatever risk algorithms they apply.</p> <p>Perhaps not unsurprisingly, the bank was unwilling to accept the alternate valuation and our mortgage broker subsequently took up the matter with the original valuer and and their minder, <a href="https://vx.valex.com.au/">Valex</a> (the valuation panel through which valuations are ordered by lenders). I have no experience contesting a valuation but understand it’s often a difficult proposition. The finer points seem to hinge on the comparability of the ‘comparable sales’ cited in the valuation—in other words, suggesting our build is comparable but at the higher end of the spectrum. As anticipated, the valuer (Peter Jones from <a href="http://www.cjalee.com.au/">Lee Property</a>) wouldn’t budge and was apparently quite direct with our mortgage broker on this point.</p> <p>In the meantime, Mortgage Choice ordered an independent valuation through another lender, giving us the option to supply that valuation to the original lender or proceed with finance through the second lender. This valuation came back at the contract price but was also not accepted by the first bank. Interestingly, many of the comparable sales cited for this valuation were in the same development whereas the comparable sales in the original valuation were from further afield. </p> <p>Our last option was to challenge the valuation with the bank directly but that was equally unsuccessful. </p> <p>In order to secure any form of financing from this application, we made the decision to reduce the loan amount (aligning to the original valuation) with the difference contributed from our line of credit (at a slightly higher interest rate and with the added risk of the increased LOC balance being secured by our PPOR).</p> <p>This would have done the trick if I had a current pay slip for the bank—which I don’t because I was unexpectedly stood down by the firm I was contracting for earlier in the year when their pipeline of work dried up. Of course the wife’s still on maternity leave and won’t be back to work for another few months and the bank won’t accept her signed contract in place of a pay slip. Of course this also makes applying for finance through another lender a tricky proposition. </p> <p>What a saga. </p> <p>Finance is due in four days, on Friday. Mortgage Choice have recommended we request a finance extension from the vendor until wifey is back to work. Open Corp have suggested this may be an option because the land titles haven’t yet registered—but will be dependent on a conversation with and the goodwill of the vendor. </p> <p>If this plan works out, maybe enough time will have elapsed for the bank to order a new valuation. Ha! </p> <p>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. <p>Enjoy, <p>Michael</p>Michael Haneshttp://www.blogger.com/profile/01877569030107816208noreply@blogger.com0tag:blogger.com,1999:blog-181096119787093794.post-26520439666990773022016-03-30T04:50:00.001-07:002016-05-24T22:41:42.705-07:0039 – Gazumped<p><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhWJfNG92M5ucE6UC7HxGRMiTp4Xff70VOHq1aAGgvl7ML_SZrwjwzcyMWlkZpqsqv2vfG_dTJ2cpOSJiI0jyyVsZUuJyxE2AfLgY8C-FOpa-Ta2EKLxo7ZNe4YnJJWn91loAWkHzkNV84/s1600-h/Tank%252520Wheel%252520Clamp%25255B2%25255D.jpg"><img title="Tank Wheel Clamp" style="border-left-width: 0px; border-right-width: 0px; background-image: none; border-bottom-width: 0px; float: left; padding-top: 0px; padding-left: 0px; margin: 0px 12px 12px 0px; display: inline; padding-right: 0px; border-top-width: 0px" border="0" alt="Tank Wheel Clamp" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj7ukgsAW7nPwR985D7-pg7qY_CQyjwvTnY3LjLPrKH1QAsInbJ_bx-RbMcLk99zZLh_VpDfVbc4mB0Pp24vswfEj2YWTrpoXzxPAHa_MsEkHnUnO5RjGN3Z9gELjrPnyPqxcI95FYMK-c/?imgmax=800" width="244" align="left" height="213"></a>I’ve <a href="http://property.mediawhole.com/2015/09/30-progress-update-done.html">mentioned</a> a few times on this blog how smoothly everything went with the first investment property. From land and build contracts, to finance, to construction, and tenanting it was one tick in the box after another. When we set about repeating the process with <a href="http://www.opencorp.com.au/">Open Corp</a>, I expected an identical outcome, this time with the benefit of personal experience. </p> <p>Through no fault of Open Corp’s, we’ve had a rocky start this time. Our finance pre-approval, with me only recently back to work and the wife on maternity leave, <a href="http://property.mediawhole.com/2015/12/34-getting-started-again.html">was heavily scrutinised</a> by the bank and was finally approved in mid-December—valid for three months, including the Christmas holidays. Dear wife then took her time finally <a href="http://property.mediawhole.com/2016/03/37-few-reasons-for-investing-in-property.html">agreeing to the commitment</a> before we gave Open Corp the green light. </p> <p>More recently, with our pre-approval due to expire within a week, I received a call from Open Corp telling us a larger buyer had come in and offered to purchase all remaining blocks in the development we were to buy in to—including all blocks with non-executed contracts. We’d signed the contract but it hadn’t yet been fully executed (signed) by the vendor. I’m not sure if it applies in the fullest sense to this specific situation, but I think we were <a href="http://www.jenman.com.au/BS_B_Gazumping.php">gazumped</a>. </p> <p>Open Corp were helpfully able to secure another, larger block for us in a neighbouring estate (at a higher cost due to the increased land size—with the difference to be rebated back to us). They also had our initial deposit refunded from the original land developer and applied to this new property. The stamp duty will be about a thousand dollars more because of the increased sale price but I’m comfortable with that seeing as how we’ll be getting an extra 48sqm at minimal cost.</p> <p>Given the timelines for the finance pre-approval, we were able to nominate Open Corp to sign the land and build contracts on our behalf (the property is in Victoria) and the mortgage broker was able to submit our finance application on the last day of our pre-approval… still without an executed land contract. </p> <p>Land contracts just aren’t working out for us this time around. It’s now been two weeks since the final finance application was submitted and we’re still waiting on the executed land contract. I have no idea what the hold up is this time and apparently neither do Open Corp but it’s all slightly concerning—especially coming from where we’ve been with the first block. Will the same thing happen with the unexecuted contract being sold to a bulk purchaser? Is whoever does the signing at the vendor’s end out of town? In other words, what’s going on?!?</p> <p>[<strong><font color="#ff0000">Update (6 April)</font></strong>: the signed land contracts finally came back late last week, which of course starts the clock ticking for the finance approval…]</p> <p>Meanwhile, the bank seems to be moving the application forward without this seemingly important document and have ordered a valuation on the property and requested a few extra pieces of documentation from us. I have no experience how flexible the major banks are with the deadlines for their pre-approvals and I’d be very curious to know what happens next if this purchase falls over on the land contract. </p> <p>All of this is unnerving and frustrating but we’ve never had any major issues buying or securing finance for our PPOR or the first IP and I’m hoping this will come good. I know finance is often the biggest hurdle for many buyers and it was certainly a relief to move forward from the point of unconditional finance approval with the first IP. </p> <p>Compounding matters, the bank (a different lender to the one we used for the first IP—to avoid cross-collateralising) has flagged a possible issue approving a 10% LMI discount for us. Certain professionals <a href="http://property.mediawhole.com/2015/01/3-first-steps.html">are eligible</a> to pay a 10% deposit instead on the typical 20% deposit before LMI kicks in and the wife, being a doctor, falls into that category of professional. The only problem from the bank’s perspective is the fact she’s not working… or more precisely, as I’d describe it: she’s on leave (maternity leave)—and she is therefore still employed. Unfortunately she has no current pay stubs to prove that to the bank and we’re waiting on a letter from her employer in the hope the bank will accept that. </p> <p>I hope we’ll have a better view of both the land contract and the finance situation this next (short) week but I won’t bet on it. </p> <p>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. <p>Enjoy, <p>Michael</p>Michael Haneshttp://www.blogger.com/profile/01877569030107816208noreply@blogger.com1tag:blogger.com,1999:blog-181096119787093794.post-47075624279163471632016-03-25T05:28:00.001-07:002016-03-26T04:59:36.184-07:0038 - Surprise! Unexpected Changes<p><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgFpg8smpvHUch8XuXdXiy2otrglXz3cqbu9GpM_-8Da5X8SxfAAQ9onCMhUyYEND-eXvxasizw6WdZJqXBc-3ylmywNt96CtXMk4SoZwgdYr3gtrqWxJBBDpT0ZUDurNOQzbNTkl745y8/s1600-h/Surprise2.jpg"><img title="Surprise" style="border-left-width: 0px; border-right-width: 0px; background-image: none; border-bottom-width: 0px; float: left; padding-top: 0px; padding-left: 0px; margin: 0px 12px 12px 0px; display: inline; padding-right: 0px; border-top-width: 0px" border="0" alt="Surprise" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg-w9n81HXYW0V29n719PVOlsjynGzN0F-HbmoZmxko7XvqcYezMHgjnIltWiRXH3u0bxJlv0BxslkYfWDSo1WXZ469CrnNfaJklIjHTDuIncvPw1NJGQbSxWOYS0oKxTi2fp12yjxzPmE/?imgmax=800" width="244" align="left" height="157"></a>I find the vast majority of mainstream real estate reporting in the media is either all or nothing: the market is going gangbusters or it’s the next worst thing since the Great Depression and all hope is lost (I’ve given up paying any attention to the news…). There’s no middle ground. Similarly, the property spruikers only share the positives and conveniently overlook the details when they do cite a one-off example of something gone wrong. </p> <p>Although many of the posts on this blog have been relatively upbeat—in line with our experience to date, I strongly believe in reality, facts, and the accurate, fair reporting of our experience. On that note, today’s post is a recounting of what is likely to be the largest single “upset” (not to dramatize) so far along our property investing journey.</p> <p>Earlier this month we had three tenants in the Brisbane property and over six months remaining of a 12-month lease; then, suddenly, we had one tenant plus an “unknown” (or rather, the girlfriend of the remaining original tenant) and a pet request for a middle-aged, large-breed dog. On Friday morning last week, a water leak in the metre box was also reported. </p> <p>How quickly things change from a seemingly stable position to near chaos. Fortunately, the exemplary property management team at <a href="http://www.century21.com.au/warner/">West Property</a> is handling all of this for us but I won’t deny I’ve found it remarkable that tenants can simply walk away from a contractual agreement they’re legally obliged to uphold. If nothing else, this doesn’t make for a good lease reference for them and they <a href="https://www.rta.qld.gov.au/Renting/Ending-a-tenancy/Ending-a-tenancy-agreement/Ending-an-agreement-early-breaking-a-lease">may end up have to cover re-letting fees for us</a>.</p> <p>I’m not sure why two of the three roommates have left but I believe they were together as a couple and I assume they either now aren’t or have decided they needed more privacy. I suspected there may be some instability when we took on the trio (we very much expected to end up with a family—mum, dad, two kids, and a dog) but they were the first application after a few weeks of home opens and they were happy to pay the advertised weekly rent. I thought one of them might leave eventually but wasn’t expecting any changes in the first year. In my mind, you sign a lease for twelve months, go to the hassle of moving, and then you stay put for a few years—call me simple and old fashioned. </p> <p>We were notified by the property manager the pair have now moved out and requested to be removed from the lease. We had the option of saying no to this request and they would be obliged to continue paying their share of the rent—regardless of whether they’re actually living there. Practically, that option may be difficult to enforce. </p> <p>In their place, the girlfriend of the remaining tenant had moved in, I’m told, but she had neither applied nor was she approved by us to live at the property. The wording in the lease document is quite specific to this point and clearly notes no one else can live in the house without prior agreement by the landlord. </p> <p>If this new couple are keen to stay on, can afford the rent, and seem to be acceptable, then we’re all for that. Ideally that means no break in rental income. Plus there’s less wear and tear on the house for them to move out and be replaced with new tenants. But who is this mystery woman? Does she have an income? Does she have any prior rental referrals (or a criminal history)? Does she smoke? If she’s not paying her way, can her partner afford the full rent on his income after paying only a third of the rent to date? </p> <p>Technically, there are more questions to be answered if the girlfriend checks out. Do we amend the lease to include her or have the tenants sign a new, 12-month lease? Do we increase the rent now as part of the new lease or after six months via some kind of special conditions clause (which may be tricky to do in Queensland—I’m not sure)? If the couple opt for a 50/50 split, the original tenant will need to increase his bond contribution from 1/3rd to 50%—or 100% if he’s covering the lot. </p> <p>The worst-case scenarios I can imagine are having the remaining tenant vacate (for whatever reason), leaving us with an empty house to re-let and the resulting loss of income, or—if he stays—having a gap in the rent payments from the departing couple while all of this is sorted out. If all else fails, we are still covered by the Open Corp rental guarantee but that does mean having to accept any tenants they pre-screen and put forward to us (which could be good or not so good). Without checking the finer points of our insurance policy, we may also be covered for loss of rent if the rental guarantee were not in place.</p> <p>Here’s another good fact sheet if you’re interested: <a title="http://tenantsqld.org.au/wp-content/uploads/2009/12/You-Want-to-Leave-Nov-09-SD_NEW.pdf" href="http://tenantsqld.org.au/wp-content/uploads/2009/12/You-Want-to-Leave-Nov-09-SD_NEW.pdf">http://tenantsqld.org.au/wp-content/uploads/2009/12/You-Want-to-Leave-Nov-09-SD_NEW.pdf</a></p> <p>On the <a href="http://property.mediawhole.com/2015/08/29-pets-allowed.html">dog front</a>, I simply wasn’t mentally prepared to deal with this request so early into the original lease and the property manager has recommended we say no for now (which was a relief). Before today’s revelation, we had considered allowing the pet if the (original) tenants were willing to sign a new 12-month lease effective immediately—using this request as a trigger event to keep the tenants on for a longer period. That’s less of an issue now.</p> <p>We also hadn’t yet decided whether there would have been a corresponding rent increase; we can’t increase the rent mid-lease in Queensland so even a token increase would likely be the way to go to a) ensure we achieve an increase within the 12-month period, b) condition the tenant that the rent will always increase at renewal time, and c) cover any issues related to the dog (i.e. damage) as we can’t charge a pet bond in Queensland. </p> <p>Meanwhile, the water leak is still being investigated by the water company. At least it’s outside and I’m told it’s likely on the water company’s side or will otherwise fall to the builder to rectify. <p>A few weeks on, and after consulting with Open Corp and receiving a tenancy application from the girlfriend, we offered the couple a six-month lease to see how it works out. We also increased the rent by $5/week. The lease was accepted and signed and we shouldn’t have missed any rental payments (the outgoing tenants would have been required to continue paying their share of the original lease until it was terminated). It will be interesting to see if the relationship lasts and what bearing a breakup has on the remaining tenant’s affordability; it’s easy to say a married couple with kids would have been a more stable tenant option but who knows—with the frequency of divorce I’m not convinced marriage equates to tenant longevity. <p>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. <p>Enjoy, <p>Michael Michael Haneshttp://www.blogger.com/profile/01877569030107816208noreply@blogger.com0tag:blogger.com,1999:blog-181096119787093794.post-45970518469838415792016-03-02T21:21:00.001-08:002016-03-02T21:21:45.569-08:0037 – A Few Reasons for Investing in Property<p><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhNO-UMIoG_9yPTA6pKE1190VFDOS-UYWIEYazNthHzpyLt7YW1TY81ey7u8D6h0Jei5JRH8VAPapYI5ac3sm7SviCrMGusUDKN5s5qJFm56e7_w7uG-NsLSWNdybCnTFWbxP5tics8QAE/s1600-h/rcr3.jpg"><img title="rcr" style="border-left-width: 0px; border-right-width: 0px; background-image: none; border-bottom-width: 0px; float: left; padding-top: 0px; padding-left: 0px; margin: 0px 12px 12px 0px; display: inline; padding-right: 0px; border-top-width: 0px" border="0" alt="rcr" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjxbq8ah5-0pj6egB4y7lwsRLvobqrxQNgp2ZU1_3Lw2MZhFVl36ACyCLvEwz0uau_VwMAaiuL2YknE1K7_PVoa6coWua0F45qXKDi5R7syLcyaYlZxBUokDNmzNDBIBd-uAOzBI7BMV0A/?imgmax=800" width="244" align="left" height="161"></a>It’s been a hard couple of weeks here. With a bank pre-approval valid for only three months before the reams of documentation would need to be supplied anew, it was go-time for getting agreement from Gemma and setting the wheels in motion with <a href="http://www.opencorp.com.au/">Open Corp</a> for the second investment property purchase. I thought Gemma remembered and understood the reasons for buying the first property—and how that logic extends to a second. As my external voice of reason, however, she was reluctant. </p> <p>A refresher was in order. I spent a few evenings nagging Gemma to think it over. I drew a few simplistic diagrams on the kid’s chalkboard to reinforce the key points. I asked her to re-read the very readable <a href="http://www.opencorp.com.au/senradio/">Property Investing Mini Guide</a> from Open Corp (which I’d helpfully underlined and annotated—because that’s how I roll). </p> <p>Gemma wasn’t sure about the risks but couldn’t explain to me the basis for her reservations—her default financial strategy is to ‘put it in the bank’ and ignore the negative impact of inflation. Her preference was to take a wait and see approach with the first property, which isn’t a good move if house prices continue to climb and become less affordable. How long do we wait? This first year also won’t tell us much: since the first property is in her name and she’s on maternity leave, we won’t see many tax benefits this financial year. </p> <p>I argued the experience of the first build went well and the process of buying and tenanting was an exceptionally solid result with Open Corp. We wouldn’t have a long-term view of success or failure for the better part of ten years or more (one property cycle) but doing nothing with our available equity would leave us behind as inflation eats away at out savings at a rate of ~3% a year. </p> <p>What should be an emotionless decision was quickly becoming a very heated emotional debate between us. </p> <p>In addition to my points above, I banged on about historical growth rates, leverage, and risk. </p> <p><strong>Historical Capital Growth</strong></p> <p>Looking back in time we see Australian house prices growing continuously since the 1970’s (and well beyond). Whatever happened (or started happening) back then—be it government forces, population and other demographic shifts, war, tax incentives, rising incomes, or other market forces—has tended to continue. That’s over forty years of generally positive data.</p> <p><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhXsf7CYQNbvwl-stBhablw5Nrq4VvZ-57kOWhDdCqYSoxw-grngGL4fHJL0oyDf7TYr-2D08irj-8FRuxcXi1HAozRIfp79Lg6Q7HXQcOS4wcVdzr2yiYyNXfhN7yqf-2ITcAbAUBDsiE/s1600-h/chart2.png"><img title="chart2" style="border-top: 0px; border-right: 0px; background-image: none; border-bottom: 0px; padding-top: 0px; padding-left: 0px; border-left: 0px; display: inline; padding-right: 0px" border="0" alt="chart2" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgiw72L36fX5xEBgK10V_RJDIiLCXSWYCx3vC6Lgcx51BA5uCMAOA6d1doc36rzAWHL6qJK8BU0LBGpuojwO0L7uRh7nfmEZePda2kVxOHxI3CWGs5ar9WTPdCD7tu1Bq6vpF4N9ZlgeXo/?imgmax=800" width="408" height="232"></a></p> <p>The past is not a guaranteed predictor of the future but it does provide some guidance. Of course you’ll also find arguments against property investment using similar data—see this <a href="http://www.macrobusiness.com.au/2013/02/the-history-of-australian-property-values/">article which proposes we’re in a housing price bubble</a>. </p> <p><strong>Leverage</strong></p> <p>Buying a property seems expensive but it’s not. We pay the up-front transaction costs (indirectly through a line of credit) and borrow 100% of the cost of the property through a combination of the line of credit and a primary loan. In other words, we put in about $70k to invest $380k. That’s a powerful thing: by my very simple math, if we put in a dollar, the banks put in $5 and the interest costs are largely covered by the rental income, tax deductions, and depreciation. Yes, both the LOC loan and the primary loan are subject to interest rate increases and other legislative changes (e.g. negative gearing) and it’s always wise to take these variables into consideration when doing your sums.</p> <p><strong>Risk</strong></p> <p>I’ve <a href="http://property.mediawhole.com/2015/01/4-risky-business.html">written about risk before</a> but the options are simple. </p> <p>1. Do nothing and inflation calls the shots. Even in a term deposit or a high interest savings account, your position will probably decrease or remain flat (i.e. unproductive). Real estate can be considered as a hedge against inflation given the relationship between GDP growth and demand. </p> <p>2. Invest in the share market and Ben Graham’s insane <a href="https://en.wikipedia.org/wiki/Mr._Market">Mr. Market</a> calls the shots—in other words, the share markets are unpredictable and crazy; unless you’re investing in the company itself and understand the industry and the internals of the company, you’re betting against the house—so to speak. Plus, you don’t have any control over how your investment is put to work. </p> <p>3. Invest in real-estate. Land has a long-term history of appreciating in value and putting a house on it will ensure the costs involved in holding the land are manageable. In time, the rental income may cover those costs and provide an income stream. If everything else turns to pot, at least you can live in a house and capital increases are potentially accessible via equity loan.</p> <p>These aren’t the only arguments to consider but they’re a good starting point and encompass many of the finer details. Here a few more points to consider: </p> <ul> <li>Real-estate investment is relatively easy to understand</li> <li>You have more control over your investment than you would as a stock investor</li> <li>You can create value (e.g. by renovating)</li> <li>As a long-term investment the impact of any initial mistakes are likely to be lessened over time</li> <li>There’s less volatility in the real estate market than there is with the stock market</li> <li>Bricks and mortar have a high tangible value (compare to investment in a start-up that may have a product idea but no product and no revenue stream)</li> <li>Rental income provides a stable income</li> <li>Housing will always be in demand as our population increases</li> <li>You have many options for managing your investment (subdividing, doing your own maintenance work, using a property manager or doing it yourself)</li> <li>Portfolio diversification</li> <li>And so on</li></ul> <p>In the end, Gemma came around and the IP#2 wheels are turning. We signed the hold agreement with Open Corp, put down the $1k hold deposit and $2k land deposit when returning the land contracts. </p> <p>Gemma did caveat her approval of this build: this second property would be our last for a little while. I’m fine with that as this purchase will come close to exhausting the small line of credit we took out for the first build, secured against our PPOR, and the banks may not be too willing to extend us a third loan given the fact I’ll be back on stay-at-home dad duties in the next few months. The general tightening of the financial lending market over the last few years doesn’t help much either on this front (I’m not quite sure how the 26 year-olds in the magazines amass 10 properties in such a short timeframe!).</p> <p>On request, Open Corp came back to us with a 400sqm property in Victoria, an hour’s drive south of Melbourne. I’ll discuss the specifics—and recount the process to acquire and build, as I did with the first IP, in future posts.</p> <p>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.</p> <p>Enjoy, <p>Michael</p>Michael Haneshttp://www.blogger.com/profile/01877569030107816208noreply@blogger.com0tag:blogger.com,1999:blog-181096119787093794.post-85397529705888480982016-01-26T03:20:00.001-08:002016-05-24T22:46:40.498-07:0036 - On Goals<p><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjWaL1TIBxBvRHKEJC4k_Ly_nxReDsG1ltXxOx7AQsbjMPKns-oIu0aQ3bi65Tnry20O2Wy8OjY5VEtL8EliThLvMMk7li_KgQeSuxSLepKvQSNxVbtIQLMK2oyhLbSgFl-Fi3fjdZy9fM/s1600-h/top-50-super-quotes-of-all-times-19-728%25255B2%25255D.jpg"><img title="top-50-super-quotes-of-all-times-19-728" style="border-left-width: 0px; border-right-width: 0px; background-image: none; border-bottom-width: 0px; float: left; padding-top: 0px; padding-left: 0px; margin: 0px 12px 12px 0px; display: inline; padding-right: 0px; border-top-width: 0px" border="0" alt="top-50-super-quotes-of-all-times-19-728" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEihL02n7CqNeGAbvsGUyqmxR_-0zHW0X8_sDijrngYm2M2VUPNNU-JmtnG2H4ZbbPNhlHrHFIDrnGtEL9P6sJ2P6m8Zi1Z9mTCjXS4mYRIu3oPhMYvW8ftuGXa0IG5GdkDLvMfNee5O3bc/?imgmax=800" width="244" align="left" height="184"></a>I scared myself silly when we signed up for our first mortgage in 2006 to buy a block of land and cover the ensuing house construction. That mountain of debt looked insurmountable and, considering the higher interest rates at the time, the repayments felt like an invisible shackle binding us to the daily grind of working life. The system had us by the balls and would continue to hold on for the next thirty years—according to the bank’s timeline. </p> <p>This mortgage was, in many ways, a necessity (of modern life, anyway) as it would fund the establishment of our family home and promote us from the status of mere tenants. As projected, we now have two young children and are proceeding to raise them in the house we built. </p> <p>In the years preceding the build we rented, paying what felt like dead money to our landlords—around $125/week or so. After repaying a student loan to my mom and moving to Perth we had very little money to our names, despite the fact I’d been working full-time as a professional for two years. My infamous frugality comes to me honestly after several years of having to live on the cheap! </p> <p>On deciding to buy the block, the savings we had put aside for a deposit were all but spent by the time the deposit (we borrowed 95%, from memory) and stamp duty were paid and then we had that fun little surprise of lender’s mortgage insurance to deal with. </p> <p>It was around this time I casually voiced my apprehensions about all of this to a work colleague (the CIO where I was working at the time, Colin Macdonald). His simple advice to me—which I would readily pass on to anyone else in a similar position—was to repay the loan as quickly as possible. </p> <p>The bank had us down for thirty years. Colin’s advice was to clear the loan in ten years. </p> <p>Say what now?!</p> <p>I broke out a spreadsheet and projected some numbers forward in time. At best, I thought we might be able to repay the principal amount by 2018 (so ten or eleven years). I played with the bank calculators and quickly realised we could save the value of the property itself in interest costs—hundreds of thousands of dollars—by making extra repayments. I was intrigued. </p> <p>We had a basic home loan at the time with no offset facility. The bank did include a free redraw facility with this product, however. With the redraw setup, we could manually (electronically) transfer our savings into the mortgage and therefore save the associated interest costs that would otherwise be charged on that amount. Better yet, the redraw funds were fluid, meaning we could <em>redraw</em>, on demand, some or all of funds we put in if we needed that money (in an emergency, to fund a car purchase, for a holiday, or for any reason). </p> <p>There is one caveat to note with redraw, which I only learned about more recently: the ATO considers funds contributed to redraw to have contributed to paying down the original debt. In brief, if you think you might rent out your property in the future, you’ll only be able to tax deduct costs associated with the loan amount you haven’t yet repaid (even if you redraw the surplus funds). Offset accounts may attract a small fee but are immune from the ATO, work in the same way as redraw, and are more convenient. </p> <p>And so we set ourselves a goal, which would later become our very basic financial strategy: put it all into redraw. Rather than making interest at whatever low interest rate the bank would offer, we save the interest the bank would charge for some of the mortgage amount (whatever we could put in). </p> <p>With me working as a contractor and the wife working long hours in a good job (that doesn’t pay terribly well) we continued to live as we had: simply. We didn’t spend excessively—we didn’t often have the opportunity to do so with the wife working 60-80 hours a week. Entertainment costs were out! </p> <p>Instead of keeping our savings in a regular bank account, we kept them in the redraw account.</p> <p>Slowly but surely the extra contributions started to add up with the added benefit of reversing the huge impact of compounding interest fees the bank would have otherwise been charging us. The Albert Einstein quote says it all: “Compound interest is the eighth wonder of the world. He who understands it, earns it ... he who doesn't ... pays it.”</p> <p>But today’s post isn’t about compound interest, it’s about goals—specifically the huge goal we set out to achieve nine or so years ago. </p> <p>Admittedly I’ve been a little distracted by being back to work and the kids and I’d neglected for some time to update my spreadsheet that tracks the balance of our home mortgage and the offset account we now employ in place of redraw. I updated this spreadsheet recently and noticed what I first thought was an anomaly in the data: the negative amount highlighted red I normally show for the balance of our home loan minus the offset balance was no longer negative and it was no longer red: it was black and it was positive. The balance in our redraw account was more than what was owing on the mortgage. </p> <p>I do keep an eye on our monthly repayments so I knew before this point we were heading in the right direction. In the last six months the monthly interest charge had plummeted steadily from a couple of hundred dollars to less than $10.00. </p> <p>It then dawned on me: we’d met our goal. We’d met our goal a year early. Although the mortgage account was still open (and will remain so for a couple of specific reasons), we effectively have the option to repay the mortgage balance in full, if and when we choose to do so. </p> <p>Back in 2006, this milestone was equivalent in my mind to being financially free. Today that’s not quite the case as our commitments—financial and life-related—have increased and of course there is a cost of living in groceries, petrol, clothing, and so on. I <em>can </em>say achieving this goal feels as good as I hoped it would back in 2006—perhaps all the more so because I neglected to watch as the odometer tick over. </p> <p>This post is isn’t to boast, it’s to celebrate and inspire. From a very low base, ten years of hard work and time has allowed us to meet our single financial goal. Your goal(s) might be different depending on your circumstances: your timeline to repay your mortgage, depending on the value of your mortgage and your income, might be the same or it might be a shorter timeframe or a longer timeframe. You may also favour a better balance in life than what we’ve managed to achieve (I believe strongly in delayed gratification but I’m also nearing forty…). Nonetheless, set a goal and then <em>plan </em>to achieve it. The world can then be yours. </p> <p>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. <p>Enjoy, <p>Michael Michael Haneshttp://www.blogger.com/profile/01877569030107816208noreply@blogger.com0tag:blogger.com,1999:blog-181096119787093794.post-61872345772738955702016-01-25T03:45:00.001-08:002016-01-27T21:10:12.646-08:0035 - Subprime Equity Loans<p><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEilmBqLtxqcPre3Tc_Cuhss5htYV2MH7Xe4NXU1qMYQHlJHrwJZcIIQISVZYn9O_BEh-SIh5hylCQTx2ftnPVusXEYYtd0yt1kwb4QOUSMjD2ARuymee7dwFfmVdclyPOS0fvoSj6zMYok/s1600-h/abandoned-house-auburn-2008jpg-089b3%25255B1%25255D.jpg"><img title="abandoned-house-auburn-2008jpg-089b37cb6d68e85b_large" style="border-left-width: 0px; border-right-width: 0px; background-image: none; border-bottom-width: 0px; float: left; padding-top: 0px; padding-left: 0px; margin: 0px 12px 12px 0px; display: inline; padding-right: 0px; border-top-width: 0px" border="0" alt="abandoned-house-auburn-2008jpg-089b37cb6d68e85b_large" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjYoWpTRMcd4leP6pYcqnpWB7eBYU94QUL3Vsbq4CGFehozLKMx_ZFDjQl71OAom7FIMBkSHVkPe0hFk44kJTvIJ0sc0xme-cZsKGVe1Umj0lZbOYmLEyc-852deaI7Q75e8_OcqLKmdmY/?imgmax=800" width="244" align="left" height="163"></a>Gemma and I watched Michael Moore’s documentary <a href="https://en.wikipedia.org/wiki/Capitalism:_A_Love_Story"><em>Capitalism: A Love Story</em></a> the other night. In the film, Moore connects the sale of suspect equity loans in the US and the ensuing subprime housing collapse. I first read about all of this in <a href="http://www.amazon.com/gp/product/0393338827/ref=as_li_tl?ie=UTF8&camp=1789&creative=390957&linkCode=as2" rel="nofollow">The Big Short: Inside the Doomsday Machine</a> by Michael Lewis and it was a fascinating recounting but given how we’ve structured our investment property loans I thought it’s important to distinguish between a <em>subprime</em> equity loan and an equity loan <em>in Australia</em>. </p> <p>From what I understand (and the entire situation was designed to be incredibly complicated), bank deregulation in the US lead to the availability of cheap finance for people who couldn’t actually afford to make the repayments. Banks, politicians, capitalism—you know what a dangerous cocktail that is. The US financial system then created products which bundled up those loans and subsequently sold products which bet <em>against </em>the homeowners making their repayments (derivatives and collateralised debt obligations or CDOs). It was only a matter of time until the foreclosures started rolling in en-masse and a few people got rich while a lot of people lost a lot of money. </p> <p>Banking regulations are much tighter in Australia but more importantly I wouldn’t take on a loan if I hadn’t myself assessed our ability to afford the repayments. In other words, the closest we got in Australia in recent times to a subprime situation was around 2006 and the banking regulators here put a stop to all of that pretty quickly (and of course what was happening in Australia was nothing like what was allowed to happen in the US). From <a href="http://property.mediawhole.com/2015/12/34-getting-started-again.html">recent experience</a>, I can vouch for the bank’s rigour in assessing our credit situation—it’s only gotten harder to get credit in the last few years, especially with the 2015 changes implemented by the <a href="http://www.apra.gov.au/Pages/default.aspx">Australian Prudential Regulation Authority</a>. </p> <p>As always, there is lot of information circulation about what’s good and what’s bad from sources which are good and bad. It’s important to do your own research and make your own decisions before acting but don’t forget it’s equally important to do <em>something</em> so inflation doesn’t do it for you.</p> <p>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. <p>Enjoy, <p>Michael Michael Haneshttp://www.blogger.com/profile/01877569030107816208noreply@blogger.com0tag:blogger.com,1999:blog-181096119787093794.post-12782027379814428172015-12-20T23:24:00.001-08:002016-05-24T22:42:58.622-07:0034 - Getting started, again<p><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiwt6ZjG4dDpqeSJ8GMVgXXXmMaIvEKPnhwqx7ElH5qnWodBxVRYFULJKqyQI0tP-npu4mtqWXHsjArCQ2zlX1zBJ1yWRrB18Yl5_wL_WhBIfe4bQ7ZYQ3h5Aj1Nae-hiPYIgljs4Uz5fU/s1600-h/Repeat%25255B2%25255D.jpg"><img title="Repeat" style="border-left-width: 0px; border-right-width: 0px; background-image: none; border-bottom-width: 0px; float: left; padding-top: 0px; padding-left: 0px; margin: 6px 12px 12px 0px; display: inline; padding-right: 0px; border-top-width: 0px" border="0" alt="Repeat" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjPZyIpi1xaXQEwyQJmjJzw_qY65rLLbnk9DeUjEwpe4-m6WPdYoA1oIs1qKJ4TxrORY_nGPno_Bdo_0ZrQVnT6avIxiarZPu7uq62vjPlLPxEyZfDEMyxyHgAtUKIAYai7tzKmWC-in2Q/?imgmax=800" width="244" align="left" height="190"></a>As <a href="http://property.mediawhole.com/2015/11/32-preparing-for-second-build.html">mentioned</a>, 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 <em>that</em> 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. <p>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. <p>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. <p>Growth aside, the holding costs for the first IP are <em>almost </em>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). <p>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 <a href="http://property.mediawhole.com/2015/01/4-risky-business.html">risk management</a> 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. <p>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. <p>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. <p>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. <p>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! <p>We’re now back to Open Corp and waiting for a block to come available before our pre-approval expires in thirty days. <p>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. <p>Enjoy, <p>Michael Michael Haneshttp://www.blogger.com/profile/01877569030107816208noreply@blogger.com0tag:blogger.com,1999:blog-181096119787093794.post-36453879596599438692015-12-05T22:39:00.001-08:002015-12-06T02:58:26.242-08:0033 – Gifts<p><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgrE4zeV5T-MCFBjKTjXgPu5Mo0b1T_YhjpzofT1htOcrDgi9vNkkGF898l3vjyDujEBJgPhyR75X3PiQC2zsYziV-C2KOA3TENHWEk9ekla5Mz6CKfCQ0HtDjqVA-t5Aynbvj3AlXuW84/s1600-h/Christmas%252520Gift%25255B2%25255D.jpg"><img title="Christmas Gift" style="border-top: 0px; border-right: 0px; background-image: none; border-bottom: 0px; float: left; padding-top: 0px; padding-left: 0px; margin: 0px 12px 12px 0px; border-left: 0px; display: inline; padding-right: 0px" border="0" alt="Christmas Gift" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgqOSFRS8yNaVuRwmBtYDOStZBwy2bgblbPx4RZ4SWJcbCtlOzaiRyAOgqyI4mrelUzdWcLxspQl5XPFZOTCmEsvpkeNljIrSficxgLvfRiEp1seNGLAaq6SsfDWIJNIMQya9YE9pYsleA/?imgmax=800" width="207" align="left" height="244"></a></p> <p>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. </p> <p>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 <em>their</em> home to <em>our </em>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!</p> <p>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. </p> <p>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 <a href="http://property.mediawhole.com/2015/08/29-pets-allowed.html" target="_blank">written in the past</a> 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). </p> <p>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. </p> <p>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. <p>Enjoy, <p>Michael</p> Michael Haneshttp://www.blogger.com/profile/01877569030107816208noreply@blogger.com0tag:blogger.com,1999:blog-181096119787093794.post-51592711027461461272015-11-12T23:49:00.001-08:002015-11-12T23:49:36.238-08:0032 - Preparing for the Second Build<p><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj4w6JrV_JGHJrUEFHgFJtVFsMt4dpvxrN0kV7TI8eaCccC9nbHLO5W4989LyiqE3gLAtA5opbpAyNJyUQXkKDunu40F2njY0EE6Z9AngrU6JyvbW5RQCqADhKSXMo4_nN1IsNlMJCf15A/s1600-h/Two-Houses3.jpg"><img title="Two-Houses" style="border-left-width: 0px; border-right-width: 0px; background-image: none; border-bottom-width: 0px; float: left; padding-top: 0px; padding-left: 0px; margin: 0px 12px 12px 0px; display: inline; padding-right: 0px; border-top-width: 0px" border="0" alt="Two-Houses" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiYCs9G_cPISXUyMCtmpGMbE2TTPfm2EJaPoQ9AIOfi4LCRq79wMzNij_TmIoeD4EdnQmlD77JlFlF4OXA3NKpl5vVB9Ii6zHniHcwIJ-x4G41bplbjEZ4DazLEzgbB4IzuTpGI2sLIR5o/?imgmax=800" width="244" align="left" height="121"></a>It’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. </p> <p>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.</p> <p>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. </p> <p>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. </p> <p>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.</p> <p>Rounding up, we used around $70k of this equity to cover the 10% deposit and other costs for IP #1, meaning <a href="http://property.mediawhole.com/2015/01/3-first-steps.html" target="_blank">we didn’t pay lender’s mortgage insurance</a> 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. </p> <p>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. </p> <p>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. </p> <p>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 <a href="http://property.mediawhole.com/2014/12/1-a-team.html" target="_blank">team</a>, with state-specific replacements for certain roles of course (e.g. settlement).</p> <p>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. </p> <p>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. <p>Enjoy, <p>Michael Michael Haneshttp://www.blogger.com/profile/01877569030107816208noreply@blogger.com0tag:blogger.com,1999:blog-181096119787093794.post-49899586662407573092015-10-31T04:53:00.001-07:002015-10-31T04:53:12.748-07:0031 – Thoughts on Upsizing<p><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh9ILJtTBvQFHuYUcdvq5X70ZXJ75vaBOvxPQK6OhAbkq-cI2SHu2wQjCXQloUM4Ge3m0VuDLtQ_TrZukRuCbu_YiFGkt_gcUwODVyF_95w0MKUFi_l_tgqFtGbmx3MmnkIngucaRslD40/s1600-h/small-house-big-house2.jpg"><img title="small-house-big-house" style="border-left-width: 0px; border-right-width: 0px; background-image: none; border-bottom-width: 0px; float: left; padding-top: 0px; padding-left: 0px; margin: 0px 12px 12px 0px; display: inline; padding-right: 0px; border-top-width: 0px" border="0" alt="small-house-big-house" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiV9rsh28MEEVb2P65WqeyzJLzqPIAf1-tXB1C8TOmBGQqMNu3tCBl6GzdgovKBjpmONSoLURffLA0B57j5AW891o02_iC1zE8lQcw-yEDOvE0KOaMbJToRc0w5uz_GpUB7YDUqy7lAGgE/?imgmax=800" width="244" align="left" height="154"></a>A 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! </p> <p>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. </p> <p>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. </p> <p>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 <a href="https://en.wikipedia.org/wiki/DINK_(acronym)" target="_blank">DINK</a>s, 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. </p> <p>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. </p> <p>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. </p> <p>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. </p> <p>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. </p> <p>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!</p> <p>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. <p>Enjoy, <p>Michael</p> Michael Haneshttp://www.blogger.com/profile/01877569030107816208noreply@blogger.com0tag:blogger.com,1999:blog-181096119787093794.post-16998936915462707952015-09-17T05:13:00.001-07:002015-09-17T05:13:44.471-07:0030 – Progress Update: Done!<p><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgtGtCX2UW5_-0XAXqjA6I1ORHYaLEEk1C2X9gKv472TU9QgODU-LL2f4jKin-HQk1a4DsR1vvJdrzIYDM4tIBk42ztmN2EDArldhKspo8eF3UC7AC_MXX6eniKdGiC9EHSJMV1l6gSeuE/s1600-h/image2%25255B3%25255D.jpg"><img title="image2" style="border-top: 0px; border-right: 0px; background-image: none; border-bottom: 0px; float: left; padding-top: 0px; padding-left: 0px; margin: 0px 12px 12px 0px; border-left: 0px; display: inline; padding-right: 0px" border="0" alt="image2" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEigFPd2m0h1t-guSl7NtdGuFoIrdlcoakhuTuy8gsiMau0V4d5Sl1HPSjg_Z1z8e82IOn3cPvTjZZdtIi7F81kA-dg1KXkpljQrZH7VeS52-eEAVnCU3Xs-78QgK71xugihRhdQo5TtXPc/?imgmax=800" width="244" align="left" height="183"></a>And that’s the end of the beginning, so to speak. </p> <p>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. </p> <p>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.</p> <p>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. </p> <p>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? </p> <p>Going on the history, it <em>will</em> 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. </p> <p>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. </p> <p>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. <p>Enjoy, <p>Michael Michael Haneshttp://www.blogger.com/profile/01877569030107816208noreply@blogger.com0tag:blogger.com,1999:blog-181096119787093794.post-64547998256053947532015-08-29T23:35:00.001-07:002016-05-24T23:01:16.729-07:0029 – Pets Allowed?<p><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhweTYl7HeRR7UcuzCPXZI-F9guHi7MhV2meAELhucNRjYUP9kl0rx-Vj947tRJHn7ygDsrnnMBnmggZph2BQvzhJHGzpvz4n312xtpD2xL36FvZZSQ9K00B_TyDWH5IPwgW3wG-h1Gowc/s1600-h/Riley%25255B3%25255D.jpg"><img title="Riley" style="border-left-width: 0px; border-right-width: 0px; background-image: none; border-bottom-width: 0px; float: left; padding-top: 0px; padding-left: 0px; margin: 0px 12px 12px 0px; display: inline; padding-right: 0px; border-top-width: 0px" border="0" alt="Riley" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiTvYIUzHESZfK6ZHA7WoDXMPrz4KzV2eOshGBNzpY9Asp_WQ1IPZiufg3sgXs2m_Qi044XFKeSGnGUuy3S7or7F_7TRYzwoESCWBaJQ-YaAhy7qLVYIgPQ-iv2YV7jYH3RINl7zDRr9M0/?imgmax=800" width="214" align="left" height="290"></a>Of 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.</p> <p>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.</p> <p>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). <p>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. <p>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. <p>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 href="http://property.mediawhole.com/2015/02/5-how-to-spend-money.html" target="_blank">a simple existence</a>). <p>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. <p>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. <p>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. <p>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. <p>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. <p>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. <p>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. <p>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. <p>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. <p>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. <p>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. <p>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. <p>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. <p>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. <p>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. <p>Enjoy, <p>Michael</p>Michael Haneshttp://www.blogger.com/profile/01877569030107816208noreply@blogger.com0tag:blogger.com,1999:blog-181096119787093794.post-28464821941753382262015-08-24T06:21:00.001-07:002015-08-24T06:21:40.778-07:0028 - To Inspect or Not to Inspect?<p><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjJvzGx2JnJQlTSoneip_4SggyCUJekLr82AE1Cz6IinRlHE3NZsEM46FsozRRLAMbp4YbbQsXYAbYskXsQOUTiujaLWNXXJ3apC6zBP5FmsVbTOT8TyzOdjv1t3J3RiSfeFyaGZEs86RQ/s1600-h/Defect-cor1_22.png"><img title="Defect-cor1_2" style="border-left-width: 0px; border-right-width: 0px; background-image: none; border-bottom-width: 0px; float: left; padding-top: 0px; padding-left: 0px; margin: 0px 12px 12px 0px; display: inline; padding-right: 0px; border-top-width: 0px" border="0" alt="Defect-cor1_2" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjM7xHGCB88EsOLvF2RdcTi3MI_kJGX4Qs928k8OiBKx0MhAVoQjb-Vp_U8SROArruVHkBMFi9sIGScGLeQCMoV1d9rDgS3dSCu1_e3KG6hxmiPYmLW2AO1FCyHFWjKnprEuQ9bIf2O1JU/?imgmax=800" width="244" align="left" height="192"></a></p> <p>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. </p> <p>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.</p> <p>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?!?”</p> <p>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 <em>need</em> to see it in person.</p> <p>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 <a href="http://property.mediawhole.com/2015/07/20-saga-of-sliding-door-seven-years.html" target="_blank">experience with our first build</a>, 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. </p> <p>I’ve <a href="http://property.mediawhole.com/2015/05/15-progress-update-base-stage-complete.html" target="_blank">previously noted Open Wealth conduct a number of inspections</a> 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. </p> <p>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. </p> <p>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.</p> <p>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. </p> <p>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. <p>Enjoy, <p>Michael Michael Haneshttp://www.blogger.com/profile/01877569030107816208noreply@blogger.com0tag:blogger.com,1999:blog-181096119787093794.post-76256483483251965152015-08-20T00:09:00.001-07:002015-08-20T00:09:32.122-07:0027 - Appointing a Property Manager<p><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjU1S4kY3LIEJAd9f2-FvjfA8NHR6IOEgMJqohRhtYeAi7RKhC56fIIsu7XbhSOlm9A_lQx4IIHoo5yfApg1O511rA9vb4PmrNeS9rOIGc0jnbf2Xg3PF8A9Rd02nFeOL1amB596T3Xz-g/s1600-h/Hoarding%25255B3%25255D.jpg"><img title="Hoarding" style="border-top: 0px; border-right: 0px; background-image: none; border-bottom: 0px; float: left; padding-top: 0px; padding-left: 0px; margin: 0px 12px 12px 0px; border-left: 0px; display: inline; padding-right: 0px" border="0" alt="Hoarding" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhbVNPkupRycndN6deheqowQaPV9cYYIsslT6KoibQ7BTKb9-KFLn2frg1QwEJoY84ALBsnFi0hgousvXf96zyWQEUJv8r2L4kMebVEROmz8PkquUrC8hvvMR-MlMYdgCxgEcGCONuNE0A/?imgmax=800" width="244" align="left" height="184"></a></p> <p>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.</p> <p>As we reside in Western Australia, managing an interstate investment property ourselves would be challenging but not impossible. </p> <p>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. </p> <p>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. </p> <p>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. <a href="http://property.mediawhole.com/2015/07/25-insurance-for-landlords.html" target="_blank">Speaking of insurance</a>, some insurance companies offering landlord insurance require the insured property be managed by a professional property manager. </p> <p>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. </p> <p>Importantly, a property manager offers a layer of separation between you and your tenants to avoid getting too personal and keep things business-like. </p> <p>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. </p> <p>I’ve heard it suggested finding a <em>good</em> 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. </p> <p><a href="http://openwealthcreation.com.au" target="_blank">Open Wealth</a> recommended us to <a href="http://www.century21.com.au/warner/" target="_blank">West Property Group (Century 21)</a> 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.</p> <p>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. </p> <p>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”. </p> <p>There were a few minor differences between property management norms in WA and Queensland that surprised us. </p> <p>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). </p> <p>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. </p> <p>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!</p> <p>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.</p> <p>Enjoy, <p>Michael</p> Michael Haneshttp://www.blogger.com/profile/01877569030107816208noreply@blogger.com0tag:blogger.com,1999:blog-181096119787093794.post-84573564995475517482015-08-15T04:54:00.001-07:002015-08-20T00:10:59.219-07:0026 – Progress Update: Final Stage<p><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh_Ii-wycCJliuQRae_p0UPAFF7kPaD4qDJzqrl-RYFyOHJzFUCtD8Ja0a_ae9XWUSNpQADuA4jk5ELuTfefdkZhUsYAEXnqmu4aBg7RlsdI7USQu6UwhHYGI56qPm6g5xdTO3cJIRZlu4/s1600-h/3_2015-07-31%25252010-50-47-606%25255B2%25255D.jpg"><img title="3_2015-07-31 10-50-47-606" style="border-left-width: 0px; border-right-width: 0px; background-image: none; border-bottom-width: 0px; float: left; padding-top: 0px; padding-left: 0px; margin: 0px 12px 12px 0px; display: inline; padding-right: 0px; border-top-width: 0px" border="0" alt="3_2015-07-31 10-50-47-606" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEi9S6fnOefgexLytKG0ldmvKlyrJat-HeuAyfqXoSwES7PxZA6Z3j270rvIGf5biekoWQYRL51vC1VfK99DbHFGiuktrljQjxaxh7Hr8lnJ4imWOjb6RAM7IArAKguUZMuePj6wetuaOMs/?imgmax=800" width="244" align="left" height="184"></a></p> <p>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. </p> <p>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 <a href="http://property.mediawhole.com/2015/07/25-insurance-for-landlords.html" target="_blank">purchased</a>. 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. </p> <p>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 <a href="http://property.mediawhole.com/2015/08/27-appointing-property-manager.html" target="_blank">write about that in an upcoming post</a> but the house is <a href="http://www.realestate.com.au/property-house-qld-griffin-416341101" target="_blank">on the market</a> and seeking a good tenant. </p> <p>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). </p> <p>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 <a href="http://property.mediawhole.com/2015/07/20-saga-of-sliding-door-seven-years.html" target="_blank">all the defects are spotted so they can be addressed by the builder now</a>.</p> <p>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. </p> <p>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!</p> <p><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhT24mTppqo2MyJCz6Ae3bKP6UxGL3AX7zrei93PAfC4jMGEyu_1su9nwK9l-R_kaP2st6Vf4OrDG_5w94WmTyg1l_ZIgzPsld8XRtBPEw00Gw5WeDA102SNc2D2g1RN-rwGOOZOeLb-PI/s1600-h/3_2015-07-31%25252010-50-55-731%25255B2%25255D.jpg"><img title="3_2015-07-31 10-50-55-731" style="border-left-width: 0px; border-right-width: 0px; background-image: none; border-bottom-width: 0px; padding-top: 0px; padding-left: 0px; display: inline; padding-right: 0px; border-top-width: 0px" border="0" alt="3_2015-07-31 10-50-55-731" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg21YdR1-u78z4uZi_anxcuUeb0f2u8NzUrt-bGSlm0wMcTPTjoslUCpFZdy9s8lWv5OPZXi7LvzW1zSAg3NKJojKpeyJ5rfVElhamSWOdHaz7qv4XoI3PZOvSuxgkF81BNDZlO6ZEuHeU/?imgmax=800" width="244" height="184"></a><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgFFRg7AevRgiFmF_Wl82Iy5B15mkq2QeMkvFZwjI0wqNq1UqvzsVajF9ytO775oVCvAIQJAbq3qveoPFYZpkzFSpv8ztcYp8De8CVWcFA_3-4zkrWT-Uu4kEMLjArnw_2BxaHzBBAzkTU/s1600-h/3_2015-07-31%25252010-51-05-278%25255B2%25255D.jpg"><img title="3_2015-07-31 10-51-05-278" style="border-left-width: 0px; border-right-width: 0px; background-image: none; border-bottom-width: 0px; padding-top: 0px; padding-left: 0px; display: inline; padding-right: 0px; border-top-width: 0px" border="0" alt="3_2015-07-31 10-51-05-278" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjzVj0S6C_-Oquxxq9agXmseBNbyf4N2rMvK9k_nCOsPn_KqBY917H3Wg4oWwMPbYsW95npezeDQvuW8t3pafX8QuJv0SoMxVWqpblxcTFvWCzubkQsqHXN8wRQHMfLeXdpLbavwSPgfFw/?imgmax=800" width="244" height="184"></a><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj0Sw3ub7kTl3gY6H03WLHJ-3J1aDdKMTK4o6Zde2Yzs48zqgoDwlN-y4ahqLK-44KwR7okZsTy3OEElo6YTXXd9VG9qSVVeCDR_NNH9-os3ZKJsCs-CpBW4Mi67QvAk9o5rXEUlson0ko/s1600-h/3_2015-07-31%25252010-51-05-762%25255B2%25255D.jpg"><img title="3_2015-07-31 10-51-05-762" style="border-left-width: 0px; border-right-width: 0px; background-image: none; border-bottom-width: 0px; padding-top: 0px; padding-left: 0px; display: inline; padding-right: 0px; border-top-width: 0px" border="0" alt="3_2015-07-31 10-51-05-762" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhfOkzmnXZPG5D0oPLfEvSCpehglAe0z4qJkrLIZFqV4NZ-BXqK_UI-emm1BX7VmFDjjlgxexH0cNqVX-riphyZXHWfc6ZX_B0qGjjHwS6mdQ5e7eUbDZyBqymNxBphDQT6Wzyd4PqmS4c/?imgmax=800" width="244" height="184"></a><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjel-0qPEcA-I6NxFQ1f4KDhICRNs7Cs7nw6cii4l4pSaJ-JOeBS7cdyMRSkbliHMRWlWcOb8mH1QWFqH_gIlK9OVf9MssjDT9qRuLhFtJZVrz6NFr2BTchtOLcG6aTGqiymisbrSPI_Z0/s1600-h/3_2015-07-31%25252010-51-23-231%25255B2%25255D.jpg"><img title="3_2015-07-31 10-51-23-231" style="border-left-width: 0px; border-right-width: 0px; background-image: none; border-bottom-width: 0px; padding-top: 0px; padding-left: 0px; display: inline; padding-right: 0px; border-top-width: 0px" border="0" alt="3_2015-07-31 10-51-23-231" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjRW7Ft-A59XGGnqJ9VxdnPFeAxw1vDEWxc_UtKe3oAb91W3eLYYRdHB5nv6jsO_j7KIoXrx3A-pRlINQmOIFCzSpPH9DaEDn_hlbG-L-_zD1JzR-ubMiZ23nvnhXIa-5huOWFE1jtHh5M/?imgmax=800" width="244" height="184"></a><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhPKJG-mmov29EuoQRVz7JblUeUkNadQ0iJlj2GQkGcGExvzKka-fKoyVxxImvftPtdUmYyhqhBY_oqtTJynShyxkfhw5YTC0Ch80MvTFlfbyXkK0MmXMNJ2QaWJWh0E2zczUNWkMlEYS4/s1600-h/3_2015-07-31%25252010-51-22-918%25255B2%25255D.jpg"><img title="3_2015-07-31 10-51-22-918" style="border-left-width: 0px; border-right-width: 0px; background-image: none; border-bottom-width: 0px; padding-top: 0px; padding-left: 0px; display: inline; padding-right: 0px; border-top-width: 0px" border="0" alt="3_2015-07-31 10-51-22-918" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh9gmRkOLN8TrYEajc5kCnyBC1ceoeY0cyEd5UKiT0eiJK7lMsYuYyx6UNPqF9x2jKHxfKvfFZut1-LnkVEsbrntgYZzKQD7voYewp7DIPm4L1M7OhN1Bm0T7rr0hYcbqIrvaUKtkB4NSU/?imgmax=800" width="184" height="244"></a><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhZB8zRcvobGNAoJ1dKCh0E9ZbTu88cfkcfWEmEcl9q7BFFgUkAD8guZa75UZBDX90oD3yGns-hCjD68A6T-PC696M_aDXV8g7HRKXAT_GCB2HOKJI8jIixgzBsJfZwQghoFuDkc7LUiKU/s1600-h/3_2015-07-31%25252010-50-46-840%25255B2%25255D.jpg"><img title="3_2015-07-31 10-50-46-840" style="border-left-width: 0px; border-right-width: 0px; background-image: none; border-bottom-width: 0px; padding-top: 0px; padding-left: 0px; display: inline; padding-right: 0px; border-top-width: 0px" border="0" alt="3_2015-07-31 10-50-46-840" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEi0Vx8ynUTzTsp3EB2S0RZ1JEasJCJAzNAZ15abXg9KPDVH7RWSRbk4g-PoA6ZqBjYY_HBgR4AkgiSdEUR88zwvTSNaVLB3Vcf8f0uY4u1My335ZNIsfrcKp7N7MkpqVLWDvBhCRNb45nI/?imgmax=800" width="244" height="184"></a></p> <p>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. <p>Enjoy, <p>Michael Michael Haneshttp://www.blogger.com/profile/01877569030107816208noreply@blogger.com0tag:blogger.com,1999:blog-181096119787093794.post-53745992097119558882015-07-31T23:45:00.000-07:002015-08-20T00:11:32.966-07:0025 – Insurance for Landlords<p><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjvHbIQ-q6BP8RgTQIrAPzfFN1p1bjKpUcNQzB5omjZpSslW7PBVVZ09B1L4D2JjmktdyFlb9OOYjf9C63db-6_ZBlTU5Cz8qbx8tQvY_0JaCgoHRf-uGa-eo9E5jxF6gX2-rrre8kuJCI/s1600-h/insurance%25255B2%25255D.jpg"><img title="insurance" style="border-left-width: 0px; border-right-width: 0px; background-image: none; border-bottom-width: 0px; float: left; padding-top: 0px; padding-left: 0px; margin: 0px 14px 4px 0px; display: inline; padding-right: 0px; border-top-width: 0px" border="0" alt="insurance" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgDh7K5CcYO1nVYSuGpU7EOYrmAzVSNzqpVDP56gya-00xZv60CUTknZoriVaV_7cCwanO14qOcUuNTxRvMs-OkXLbl6neVeMjOtSoBoNQDODzTzr7Qo3_8k9aUnK_tpjk-yS2-5nY27Ro/?imgmax=800" width="244" align="left" height="225"></a>As 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 <a href="http://property.mediawhole.com/2015/03/13-life-insurance.html" target="_blank">insurance</a>! </p> <p>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. </p> <p>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. </p> <p>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 <em>our</em> driveway, for example. In general, these things come under the heading of “landlord insurance”. </p> <p>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. </p> <p>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 <a href="http://property.mediawhole.com/2015/08/27-appointing-property-manager.html" target="_blank">property manager</a> 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!</p> <p>I’ve also investigated having a broker recommend a suitable insurance product and thus far <a href="http://www.qldins.com.au/" target="_blank">Queensland Insurance Services</a> has supplied me with a few quotes after I submitted a fact finder document to them. </p> <p>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. </p> <p>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. </p> <p>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. </p> <p>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. </p> <p>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. </p> <p>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 <em>your</em> house (er, investment property)!</p> <p>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. </p> <p>Insurance, despite being awkward and boring, is one of those things required to manage <a href="http://property.mediawhole.com/2015/01/4-risky-business.html" target="_blank">risk</a>. You pay the premium in the hope you’ll never need to make a claim.</p> <p>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. <p>Enjoy, <p>Michael Michael Haneshttp://www.blogger.com/profile/01877569030107816208noreply@blogger.com0