Showing posts with label Open Wealth. Show all posts

32 - Preparing for the Second Build

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.

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

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

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

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

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

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

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

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

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

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

Enjoy,

Michael

30 – Progress Update: Done!

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

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

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

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

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

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

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

Enjoy,

Michael

29 – Pets Allowed?

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.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Enjoy,

Michael

28 - To Inspect or Not to Inspect?

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

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

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

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

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

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

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

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

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

Enjoy,

Michael

27 - Appointing a Property Manager

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Enjoy,

Michael

26 – Progress Update: Final Stage

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

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

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

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

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

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

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

Enjoy,

Michael

23 – Progress Update: Fixing Stage Complete

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

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

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

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

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

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

Enjoy,

Michael

18 – Progress Update: Frame Stage Complete

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

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

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

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

Enjoy,

Michael

17 – The New Addition and a Change in Circumstances

I’ve been a little quiet on the blog front as of late—for good reason: our second child arrived on Sunday morning, a little boy! If it were a previous age, I’d have extra reason to be excited, now having a male heir to who I can leave my vast riches and estates*… in our time, we’ll divide our assets in two between the kids but I’ll write more about wills another time. In brief, having a second child has highlighted the need to buttress our finances and ensure their well-being.

Benjamin’s arrival also means his mother is now on maternity for the next twelve months, which, not coincidentally, means we’re now a zero-income family. In other words, time for me to hang up my apron and get back to work.

My original plan on this front was to return to the world of IT contracting but the current market situation in Perth isn’t as hot as it was a few years ago, on the back of the resources sector, and there aren’t as many options as I’d hoped for. In truth, I’ve always been pretty lousy at timing these things!

I could continue at home and enjoy this period with my wife and children. I’m sure we’d scrape by. I could also leave it for a while and revisit in three to six months. But the idea of having no income between the two of us, the fact we’ll be needing to support our first investment property financially—at least in part—from around August/September/October, and our plans for an overseas trip which will cost thousands in flights alone, leaves me wanting for some pocket money. What a pain, this working stuff!

I’m also considering whether I want to take on a job with less responsibility and a correspondingly low rate of pay or do something a little more stressful but that will generate a higher return on my time invested. It’s tricky this one: do I make it home for dinner every night or just push hard and maximise the limited time I’ll have back in the workforce?

On a related note, I spoke with our mortgage broker about the possibilities of a taking on a second IP sooner rather than later—presumably once I’m working full time again but while the wife’s still on maternity leave. We still have plenty of equity in our PPOR and the sooner we get one or more investment properties built, the sooner we can leverage the equity in those properties to duplicate.

Nathan at Mortgage Choice noted many lenders are wary of considering potential future income from a woman on maternity leave because—in percentages—many women do not return to work. He noted a letter from the wife’s employer would be required at a minimum. We left it there for now but decided to reconvene on the subject in August once I’ve hopefully been back at work for a little while.

In the meantime, I’ve lined up a second call with Michael Beresford at Open Wealth to discuss our options for IP #2. No reason not to at least have a chat!

Enjoy,

Michael

16 – Base Stage Invoice

In my last post I mentioned the slab for our first investment property had been poured and we were now at the ‘base stage complete’ milestone. I also wrote that it was time to pay the base stage invoice of $22k to the builder. Our mortgage broker forwarded a copy of the invoice for signing to authorise payment by the bank (from our main loan).

That would have been great as I’d prefer not to pay anything more than I have to from our line of credit due to its higher interest.

Naturally, things didn’t work out as intended. The bank asked that we pay this first invoice in full as part of our contribution so we had to pay the full amount from the LOC.

Again, not a biggie as it’s there for a reason but it’s amazing how random this process seems—would it not be sensible to expect the bank to provide some sort of payment plan or schedule so we can know what we’ll need to pay and when? Cash flow isn’t a problem thanks to the LOC but I can only imagine it would be for some customers. We had seven days to pay this invoice and I got the invoice paid across two payments with a day to spare, thanks to the bank stuffing around.

Open Wealth mentioned late payments are taken into account should they need to pay the build guarantee or rental guarantee and that’s apart from the fact I do not like being late with payments.

Hopefully the next one will go more smoothly.

Enjoy,

Michael

15 – Progress Update: Base Stage Complete

Well that happened quickly! We have a slab (and a corresponding invoice for the base stage of around $22k). It suddenly feels like progress is moving quickly—at long last. Looking back, I see the approvals came through around mid-April so it’s not that speedy but I’m happy given the weather.

I should note I’ve been very impressed with our Mortgage Broker this time around. As I’ve no doubt mentioned previously, we used Mortgage Choice when we bought our PPOR (land and build). They were involved then to the finance approval stage but I don’t recall interacting with them beyond that point for progress payments on the build.

This time, we received a copy of the builder’s invoice for the base stage from Open Wealth and that very same day, Mortgage Choice sent me the same invoice to approve for payment by the bank. It’s only a little thing but it’s nice knowing the broker is still involved to grease the wheels between us, the bank—and Open Wealth too for that matter. In theory, this means this invoice and future invoices should get paid on time and help us avoid any penalties for late payment.

As we’ve not yet seen the block and live on the other side of the country from Brisbane, it occurred to me it might be time to enquire to Open Wealth about how I go about approving payment for $20k of works when I haven’t seen the slab and have received no other reports as to quality, correctness, etc. Admittedly I should have asked this question before committing to the build with Open Wealth but I wasn’t thinking along those lines at that point.

I was happy with the answer from our Open Wealth Client Liaison Manager, however, and it turns out there are several inspections which occur throughout and after the build. She emailed me this helpful response:

“The builder employs a Certifier who conducts multiple inspections. The Certifier is governed by the council and legislation.

Here is a list of the certifier and other inspections:

Prior to the slab being poured the plumbing, and then the slab form, is inspected by the Certifier. In particular the drainage and sub-drainage; the piers and slab are inspected for form.
Once the frame is up, the inspector checks the carpentry is to code, Australian standard.
After the frame, the inspector also inspects: the plumbing pipe work, this is referred to as the rough-in inspection. There is also a plumbing inspection by the certifier at the final stage.
At completion stage of the build the Certifier produces the Form 21, which is to assure that the build is complete and meets Australian standards. This form is sent to the bank to release the final payment.
After Form 21 is received by the bank, the bank sends out a valuer with a copy of the plans and specifications to make sure that the builder has constructed your property to plan and included all specifications.
Open Wealth then organises two independent inspections; we employ a company in Queensland to go out and check the quality of the work. This is mainly for finishes to paint, craftsmanship and visible defects – it is very thorough.
During the property manager’s first inspection any additional visible faults are identified.
At the property manager’s six-month inspection, any outstanding faults identified are to be fixed under the builder’s warranty. Because your house is made from natural materials and as your house settles, there are always a few adjustments to doors, towel rails that need to be tightened, etc and is at no cost to you.”

When we built in Perth in 2007 through a “project builder” we had only the word of the site manager to go on (at practical completion) and we commissioned an independent inspection at a cost of $500. I’m sure the bank had a look in some shape or form but this was never made evident to us. Despite living in this house for nearly eight years, we’re still dealing with issues from the build (long story for another day…). Perhaps it’s all smoke and mirrors but from what I’ve seen so far the level of rigour in Queensland in 2015 seems greater than that in WA in 2007/08.

Enjoy,

Michael

14 - Progress Update: Plans Approved

We received a quick note from Open Wealth today noting the builder has confirmed building plans and permits have been approved. The start date for construction—preparation for the slab pour—is next Monday!

I’m certainly ready to see this house built so we can get tenants in and start recouping costs. The holding costs have been minimal to date but now that we’ve settled on the land we’re accruing interest on the mortgage for that component and our first interest payment of nearly $700 came due just this week. That amount is paid from our line of credit and capitalised as interest during construction so it’s no problem from a cash flow perspective—and was budgeted for—it’s just a bit scary seeing it all start to happen for real now.

In contrast to our new build, Gemma’s father recently popped into town (they live south of Perth) with the intention of buying a second residence to accommodate them when they come up. They located an existing house in one day, put in an offer that equals the asking price, and settlement is due in the next few weeks. In effect, they’ll be able to move in soon and the time between their offer being accepted and move in day will be less than a month (if everything goes smoothly).

Two of the reasons why Open Wealth advocates building over buying is to take advantage of depreciation as a non-cash tax benefit and to avoid paying stamp duty on the building component of the purchase (i.e. the house). With a new build, we’ll pay GST to the builder (10%) and while the depreciation will be a substantial bonus, we’ll be accruing interest for many months before the house is tenant ready (again, assuming the build goes smoothly). I haven’t done my figures to determine which is the most cost-effective route but I imagine it would be close.

Note building new also brings builder’s and structural warranties, greater tenant appeal, of course, and potentially a greater valuation so you can leverage the equity and do it all again.

Enjoy,

Michael

12 – Progress Update: Settlement

Settlement day today and everything went smoothly, as far as I know. I received an SMS from the bank to notify us settlement is complete, an email from our solicitor, and an email and phone call from our Client Liaison Manager at Open Wealth to say congratulations. So I’ll call that done.

I’d suggest this would be a good occasion to pop a bottle of bubbly but the wife is pregnant and heading out for dinner with the girls tonight, no less. So, in our usual way, we’ll let the occasion pass without much excitement. What investment property?!

Here’s a picture of a pile of dirt—but it’s our pile dirt (er, the bank’s pile of dirt rather)! Good to see the skies are blue in Queensland so hopefully progress can be made without too many disruptions from the weather.

I’m told by Open Wealth “the builder has arranged the soil test, engineering plans and working drawings and the plans have been submitted into council for approval”. “While the plans are being approved the builder will be organising the site works, retaining walls, sediment barriers, driveway shake-down and signage.”

Open Wealth expect 6-8 weeks for permits (ideally six since we paid the 5% builder’s deposit up front and should have jump-started the process) and then things start to really get underway.

I would have preferred to be further along by now, with the original aim of having tenants in place by the end of the 2014/15 financial year but settlement has pushed us out to October (worst case, on the basis of the 30-week construction guarantee Open Wealth includes). Naturally, this will be particularly awesome timing—he said sarcastically—as I’ll likely be overseas as we transition from construction to rental.

The base stage complete milestone is next, which is everything before framing starts.

All said, I’m impressed with myself for a) doing this and b) doing this as well as I possibly could using my newfound knowledge. When we built our PPOR in 2006, we were clueless and did as we were told. Rather than try and understand the process, we followed the bouncing ball. We lucked out in general, but for an investment property I felt complete engagement was necessary. This will be one of several (future) income generating assets which I intend to run as a business and I believe it would have been amiss of me not to dive deep into the semantics. Yes, we’ve still followed the bouncing ball in general because the process outlined by Open Wealth is aligned to my knowledge and strategy but I now understand why the ball bounces and I’ve not hesitated to correct its trajectory when I felt it was heading in the wrong direction.

Time will tell whether we’re doing the right thing but right now I’m comfortable knowing I’ve taken the first steps to secure my financial future and done it in a way that I understand and believe to be correct.

Enjoy,

Michael

11 - Bank Deals

Here we go again! I recently posted about the improved deal I got on our house insurance just by phoning up and asking for a better price. Almost to prove my point, I called up the lender who holds the mortgage on our PPOR, asked for a better rate, and they were able to pretty much instantly knock off .05% (pending new paperwork to sign).

Not a vast improvement but nothing to sneeze at either—that works out to about $50/year for every $100,000 owing (.0005 x 100,000). Since this is the mortgage for our PPOR, we can’t tax deduct expenses like mortgage interest so every bit less we have to pay back is more money to us instead of the bank.

It’s worth noting we’re already on a discounted rate by virtue of having both our PPOR mortgage and IP LOC together under the one umbrella product.

The bank wasn’t, unfortunately, able or willing to improve the rate applicable to our equity loan but did suggest we could convert that loan to a fully-fledged home loan to achieve a better rate. Interesting concept but I’m not clear on the tax implications—i.e. the debt may be considered non-deductible.

We’re on a variable rate loan product and intend to stay there. I briefly considered fixing some or all of the loan before the most recent rate cut but was obviously glad I didn’t as interest rates dropped .25%. Some pundits in the media are predicting a second rate cut this year.

Michael Beresford at Open Wealth recently published a brief but informative “Wealth Workout of the Day” video on the subject of variable vs fixed and some of the implications you may not have considered, such as pulling equity out of your property. Here’s the video.

Enjoy,

Michael

9 - Performance Measurement

My wife is my yardstick for measuring reality. I’m admittedly a bit of a dreamer at times (with the ability to get mired in the details, mind!) but my Dr. wife, being smarter than me, is always ready to offer the checks and balances I occasionally require to cool me off when I get carried away.

Part of that is because she hasn’t learned what I’ve learned so she asks a lot of tough questions which forces me to think hard about the answers. She’s also far more conservative than I am and could probably be labelled a reluctant partner in all of this—her preferred approach to investment is to save cash in the bank.

Related to all of this, Cam McLellan over at Open Wealth, with who we’re building our first investment property, did an early podcast on the subject of what he calls “Dream Crushers”. A Dream Crusher tells you what they think (i.e. which is usually a negative, subjective view about what you’re thinking about doing) without having the experience or objective education on the particular subject to support their comments. This commentary gets you down and ultimately prevents you from taking action. The wife is effectively my lead Dream Crusher—although she usually comes around, either because I babble at her so much she wants to shut me up or because what I’m saying makes sense to her and she comes to understand my intention.

Which leads me into the subject of today’s post.

The investment strategy I had yet to—until yesterday—articulate to my beloved wife was to complete construction of IP #1 by mid-year (ish) and look at identifying and securing finance for IP #2 (and possibly IP #3) through the end of Q3 and the start of Q4 2015. This would tie in well with the fact I’d be back at work full time by that point, which the banks would hopefully look at favourably in terms of debt serviceability.

Then my wife hit me with her strategy: evaluate the performance of IP #1 before rushing forward. To me that was the sound of the cord being pulled and the lights going out. Fizzle. Zap. “No more property investing for you, dear hubby!”

We didn’t speak more on the matter initially but her comments certainly got me thinking: what is the detailed set of criteria we might use to define performance?

I’ve honestly been a little bit stumped about how to measure performance for a while now.

The easy one, of course, is a doubling in value (capital increase of 100%) every 7-11 years for good metro properties. The market will generally do this for you unless you’re adding value somehow (i.e. through renovations or infrastructure projects coming online).

Gross—or better yet—net rental yield is a good starting point as it’s a metric that’s easy to calculate and track.

Perhaps more important is the transition from negative gearing to neutral or positive gearing within a timeframe you can afford. Let’s say 1 to 5 or 7 years. This might happen in a number of different ways. Rents increase. Debt might be reduced or retired (but I wouldn’t take this approach) and interest rates might move—down like we’re seeing these days. You earned income may increase as you progress in your career, allowing for more effective tax deductions.

The conclusion that I’ve come to is performance must be measured over specified time intervals: 1 year (or less initially); 3 years; 5 years; 10 years; 15 years; 20 years. My strategy is to hold for the very long term and hence I believe performance should therefore be measured over the long term too. Hopefully in that time our property would have become positively geared and seen reliable capital growth.

Simply looking at results year on year doesn’t work for me. A property might be sitting pretty one year but take a step backwards the next before recovering again in year three, for example. The contextual economics need to be factored in to your assessment at the very least and this will happen automatically by measuring performance over a multi-year period.

More importantly, deciding to invest or not invest in a second property, which will likely be in a different suburb if not a different market (i.e. a different capital city), based on the performance of the first property isn’t an equitable comparison.

There are also other factors that I’ll say are beyond your control, for lack of a better expression. Let’s say you buy a negatively geared property in the years before you retire. Your income is hopefully at the highest level it ever has been and so your tax deductions go further and, were you to keep working, that negatively geared property might be able to generate a positive cash flow for you in a few years.

And then you retire, hopefully with structures in place that will minimise your tax burden. Realistically your income will likely decrease in retirement. But what about those deductions?! That negatively geared property might remain that way for longer than you anticipate if you’re not able to pay down debt. At worst, it might eat into your retirement income and put a hold on your big retirement plans. Moreover that property may have seen only insignificant capital growth in the short term, making any sale not worthwhile despite the potential CGT savings.

If you’re younger, as I am, what if you’re working full-time one year but not earning at all the next? This is my reality as a stay-at-home dad. Bring forward tax deductions, yes, but that muddies the waters somewhat across the financial year boundaries.

Tenant churn might be a problem. That is, you might struggle to retain tenants, leading to more vacancy periods than another investor might have with an elderly couple who’ve been in the rental for a decade—doing their own light maintenance no less! (I read an investor profile just like this one in API). If you’ve got a strong property manager now, what happens if he or she moves on and you’re left with an average manager?

What about bad tenants? Insurance claims? Construction defects if you’re building new?

Interest rates may (will) increase, reducing positive cash flow.

Special circumstances may also intervene. Let’s say you lose a tenant for a length of time greater than you planned for because a major industry pulls out of the local market and rental demand evaporates. Or a flood leads to a broad stagnation in the market in terms of capital growth (as per Brisbane). I can only imagine what impact the earthquakes in New Zealand had on rental property there.

If you’re holding long-term, these sorts of events that occur in one year, or even over a number of years, don’t necessarily mean you’ve bought a dud. It might, if you’re being forced to subsidise a negatively geared property you easily can’t afford—in which case you’ll probably want the situation to come good within a defined time period (i.e. five to ten years); you’ll also need to decide whether that subsidy is worth the cost to you—especially if it’s not a burden. The selling costs (agent’s fees, possibly CGT, timing, etc)—coupled with the costs to acquire a replacement property (stamp duty, possibly LMI, time lost in the market)—make selling off an “underperforming” asset problematic.

I’ve written previously that time heals all problems but the flip side to this statement, of course, is that time is not on our side! Even for me as a relatively young man I’ll only get two to three decades (two to three growth cycles) before we both retire and our earned income dries up. With a goal of holding 6-10 properties at minimum, and natural constraints around how quickly we can do that, time is most definitely not on our side!

I’ll keep working through this one but I wanted to share while the subject was front of mind.

I’ve been reading a lot of Robert Kiyosaki lately so I’ll close by highlighting a recurring theme in all of his Rich Dad books: don’t buy investments that will cost you money. Speaking to us Aussies, I’m pretty sure he’d say “buy positively geared properties, mate”. That doesn’t completely solve our performance question—a positively geared property could revert back—but it’s a sound idea where it’s possible to find and buy such an asset.

Enjoy,

Michael

7 – Progress Update: Land Settlement

As mentioned in previous posts, settlement on our Queensland block of land was delayed in late January; apparently adverse weather conditions over Christmas and throughout January “may” have led to delays for the developer—presumably in to relation finalising all things tied up as part of the land division such as sewerage and services, roads, lighting, etc.

I’ve now been told to expect settlement in the coming days (now late February) and this will mean building plans can be submitted to council for approval and building permits obtained.

This process is very opaque to me but from what I understand, the land developer is required to bring the land to an agreed standard as part of subdivision, council will then approve that work, and the development process for individual developments (i.e. construction) can then commence subject to the rigours of the council building process.

Enjoy,

Michael

4 - Risky Business?

Risk is one of those misunderstood concepts that seemingly plagues everything we do: riding a bike is risky, crossing the street is risky, buying property is risky.

I’ve found people throw around the word risk in a very self-limiting way and when it’s used in the context of any random conversation they:

a) haven’t identified the actual risks that apply to that situation;

b) haven’t classified those risks in terms of their likelihood of actually occurring and the impact if they do occur;

c) haven’t identified ways of mitigating those risks or reducing the likelihood of their occurrence and severity should they occur.

Your mom or sister or brother or uncle will just say “oohhh that’s too risky for me” without understanding why it’s risky. This annoys me to no end because their ignorance suggests I haven’t evaluated risk and am therefore as ignorant and blind as they are myself—I am not!

Experience also reduces the risks that apply and time, of course, redresses many risks—especially in the world of long-term property investment.

Not taking risks could be said to be just as risky as taking managed risks! How else do we move forward as individuals and as a society and culture?!? NASA didn’t put men on the moon without taking risks.

The key to managing risk in any situation is understanding and qualifying the risks that might eventuate.

The example cited above of riding a bicycle is simplistic but the risks of riding a bike are numerous and include falling off, getting hit by a car, riding into a pedestrian, vehicle, animal, or lake, the chain falling off, getting wet if it rains, getting a flat tyre, having to shower when you get to work but having no soap. I used to ride my bike to work every day and these are all real risks!

Having identified the risks, scrutinise each risk in further detail to categorise and rate each one. Here are a few examples from bike riding:

Falling off: There’s a small chance you might fall off your bike and the result might be of no consequence if you land on your feet or it might be catastrophic if you bump your head. Maybe you’re riding over a loose surface or in the snow. Maybe you’re trying to stay balanced while you’re clipped in at a traffic light. Maybe you’ve made the poor decision to ride home after a few beers on a Friday night after work. The risk of falling off could be decomposed into several risks which are easier to think about and to manage but let’s keep things simple for now. In all cases, you can mitigate the risk of falling off by wearing a helmet and gloves, taking a safe route on bike paths and becoming familiar with the route and all of its hazards, and of course making good decisions while you ride such as unclipping from your pedals at intersections! You could also take out life insurance to cover your healthcare expenses, protect your income if you’re seriously hurt, and reduce your liability if you hurt someone else.
Flat tyre: This one’s easy: the risk is very low as it’s bound to happen every so often and is something that can be fixed on the spot in ten minutes (or worst case: call someone to collect you and your bike). Mitigation includes not riding over broken glass and fields of prickles; of course, you’ll also want to carry a spare tube or patch kit, tyre levers, and a pump and a flat may make you late for work… which might get you fired.

Don’t forget to take a moment to look at the risks in the context of what you gain, which in the case of our example include improved health (if you don’t fall off!), cost-effective transport and exercise, less stress, nice tan, etc.

In a similar vein, property investment has it’s own set of risks but it’s not inherently “risky”. You’ll want to identify the risks that apply to your situation but this is easily done and takes only a few minutes to think through the details. You’ll sleep better at night having done so—I promise: if your mind starts playing tricks, all you have to do is return to your risk assessment and you can say “nup, that’s a low-likelihood risk and although the consequences are high these mitigations are in place” and carry on sleeping.

Here’s a shortlist of property risks to get you started:

Buying a low growth property
Buying a property with expensive problems (pests, asbestos, etc)
Buying a low cash flow property
Paying more than the property is worth (i.e. buying at auction)
Sharks and dodgy investments
Problem tenants/property management
Vacancy
Unexpected repairs/shonky builder
Interest rate increases
Job loss
Hidden costs (stamp duty, mortgage lender’s insurance, council rates, insurance, accounting, management, etc)
Change in legislation (i.e. taxation laws relating to negative gearing)
Liquidity
Capital gains tax
Selling costs

It’s also important to weigh up the risks you identify in context of the reward—the gains you stand to make if the risks you identify do not eventuate. These might include income through a positively geared property, equity, and wealth.

We mitigated a number of the early risks related to buying by going through Open Wealth but I compiled a risk matrix for each of the risks that do apply in our case, specifically as we move into the post-construction phase. It’s a simple grid. I noted the risk, the criteria for that risk to be fulfilled, probability, impact, ranking, mitigation, and contingency.

Simplistic definitions for these terms are as follows:

Probability:

Improbable
Remote
Occasional
Probable
Frequent

Impact:

Negligible
Marginal
Critical
Catastrophic

Ranking:

Acceptable as-is
Acceptable with controls
Undesirable
Unacceptable

If, in future, I do encounter one or more of the risks I’ve defined, I have a ready-made framework for understanding those risks—at the very least—and some initial guidance for dealing with them in the heat of the moment. Hopefully I’ve taken steps to mitigate a risk before it becomes a big problem. If nothing else, my risk matrix is an integral part of my strategy relating to property investment and prompts me to think about things that might go wrong before they go wrong—or more specifically—how to measure my success or lack thereof.

Property investment is not inherently risky and I consider it to be far less risky than investing in stocks, where you have no real control over how your investment performs, or leaving in the bank to suffer at the hand of inflation. Many risks in the property sphere are readily overcome and the risk of losing money—or not making money—are often under your control with reasonable opportunities for mitigation.

Of course not doing anything is the biggest risk of all to building your future wealth. Time, conversely, is your biggest ally and will help to remove many short-term risks if you’re prepared to hold and ride out any lumps and bumps.

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. I'm learning too and expect to make many, many mistakes along the way.

Enjoy,

Michael

3 - First Steps

There are so many subtle decisions and parallel steps in the property buying process it’s hard to know where to start in describing how we went from A to B. I suppose I’ll start at the very beginning, following our decision residential property investment was the thing for us.

Selecting an Investment Advisor

I’ve written about our “A-Team” previously so won’t reiterate the contents of that post here. Suffice to say we knew we’d need to decide on an individual or company to assist us to select a market, suburb, and property. I considered the risks too high to attempt this on my own, the first time around. You might do this yourself, someone might do it for you at no cost to you, or you might pay someone to provide this service (such as a broker).

I met with a few property investment companies and ultimately decided to move forward with Open Wealth Creation. We aligned to the Open Wealth methodology because it made sense and the Open Wealth team provided a large quantity of quality educational materials at no charge (a reminder, this blog is not an advertisement or referral for any of the entities I mention in these posts).

As we evaluated Open Wealth, I was also interacting with Joyce Property (based in Perth) but I opted not to move forward with them because they also promote and sell apartments; I don’t believe apartments are a good residential investment and I believe if you’re spruiking apartments you’re not working in the interest of those who are investing with your firm. Notably, Joyce does not charge a fee for their services, whereas Open Wealth do charge a fee. Joyce are obviously a very experienced organisation (I met with Graham Joyce and he oozes professional history).

My wife and I also met with a representative from Investmark and I attended a seminar and had a follow up meeting with IPG but neither were up to the task I set them and seemingly just wanted to shift stock onto naive investors. Their eyes widened when we first explained how much useable equity we had but neither one followed up with me, despite prompting, when I asked them to back up their claims. The free IPG seminar was more or less promising and it seemed like what they were selling was based on good research. At the end of the day, both felt very slippery, verging on dodgy.

Finally, I met with Nicheliving a few times (primarily for their mortgage brokering services but initially for their house and land packages). They’re obviously big in WA but were really pushing us towards NRAS properties and their approach seemed somewhat thick. I knew pretty quickly I wanted to be building in Queensland (Brisbane) but it was worth the discussion with Nicheliving. Nicheliving are a one stop shop, which might be a good thing (or might not!). Their advertising also shows a dude holding wads of cash so it seemed like they target the get rich quick crowd which is not what I’m about.

Getting Money

In parallel with the discussions I was having with these advisors and property development firms, I initiated contact with our current bank and with the mortgage broker we used when purchasing our PPOR.

Although I didn’t intend to send the investment property mortgage to the bank that holds the mortgage over our PPOR, I needed to understand how much equity we had in our family home and, secondarily, how much they thought we could borrow. This turned out to be a good move as the bank was able to very quickly order a full valuation at no charge to me and it turned out to be a very positive engagement in terms of learning how to to converse successfully with the bank. Importantly, because the bank ordered the valuation directly, I was able to get a copy (I wasn’t able to get a copy when our mortgage broker requested a second valuation—which also went through the bank…).

I wasn’t as impressed with the bank’s view about our loan serviceability—and in turn how much they would lend us; this was due primarily to the fact we’re a single-income family. Nonetheless, the home loan specialist I dealt with was immensely useful in helping me to understand the value of our family home and how we might go about refinancing its corresponding mortgage and optionally financing the investment property purchase. The specialist was also able to share the valuation report with me and it was helpful to see how the valuer saw our property (interestingly, we have a four bedroom house—as per the plans I supplied to him—but he recorded and valued the property as a three bedroom house with a study…).

I didn’t want the bank which has our PPOR mortgage to also hold our IP mortgage because I didn’t want to cross-securitise the loans. I highlighted this when I spoke to our bank and was reassured it wouldn’t be a problem but I’ve read a single lender holding both mortgages will always ensure they come out best in the event of any problems. Yes, we might have secured a lower interest rate and it would have been convenient having everything in one place but I’d only consider a single bank scenario if we eventually get to the world of private banking.

Following that initial conversation with the bank I also got in touch with a mortgage broker. Broker’s are often recommended and, as mentioned, we’d had success with a broker when mortgaging our PPOR (we used Mortgage Choice). You can do your homework and check out products from each of the banks on your own but why bother when using a mortgage broker doesn’t cost you anything and they’re already familiar with countless loan products? The broker I dealt with reassured me Mortgage Choice is paid the same commission for all of the products they recommend, removing the opportunity for the broker to recommend one product above another that will earn them more money; of course I’m not sure how true that is.

Our broker told me he has a few investment properties himself and I think finding people who understand investment property is really important because they’ll have a better appreciation of the path you’re following. As some of our requirements were different to your mortgage broker’s average client requirements (more on that in a moment), I wanted to structure our loans differently than what the broker first had in mind. At the end of the day the broker was able to find the products we needed, submit the applications (he walked through every line on the application forms with me), and secure an interest rate on the main loan that is 0.02% better than what that bank would have offered had I gone to them directly.

With my wife being a doctor, it turned out she was also eligible for a partial LMI waiver (this is one of the interesting requirement I mentioned earlier). Essentially, some lenders will offer members of specific professions an LMI waiver on the basis that they present a lower risk as borrowers. Search for LMI discount or see here for examples—you may be surprised what you find. I certainly wish I’d known about this offer/wish it existed when we purchased our PPOR as we had some major cash flow problems for a little while when we first had to sort out stamp duty and then LMI (and then retaining walls)!

Both of the brokers I was dealing with (Mortgage Choice and Nicheliving) were across the major lenders offering LMI waivers (initially CBA and Westpac but now ANZ and possibly Macquarie and St Georges) and we ended up being able to borrow 90% of the IP costs without incurring LMI. Note the 10% balance was paid from the line of credit secured against the equity in our PPOR but we could have done an 80/20 split if necessary. You can take the latter approach too if you don’t qualify for an LMI waiver but don’t want to pay LMI and have sufficient equity.

Mortgage Choice submitted applications for the main IP loan and the line of credit with our existing lender. Both lenders performed their respective valuations, the first on the property we were buying and the second on our home.

After all was said and (nearly*) done, our unconditional finance approvals came through without a hitch. People get all bent out of shape about finance but I don’t let it phase me—in this case I’d done my homework and knew what to expect. In other words, I wasn’t asking for more than any reasonable person in our situation might need and the numbers were simple and made sense. I was also confident our team would get us through. Might be different next time around though!

* Land settlement is due in the next few weeks. When settlement occurs, the solicitor will meet with the bank and land developer to ensure monies are dispersed appropriately and all of the legals are taken care of.

Land and Builder (etc)

Following an initial phone consultation with Open Wealth and a bit more back and forth, the first thing we needed to do with them was have our name added to a waiting list for a property in the area (the development) they were recommending.

After looking over the property details and the house specifications, we had to sign an “Exclusive Hold Agreement”, which essentially allowed us to deliberate further, and undertake additional due diligence, while the property could not be offered to anyone else. The hold agreement also required payment of a $1,000 refundable deposit. If we chose to back out, the deposit would be refunded in full. This deposit was payable to Open Wealth and is ultimately part of their 2% fee.

With the land contracts submitted, we then had to pay a $2,000 refundable holding deposit to the land developer. This deposit is essentially part of what would be a typical 10% land deposit—there is no further deposit to pay for the land and the balance of the land price and costs are paid at land settlement. The land contracts included the Contract for House and Residential Land (REIQ) and Terms of Contract for House and Residential Land (REIQ), as well as special annexures.

Note we had no opportunity throughout this process to submit an “offer” as such and when I enquired about negotiating on price, I was told the prices are essentially non-negotiable. This is something I want to find out more about if we repeat the process again with Open Wealth.

Next, we had to pay the balance of the Open Wealth “Development Management Agreement Fee” (their fee) within seven days following unconditional approval. This fee is 2% plus GST of the total land and construction price and is tax deductible.

Finally (FINALLY!) we had the 5% builder’s deposit to pay; we were given the option of paying this before settlement so the builder could make a start before we actually owned the land (due to an arrangement between the land developer and the builder negotiated by Open Wealth). We had the option to pay this after settlement.

Note I would have paid all of these costs from our line of credit in order to tax deduct the interest but unfortunately the LOC wasn’t yet available when I paid the $1k and $2k deposits. I may still be able to claim something for these but it gets tricky as I paid both of these initial deposits from our personal transaction account and that gets messy in the eyes of the ATO; will let the accountant sort that one out come tax time! [Update: on advice from our accountant, I “refunded” the $3k to our personal account, in two separate transactions, from our LOC.]

In summary, these were our upfront costs and the timing of relevant milestones:

September

Exclusive Hold Agreement signed and returned.

October

Open Wealth deposit: $1,000 (of the total Development Management Fee) to Open Wealth. Refundable.
Land contracts signed by us and returned.

November

Land developer deposit: $2,000 (of the land price) to the land developer. Refundable. Payable once land sale contracts submitted
Unconditional finance approval received.
Development Management Agreement Fee: 2% plus GST (minus $1,000 paid initially) of the land and construction costs to Open Wealth. Tax deductible.
Construction contracts signed by us and returned.

December

Builder’s deposit: 5% of the construction price to the builder. Tax deductible.

[Update: March

Land settlement]

Reading and Learning

As all of these events unfolded, I was busily reading everything I could get my hands on. I’ve started a bibliography ~~which I’ll publish soon~~ in case you want to follow what I’ve read. Education is obviously a time consuming (and at times tiresome) activity but I feel it’s important to understand the principles of property investment inside and out—especially as I lack the repeated experiences myself.

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. I'm learning too and expect to make many, many mistakes along the way.

Enjoy,
Michael

About Me

Hi, I'm Michael. I'm a first-time property investor living in Western Australia. I'm also a stay-at-home dad and husband. Follow along with me as I recount the day-to-day activities of buying a block of land in Brisbane and building a new house for investment purposes. If you're thinking of doing the same, I hope you'll learn something from my mistakes--which I'll share openly. If we're successful this time around, I hope one will become two and two will become four and so on... as interest rates no doubt increase and the Australian economic landscape shifts and slides and evolves. Should be interesting! Thanks for reading.

Property Investment

Pages

32 - Preparing for the Second Build

30 – Progress Update: Done!

29 – Pets Allowed?

28 - To Inspect or Not to Inspect?

27 - Appointing a Property Manager

26 – Progress Update: Final Stage

23 – Progress Update: Fixing Stage Complete

18 – Progress Update: Frame Stage Complete

17 – The New Addition and a Change in Circumstances

16 – Base Stage Invoice

15 – Progress Update: Base Stage Complete

14 - Progress Update: Plans Approved

12 – Progress Update: Settlement

11 - Bank Deals

9 - Performance Measurement

7 – Progress Update: Land Settlement

4 - Risky Business?

3 - First Steps

Selecting an Investment Advisor

Getting Money

Land and Builder (etc)

Reading and Learning