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PROPERTYINVESTINGTHE SWITZER GUIDE TO

EVERYTHING YOU NEED TO KNOW TO PROFIT FROM PROPERTY IN 2015.

TABLE OF CONTENTS

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HOW TO MAXIMISE THE RETURN ON YOUR INVESTMENT .................................................04

4 THINGS YOU MUST DO IF YOU’RE BUYING PROPERTY IN 2015 ........................................05

NEGATIVE GEARING EXPLAINED ..............................................................................................06

4 WAYS TO PAY OFF YOUR MORTGAGE FASTER ....................................................................07

FINDING THE RIGHT HOME LOAN – WHAT EVERYBODY NEEDS TO KNOW .........................08

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A NOTE FROM THE FOUNDER

Australians love the security of ‘bricks and mortar’ and identify with those who have achieved great wealth and financial security through smart property investment.

However, investing in real estate isn’t child’s play and to make a successful investment you need to know what to look for and then, once purchased, you need to know how to maximise the return on your property.

A successful property investor should be able to make money in any market but it also helps to know which areas are doing well, and why.

To make sure you achieve superior investment returns, here is everything you need to know to make the right real estate investments in 2015.

ABOUT THE AUTHOR Peter Switzer is one of Australia’s leading business and financial commentators, launching his own business 20 years ago. The Switzer Group has since grown into three successful companies spanning media and publishing, financial services and business coaching. Peter is an award-winning broadcaster, twice runner-up for the Best Current Affairs Commentator award for radio, behind broadcaster Alan Jones. A former lecturer in economics at the University of NSW, Peter is currently a weekly columnist for Yahoo!7 Finance, a regular contributor to ABC radio, and host of his own TV show, Switzer on Sky News Business Channel.

HOW TO MAXIMISE THE RETURN ON YOUR INVESTMENT

KEEP THESE FACTORS IN MIND WHEN LOOKING FOR INVESTMENT PROPERTIES• Investing in property is a long-term decision. To get the most value from your investments, you should aim to hold the property for at least seven to 10 years. • It’s usually wiser to invest in properties located in capital cities where there are more potential tenants. Jobs are also more readily available for tenants of residential properties. • If you are investing in residential property, concentrate on properties in the inner suburbs around the seven to 10km mark from the CBD. • Residential properties with unique qualities, such as period-style homes or homes with sought-after features designed by clever architects, bring good returns because of their scarcity value. • Properties that only need cosmetic improvements can be good buys. Don’t be put off by poor paintwork or worn carpeting; these are not defects. If the property is in good structural repair and is in a good location, it’s worth your consideration. • Young people often move into suburbs that people in affluent suburbs consider undesirable and then set about improving their properties to the extent that they become very desirable. Whatever your personal opinion about gentrification, it’s a good idea to try and spot the next trendy suburb where young people will want to live. • As with most things in this life, it’s best to talk to an accountant about the tax implications of any property investment you are considering.

1. First up, do plenty of research on what the market can take for rent. If you’re going to use an agent, make sure you know the terms and conditions of the relationship. They can be very pricey, so check a number of agents in your area. A good one also can act in your interests, so don’t assume they’re all the same — there are real quality differences between agents.

2. Next, look for a good accountant if you haven’t already got one — someone who will partner with you in this business venture. Knowing what you can claim for can be very eye opening. For example, a trip to visit your property can be a tax deduction if it’s interstate and even overseas!

3. Go to a mortgage professional to ensure you have the best deal with your home loan. As a landlord, interest only and fixed, especially at these rates, could ensure you have the best cash flow possible. A lot of landlords like to pay down the principal but you might prefer to keep maximum cash flow.

4. Finally, get a quantity surveyor on the job as these guys often know more about what you can claim as legitimate tax deductions related to depreciation.

There is a good book by Tyron Hyde, interviewed by Peter Switzer on Switzer TV on the Sky News Business Channel. He says a quantity surveyor will go to the

property and find all of the assets that can be depreciated, and their insights are worth the $600 they might charge, which of course is tax deductible.

Tyron also points out something else you may not be aware of regarding renovation. Imagine you buy a property where the carpet is five years old but it’s worn, stained or just ugly. You might think a better floor surface will bring a higher rent. Well, the carpet you throw out has five years of deductions left in it, as carpet has a 10-year life in which tax deductions are possible.

Many quantity surveyors will actually guarantee they will at least find savings equal to their bill, while others say they will find deductions up to double their bill as a minimum.

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4 THINGS YOU MUST DO IF YOU’RE BUYING PROPERTY IN 2015

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Heading into 2015, none of us can really predict what the year ahead will bring. Century 21’s Charles Tarbey shares his advice for prospective buyers.

We can’t say for sure whether interest rates will rise, fall, or stay the same. Nor can we predict with any true accuracy the “hotspots” which will provide the greatest capital gains, or the highest rental yields. Regulatory requirements may sharpen or become more lax, and economic activity abroad may see numbers of foreign investors increase – or drop – as a response.

I believe it will be an interesting year to watch unfold, and below are my tips for buyers heading into 2015.

1. PUT ON THE BREAKSWe entered 2014 off the back of the “sellers’ market” of 2013, in which vendors could easily find a buyer willing and ready to meet their, at times, fairly high prices. This is still occurring to some degree in certain market “hotspots” where a shortage of listings continues to drive up pressure on pricing.

However, I believe there are still many areas now where this frantic demand is cooling off, and the power in the negotiation is beginning to tip in the direction of buyers. For this reason, I would suggest buyers take their time when attending open inspections, or when considering their different options. Be committed to looking at a number of different properties, instead of rushing to purchase at the first available opportunity. Take your time. Then come back with the price you believe the property is worth – not the price being pushed on you by the seller – and stick to your guns, or walk away.

2. …BUT DON’T BE TRAPPED BY ANALYSIS PARALYSISI would never advise anyone to rush into a purchase without having done

some thorough research. However, I’ve also witnessed prospective buyers become trapped by what is often referred to as “analysis paralysis”. This occurs when someone overthinks, or over-analyses, a situation to such a degree that an action or outcome is prevented from ever actually occurring.

These days, we have so many great sources of property market statistics that it can become addictive to pore over every possible metric, speculating as to the best, or worst, time to make a move. However, as enormously informative as these sources are, they still only demonstrate historical trends, which have already occurred – not those anticipated to transpire.

If you are truly considering entering the market, I would certainly recommend self-education on the historical trends of different locations and property types. But at some point it may be time to put down the research and begin to consider taking action.

3. RENT WITH YOUR HEART, BUY WITH YOUR HEADSpeaking of trends, an interesting trend I witnessed in 2014 was an elevated level of interest in areas outside of the capital cities, such as Nowra in New South Wales and Queensland’s Gold Coast. This leads me to believe that prospective first home buyers who feel property prices are currently too high to enter the market may not be considering all of their options. It’s important to live in an area, which is convenient for whichever lifestyle suits you best – whether this means access to a particular university, an abundance of local parks in a quiet neighbourhood, or a raging night life just down the road. However, it may not always be

possible to purchase in these areas.This is why I always recommend

buying in an area you can afford, and renting where you wish to live. It’s my opinion that there’s no point waiting until you can finally afford to buy your dream house, if doing so means losing the potential capital gains you could have been making through another property. Using this technique could help you to enter the property market in a way which works for your particular budget, while allowing you to live in a location which works for your chosen lifestyle.

4. LEAVE YOUR EMOTIONS AT THE DOORBuying a home can often be an enormously emotional undertaking. Considering where to lay down your roots, raise a family, or simply begin your journey as a property investor can all be highly personal concerns. This is then heightened by the high, and long-term, nature of the financial costs involved.

However, buyers who enter into a home-buying negotiation with an objective mindset may avoid a number of emotional traps, such as bidding too high at auction for that “perfect” three-bedder with the cute picket fence, or signing up for a snazzy property, which is way out of their price range. By committing to remaining strictly impartial and sticking to a set of pre-defined parameters, it’s my belief that buyers will secure the most favourable outcome.

So look around, take your time, but don’t be afraid to make your move when the time is right. By following the above tips I believe buyers may be positioning themselves in a way, which sets them up for the greatest chances of property-buying success in 2015.

ABOUT THE AUTHOR Charles Tarbey is the chairman and owner of Century 21 Australasia and has been actively involved in the property market since 1972.

The rich and brainy not only use their own money to purchase assets that are at the bottom of an up phase, they also borrow money for investment purposes. And the Tax Act lets you claim interest from any borrowings made for business or investment purposes. In the investment sense, gearing means borrowing. When you engage in negative gearing, you effectively run your investment at a loss. The plan is to make the loss only short-term. In the long run, the capital gain on a house or unit that you hold for, say, 10 years, can skyrocket in value, especially if you buy in an area that becomes the next Paddington or St Kilda. Anyway, even if there is only an average real estate gain, the strategy can pay dividends, though

some people who buy badly can lose in the long run with negative gearing.

Let’s say that you borrow money for an investment unit and receive $10,000 rent a year. However, your costs, such as interest and real estate agents’ fees, amount to $17,000. This means you’re losing $7000. The Tax Act lets you deduct this $7000 loss off the income you receive as a wage or salary. So if you’re currently receiving $50,000 a year in taxable income, you now pay tax on $43,000 ($50,000 minus $43,000).

YOU HAVE TWO OPTIONS ON THE TAX FRONTThe first option is to ask your paymaster to reduce the amount of tax deducted from

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NEGATIVE GEARING EXPLAINED

your pay each fortnight. You can do this by filling out a form that shows what you’re losing from your investment.

The second option is to wear the loss and wait for a tax refund at the end of the financial year.

You can choose either option. The best advice we can give you is to talk to an accountant about the option that best suits your individual circumstances.

In the short-term, you’re still losing on the property, but you are betting that the capital gain on the house or unit outweighs the loss and the eventual capital gains tax you pay if you sell the property.

If this description of negative gearing puts you in an investment mood, ask your accountant if the strategy is right for you.

“When you engage in negative gearing, you effectively run your investment at a loss. The plan

is to make the loss only short-term.”

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4 WAYS TO PAY OFF YOUR HOME LOAN FASTER

1) GET THE BEST INTEREST RATE POSSIBLEIt’s a no-brainer but what many people don’t do is look beyond the big four banks. They may have a brand, but they rarely have the best rates, although they may (with the stress on may) do you a better deal if you have a decent income and have been with them for a while. Here’s an example of what a 1% difference in interest rates can make over a 25-year term on a $300,000 loan – on a 4.9% rate, compared to a 5.9% rate, you’ll save over $53,000 over the life of the loan.

2) TRICK YOURSELFDon’t pay monthly, halve that amount and pay it fortnightly. Sound like the same thing? Well it’s not. You end up paying 26 fortnights, which is one more monthly payment than you would have if you just paid for 12 months. Don’t think it makes much of a difference? On the same home loan above – the one with the 4.9% interest rate - you would save $34,000 in interest and pay off the loan nearly three and half years quicker.

3) EARLY PAYMENTSpeaking of tricking yourself, make a payment as soon as you take out the loan

(rather than at the end of the first month when the banks usually demand it) and you’ll save thousands too.

4) SHORTEN THE LOAN TERMIn terms of risk mitigation, many will argue that a longer term loan is better but if your loan sum is manageable, then definitely try for a shorter term. It’s all well and good to say that you’ll pay back more when you can, but the problem is most of us don’t. If you do think you’ll struggle with the higher repayments don’t do it, but if you think the extra pressure will help, then definitely consider it.

Finding affordable property in a major capital city like Sydney or Melbourne is hard, so the size of our mortgages are increasing. But nobody wants to be in debt forever. Here are four tips for paying the mortgage off.

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FINDING THE RIGHT HOME LOAN – WHAT EVERYBODY NEEDS TO KNOWN

WHAT ARE SOME OF THE THINGS THAT BUYERS NEED TO KNOW WHEN THEY LOOK FOR A HOME LOAN? Borrowers need to ask themselves what the loan is for – is it for a purchase, do they want to refinance their existing loan, are they looking to purchase an investment property or do they simply wish to access the equity in their home, either for personal or investment reasons – this will dictate the kind of product they will need.

They need to know how long they intend to retain the loan. For example, if it’s for an investment property that they want to sell in five years for the capital gain, interest only repayments could possibly be the most suitable repayment structure.

They need to know what kind of ‘bells and whistles’ they want. Do they need full transaction capabilities with the loan or is a simple set and forget style loan more suitable? Do they need to identify multiple purposes within the loan? If so they should be looking for a loan that provides multiple portions under the one approved limit. Simple structures like this can make tax time much less stressful and ongoing management more straightforward.

WHAT ARE THE LENDERS LOOKING FOR?Essentially the lenders will look at three core items when they assess your mortgage application.

Does the applicant have the capacity (i.e. income) to repay the debt and continue to meet their other loan commitments and living expenses?

Is there enough security for the loan and is it suitable to the lender? Is the property being used for security for the loan in an acceptable location for the lender, is it a suitable property type and is it a property

Adrian Sheahan, Manager of Lending Operations at Switzer Home Loans, answers some common questions about mortgages.

that would be readily saleable in a normal residential property market. For example, properties with multiple dwellings are often considered outside the scope of the normal property market.

Is the applicant credit worthy? Do they have any credit issues and are their existing loan repayment records satisfactory. Do they have a stable employment history and is their asset/liability position reflective of their age, income and circumstances.

The lender of course looks at other factors in the application, but these will be the initial focus.

WHAT MISTAKES DO PEOPLE OFTEN MAKE? The factor that is most commonly misunderstood is the area of income and repayment capacity assessment, or the ability to repay.

The recent introduction of additional regulatory requirements for lenders has contributed to this by increasing their requirement to demonstrate how the applicant can meet the loan repayment obligations without placing them under financial stress.

The lenders therefore have tighter policies surrounding how they assess applicants’ income (for example overtime or bonus income), which directly impacts on how much they can borrow. In addition to that, the lenders are more closely scrutinising applicants’ living expenses and applying higher living allowances, which again, negatively impact the applicant’s borrowing capacity.

The other thing that they often don’t appreciate is that when the banks look at how much they can afford to repay, the banks apply a loading or stress rate to that. If interest rates rise they need to be confident you can still meet repayments. Given rates

have been so low for the last few years that fact isn’t front of mind for some people.

The applicant’s contribution has a significant impact on the interest rate and loan fees. Lenders generally prefer the loan amount to be no more than 80% of the security provided for the loan, as it represents a lower risk for them. To encourage that, they will offer discounts on the interest rate for loans at less than 80% of the security value. Loans above the 80% figure also attract Lenders Mortgage Insurance, which adds cost and time to the loan process.

Once potential borrowers are clear about what they need from a home loan, it’s a good idea to speak with a residential mortgage lending expert to help them sift through the many products available on the market.

WHAT SHOULD INVESTORS BE LOOKING FOR WHEN USING A MORTGAGE PROFESSIONAL OR BROKER?A good mortgage professional should be experienced and able to work with you to find the best loan option or, more specifically, the most suitable loan structure for your individual needs.

They must be able to listen to you so they can fully understand both your short and long-term goals because that will determine the best mix of rate structures, loan splits and product features.

They should also take into account your tax situation and find tax efficient options for you. Of course competitive rates are a must and a good broker should be able to find you the best rate possible but it is not necessarily the most critical factor in making a choice of loan. A good broker doesn’t provide loans simply based on rate, they provide the loan that most closely suits your needs.

Thinking of an investment property? Make sure you have the right loan with our FREE loan health check valued at $600. One of our expert mortgage professionals can review your loan to help you achieve your financial goals. Click here to organise a session or call 1300 664 339.

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