Wednesday, 5 December 2012

DHA and NRAS do they need ASIC intervention?

Below is an article published in The Advertiser on 1st December 2012. It vindicates what i have been saying in my Seminars for over 12 months. The article is brief on the pitfalls of NRAS but clear on the fact that they are not good investments. If anyone is interested in the remainder of the pitfalls please message me here or give me a call.
Help us put these property spruikers out of business by passing this message along...



Time ASIC eyed Government role in pushing dodgy property to unwary.

By Monique Wakelin and published in The Australian 1st December 2012

ASIC Commissioner Peter Kell recently told The Australian that self-managed super funds should not be “the preferred vehicle for dodgy property spruikers”.

To show it means business the Australian Securities Commission is establishing a task force on aggressive marketing of speculative property developments.

But while ASIC is to be applauded for its proactive stance on the issue, is the Federal Government guilty of sending out mixed messages about investing in property?

I am afraid that while ASIC is on the lookout for dodgy property spruikers, other arms of the Federal Government are spruiking dodgy property to unwary investors.

The most high-profile example is Defence Housing Australia. This offshoot of the Defence Department is tasked with accommodating defence staff and their families. Typically, it builds or sources properties within 30kms of Defence facilities, sells them to investors at a non-negotiable price, leases them back and manages the property on behalf of the investor for a fee.

I am wary of Defence Housing properties as an investment. The buy-in price is often artificially inflated and the property management fees are very high at about 16%, twice those for conventional property management by Real Estate Agents or other property managers. You can only sell to another investor, which means homebuyers who represent 70% of the market are excluded. This limits resale value.

But my greatest concern with DHA properties is that most of the properties have been built in low land-value areas which are not prime prospects for capital growth – the main game when it comes to selecting investment property.

While you may find rare examples of DHA housing showing satisfactory capital growth, the DHA’s mission is to provide housing for our Defence personnel and not necessarily to provide investors with the best possible investment property.

Don’t be lured by guaranteed rental income or perceived tax advantages that often go hand in hand with these kinds of properties. Often these incentives are factored into the purchase price and/or management costs.

What happens if Defence downsizes in your area? Once your contact with DHA expires you and many other Defence Housing investors may find it hard to find willing buyers or tenants.

But there’s more. The National Rental Affordability Scheme (NRAS) is a government initiative to increase the supply of affordable accommodation by providing a financial incentive of $10,000 per property to investors who lease their property out at a rent of 20% or more below the market rate.

NRAS is a wholesale investor initiative that is open to developers building large numbers of properties rather than the retail residential investor who has just one property to lease out. It is however, possible for an individual to get involved by buying an NRAS property from an accredited developer and having the NRAS credits passed on to them so long as they continue to meet the “affordable rent” criteria.

I warn investors away from NRAS investments because in order to meet the NRAS criteria, the properties, just like Defence Housing, tend to be in areas with lower land values and poor capital growth prospects. Yes, the combination of rent and government incentives might provide a high yield, but your capital would be better off in an area where capital growth is strong.

Once again, I fear that investors see the government involvement as a stamp of approval for these investments. It’s not.

The reality is that investors are now being wooed by advisers to use their SMSF’s to buy DHA and NRAS properties. To my mind, these properties are wholly unsuitable for this investment purpose. If this situation is allowed to continue, we are sowing the seeds of a crisis that may well be reaped during the next downturn.

Mr Kell, it’s time to turn your attention to the complicity of government in promoting dodgy dealings.

NOTE:  I have republished this article because NRAS properties are being heavily promoted on radio and TV as good investment opportunities. They are generally not.
The prices are often inflated and they are often located in areas that are already over supplied.
Long term these areas could become ghettos and NRAS properties virtually worthless. This is not something that we have ever seen in Australia but we need only look the US to see what happens when builders and developers are given free rein to build as many houses as they can with Government supported initiatives.
Property is a good investment dont let a few bad eggs spoil this investment. Do your part and let people know.
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Wednesday, 14 November 2012

Is it time to consider investing in commercial properties?

With our residential property markets in a slump over the last few years, some investors are wondering if it’s worthwhile considering commercial property as an alternative.
So lets take a look...
Potential investors see that these are the type of properties owned by people in the BRW Rich 200 List and the big institutions; and they hear of high rental yields, long term leases and tenants paying the outgoings. This makes commercial property sound very appealing.
So let’s do a Q&A to find out a bit more about this asset class:

Q: What are commercial properties?

A: Commercial properties consist of shops (retail) factories and warehouses (industrial) and office space (commercial).

Experience shows that commercial real estate has both historically, and in our recent times of economic turbulence, have proven to be significantly more risky for investors than residential real estate because of businesses (potentially your tenants) failing and/or closing down.

Q: What’s the fundamental difference between the 2 types of investment?

A: They are very different investment vehicles. Residential property is a high growth, low yield investment while commercial property is a higher yielding but low growth investment.

The values of commercial properties are yield driven rather than demand driven in residential property and the values fluctuate over time related to yields available from other competing investments and the prevailing interest rates of the time.

With most commercial rental leases increases are usually pegged to the rise in by C.P.I. Your rent therefore increases at around 2% or 3% each year. This has the effect of stifling your capital growth. Then when the economy falters and businesses languish commercial property tends to be out of favor because of the risk of your tenant going broke and hence they drop in value.

Q: If the total return is similar, why not go for the investment with the higher cash flow, in other words commercial investments?

A: The fundamental job of property investors is to build themselves a substantial asset base to one day create a “cash cow/machine” to replace their personal exertion income. This is much easier to do with capital growth that can be refinanced and which is not taxed, than with cash flow from commercial rent which is taxed.

Q: How else does commercial property investment differ from residential real estate investment?

A: There are considerable differences between the two types of property which may make them a less safe option for beginning real estate investors:-

  • Commercial properties tend to yield a higher return than residential properties – usually between 7% and 10% net compared to residential properties which yield 4.5% to 5% gross (then you subtract rates taxes insurance etc. to net about 3%).
  • Professional investors investing in Commercial property require a higher rental return to make up for this type of property’s inferior capital growth and the longer vacancy factors.
  • With commercial properties the tenants usually pay all the outgoings such as rates, taxes and insurance. But this merely offsets the lower Tax deductions for Depreciation available on residential property.
  • Because your tenant conducts their business from your commercial property, they tend to look after it better by maintaining the property including painting it and most leases require the tenant bring the property back to its original condition at the end of the lease.
  • Leases for commercial properties tend to be for longer periods, often 3 to 5 years as opposed to the one year lease you can get from a residential tenant.
  • However when vacancies occur in commercial properties they are often for considerably longer periods than the week or 2 you may have a residential property vacant. How often have you seen a shop in your local shopping center vacant for months or even years on end? And when you do find a tenant you often have to offer them an incentive such as a rent free period or a free fit-out to entice them to lease your property.
  • Lenders will usually only lend up to 70% of the value of commercial properties and I don’t know of any mortgage insurers who will lend on commercial property because they consider them to be higher risk.
  • Interest rates for a loan on commercial properties are usually higher than for residential properties- sometimes around 1% higher.
  • Investors need significantly more equity to purchase a commercial property. Partly because a bigger deposit is required and also because a good commercial property usually costs significantly more than a house or apartment. Sure you can buy cheap shops or factories in secondary centers, but they will usually have secondary tenants who are more likely to go broke and leave you with a vacancy.
  • The cycle for commercial properties is different to that for residential properties and is more dependent on the general economic factors than the residential market.
  • The lease required for a commercial property is a much more complex and is often prepared by a lawyer and at significant cost.
  • It’s easier for the average investor to pick a top performing residential investment. Most know what to look for in a residential property but few would know what a tenant looks for in a good commercial or industrial property unless they have conducted their own business from one.

In summary:
There is a place for commercial property in an investment portfolio but it is more suitable for investors who already have a substantial asset base and have transitioned to the cash flow stage of their lives. It is important to remember that it is higher risk and requires a differnet set of knowledge and skills to make it work for you as an investment vehicle to secure your future.
But it makes a great investment to consider in your Self-Managed Super Fund if you have substantial equity within the fund.

Tuesday, 23 October 2012

Are the Media your investment adviser? Are you sure?

A lot of people get their investment advice from the Media by default and that worries me and should worry you.
Sometimes it is because we believe what we read and sometimes because the short term nature of news causes us to have doubt about the long term viability of property and hence we don't do anything for fear of making a mistake.
Believe me they don't write articles to help anyone make wise investment decisions. They write articles and produce the nightly News, to sell advertising.

The investment arena is full of misinformation so to do my part to help clarify it, here are some things I think investors should never forget when it comes to the Media.

The media have a huge disadvantage...
Unlike me, where I can write an article when there is something worth writing about, the Media have to produce something worth reading/talking about every single day.

Can you imagine how effective a headline like “Nothing to report today… situation normal” would be at selling advertising. It probably wouldn’t sell many papers... or get you to watch the nightly news. (Actually it probably would if someone did it, just once, but beyond that, probably not).

So the problem for the Media is they have to produce something sensational to get your attention, even if there is nothing sensational happening that day. As a consequence a slight rise in an investment market becomes the beginnings of a boom or a slight fall becomes “the bubble is about to burst”.

For the Media there is only “boom or bust”, there is no in between. And yet, the reality is 90% of the time is neither boom nor bust.

Out of the last 112 years of residential property investment (that we have records of), only 11 years have had a negative return. As an investment, I am sure you would agree, that's pretty good!

The 24-hour news cycle is built for people who can’t see more than 24 hours ahead. That’s why a long, slow, but very important rise is rarely mentioned.

Then there are the Economists who want to see their name in lights or maybe want to take the focus off the fact that they failed to predict the GFC, so they declare, "The Real Estate Bubble is about to Burst” and it becomes a MUST READ - BREAKING NEWS. That was 4 years ago and it was going to be a drop of 40% in the next 12 months. We saw a rise of over 20% in the 12 months following that comment.
Or recently "The Mining Boom is Over"...
Not a month earlier they were reporting that the Mining Boom was here for the next 30 years.
So sorry, but they have no credibility with me.
  • Non-existent ie ingnore it all, don't listen and don't read it. (there are now many people that feel this way) Put it in the Fiction Section with Lance Armstrong's book.
  • OR
  • Something that incrementally help you understand how the world works but rarely compels you into action.
After all, how many of the items that we see every day will be important to investors in 5 years time?
Sure, short term, the articles may be useful for employees, customers, suppliers and other interested parties for whom the short term does have relevance, for jobs, sales orders and deliveries etc. But for investors, they are at best irrelevant and at worst a distraction that leads to poor investment decisions.
A well known journalist Derek Thompson recently wrote:
I'ver written hundreds of articles about the economy in the last 2 years, But I think I could reduce those thousands of words to one sentence, : "Things got better slowly".
That's all you need to know. The rest was just noise.
For investment decisions on residential property you need to trust that property goes up in value while there is more demand than there is supply. When property stops going up our economy is in a really bad place and whatever you have invested in, will still be in a worse situation than property.
So look for properties that are in long term quality locations and buy as many as you can afford.

Monday, 22 October 2012

Bank Valuations – What’s with them right now?

We have had some amazing valuations lately…

With variations of over 20% on the same property, with the same valuer, but with different Banks, so what is going on?

On one property alone recently we have seen valuations of; 2 lenders at $300,000, 1 of $330,000, 2 of $340,000, 1 of $350,000 and 2 at the Contract Price which was $365,000, with a valuation of $300,000, $340,000 and $365,000 from the same individual valuer. It was actually different properties but they were all identical and all within a block of each other and on the same size land.

Explain that to me?

Bank Valuation 101.

The valuers job is to assess risk for the bank.

It is important to note there is a distinction between the way lenders value a property and the true market value.

True market value can only be assessed by a “willing buyer and a willing vendor” however in the past the lender valuation has always been close, because it has previously been based on previous sales of a similar property in a similar area, without caveat.

More than ever our lenders are placing caveats on valuations by way of “instructions” all possibly driven by profit at any expense.

Lenders have outsourced the overhead of valuations to commercial valuers but still control the valuation process with “instructions” to the valuer.

If a loan goes bad and the banks are not able to recover their principal and costs, then valuers are at risk of getting sued. Yet they are paid peanuts to do the valuation so the commerciality comes into it too, for the valuation firm.

So when undertaking a valuation, the valuer must take into consideration a number of factors not the least of which is, how much they are getting paid for the time spent on it. Hence they might give the task to a new or less experienced valuer and therefore they must consider the terms of their Professional Indemnity Insurance.

Nowadays Bank valuations are not generally based on true market value of a property, but are rather based on the level of risk to the valuer and to the bank.

Valuers take their “instructions” from the bank.

Right now banks are cooling the market, with tight lending criteria and they do that by limiting valuations. When you go to borrow money, the instructions will more often than not (these days) come through from a lender that may force the Valuer to use certain “indicators”.  For example the value of a brand new property may be valued significantly lower than expected as it may be based on using only second hand properties as sales data. Or perhaps previous sales of old homes in an area that is going through re-gentrification where the old homes are really land value only.

Over exposure in certain areas:

Banks have exposure limits in areas and even complexes. In other words, if a particular lender has lent too much in a postcode, they will restrict further involvement or at least offer less favourable terms.

Lenders Mortgage Insurers (LMI’s) have exposure limits in areas and even complexes. In other words, if they have lent too much in a postcode, they will restrict further involvement.

So funders don’t chase business away, they use guidelines and instruction to control the outcome.

No Bank wants to chase away business so they will rarely say “No” but what they will do is make the loan more attractive to their business guidelines by lowering the LVR.

LVR an acronym for “Loan to Value Ratio”

LVR is basically the amount you are borrowing, represented as a percentage of the value of the property being used as security for the loan. Lenders place a large emphasis on the LVR when assessing your loan application. The lower the LVR, the lower the risk is to the bank and hence the lower their cost on that loan and on their Book in general.

Question: Would it be plausible that a lender would advertise that they will do 95% LVR loans yet rarely lends that amounts over 80% LVR?

Absolutely, and they can achieve that by giving “instructions” that result in a lower valuation.

LMI (Lenders Mortgage Insurance)

When a loan has a LVR of less than 80% then the borrower doesn’t pay mortgage insurance. Lenders still insure all loans so in the case of a LVR less than 80% the Lender pays the premium.

If the loan is greater than 80% then the borrower pays the LVR.

* Would it also be plausible that a particular lending might instruct the valuers in such a way that it elicits lower valuations so that the lender does not have to pay as many insurance premiums? Absolutely! That way you pay for their risk.

NOTE: Nowadays you just can’t tell whether a valuation is realistic or not until you see the valuation and try to understand what the Lender is trying to achieve.

Thursday, 18 October 2012

Housing Stimulus Package announced by SA Govt.

This week saw the announcement by Revenue SA of the Housing Stimulus Package to boose the SA Housing Construction Industry.
This time the handounts are available to investors as well as first home buyers...
Below is the actual detail from Revenue SA and as you can see there is no mention of it not being available to people who already own an investment property or two. Still I have sought clarification.

If you are interested in finding out more about the stimulus package and how best to apply it or if you are considering an investment in residential property please give us a call or <click here>

From: DTF:RevSA Taxpayer Education & Communication
Sent: Monday, 15 October 2012 2:50 PM
Subject: Increased Government Assistance for New Home Buyers

Today, 15 October 2012, the Government announced that they have retargeted their home buyer assistance by:

§         increasing the First Home Owner Grant (FHOG) for new homes from $7000 to $15 000 (ongoing) for contracts entered into on or after 15 October 2012;

§         reducing the FHOG for established homes from $7000 to $5000 for eligible contracts entered into between the date the necessary amending legislation comes into force and 30 June 2014. The FHOG will be abolished for established homes from 1 July 2014; and

§         replacing the $8000 First Home Bonus Grant with a Housing Construction Grant (HCG) of $8500 for all new home construction where contracts are entered into between 15 October 2012 and 30 June 2013 inclusive. The HCG will be available for properties valued up to $400 000, phasing out for properties valued up to $450 000.

First Home Owner Grant

From 15 October 2012, new home purchasers are entitled to a $15 000 FHOG. This measure is ongoing.

Purchasers of established homes will continue to be entitled to a $7000 FHOG until the necessary amending legislation comes into force.

From the date the amending legislation comes into force and 30 June 2014 purchasers of established homes will be entitled to a $5000 FHOG.

From 1 July 2014 no FHOG will be available to purchasers of established homes.

The FHOG property value cap of $575 000 will continue to apply for all FHOG applicants.

Other than the changes above, no other criteria will change.

First Home Bonus Grant

The $8000 First Home Bonus Grant is abolished for all contracts entered into on or after 15 October 2012.

The First Home Bonus Grant will still be available for contracts entered into between 1 July 2012 and 14 October 2012.

Housing Construction Grant

The $8500 HCG is available for new home buyers and owner builders, and, including investors, who are purchasing or building a new home valued up to $400 000, phasing out for properties valued up to $450 000.

The HCG applies to contracts that are entered into between 15 October 2012 and 30 June 2013 and to owner builders where construction of the new home commences on or after 15 October 2012.

The HCG will be available to natural persons, companies and trusts and there is no limit on the number of grants available, regardless of whether a person purchases or builds a new home alone or together with others.

Previous recipients of FHOG grants are also entitled to the HCG on purchasing a new home. First home buyers of a new home will receive both the $15 000 FHOG and the $8500 HCG provided all eligibility criteria are met.

New Home

New Home means a home that has not been previously occupied or sold as a place of residence and includes a substantially renovated home. There is no change to this definition.


Initially all applications for the HCG (including by first home buyers) will need to be made via RevenueSA. An application form will be available as soon as possible.

Applications for FHOG can still be made via Financial Institutions and it is planned that systems changes to reflect the new arrangements in FHOG online will be in place in the near future.

Internet pages, publications and forms will be updated as soon as possible to reflect the revised arrangements.


Kristy Ferguson
Taxpayer Education & Communication

phone: (08) 8226 0193  fax: (08) 8226 3788
GPO Box 1353, ADELAIDE  SA  5001
Level 2, State Administration Centre, 200 Victoria Square, Adelaide 

Sunday, 14 October 2012

Is Property a Safe Investment?

I did a bit of research on a particular investment and was surprised at what I found...
The figures that I'm quoting date back from 1900 to 2011, so it
not a recent trend, it's been around for a while and that's a good thing. It is not a get rich quick scheme.

After reading this I want you to think...
Would you invest in this asset class based on the following historical results? 
So here we go...

In the last 111 years, this investment has only had 11 negative years. That's just 1 in every 10 years producing a negative return... Ten years is a long time to have just one losing year!

The worst of those years was 1930 with -18%, but remember what happened back then; The Great Depression was not the best time for any investment!
Since that period the average losses in the bad years for this investment has been only around -5%, remembering that the other nine years were all positive.

How positive?

Well of the 111 year history, 100 of those years produced at least 1% return or better.

But 24 of those years produced 10% or more…

And 13 of those years produced more than 15%, often in the return was in the mid 20%’s…

The best of the lot was 1950, that year produced a whopping 133% return.

I'd love to tell you why that year was so good, but I don't know. Maybe it had something to do with the end of the war or maybe a late recovery from the Great Depression which ended in the mid-40s. But no one will ever know exactly why.

In the entire 111 year history the average return has been 6.9% annually... Not bad!

That is doubling every 10 years and is probably given you a hint as to what the asset class might be.

So, if we go back a step and we consider that in 1 in 10 years, you have an average loss of less than 5% and the rest of the ten years, you get an average growth of 6.9%, you're way ahead. Actually the average of 6.9% takes into account the losses as well. So it is pretty solid!

But there is more… Here are a few other interesting observations:

o   There was hardly ever a period of 2 years in a row with negative returns and immediately after a negative return you get higher than average positive returns. A “recovery to the norm” so to speak.

o   This investment can go for 10, 15, even 20 years with positive, back to back gains before you see a loss.

o   If you invested $226,000 invested in this asset class in 2001 it would be worth $485,000 in 2011 ...that's a 125% gain in a period that included the 2008-2009 Global Financial Crisis.

So back to my question when we started out, would you invest in this asset class?

With 111 years of strong history on your side, it’s a yes or no proposition.

OK, enough suspense... the big reveal...  What asset class is this?

Have you figured it out?  It’s REAL ESTATE!

Now, I didn't make these figures up, I got them from the REIA (Real Estate Institute of Australia).  

So what do you do now with all this information?

You can be influenced by all the noise, opinions, doom sayers, and the Media out there and do nothing. And by the way that is a very natural human response to risk. It’s the fight or flight response that is programmed into our brains. Every day you'll hear reports of property bubbles about to crash, inflated prices, unsustainable growth, etc, etc, etc. so it is quite natural to be concerned.

Or you can use 111 years of historical fact and figures to realise that long term the risk is less than it is being made out to be, and that the negativity comes from looking at too short a period of time. And the Media are good at that!

If you can see the long term view then you can move forward and be part of a great investment opportunity. If you can’t then blame the Media.

Now, I'm not saying that you can't lose money in real estate; there are plenty of opportunists out there ready, willing and able to take your money, if you are not wary, but if you're smart, do your research, find someone you can trust and invest for the long-term it's pretty hard not to make substantial gains.

The quicker you get on board the better for you in the long run.
NOTE: Compare that to other asset classes during the GFC which saw the Stock market fall by 46% in the first 12 months and falls of 5% or more are possible on a daily basis.
If you want to know more please call or join us at one of our Property Seminars...

The next seminar is tomorrow night 16th Oct 2012

Click here to register

Friday, 12 October 2012

Investment Property Finders is different to most property marketing businesses in that we have a Financial Planning background.
That means that we are ideally suited to assist you plan your future... others just sell property.

With nearly 20 years of Financial Planning background and 8 years specialising in residential property we have a wealth of experience to assist you build a property portfolio with a minimum impact on your existing lifestyle.
We have strategies to use that portfolio as your asset base to provide additional income before retirement or the lifestyle you have been looking to achieve in retirement.
We are continually researching the market and our existing client base to come up with strategies that will help you make money, pay less Tax or find the right property or combination of properties.
As we discover and after testing we will post our findings here.