EMail Newsletter

June 2006

"The Bottom of the Market has Arrived"

At least that’s the claim from an advertising blurb that I received on my desk last week. As it happens, it came from an organisation that sells Real Estate to Property Investors (hmm).

Something I learnt from many years of share trading is that you will never pick the absolute bottom and you will never pick the absolute top of the market. In years to come when the property prices have doubled (as they always do), whether you paid $400,000 or $420,000 for your investment property will seem irrelevant.

However, if you are waiting for the market to "bottom out", don't wait too long.  Remember what property prices were like 10 years ago.  In 2016, 10 years ago will be 2006.

Defence Housing

If I had a dollar for every client who asked me about Defence Housing I wouldn’t be here writing a newsletter on a holiday Monday. For those who don’t know, Defence Housing is where you buy an investment property from the Defence Department and they lease the property back from you, usually on a long-term lease.

People generally look at defence housing for a number of reasons:

• They get a guaranteed rental income for 52 weeks of the year

• The defence department looks after much of the maintenance that would usually be the responsibility of the owner

• The defence department paints the house at the end of the lease and makes sure the house is returned in good condition.

Here are a few points to consider:

Vacancy Rates
People hear about vacancy rates of between 2% and 5% and imagine that for every 100 people with an investment property, 5 are without a tenant. In fact, if your property is vacant for 2 weeks out of 50 then it will have been vacant for 4% of the year. Your property gets leased out and then it’s someone else's turn to become the 4%.

Defence Housing v Regular Housing
The 52 weeks of rental income is often attractive to anyone considering defence housing. However, the defence department also charge a very high management fee of around 16% (compared to regular management fees of around 4% to 7%). A regular house (48 weeks of rental income and 7% management fee) can often provide more income per year than a defence department house (52 weeks with 16% management fee).

Resale of the property
A regular property can be sold to either an owner-occupier or property investor. If your Defence House is still under a long-term lease you will only be able to sell another investor.

Summary
Defence Housing is a perfectly good investment and you are guaranteed a rental return and a tenant that will look after the property. I believe the unusually high enquiry rate for Defence Housing is due to the fear of not being able to find a tenant. Once investors take a closer look at the details they tend to steer more towards a more traditional investment property.

Why Doesn't the Bank like my Property?

We often get approached by people looking for finance to purchase a property that falls outside what I’d describe as a traditional “house in the suburbs”. This can range from a small Inner City Bedsit to a few hundred acres in the country. They are often surprised to learn that the banks do not necessarily view their potential purchase through the same rose coloured glasses that they are using.

Just because a bank is not keen to take the property as security does not mean that the property is a bad investment. The banks are simply looking at two factors:

1. How quickly could I sell the property if I needed to?

2. How much would I get for it?

For example, a serviced apartment under a long-term lease can only be sold to an investor. Therefore, a regular apartment is easier to sell and is viewed as a better security. There are also less potential buyers for 200 acres in the bush than a standard house Sydney

In general, the larger lenders are more willing to lend on some of the more exotic properties than some smaller lenders. If a loan requires mortgage insurance, the insurers will have different rules to many of the lenders.

• Some properties are not acceptable to particular lenders. For example, many lenders won’t lend in flood prone areas, hobby farms, warehouse conversions etc.

• Some properties will have reduced LVR restrictions. For Example, some lenders will only lend 75% on Inner City Apartments while others will go higher.

• Some properties have other restrictions. For example some banks will only do rural properties to 5 acres while others will do a few hundred acres.

• Some properties are location specific. For Example, must be within 10km of a town with 10,000 people. Some locations are considered risky due to over-supply and instability in the market. Docklands in Melbourne and Pyrmont in Sydney are two examples.

• Some loans will be done by very few lenders. For example, Owner Builders are not very popular with most banks due to their tendency for cost blowouts.

So, if you are buying anything other than a BSH (Bog Standard House) it is best to check with us before you sign on the dotted line. As well as looking at the investment potential of a property, you also need to check the suitability of that property as a security for your finance. This is particularly important for Off the Plan purchases.

People have also sorts of wild ideas regarding how they are going to finance the purchase and how they are going to pay the deposit, much of which is not based on reality.