Spend Less with the Right Tactics
Information goes a long way when you’re buying an investment property in Australia. Without information, you can’t prepare for the negotiations. This is when you sit down with the seller to try and find the right price for your investment property in Australia.
However, the information you have isn’t the only weapon in your arsenal. There are plenty of other tactics that you can employ to get a good deal. With that in mind, we’ve come up with five hot investment property tips for beginner negotiators.
Tip #1 – Learn as Much as You Can About the Seller
You may think the state of the property market would make it impossible to negotiate a good deal. If property prices are going up, it’s easy to assume that all sellers you meet will ask for more money.
However, this line of thought doesn’t take the seller’s situation into account. You need to find out everything you can about the seller when buying an investment property in Australia. For example, do you know the reason why the seller is getting rid of the property? If not, then you need to find out.
Many people sell because they’re in distressed situations. They may be in financial difficulties, or need to sell quickly to fund a new purchase. You can use this to your advantage and negotiate a better deal. After all, a motivated seller is one who will listen to lower offers.
Tip #2 – Sweeten the Deal
This ties into our first tip. Sometimes, a seller wants something really specific, which will make your bid for their investment property in Australia more attractive.
Consider the following example. The seller is currently going through a divorce. It’s a heartbreaking and emotional situation, but they really need to sell their property before the divorce is settled. As a result, that seller may be looking for a buyer who can help them settle the sale quickly, so they can get on with the rest of their life.
That’s where you come in. If you limit the terms attached to the transaction, you can speed up the process. That gives you some leeway to negotiate a lower price with a seller who wants to get rid of a property quickly.
Tip #3 – Get Pre-Approval on a Home Loan
Sellers love serious buyers. If you enter negotiations knowing that you don’t yet have the money to make the purchase, you’re going to sour the seller to any offers you might make.
This means it’s best to get pre-approval on a home loan before you try to buy an investment property in Australia. Lodge your application and ask your lender to provide proof of the pre-approval.
You can then take this into your negotiations. Having pre-approval shows that you’re a serious buyer who wants to move forward. This will make the seller more willing to negotiate terms with you, which could be your pathway toward making a lower offer that saves you some money.
Tip #4 – Make the Right First Offer
The first offer you make on your investment property in Australia is crucial. Go too low, and you may insult the seller so much that he or she stops taking you seriously. Make a high offer, and you may end up spending more than you need to.
This is where your research is going to help. Find out how much similar properties in the same area are selling for. You can use this to get an approximate figure for the value of the property. Compare this to the seller’s valuation to ensure you’re both on the same page.
From there, you need to make your offer. It’s usually best to offer somewhere between 5 and 10% less than the seller’s valuation. This shows you’re a serious buyer, while giving yourself some wiggle room if the seller comes back to you with a higher figure.
Tip #5 – Don’t Mention Your Budget
Remember that your seller’s agent is going to try and extract as much information as they can from you. After all, they want to secure the highest possible price for their clients.
Talking to the seller’s real estate agent can offer you more information. However, it can lead to you giving away information that the seller could use against you.
The key is to not let the seller know how much you’re willing to spend. If they have that figure, negotiations are going to start at a much higher price than you had hoped for. Play your cards close to your chest, while still making offers that show you’re a serious buyer.
You Could Use Your SMSF to Save on Your Tax Bill
You can use a SMSF (self-managed superannuation fund) to buy an investment property in Australia. However, this has previously been quite difficult. Many lenders would not allow SMSFs to borrow money, which means they had to fund the full purchase themselves.
However, that changed after the 2017 Budget. Now, a self-managed super fund can borrow the money needed to fund the purchase of an investment property in Australia. As a result, those who previously couldn’t afford to use their SMSFs to buy an investment property in Australia now have a pathway to do so.
The first thing to remember is that you shouldn’t set up a SMSF solely to buy a property. However, having it available makes sense for a lot of small business owners. After all, a business owner can occupy the SMSF’s investment property in Australia, as long as they use it for business purposes.
However, managing an SMSF takes a lot of time and hard work. To help you along, we’re going to show you some of the secrets of using an SMSF for property investment.
You’ll need some money in your SMSF before you can use it to buy an investment property in Australia. How much will depend on your situation, but as a rough guide you should aim to have $200,000 available.
This will help you to cover the deposit and the fees associated with taking out a home loan. Furthermore, you’ll probably have some money left over for diversification. This is important, as investing only in property could come back to bite you if the market crashes.
The funds should come from every SMSF member. You don’t have to fund the entire thing yourself.
Know How Much You Can Borrow
Most lenders are still quite wary of lending to SMSFs. That shouldn’t come as a surprise, as many have only just started doing so following the 2017 budget. As a result, it’s unlikely that you’ll be able to secure a home loan with a loan to value ratio (LVR) above 80% of the home value.
In fact, most lenders prefer to offer 50% LVR on SMSF loans. Having a 50% deposit available for your investment property in Australia increases the lender’s confidence and puts the property closer to being positively geared.
Of course, you need to make repayments on the home loan once you’ve secured it. This is where the self managed super fund can really help an investor. You can use your super contributions, which you can deduct from your taxes, to make the repayments. The same goes for any rent or other payments that the SMSF receives.
As a result, you often won’t need to spend any of your own money to repay the home loan. Better yet, you can deduct quite a large portion of the repayments from your tax bill. Of course, it’s best to work with a tax professional to ensure you set up the correct structure for this.
The Tax Benefits
Let’s look at the tax benefits of buying an investment property in Australia using an SMSF in more detail. For one, the fund only has to pay a maximum tax rate of 15% on any income the property generates.
However, the bigger benefits come if you choose to sell the property. Assuming the SMSF has held the property for at least one year, you only have two-thirds of the capital gains tax (CGT) you would have paid on a property you personally own.
Better yet, both of these tax contributions disappear if the SMSF keeps the property until its members start claiming their retirement pensions. As a result, retired SMSF members can benefit from the property’s income, without having to pay any tax. They also receive larger lump sums if the SMSF sells the property because they don’t have to pay CGT.
Can Everybody Do It?
Property investing using an SMSF sounds appealing, and it can provide you with a lot of benefits. However, it’s not for everybody.
As mentioned earlier, you should avoid using your SMSF to invest in property if it doesn’t have a large sum of cash available. Diversification is crucial when investing, so you don’t want to be in a situation where your SMSF relies only on the property’s income. A lost tenant or property market crash could cause major problems.
Furthermore, those on low incomes should think twice about investing using an SMSF. Remember that you have to make regular SMSF contributions. These contributions benefit you when it comes to your taxes, but they’re also long-term benefits. You may struggle in the short term if you don’t have the money to make regular SMSF contributions.
You Could Bag a Great Investment Property in Australia at Auction
Trying to buy an investment property in Australia at an auction is something of a mixed bag. On one hand, you have the chance to snap up a bargain. A lot of sellers use auctions as their last resort. As a result, they may ask for less than the value of their property. As long as you don’t get caught up in the heat of the moment, you may get a great investment property in Australia at auction.
However, you also have to consider the other possibility. Auctions are emotional places. If you get caught up in a bidding war, you could end up spending more than you intended. That makes it much more difficult to generate a good return on your investment property in Australia.
So how do you get the most out of your visit to a property auction? We have a few tips that should help you.
Tip #1 – Prepare Your Finances
Did you know that you have to pay the deposit for any properties you win on the same day as the auction? There’s no cooling down period, which means you need to be prepared financially.
This means you need to prepare yourself financially for the auction. Firstly, make sure you have a budget, and enough cash available to pay the deposit relevant to that budget.
You also need to consider how you’ll buy the investment property in Australia. If you’re buying using a trust or self-managed superannuation fund (SMSF), you need to make sure it’s organised for the purchase.
Finally, lodge a home loan application and get it through to the pre-approval stage. This means the lender is confident that they’ll approve your loan, barring a couple of extra checks. Having pre-approval means you can feel more confident in your bidding. It also places you in a good position to negotiate if the property doesn’t meet its reserve price, and you’re the highest bidder. The seller will see that you’re serious about buying if you have pre-approval, which may help you pull the price down.
Tip #2 – Look the Part
Impressions play a bigger role than you might realise at an auction. There are going to be all sorts of people there, so you need to play to the crowd a little bit.
Make sure you look the part. Ideally, you should arrive in business wear, so you look like the investment professional that you are. Bring a small notebook to jot things down. You may not need to write anything important, but it’s a little thing that could make inexperienced bidders wary of you.
The key is that you need to look confident, so people think you’re an experienced auction-goer. If you look like you have money to burn, a lot of people will refuse to bid against you. This gives you a distinct advantage, so you may secure an investment property in Australia for less than it’s worth.
Tip #3 – Bid Early
Many people try to lodge late bids when buying an investment property in Australia at auction. This tactic seems to make sense. You wait until the last second before making your bid. You rattle the other bidder, which lends you an advantage.
That tactic can work, but it has some risks attached. If you leave it too late, you may miss your bid. The auctioneer will bang the gavel, and you’ve lost out on a great property.
It’s much safer to bid early. This puts you in the running straight away, plus the auctioneer will start paying attention to you. As a result, you may get a touch more time to make that last bid count. Furthermore, jumping straight in with a strong bid can unnerve your opposition. This can reduce the bidding pool, so you face less competition.
Tip #4 – Don’t be Afraid to Walk Away
Walking away from a property you want is one of the hardest things you may have to do. However, it’s sometimes necessary.
Remember that you have a budget, and that every property you buy has to offer a good return on your investment. The bidding may get heated, and there may be people who can top every bid you make. It happens. You just have to make sure to react in the right way.
Stay calm and walk away if it looks like you’re going to spend more than you’re comfortable with. This protects you financially and ensures you have more money left over for any other properties you may be interested in.
You can make a lot of great purchases at property auctions. However, you need to avoid getting caught up in the emotion of the event.
If you follow these tips, you’re sure to bag some bargains eventually.
Where should I buy my investment property?
Investors mostly focus on Australia’s biggest cities, overlooking the smaller capitals such as Hobart, Adelaide and Canberra. However, what is often forgotten, is that some of the best opportunities lie in these areas, if you know where to look.
Experts are increasingly naming Hobart as the place to buy. It has indeed already started to see growth after a long period of relative inactivity.
According to the latest CoreLogic RP Data figures, Hobart has seen more than 6% growth in dwelling prices over the past year.
It is the most affordable capital city in Australia. The median dwelling price is sitting at $335,000, some 25% lower than the next affordable city of Adelaide. It also has the highest rental yields, with returns of greater than five per cent.
While Adelaide’s growth isn’t as impressive, sitting at 3.9% for the year, many experts report that this market is also on the move. Canberra, meanwhile, has seen decent growth of 5.7% over the past year.
So where are the opportunities in these cities? We’ve drilled down to look at each market more closely, and where investors should be looking for the best buys.
Does Hobart offer the best growth potential?
Hobart is one city most investors would never consider, says Hotspotting.com.au founder Terry Ryder, but this could be the year it might “step up”.
“An increasing number of credible reports have identified the fact that it’s no longer a basket case; it’s growing,” he says. “It’s actually starting to lead the nation with certain indicators, which is something that hasn’t happened for 10 years.”
There has been some pretty solid price growth, Ryder says, but there’s still really good buying.
“There are a lot of reasons to look there. Prices are in the $300,000s, so it’s good value for money compared to what you pay in Sydney or Melbourne. In those cities you’ll be paying double or three times as much.”
Ryder says what’s really helping to drive the growth in Tasmania is its proactive State Government. He adds that the economy will be pushed along by tourism. It’s the main industry performing well there. Which is stemming from the low Australian dollar encouraging Australians to holiday at home.
The agricultural sector is also going well, says Ryder, in addition to the manufacturing and construction industries.
“There are a lot of quite significant new projects – there are new hotels, infrastructure and property developments,” he says.
Ryder says Hobart is the place to be buying in Tasmania. While Launceston is also a good, strong city, he says, in the long-term Hobart will be better for investors.
It’s a small city though, he says, suggesting investors buy close to work nodes and the airport.
He specifically names the northern suburbs as being a good spot to consider, particularly the local government area of Glenorchy, where he says there’s plenty of good buying.
Property lecturer and author Peter Koulizos names South Hobart as the place to buy. Pointing to its proximity to town and a campus of the University of Hobart in neighbouring Sandy Bay.
The opportunities in Adelaide
Koulizos believes Adelaide is one of the capitals investors should be considering buying in this year. He says growth is likely to be steady rather than huge. But will most likely be better than the other capital cities.
While Adelaide may not have the “economic oomph” of other states, Ryder says it is seeing growth. There is also a surprising amount of money being spent on infrastructure, including the $1.85 billion Royal Adelaide Hospital, due to open this year. As well as extensions to rail links and road upgrades.
“There’s also a major building boom happening with high rises around the city; that’s a massive generator of the economy there,” he says.
Koulizos agrees that there’s a huge amount of infrastructure being built, but he notes that on the downside there is the looming closure of Holden and other manufacturing plants.
Buyers’ agent and CEO of www.propertybuyer.com.au Rich Ha rvey, meanwhile, doesn’t believe strongly in Adelaide’s growth prospects for this year.
He says the city is usually a slow performer and stays somewhat under the radar, with no major impetus on the horizon to drive growth.
However, Ryder says Adelaide has a lot more going on there than it gets credit for and says its property market has “good momentum”.
“It won’t boom but it will have good growth, and investors should target the right areas with double-digit growth.”
What are those areas?
Ryder says it’s the middle market and the cheaper outlying areas that have the greatest momentum.
He specifically names the growing local government area of Onkaparinga, on Adelaide’s southern fringe, which he says has recently had some of the highest sales volumes in the city.
There’s improved transport infrastructure in the form of a rail extension and a duplication of the Southern Expressway in Onkaparinga, he adds, which has improved accessibility to and from the area.
According to Ryder there’s also good buying in Adelaide’s western suburbs.
“The swanky, upmarket areas are clustered around the eastern suburbs, but I think the western suburbs are really underrated,” he says.
“They’re between the CBD and the beach, and in close proximity to the airport.
“The suburbs with character housing for around $400,000 that are five to 10 minutes from the city or the beach are really good buying.”
Ryder says suburbs within the City of Charles Sturt in that general precinct have good momentum, particularly in terms of rising sales volumes.
He also names the City of Holdfast Bay, on the southwestern coast of Adelaide, as being a good area for investors to consider. Noting its affordability in comparison to the equivalent in Sydney and Melbourne.
Meanwhile, Koulizos says investors looking to buy in Adelaide should stick to the fundamentals of buying close to the city.
He names suburbs including Torrensville, Thebarton and Croydon, all just to the west of the CBD, as having potential for growth.
The type of housing that should be purchased in those areas, says Koulizos, is character housing or “period-style homes”.
“Ideally a house is better than units,” he says. Adding that size does matter but the most important thing is to get the location right.
Where to look in Canberra
The market in Canberra is bubbling along okay, says Koulizos. But he notes that what happens in the latter stages of this year will depend upon which party is victorious at the Federal Election. And whether employment is impacted, which in turn will impact upon the property market.
“Employment is fairly stable at the moment but the tradition is that a Labor Government will employ more public servants and a Liberal Government will shed them,” he says.
Koulizos’ pick for Canberra is the suburb of Braddon. It is close to the city centre, at a distance of just two kilometres north.
Ryder says the Canberra market was hit by the downsizing of the public service a few years ago. It is now showing signs of recovery with a turnaround.
“There was certainly a rise in activity in 2015 and it’s starting to show through in growth in prices,” he says. “Very much the base of the housing market is looking solid again.”
Ryder says investors looking at Canberra should consider the Gungahlin district, around 10 kilometres north of the CBD. He describes it as “solid”, adding that it will benefit from a planned light rail project.
To Repair or Not to Repair – That is the Question!
Is it a Repair or Capital Improvement
When you renovate a property, the builder will generally supply a Tax Invoice that outlines the amount owed and an overview of the work carried out.
If part of the work carried out is deemed to be a repair in nature, you can claim the total cost of the repair as an outright deduction.
BUT, if the work carried out is deemed to be a capital improvement – you must claim the cost of the work over 40 years at a fixed rate of 2.5% per annum.
Unfortunately, the determination of these works is not always straight forward.
So how can you determine whether it a repair or capital improvement?
The correct classification of the renovation can make a big difference to the bottom line for a property investor.
Generally, a builder is not thinking “How can I itemise this Tax Invoice in order to maximise my clients’ tax return?”.
That’s where Quantity Surveyors can help!
Quantity Surveyors, in my opinion, are well placed to assist in the determination of capital works items versus repairs, potentially saving property investors thousands.