Following on from that trend, as with any asset class, real estate comes with its own set of cautionary tales about the potential hazards and pitfalls. Many things can go wrong and the risk is amplified if you leap in without first seeking professional advice and devising a sound strategy and investment plan. But does that mean you should avoid property investment entirely? Of course not, says Michael Yardney, from Metropole Properties, and in today’s show he details why.
Kevin: Like with anything in life, everything comes with risk. So, too, does property investing.
I’m going to talk to Michael Yardney now. He wrote an article recently that was featured on our site about how you can reduce some of those risk factors involved in property investment.
Good day, Michael. How are you?
Michael: Hello, Kevin.
Kevin: Michael, of course, is from Metropole Properties and is always a regular on our show.
Take us through the things that you find that can actually reduce our risk exposure.
Michael: I think this is a good topic because it’s one of the things that holds people back. They’re worried about all the things their mates tell them can go wrong, and so therefore they don’t go ahead. That’s not a reason not to invest. I think it’s important to know what the potential risks are and be prepared for them.
Kevin: What’s the first one?
Michael: One of the big ones that people are scared of is vacancy. They’re worried that the property is going to be vacant for a long period of time and they’re not going to have rent coming in and they’re not going to be able to pay the mortgage.
Even today, current vacancy rates are a little higher than normal, and that means rents aren’t moving up much, but if you price your property correctly – and if you have the right sort of property – then vacancies shouldn’t be more than a couple of weeks.
I guess the way you minimize this is buying the right sort of property in areas where there’s a wide range, a reasonable demographic, of potential tenants. That’s why I avoid mining towns, regional areas, and holiday locations, because that’s where you tend to get the large fluctuations when there’s sometimes lots of people and sometimes hardly anyone wanting to rent your property.
Kevin: Also with commercial property, I would think?
Michael: Much the same, too. You want to be in the main roads where there’s always going to be lots of people walking past to help pay the rent for the tenant of your property.
Another way of minimizing the vacancies is having a good property manager who is up to date, proactive, has all the latest software, and can get your property let quickly.
The last way, of course, is to make your property appealing. Increase its appeal by always keeping it spick and span, up to date, looking nice and appealing.
Kevin: Talking there about property managers, getting the right kind of tenant and not a horror tenant is pretty important, too.
Michael: I guess we’ve seen those shows on A Current Affair where they chase the bad tenants down the street because they trashed this little old lady’s property. Unfortunately, there are some tenants who let you down, but having a good property manager select tenants is important.
The other thing is having insurance to protect yourself against this is another way of making sure that you’re not going to be caught out by the horror tenant.
Kevin: Some people are also very concerned about some of the things that might occur that we don’t expect to happen – like being unemployed, for instance.
Michael: That’s one of the issues that scares people. “If I take on this big financial commitment by buying an investment property, what can go wrong?” That’s the reason I always talk about having a financial buffer in place. Apart from protecting the property, you also have to protect yourself and your finances by having a bit of a line of credit or an offset account where you have some money for those little surprises.
Also, having adequate insurance – for not just the property, but also yourself. It may seem like a bit of an expense today, but if things go wrong, having that insurance is going to get you out of hot water.
Kevin: Talking about that buffer, Michael, what about chasing interest rates?
Michael: I guess what’s happening is that people are committing themselves to investments now in a low-interest-rate environment, but this too shall pass and the way of the economic world is that interest rates will go up again. One way of protecting yourself is having a buffer, as you correctly said. Another way is to consider locking in a portion or all of your interest rates at the moment, and that will give you a level of security.
What we’re really doing is running through the concerns people have about getting involved in property, and as I’m trying to show, there are ways of minimizing them.
Another big one is unexpected maintenance issues, because things do go wrong even in new properties. You have to set aside a budget. One of the mistakes investors make is not leaving aside a bit of money each year for the hot water service that blows, or something else that goes wrong, and every five or seven years, you might have to paint the property, and every ten years, you may have to put new carpets in. So, be prepared for it, budget for it, have that buffer, and you won’t get caught out.
Kevin: What about the highs and lows of the market, Michael?
Michael: That’s another thing that scares investors. At the moment, everybody is on a bit of a high and the property markets are doing well, but wealth creation is a long-term strategy, and therefore investors shouldn’t be scared by the ups and downs of the market. They should be prepared by buying only investment grade properties, those that are going to be stable.
So again, buying in the big capital cities where there are multiple pillars of the economy and wages underpinning their property values growth. That’s going to ensure that they’ll be able ride through the ups and downs, as opposed to buying in mining towns, regional towns, or other areas where when property values plummet, it gets pretty scary, Kevin.
Kevin: Just before I let you go, have you got time for a couple of quick questions?
Michael: Of course.
Kevin: Okay. One is from Brad, who says, “How do you claim the LMI and interest on line of credit that you set up to buy an off-the-plan property?”
Michael: First of all, I’d be saying to Brad to be really careful about buying off-the-plan properties at this stage of the cycle, but that’s a totally different question.
Kevin: Is this an accounting question, Michael?
Michael: Yes it is, but you don’t actually have to pay lender’s mortgage insurance until you take your loan, which doesn’t actually happen until you’ve settled your property. Therefore, if you’re putting a deposit down to buy an off-the-plan property that will settle in two or three years’ time, it becomes part of the loan when you settle, when you start getting income in, so it’s just a normal tax deduction.
Kevin: Wonderful. Another quick one from Katrina: “Can you please address the effect of granny flats on principal places of residence and resale – particularly when you own and then go overseas and want to use the six years CGT exemption to sell when you have the flat in the backyard?”
Michael: Quick disclaimer, Kevin: I’m not an accountant, so I can’t give the CGT advice. But the answer is that a granny flat on your principal place of residence will devalue it. It’s going to make it less appealing to a wide range of tenants – not everybody wants somebody in their backyard – and it will make it less appealing to purchasers in the future.
The next comment that she asks is, “Has this now changed the nature of my home to make it now no longer my principal place of residence, and may I have to pay some capital gains tax?” I guess, in truth, it has changed the nature of it. How does that impact the capital gains tax? I’m sorry, Katrina; I think you’re going to have to ask your accountant. That’s a very specialized question.
Kevin: It’s a very good question, too, and it’s one that I think a lot of people probably haven’t even thought of, Michael.
Michael: That’s right, but when you change the nature of your property, it’s no longer your principal place of residence. If, for example, you use it for business, for your home office, or for other things, that portion that isn’t your principal place of residence usually does not get the capital gains tax exemption. You have to pay some extra capital gains tax, and it could well be the case with your granny flat.
Kevin: Good talking to you. Michael Yardney from Metropole Property Strategists. Thanks, Michael.
Michael: My pleasure, Kevin.