{"id":3273,"date":"2015-01-09T12:00:15","date_gmt":"2015-01-09T01:00:15","guid":{"rendered":"http:\/\/realestatetalk.com.au\/?p=3273"},"modified":"2015-01-09T12:00:15","modified_gmt":"2015-01-09T01:00:15","slug":"how-to-know-when-your-property-is-a-dud-what-do-tenants-look-for-financing-renos-a-lesson-for-2015","status":"publish","type":"post","link":"https:\/\/channels.realty.com.au\/realtytalk\/how-to-know-when-your-property-is-a-dud-what-do-tenants-look-for-financing-renos-a-lesson-for-2015\/","title":{"rendered":"How to know when your property is a dud | What do tenants look for? | Financing renos | A lesson for 2015"},"content":{"rendered":"

 
\nThis time of year there is a good window of opportunity for those with underperforming properties in their portfolio to divest themselves of their lemons.
\nThe best way to uncover an underperforming asset is to annually review your portfolio and ask yourself some hard questions.
\nHear\u00a0Michael Yardney<\/b><\/a>\u00a0tell us the questions we should be asking.
\nMargaret Lomas<\/b><\/a>\u00a0tells us the lesson she will take out of 2014 that will help her invest better this year.
\nCritics of negative gearing have recently argued the case that scrapping the mechanism would save the Government $5 billion in the first year and free up housing supply.\u00a0Ken Raiss<\/b><\/a>\u00a0tells us why he isn\u2019t a fan.
\nShannon Davis<\/b><\/a>\u00a0explains the ways to make sure your investment is attractive to potential tenants \u2013 happy tenants, happy investor.
\nA Sydney buyers agent recommends that South East Queensland might be a place to look for a good investment property. Christine Rutledge tells us exactly where to look and why.
\nAnd finally in today’s show, our finance expert\u00a0Andrew Mirams<\/b>\u00a0<\/a>details some strategy you can employ to secure funding for your next renovation.<\/p>\n

<\/h1>\n

Transcripts<\/h1>\n

 <\/p>\n

Margaret Lomas<\/h4>\n

Kevin<\/b>:\u00a0 It\u2019s a pleasure to have Margaret Lomas on the line once again. Margaret, of course, is from Destiny Financial Solutions.
\nWelcome to the New Year, Margaret. It\u2019s nice to be talking to you again.
\nMargaret<\/b>:\u00a0 It\u2019s great to be back. It\u2019s been a while.
\nKevin<\/b>:\u00a0 It has, too long, but we should do it more often during 2015. That\u2019s for sure.
\nMargaret:\u00a0 <\/b>We will.
\nKevin<\/b>:\u00a0 Margaret, I\u2019m really curious to know what you picked up during 2014 as a lesson, I guess, or something that you experienced that you\u2019re going to take in to 2015.
\nMargaret<\/b>:\u00a0 What I found in 2014 is that because the interest rates came down to probably, as we all know, their lowest level in a very, very long time, I found that a lot of the spruikers tended to resurface, and there were a lot of deals going where there was a sense of urgency for people to jump in and buy.
\nI think the fear of missing out once again reared its ugly head, which it does during times like that. I saw so many property investors who would come to me subsequent to making a deal or signing a contract were jumping in with their two feet onto something that was offered to them, thinking about it afterwards, and realizing that maybe they didn\u2019t do their due diligence.
\nThey were just really frightened that this market was going to become so unaffordable to them that they would never be able to get in. We did see a lot \u2013 unfortunately \u2013 of not so good deals made during the year.
\nKevin<\/b>:\u00a0 I was staggered to see how many people, despite all the information that was flying around, who still persisted in wanting to chase those big returns and go to some of the mining towns. It was staggering.
\nMargaret<\/b>:\u00a0 Oh my goodness me. I hate it when I\u2019m right. That\u2019s not true. Of course, I love it when I\u2019m right, but I hate it when I\u2019m right and we have a fallout like we\u2019ve had. You know because you\u2019ve spoken to me for years about mining towns. You know the warnings that I\u2019ve always issued about them.
\nThat includes the fact that not only are they very volatile, but if you\u2019re going to invest in a mining town, you have to be an investor with the kind of risk profile that can bear not only the extreme highs but the very, very extreme lows.
\nUnfortunately, for the average investor, the extreme low can\u2019t normally be worked through. Most people can\u2019t bear the major expense of sustaining a property with very low returns and high expenses and waiting for the next upswing, which \u2013 of course \u2013 will come.
\nI think of people who invested in towns like Moranbah as a great example. Eventually, Moranbah will probably be okay again, but we saw people \u2013 again, the ones who had that fear of missing out \u2013 investing in areas like that as they were on their way up and up and up, chasing the major returns \u2013 which, of course, they were getting \u2013 paying $700,000 and $800,000 for properties that they may have seen a $1500 a week return for, but still not seeing the fact that it was unsustainable and very, very risky.
\nUnfortunately, a lot of those now are having to declare bankruptcy, liquidate other properties to sustain their holdings in those mining towns, and basically having to start all over again \u2013 an awful situation.
\nKevin<\/b>:\u00a0 It is an awful situation. This is a saying, too, that if it looks too good, it probably is. I think we learned in 2014 that if it looks too good, it might be true, but it may not last.
\nMargaret<\/b>:\u00a0 Exactly. It\u2019s interesting, Kevin. The other day, I was reading a blog that was sent to me by an investor who said, \u201cI think you\u2019re going to like this one, Margaret.\u201d When I read it, it told of rising property prices, it told of unsustainable rent returns, it told of that fear of missing out and people rushing in and pushing the market up.
\nBut when you got to the bottom line, you realized that it was a blog from the 1970s. It could have been a blog that was being written today. I guess what it taught me \u2013 and it\u2019s something that I\u2019ve always known \u2013 is that when we\u2019re in these situations, we will be in them again. The aftermath is usually always the same.
\nA property investor needs to be very, very careful about following the crowd into these supposed hot spots, about being worried that the property market is going to become unaffordable and therefore making bad decisions, and instead sticking to the old basics of being able to understand what makes property grow, being able to find an area that isn\u2019t the subject of current overheating and buying pressure, areas that go on and have generational growth because families live there and councils are providing infrastructure for generations to come.
\nWe see those areas not return such a high return in the short term, but when you measure them over time, their ultimate return over a 10- or 15-year period is usually far better than those hot spots that people rush in for.
\nKevin<\/b>:\u00a0 Margaret Lomas, always great talking to you. Thank you so much for your time. Margaret Lomas from Destiny Financial Solutions. Thanks, Margaret.
\nMargaret<\/b>:\u00a0 Thank you.
\n <\/p>\n

Shannon Davis<\/h4>\n

Kevin<\/b>:\u00a0 Any property investor will tell you that one of the important things about having investment property is making sure you have income coming in. One way to do that is to make sure that your investment property is tenant friendly. How do you go about doing that?
\nShannon Davis from Metropole Properties in Brisbane <\/a>joins us. Good day, Shannon! How do you go about doing this, mate?
\nShannon<\/b>:\u00a0 I think the first thing, Kevin, for being tenant-friendly is the price. No matter how good your property is, if it\u2019s over-priced\u2026 People do a lot of study for these recurring expenditures, and for many people, it will be their biggest bill. So don\u2019t have it over-priced.
\nSecondly, the location. People have grown up in an area, or they work in area, they have commitments to an area, so location is going to be pretty important. When choosing a property, look for employment hubs, and transport, and shopping, and school districts, because that\u2019s going to bring your property more and more in demand.
\nKevin<\/b>:\u00a0 What else?
\nShannon<\/b>:\u00a0 The main living areas. Kitchens: look for counter space. Bathrooms: try and make them modern. A really tired bathroom will drag you back. Bedrooms: see if they can fit a double bed in, and have built-ins, if at all possible, because that\u2019s what tenants want.
\nWith living spaces, Kevin, the more bedrooms you have, the more reception areas you need for people to retire. A four-bedroom house might need two reception areas or two informal lounge areas, maybe a courtyard or a balcony, as well, because people don\u2019t want to be crowded or living upon each other. I think that\u2019s really important.
\nAlso, Australians still love their cars, so parking \u2013 especially the off-street parking \u2013 is really important to an investment property. Also, pet friendly accommodation is really important. 56% of Australians, as per the last census, have pets, and 25% are thinking of getting pets. I think that\u2019s a really important thing to consider, because if you rule out pets, you are ruling out a big percent of the renting population.
\nKevin<\/b>:\u00a0 Yes. It\u2019s crazy to cut out people with pets, and also I guess that flows on to making sure that the backyard is nice and secure for the pets, as well.
\nShannon<\/b>:\u00a0 Yes, definitely. Well-fenced, which brings me to my next point. Security is a big point. I would make sure that not just fencing, but security grilles and allowing the tenants to feel safe within their home is really important, and it\u2019s something that comes up a lot in open home inspections.
\nKevin<\/b>:\u00a0 How important is storage, making sure there\u2019s plenty of storage space?
\nShannon<\/b>:\u00a0 Yes, storage is becoming increasingly popular. You can actually get more rent for it. You see storage cages in areas where there\u2019s a secure car park but not secure for people to put items like bikes, and whip snippers, and things like that away are becoming more and more important, and people will pay you extra for that.
\nKevin<\/b>:\u00a0 You can actually charge extra for that? Are there any other things that you could charge a little bit extra for, or maybe get a slight premium on, Shannon?
\nShannon<\/b>:\u00a0 I think mod-cons are really important. When you update your properties with air conditioning, or remote garages, or dishwashers, tenants will pay a premium for those modern conveniences. I think despite if that\u2019s the way you live or not, you should think about that for your investment property.
\nKevin<\/b>:\u00a0 Always good talking to you \u2013 Shannon Davis from Metropole Properties \u2013 about ways that you can make sure that your property is more tenant-friendly.
\nThanks for your time, mate.
\nShannon<\/b>:\u00a0 No worries, Kevin. Any time.
\n <\/p>\n

Andrew Mirams<\/h4>\n

Kevin:<\/b>\u00a0 Andrew Mirams from Intuitive Finance joins us to give us some tips on financing renovations. Does it need to be any different, Andrew?
\nAndrew:<\/b>\u00a0 It does, Kevin. There are probably the two main things we need to talk about. The first instance is whether the renovation is actually structural or non-structural. If you talk about a structural renovation, that\u2019s more an extension, extra rooms, maybe even a second story, or a significant amendment or change in the footprint of the property.
\nThe way you would finance those might be different to what we would call then a non-structural or cosmetic renovation. That might be just simply replacing a kitchen, bathroom, or both, or painting or floor coverings, etc.
\nThe difference with the two of those is with a structural renovation, you will nearly always have them as a builder\u2019s contract, unless you\u2019re doing an owner-builder. Certainly, you\u2019ll have a build contract, and there will be certain stages of the development \u2013 as the renovations and improvements are added \u2013 that certain payments will need to be made.
\nKevin:<\/b>\u00a0 On that point, does the bank prefer you to have a fixed contract?
\nAndrew:<\/b>\u00a0 Absolutely. Owner-builders all want to do it themselves and save a buck along the way. Sadly, a great majority of owner-builder projects actually never get finished, and you only have to look at a street with actually a builder\u2019s own property, normally, and you still see it not finished. A lot of them don\u2019t get finished, and most of the banks don\u2019t like or don\u2019t do owner-builders, so they can be tricky in themselves.
\nThe banks will always prefer a building contract of some sort to be provided.
\nKevin:<\/b>\u00a0 Once you get the contract done, should you talk to the bank before that so that you can structure the contract around the financing needs?
\nAndrew:<\/b>\u00a0 It\u2019s like most things, Kevin. In the case of a major structural renovation and improvement, you\u2019re probably spending $100,000 to $300,000 or $400,000, depending how much, so obviously it would make sense to get a pre-approval to make sure you\u2019ve got the funding at that level. Once you finalize the plans, the contract, the tenders, and the quotes, etc., then you can go back with the actual terms and get the bank to finance them.
\nWith a significant structural improvement, most of those would get financed along the journey. Where you probably don\u2019t finance them as much might be in a non-structural event, where you\u2019re actually doing a cosmetic or interior renovation and not changing any of the footprint of the property.
\nKevin:<\/b>\u00a0 If I\u2019m going to be doing a renovation, what are the things that I have to be wary of that are going to make the bank a bit nervous of funding for me?
\nAndrew:<\/b>\u00a0 Again, if we talk about the structural ones, the main thing they want to know \u2013 and the key to all of this \u2013 is getting an end valuation. If your property today is worth $400,000 and you\u2019re spending $100,000 on a renovation or structural improvement, getting a valuer to come in and agree that it\u2019s going to be worth $500,000 \u2013 i.e., your cost base \u2013 as a minimum to be able to finance that.
\nThe end valuation is really important. If you are over-capitalizing, you might be spending $100,000 on that property that you think is worth $400,000 now, but it\u2019s only worth $350,000. You spend $100,000, you think your place is worth $500,000, and it only comes valued in at $450,000. That can have a major impact on how you may finance it or not be able to actually complete the project.
\nKevin:<\/b>\u00a0 To get a good feel for the end value, do you think it\u2019s good enough just to get some agents in, or should we go the extra step and get a valuer in?
\nAndrew:<\/b>\u00a0 Normally, when we\u2019re coordinating on behalf of our clients, we will actually coordinate the valuation on their behalf and try and arrange it. That\u2019s using our expertise and knowing the documents that we need to show a valuer \u2013 being the plans, permits \u2013 and what work we\u2019re actually going to do.
\nIf it\u2019s on contract, we don\u2019t have too many issues. A lot of the variances probably come in what people think their actual property is worth today, and then, because you\u2019re spending $100,000, they think that all of a sudden that\u2019s going to add $200,000 of value, which is unrealistic. Probably just managing expectations is the key in that.
\nKevin:<\/b>\u00a0 Just your closing tip then, Andrew, your biggest tip on helping us get some funding for our renovation.
\nAndrew:<\/b>\u00a0 I was just going to make one other note just in relation to non-structural cosmetic renovations, which probably, depending on your property, can be as low as $10,000, or maybe up to $60,000 or $70,000 if you\u2019re doing a kitchen, bathroom, painting, and floor coverings. This is a tip to get a valuation uplift in the future.
\nIf you can finance that yourself, valuers will generally take today\u2019s value, plus your cost base <\/b>of what it costs to do, and they\u2019ll value it at your cost. If it\u2019s, like I said before, $400,000, and you\u2019re doing $100,000, they\u2019ll value it at $500,000, as long as they have realistic estimates or comparable sales of the property.
\nIf you can do it and fund it yourself, what we like to do with our clients who have a good equity position and can fund it themselves is we like to get them the valuation in nine to twelve months \u2013 and we\u2019ll generally get a nice uplift in the value, probably more to do with the market flow.
\nYou\u2019re based on three really key events, and that is hopefully and in the markets at the moment, you get a bit of market movement \u2013 an increase. Obviously if you\u2019ve done an improvement, you\u2019re going to get a higher rent, which gives you a higher yield. The key \u2013 and why we wait that nine to twelve months \u2013 is we are going to get comparable sales of renovated units that will justify a higher valuation.
\nThat is the real key to getting that, and you\u2019re going to release potentially more equity than what you\u2019ve actually put into it at the outset.
\nKevin:<\/b>\u00a0 Very good.
\nAndrew Mirams from Intuitive Finance. If you want to know a little bit more about Andrew and his team, too, you can check out the featured channel at RealEstateTalk.com.au. Lots of great information there for you.
\nAs usual, Andrew, thanks so much for your time.
\nAndrew:<\/b>\u00a0 My pleasure, Kevin. Thanks.
\n <\/p>\n

Ken Raiss<\/h4>\n

Kevin<\/b>:\u00a0 Critics of negative gearing have recently argued the case that scrapping the mechanism would save the government $5 billion in the first year and free up housing supply. Now, I know a number of people who don\u2019t agree with that view, and I want to take the opposing view right now.
\nKen Raiss from Chan & Naylor<\/a> joins me. Ken, thank you for your time. I thought it might be useful, firstly, just to tell us what negative gearing really is.
\nKen<\/b>:\u00a0 Yes, it\u2019s the shortfall between the rent you receive and the expenses of holding the property, including your interest and your outgoings. It\u2019s effectively the loss you have on that investment property.
\nKevin<\/b>:\u00a0 A lot of the arguments about scrapping it are based on the fact that many people believe that people who benefit from this are rich, wealthy landlords. Is, in fact, that the case?
\nKen<\/b>:\u00a0 I think far, far from the truth. The focus is not on how much money the government would save, but they never look at the other side of the coin and what it would cost. My position is the costs are significantly more than what they would save.
\nWhen we look at the ATO annual statistics, we see that over 70% of residential property investors earn under $80,000 a year. They are moms and dads who are \u2013 if you like \u2013 trying to create a bit of financial future for themselves so they\u2019re not dependent on government. It is the normal person that you pass in the street, not the riches that\u2019s portrayed by a lot of our commentators.
\nKevin<\/b>:\u00a0 Many people \u2013 of course, investors \u2013 are getting the benefit of capital growth in this current good market. Why, too, should they get some sort of a tax break? Why should they be favored, Ken?
\nKen<\/b>:\u00a0 Well, they\u2019re not getting a tax break. Every Australian is entitled to claim their expenses, and owning an investment property is like having your own small business. All business owners are allowed to claim any losses.
\nHow many people would start a new business knowing that they can\u2019t claim their initial costs? There is a cost when you open up a new caf\u00e9, a new hairdresser, a new mechanic shop \u2013 and for most businesses, they probably don\u2019t generate enough to cover all their costs in those initial years.
\nWhy punitize people in one particular investment category \u2013 property \u2013 versus all the other businesses that people set up in Australia?
\nKevin<\/b>:\u00a0 Ken, let\u2019s now play a what-if game. What if the government did, in fact, drop negative gearing? What impact do you think that would have on the market and also prices?
\nKen<\/b>:\u00a0 I think it would have a devastating effect over a period of time. I think in Australia we see that about 90% of investment properties are owned by mom and dad, who own either one or two. Over 70% of investment property owners only own one property, so it\u2019s a very cottage-based industry.
\nI think if you took out that ability to claim those initial losses, you would get a lot of those moms and dads who would pull out of the market. That would create a significant shortage. It would have devastating effects on all the ancillary industries that support investment properties \u2013 all the tradesmen \u2013 but more importantly, it would bring in professional investors. Professional investors would not be happy with the low yield, and it would be my expectations that, over time, rental prices would increase 50%.
\nKevin<\/b>:\u00a0 When you say professional investors, are you talking about institutional investors now?
\nKen<\/b>:\u00a0 No. I\u2019m talking about the more sophisticated investor who doesn\u2019t own one property or two; they will own four, five, or six. They will bring the same financial rigor into that investment that they do in the other areas of their investments. Just as an example, the rental yield on a commercial property is 7% or 8%, so why will those people accept a 4% or 5% yield on residential property?
\nOver time, the yields will go up for two reasons. Maybe there\u2019s not as much supply \u2013 there\u2019s definitely going to be an increase in demand over time \u2013 and more importantly, they will want a return on their investments.
\nWhen we look at the U.S., I was reading an article by this U.S. group, called RealtyTrac, in their September 2014 review. They\u2019re a statistical generator. They go and get statistics on properties around America. They looked at over 580 counties in the U.S., which represents 280 million people, which is 71% of the population in the U.S. They said, on average, rental yields were about 9.5% in the U.S., and in the better markets, it was closer to 11.5%.
\nNow, I\u2019m not suggesting Australia will get that bad. But in a market where it is a bit more professional, and the number of owner occupiers \u2013 at about 65% \u2013 is very close to Australia\u2019s 70%, so there is still that 30% or 35% of people who rent, and they\u2019re paying on average over 9.5% rental yields.
\nWhy won\u2019t that happen in Australia? I think people stick their head in the sand and say, \u201cWell, if it happens, it will happen not on my watch and it will be years away.\u201d But the problem is they\u2019re putting in place \u2013 if you like \u2013 the bedrock that will force those increases to occur over time.
\nKevin<\/b>:\u00a0 Does negative gearing happen in the States, Ken?
\nKen<\/b>:\u00a0 Yes. You can actually claim the interest on your property that you live<\/i> in, in the U.S. So you actually get a tax deduction for interest on the property, even if you\u2019re living in it.
\nKevin<\/b>:\u00a0 So Australians are not really pioneers in this, are they?
\nKen<\/b>:\u00a0 No. Again, if we go back to what negative gearing is, it\u2019s recouping your losses. The ATO won\u2019t let you recoup your losses unless they think you\u2019re going to make a profit in the future, which is a fundamental tax rule. This happens in every industry, in every aspect. If you buy shares, if you buy businesses, if buy commercial properties, you\u2019re allowed to claim losses.
\nKevin<\/b>:\u00a0 Yes.
\nKen<\/b>:\u00a0 I don\u2019t know why there\u2019s this pincer movement \u2013 if that\u2019s an appropriate word \u2013 that targets residential property under what I think are very false premises. It\u2019s almost the have and the have-nots argument.
\nKevin<\/b>:\u00a0 Yes, indeed. Ken. It\u2019s great talking to you. We\u2019re out of time, unfortunately. Thank you very much.
\nKen Raiss has been my guest from Chan & Naylor, the national accounting and wealth advisory group.
\nKen, thank you very much for your time.
\nKen<\/b>:\u00a0 Thank you, Kevin.
\n <\/p>\n

Michael Yardney<\/h4>\n

Kevin:\u00a0 <\/b>Regular listeners to the show will recall that late last year, towards the end of the year, I was talking to Michael Yardney<\/a> from Metropole Property Strategists<\/a> and suggested that in 2015, a great way to start that year would be to have a look at the window of opportunity that exists to identifying and do something about some underperforming properties.
\nBut what do they look like? How do you know if you\u2019ve got a lemon?
\nGood day, Michael. Welcome to the New Year.
\nMichael<\/b>:\u00a0 My pleasure, Kevin. It\u2019s going to be another exciting year.
\nKevin:\u00a0 <\/b>It is indeed, and I\u2019m looking forward to working with you as the year unfolds, too.
\nMichael, that question, how do you know if you\u2019ve got an underperforming property? What are the signs?
\nMichael:\u00a0 <\/b>Let\u2019s go back to what you said initially. I think it\u2019s a good opportunity, because I see it in some ways as a window of opportunity. I think later this year, early next year, interest rates are going to rise, and when they do, they are going to affect certain markets more than others. I wouldn\u2019t be wanting to hold an underperforming property into later this year, early 2016.
\nA good question is what do we look for, Kevin?<\/b>
\nKevin:\u00a0 <\/b>Can we identify it?
\nMichael:\u00a0 <\/b>What I\u2019ll be doing is looking at my portfolio once a year \u2013 or more often \u2013 and probably with somebody independent, because if you do it yourself, we tend to be a little bit biased because we\u2019ve put so much effort and time and emotion into buying our properties.
\nI\u2019d look at each of my properties and ask questions like:<\/p>\n