Highlights from this week:
- The benefits of creating an offset account.
- Ways to ensure you don’t overcapitalize on a renovation. Cherie Barber’s formulae.
- How to dramatically increase the returns from a rental.
- How can crunching the numbers help investors with their purchase decisions
- Airbnb success story and news about a new company that helps with the Airbnb experience for property owners.
- Why get a depreciation schedule before you buy? How accurate is an early estimate?
- Free tool to calculate how much value is added to a property with extensions and renovations.
Offset account benefits – Andrew Mirams
Kevin: I want to answer a question that came in from Simon at Caulfield. Simon asks about an offset account. Could we please explain what it means? We mentioned it in the show on a few occasions. Joining me on the line to discuss that, Andrew Mirams from Intuitive Finance.
Good day, Andrew.
Andrew: Hi, Kevin. How are you?
Kevin: Good, mate. I shot that question to you from Simon. Just explain for him what an offset account is, mate.
Andrew: I think it’s a good question because still, it appears that the offset accounts and do they really work are common questions that we get asked quite regularly.
The first point is what is an offset account? Traditionally, it’s now basically like your savings account. A lot of people will have a second savings account or something like that, but it can just be your normal day-to-day savings account. What we do is we take them, we attach it to your loan, and then whatever the balance is sitting in that account actually fully offsets against the interest you pay on your loan.
Let’s just say, for example, you have a $500,000 home loan and you have a balance of $10,000, it’s effectively saying you only pay interest on the $490,000, so it saves you the difference between what you have in savings and what you have in the loan.
Kevin: Mate, are there any questions that someone should ask themselves before they step into one of these, an offset account?
Andrew: Yes. I think wherever you’re going into a normal package or something, if you can get an offset, we’re big advocates of them because we see the ease of management, so not having to shuffle money around. All your money goes into the account and effectively starts working for you to assist you to reduce your loan interest. So, I think they are great things.
But at the same time, you have to watch. The banks sometimes will charge you a fee for having it. Sometimes the rate might be slightly higher, so you have to make sure that you have to be able to justify the benefits.
If you never have more than $100 in your account, it’s probably not worth having an offset account. But if you tend to sit on thousands of dollars from month to month, or you’re a good saver and you’re regularly adding more money, absolutely, I think an offset account is a great facility to have to help you reduce your interest on your loan.
Kevin: In the event where an account may vary quite a lot – lots of ins and lots of outs – is there any advantage in having an offset account in that situation, Andrew?
Andrew: It tends to just depend on the average balance. Our high income earners, a lot of them get paid on a monthly basis, so they get a big lump sum once a month and then they slowly work their way through their living expenses to the end of the month, and it can diminish. That’s very normal.
While you have all of that money in your account, it’s like paying off your loan, just living out of your loan. That’s kind of what it is. If you have a reasonable fund going there, I think it can definitely save you interest.
To give you an example, Kevin, just say you had a $500,000 home loan at an interest rate of 4% and you just had $10,000 sitting there as an average balance offsetting against it. Over the life of the loan, that’ll save you just shy of $23,000. I know I’d rather have that in my pocket than in the bank.
Kevin: Absolutely yes. There’s a good demonstration. We’ve had a number of questions about this, and I think you said it at the outset too, that offset accounts is one thing that you’re asked quite regularly about.
We’re also asked about loan redraws. We’re out of time right now, but what I would like to do is do a special interview with you on that. We might actually do that as a video, Andrew, and then we can post that up on your website, on your channel on Real Estate Talk as well.
Andrew: Absolutely. I think that’s a great idea because there are some key differentials that you need to understand.
Kevin: Watch out for that. It’ll be on Andrew’s channel. We’ll put it up there for you this Sunday, actually, the difference between offset accounts and loan redraws. That’s on the Intuitive Finance channel on Real Estate Talk. Just have a look for it. That’s what we’ll call it: “What’s the Difference Between Offset Accounts and Loan Redraws?” You can just put that into the query box.
Andrew, thanks for your time, mate, and we’ll catch you again soon.
Andrew: My pleasure, Kevin. Have a great day.
How to improve on Airbnb returns – Bessie Yin
Kevin: As investors chase better returns on their investment properties – and why wouldn’t they? – it naturally raises the question of short-term stay. I guess when we talk about that, we’ve heard stories of disruptors and so on and how Airbnb is disrupting the industry around the world. But I have to say that they’re offering some pretty good returns.
In our association with Your Investment Property, we undertook an exercise recently and looked around at how dynamic that improvement in return can be, and we came across a company called Made Comfy.
Made Comfy sits between you, as the property owner, and Airbnb to manage that process for you because generally, they found that people who invest in property are quite busy, they don’t have the time to devote that it takes to make sure that the tenant is right, that it’s checked, and that the property is okay.
As part of that process of looking into Made Comfy, we came across a person who has actually used Made Comfy quite successfully, Bessie Yin. I caught up with Bessie to find out from her just how successful it’s been.
Bessie, thank you very much for joining us. How did the idea come about for you to actually work with Made Comfy and Airbnb?
Bessie: In September 2016, I started to look for an Airbnb agency online. I searched in Google, and I found two or three agencies listed on that. I called them up one by one, and at the end, I felt that Made Comfy is the one. It’s very professional. It has a bit of knowledge and experience in this short-term lease market.
Kevin: I understand they also helped you with finding the right area to invest short-term in. Is that right?
Bessie: After the first one, I was talking to them about maybe I want to try again. The sales manager, Julian, recommended a few best-selling properties in the Airbnb market.
Kevin: How important is it for people to check with their body corporate to make sure that they’re allowed to do this?
Bessie: Yes, it is very important to check with body corporate first.
Kevin: Tell me when you first struck the relationship with Made Comfy, what was your expectation about occupancy?
Bessie: I was thinking probably around 70%, and then the first few months, it’s really almost fully booked, so it came as a very happy surprise.
Kevin: Just harking back on something we said earlier is that Made Comfy can actually help you work out where, if you want to build your portfolio, that you can get the best short-term return as well.
Bessie: I felt that they were a great help in terms of finding a good suburb to do a short-term lease. Also, they have provided me some advice in terms of how to boost up the booking rates and how to give a better experience for the guest. Yes, I’m pretty happy with them.
Kevin: Good on you, Bessie. Thank you so much for your time, and great talking to you.
Bessie: Thank you, Kevin.
Kevin: I think for any investor who is looking to get a better return for their property, this is something you should look into.
We’ve produced a special podcast where we talk to Bessie as we did there. We also talk to the operators behind Made Comfy, what it’s all about, and we’ve delivered that as a special podcast, which you can see now on the site. Just simply go to Your Investment Property, their channel.
We’ve also made it a little bit easier for you by putting a link inside the transcript for this interview, so just scroll down. You’ll see the link there. That’ll take you straight to the podcast. It’s also on the website for Your Investment Property as well.
I strongly suggest you have a look at that because it might be a way for you to make better returns from your investment property.
Free tool to calculate value – Kent Lardner
Kevin: Every property investor wants to get as much out of their property as they possibly can, so we always get around to talking about adding things, like a granny flat or an extra bedroom or even an extra bathroom. Wondering then, how much value does that add? Is there any way for you to tell before you go in? Because of course, the risk here is that you may just over-capitalize. That’s what I want to talk with my next guest, Kent Lardner From view.come.au, one of our supporters.
Kent, you’ve done a lot of work on this over the years, haven’t you? Welcome to the show, by the way.
Kent: Thank you very much, Kevin. It’s great to be here.
Yes, done plenty of work in this space, and typically, what we do is we try and model houses based on what we call attributes. We try to predict the house price based on things such as number of bedrooms, the street type that it’s on, and how many bathrooms it has.
So, a lot of that modelling and a lot of just, actually, plain and simple research can answer those questions.
Kevin: You would know because that’s what you do, but as a consumer, is there a tool somewhere that will tell me, if I just simply plug in one extra bedroom, what will it do?
Kent: Yes, we’ve created a property page for effectively, every address in the country on View. If you go to the site and just follow the Research link, you can enter in your address, and then from there, scroll down the page and you can change the bedroom count on that.
So, if you’re currently a two-bedroom and you want to do a “what if” analysis – “if I added a bedroom and make it three” – you can change it, and then hit the button that says Update. What it will do is it will automatically return to you what we think are well-matched comparable sales.
Then what the user would do is cycle through and say, “No, I don’t like that one; get rid of it,” because the matching algorithm can only see things such as distance and time and size. It can’t really see quality.
That‘s where the human eye comes in, and actually, you go through and cycle through and pick the three comparable sales that work the best for you, and that will give you a price estimate instantly.
So, through that tool, you can understand really quickly, within a few seconds, what the price change could be through adding a bedroom or adding a bathroom.
Kevin: Wow. That is a great tool for someone who is looking at renovating or doing some work on the house before they get into it. As I said at the introduction there, the great risk there is that you will always over-capitalize.
Kent, can I ask you, with something like a granny flat, which is fairly new on the horizon, is there any way to estimate what value, if any, that would add to a property?
Kent: I think there are probably a couple of approaches you can take with that. What I’ve always done with granny flats is the first thing I do is look at what the rental return could be. So, it’s not really a capital gain calculation; it’s more what is the rental return?
But when you look at it, if it looks and feels part of the house, you can actually add it as a bedroom, add it as bathroom, and expand the size of your house – so, treat it as if it is part of the house – and that can give you a rough idea what the additional attributes can add.
Kevin: Are there any other additions we can add to a property that will add value? You mentioned there about a bathroom, and so far, we’ve only just focused on bedrooms, but what about if I were to put an ensuite into a property? Have you got any estimate on what that would add?
Kent: Yes. Typically, we do the whole integers, but a lot of the American sites, you will probably see them, they do one or 1.5 bathrooms to capture the ensuite. We found in Australia that the measurement of what is a bathroom and what’s an ensuite a little bit challenging. Most of the property data providers, most of the databases in Australia, typically, just count in whole bathrooms – one, two, or three – so it’s always a little bit of a challenge with the ensuite.
An interesting thing with bathrooms, however, is most of the time a one-bathroom property is very different to a two-bathroom property because typically, the older houses that are yet to be renovated are one-bathroom, whereas suddenly, when you move up to a two-bathroom property, the price jumps up considerably, and usually, that’s because they are the renovated properties. So, it’s quite a different sub-market as soon as you move to that two or three bathrooms.
Kevin: Sorry to stay focused on one thing, Kent, but I’m really keen to hear from you how I can make sure that I’m not over-capitalizing when I do an improvement on a property.
Kent: I think the big thing is that the risk increases as you get larger and larger, so jumping from a two-bathroom to a three-bathroom has a greater risk of over-capitalizing when you compare that to, say, going from one bathroom to two. Or jumping from four bedrooms to five.
I think the key is that the lowest risk, greatest opportunity is always best in a higher-priced market with a smaller house.
Kevin: Great advice, Kent Lardner. Kent is from View.com.au. Wonderful opportunity for you to go in and experience the site, and Kent, you did say that every property in Australia effectively is listed on the site, so you can go in and interrogate it from there. Is that correct?
Kent: You can, and it’s all free.
Kevin: How good is that? View.com.au. They are one of our supporters, and we thank them for that. Kent, thank you so much for your time.
Kent: Thank you, Kevin.
Cherie Barbers failsafe formulae
Kevin: I want to answer a question now that came in specifically for Cherie Barber, and Cherie joins me.
Cherie: Hi, Kevin.
Kevin: It’s great to be talking to you again, Cherie.
Cherie: Thank you.
Kevin: Cherie, this comes from Kane. He says, “I’ve found a good property in regional Victoria that I want to renovate and sell for a profit. What steps can I take to ensure that I don’t over-capitalize? Could you ask Cherie for me? I paid $250,000, and well-renovated properties in the town are selling for between $325,000 and $390,000.”
So, what would your tips be to Kane, Cherie?
Cherie: Okay. Well, first of all, it’s good that he’s done his research. I say before you buy any property, make sure that you know what the value of the un-renovated house is worth. But at the same time, if you’re going to be flipping, where you’re going to be selling at the end, he needs to know what the resale property values are.
So, if he’s bought a house for $250,000, he needs to be reselling around the $340,000 mark to cover his renovation and all of his project costs, like his holding cost, resale costs, and so forth. So that’s great. It seems to me that he’s actually already in that range, which is really good.
The next thing is to make sure that he spends an appropriate amount of money for the actual renovations. On a $250,000 house, the general rule of thumb for a cosmetic renovation is that you spend 10% of the property value. So, that means his renovation budget is $25,000 – not a cent more – and that’s to completely transform that house, inside and out.
Now, I guess some of the ways, in terms of not over-capitalizing – obviously that’s a very tight budget – he might go through the house and make a list of everything that needs to be done, and he might cost that up at $40,000. So, then he needs to say to himself, “Okay, I don’t have enough money to actually do everything. What are the things that are going to add value?” So, certainly things like painting, ripping up the carpets, polishing floorboards, cosmetically updating the kitchens and bathrooms.
I guess if I can give him one big piece of advice, I always say to my students around the country, before you start any renovation, ask yourself what can truly stay in the house and what has to go. Because obviously, everything that you keep is going cost you less money to put back in.
So, things like your kitchens and bathrooms can be cosmetically refreshed through products like laminate paint, tile paint, bench-top resurfacing kits. You can buy all of these products for under $100 a tin. And this where you spend hundreds of dollars, not thousands of dollars.
Kevin: It seems to me, that as well as doing the research on the property, you also have to research all of the materials that you will be using in the renovation, because as you’ve just highlighted, you can actually very easily over-spend just on those, Cherie?
Cherie: Oh, 100%. And there are certain things… For example, I always say to my students, when you’re selecting your fixtures and fittings, really shop around. Go out and be an absolute scrooge, getting the best price on your fixtures and fittings, because $50 you save here, $100 there, it all adds up to thousands and thousands of dollars over the course of the whole renovation.
And it’s also the type of fixtures and fittings. I generally say, shiny fixtures and fittings add more value than matt or satin type fixtures and fittings. I’ll try and give you a practical example. In the bathrooms, even when I’m doing my low-budget TV renovations, I’ll always put polished tiles on the bathroom walls because they look more expensive than matt tiles.
Even things like larger tiles look more expensive than smaller tiles. They still cost you the same amount of money, on a square meter basis, but one has a perception of value, one doesn’t. There’s lot of little tricks in renovating.
Kevin: Yes, there certainly are. The other point that I wanted to raise too, and you raised it right at the start there when you were talking about Kane’s budget. It would be so easy for him to have a budget of, say, $50,000 on that reno, and then say, “Well, I paid $250,000, there’s $50,000 on top of that; that’s $300,000. If I can sell it for $350,000, I’m still going to make a profit,” but as you’ve just pointed out, that’s only just a portion of your costs.
Cherie: It is. This is where a lot of people go wrong. They think just about the actual renovation and they don’t consider their project costs. There’s stamp duty, there’s holding cost, legal fees. There are sometimes building and pest inspection fees, sometimes council fees, agents fees to resell the property. They’re called resale costs. And you should always have a contingency, and all of those costs, add up to be more than the actual renovation itself.
I call them the total cost of a project, and that’s what most people forget about and they get to the end of their project and they think they’re going to sell for X amount and they don’t. And this is where a lot of people lose money renovating or they break even.
Kevin: Tremendous talking to you, Cherie. Thank you very much. If you want to contact Cherie, or go to one of her workshops, you’ll get all the information at her website, RenovatingForProfit.com.au. One of our experts, Cherie Barber.
Cherie, thanks for your time.
Cherie: You’re welcome. Thank you, Kevin.
Calculate depreciation before you buy – Brad Beer
Kevin: We quite often discuss the benefits of obtaining a depreciation schedule once an investment property has been purchased, but are there any advantages in discovering what deductions can be claimed before you buy? Brad Beer from BMT Tax Depreciation joins us.
Brad, are there any ways that investors can discover the depreciation potential of a property without obtaining a full depreciation schedule?
Brad: Yes, Kevin, very easy to do that. The amount of data that we have these days and also the sheer hundreds of thousands of depreciations schedules we’ve done, we’ve probably seen a property similar. So, we’ve built some things so that we can come up with an estimate of how much deduction might be available to a property that you’re looking at buying.
That might be through a simple estimate that can be done on a calculator that’s on the website, that we put some information in about, that’s free for you to use as many times as you like. It spits out an approximate number. Obviously, it’s based on the information that you put in.
The other thing is we can have a look at the information that you do have available. Once we know the address of the property, we can pretty much see most things about it these days, if it’s been rented before, and come up with a fairly close approximate number of what sort of deductions would be available.
Kevin: It’s pretty shocking, but we do realize that there are still a number of property investors who don’t do a depreciation schedule. Just to give me a bit of an idea, what information is included in a comprehensive depreciation estimate?
Brad: The important thing is the approximate number in the first year or the first five years, because the reason you need to know that is so that you can go in and crunch those numbers. But we can do it fairly quickly and easily over the phone with some information that we can see pretty quickly.
But then sometimes if you are buying in a development, then there may have actually been one prepared for the developer or for the guys who are selling it that has a bit more detail because we have things like schedules of finishes on new stuff and things that give us a bit more detail.
Kevin: Can you give me a bit of an idea about how crunching those numbers can help investors with their purchase decisions, Brad? Have you had some experience with that?
Brad: I’ve spent 19 years in this business. I’ve been to lots of different property expos and everything under the sun as far as learning about property investment, and I guess it almost saddens me to see that people don’t crunch their numbers on everything before they buy property. And the fact that they don’t buy a depreciation schedule for some time after is concerning.
I think whenever you’re buying property there’s a lot of things to consider: the area, the drivers in those areas that are going to give you that growth.
Look, I’m the depreciation guy. Depreciation is not the most important thing and you shouldn’t buy for depreciation, but you should really know what that cash flow looks like for you, after tax, given your income on a specific property you’re looking at, so that you really crunch the numbers and know what that’s going to look like for you to make sure that you can afford it and you have that risk covered.
Kevin: Are depreciation estimates also useful for developer’s agents, mortgage brokers, and loan providers, Brad?
Brad: All of these people are involved in this transaction prior to an investor buying, or maybe not always, all of them – if it’s second-hand property, usually not a developer, obviously. But when someone is either selling, financing, or building a particular product, an investment property or potential investment property, it’s very easy for us to provide some sort of numbers to a potential purchaser to help them crunch those numbers.
So, if you’re in any of those property expertise, you’re involved with these people who may be buying investment properties, knowing that exists and being able to actually talk about it – “Well, depreciation is important. Have you thought about it? You have to crunch your numbers properly” – they can get that information very easy from us.
Kevin: Okay. Give us that website again, because you mentioned there are a number of calculators on the website as well, Brad?
Brad: It’s BMTQS.com.au. There’s a tax depreciation calculator part there, that’s very easy. It’s an app also. You can download it and use it. It’s free, as many times as you like. Just make sure you use that to crunch your numbers. Or if you have an existing property, you can use to that see that you’re getting all you get and amend if necessary or see whether it’s worth having a look at. But, very easy to find.
Kevin: Good on you, mate. Thanks for your time. That’s BMTQS.com.au. Brad Beer, thanks for your time, mate.
Brad: Thanks, Kevin. Much appreciated.