Buying an investment property Step 1 - Location Step 2 - Buy quality Step 3 - Gross vs net returns Step 4 - Coping with vacancies Step 5 - Triggers for failure Step 6 - Top tips
The number of property renters is rising as homes become less affordable to buy. This is good news if you own an investment property because maintaining a good occupancy rate is crucial to your investment success.
During the property boom of the 1990s, investment properties were all about capital gains; properties often jumped in value whatever you bought. That’s no longer the case. Now that the boom has passed, investors need to be more selective about the properties they buy.
Step 1 - Location
For a successful investment, you must acquire the right property in the right location at the keenest possible price and with its long-term viability in mind - in both terms of good rental potential and capital growth.
Check for proximity to transport facilities, schools, shopping centres, sports and entertainment facilities and areas of future jobs growth.
The property needs to be located in a safe, clean, attractive environment and the area will have an already established high rental demand.
Step 2 - Buy quality
The quality of the property is crucial.
The building must be appropriate for the market - for example, with at least three bedrooms if located in a family rental area, or with some security if inner-city high-rise.
It should be well-built (brick and tile is desirable) and have low maintenance buildings and external areas (check that the gardens and any other outdoor areas are in good order).
If it is an apartment, make sure it is large enough to meet the approval of your bank or lending institution.
Step 3 - Gross versus net returns
You’ve collected your rents (the gross return or yield) and now it’s time to pay out all your investment expenses.
You are then left with the net return or yield. This net return is this figure you need to capture regularly in order to understand how your investment is travelling.
While rents may not rise so quickly, sometimes the cost of the investment fluctuates and it is this you must keep a close eye on.
A quick way to calculate the net return is to determine the gross rental and then deduct 25 per cent (for outgoings such as rates, insurance, maintenance and body corporate levies). This gives you a rough idea of the net return before tax.
Step 4 - Coping with vacancies
Around 30 per cent are renters, providing a huge pool who are housed in or looking for rental accommodation.
Vacant properties can spell real trouble for the investor and are a security risk.
You should calculate on a loss of around 2 per cent of your gross possible returns for each vacant week.
However, a well kept, appealing property in good condition and in the right area should not be vacant for long periods.
If you are managing the property yourself and having difficulty finding tenants, you might want to approach some local property management agencies to see if they can help (for a fee, of course).
Step 5 - Triggers for failure
• The purchase price was too high.
• The property is in an area of low capital growth potential.
• The property is too high maintenance.
• The rent is too low.
• Vacancy periods are too long or too many.
• The loan taken out was structured wrongly.
• Some tax deductions are missed.
Step 6 - Top tips
Because of depreciation entitlements on properties (including the purchase price, the construction price and the land value), units generally provide higher depreciation and can often provide a better return than houses.
Revalue your properties every year, so that you can use your additional equity to negotiate a larger loan which you can reinvest in another rental property.
If you find the right property, buy it. Don’t be put off by the economic cycle. Even in the worst recession, there is always a suburb growing in value and producing good rent.
For more tips goto http://www.propertyexpresscrm.com
Best,
Mike
Thursday, December 3, 2009
Thursday, November 26, 2009
Signs of Recovery?
Real estate is showing some early signs of a revival as an attractive investment destination compared to other opportunities like corporate debt, but the equity and debt markets have to open their wallets with more confidence to resume a normal flow of deals. Real estate looks like a better value deal relative to other alternatives than it did six months ago although while debt capital is available, equity investors are still holding back. That phenomenon is not helping the process of deleveraging, or reducing the share of debt in portfolios, that banks and other lenders must undergo before a more normal deal flow can resume-The difference is very few people are writing equity checks to buy property.
The bond markets for investment-grade debt from REITs have also opened up, with issuances totaling $8 billion so far this year. All that has given more confidence to the market participants and propels new opportunities.
Those confidence levels will move to a higher plane only with deleveraging of investment portfolios- banks hold about half the $3.4 trillion in private debt. Another 20% is in the commercial mortgage-backed securities (CMBS) market and the remainder is split between insurance companies and agencies of Fannie Mae, Freddie Mac and the Federal Housing Administration. There is money for new loans; we have more money to invest than we can find the loans for, but the problem is deleveraging as a process is going to take time.
Still, while some glimmers of confidence are returning to some sectors, the positive signs are distributed unevenly. Activity is at "historic lows" among the roughly 600 private market funds that invest in real estate-Few, if any, funds are closing [deals], and managers who have capital are not executing deals-Aggravating that situation: Institutional investors were seeing "dramatic losses" at the end of the second quarter, with the prospect of that continuing.
Insurance companies wrote $40 billion in loans in their peak years -The market needs capital flows from banks and agencies such as Fannie Mae and Freddie Mac, as well as a revival of the CMBS market!
Expect job growth to resume around April 2010, creating nine million jobs over the following three years.The key driver: basic confidence in the economic outlook, just as it has been in earlier recoveries. You're going to get that again because panics are as much psychological as anything else. Housing starts are expected to regain strength to meet the needs of a population increasing by three million people annually.
Interest rates are down and we have normalization of spreads -- which are good things. The housing crisis has in some sense bottomed out, and construction volumes and inventory levels are down, although shadow, or hidden, inventory exists. But it's totally dependent on the federal government.
http://www.propertyexpresscrm.com/
The bond markets for investment-grade debt from REITs have also opened up, with issuances totaling $8 billion so far this year. All that has given more confidence to the market participants and propels new opportunities.
Those confidence levels will move to a higher plane only with deleveraging of investment portfolios- banks hold about half the $3.4 trillion in private debt. Another 20% is in the commercial mortgage-backed securities (CMBS) market and the remainder is split between insurance companies and agencies of Fannie Mae, Freddie Mac and the Federal Housing Administration. There is money for new loans; we have more money to invest than we can find the loans for, but the problem is deleveraging as a process is going to take time.
Still, while some glimmers of confidence are returning to some sectors, the positive signs are distributed unevenly. Activity is at "historic lows" among the roughly 600 private market funds that invest in real estate-Few, if any, funds are closing [deals], and managers who have capital are not executing deals-Aggravating that situation: Institutional investors were seeing "dramatic losses" at the end of the second quarter, with the prospect of that continuing.
Insurance companies wrote $40 billion in loans in their peak years -The market needs capital flows from banks and agencies such as Fannie Mae and Freddie Mac, as well as a revival of the CMBS market!
Expect job growth to resume around April 2010, creating nine million jobs over the following three years.The key driver: basic confidence in the economic outlook, just as it has been in earlier recoveries. You're going to get that again because panics are as much psychological as anything else. Housing starts are expected to regain strength to meet the needs of a population increasing by three million people annually.
Interest rates are down and we have normalization of spreads -- which are good things. The housing crisis has in some sense bottomed out, and construction volumes and inventory levels are down, although shadow, or hidden, inventory exists. But it's totally dependent on the federal government.
http://www.propertyexpresscrm.com/
Wednesday, November 25, 2009
A beginner's guide to commercial property
COMMERCIAL property investment is not just about investors with deep pockets and buying tall buildings. Ordinary people can own a slice of commercial real estate for only a few thousand dollars, but like all investments they need to do their homework.
There are more things to consider than with residential property investment. Do you go for a tiny piece of a shopping centre by buying shares in Westfield Group? Do you pool your resources with friends or strangers through a property syndicate? Or do you go it alone, either inside or outside of your super fund?
CB Richard Ellis director Philip Rundle says there are four key financial questions every investor should ask before taking the plunge.
Firstly, is the lease secure? "Always read the lease and ask questions where there is any uncertainty," Rundle says.
Secondly, what will the stamp duty cost you?
"Stamp duty can often be a big amount and get forgotten in the purchase calculations," he says.
Thirdly, is the rent net or gross?
It is important to know what the property's outgoings are and, more particularly, who pays for them. The final question is: Does the yield reflect the quality of the improvements to the property, the terms of the lease and the strength of the tenant?
It's likely to be a lot tougher to find a new tenant for your office or warehouse than a three-bedroom townhouse on the city fringe.
Going solo
As most commercial properties won't give you much change from $1 million, this is the most expensive way to get into commercial property investment.
But investors can be creative. For example car park spaces are a form of commercial property and can be bought for less than $50,000 a space.
Solo investors tend to stick with what they know. Savills national head of research Tony Crabb says they often target "the ever-popular bank branches, fast food outlets, occasionally a service station, and the street-front shop".
"Sometimes they run their own business out of it," he says.
"These properties are regarded as having stable returns.
"Most remain occupied for a long period and are rarely vacant."
Sean Ryan, director of specialist property law firm FR Law, says research is a key to success, as is "good financial and accounting advice about the correct vehicle in which to structure the investment".
Location
People often think of inner-city high-rise, but there's a substantial amount of investment that occurs in the fringe CBD and even the suburbs-investors can add value by choosing a site that has flexible development guidelines.
People should look for properties in busy areas specific to a particular sector.
Look for opportunities in locations that have been appropriately zoned for a specific use and which are near larger development sites or land users which may require expansion in the future - Google Earth can represent a commercial property investor's best friend.
At the push of a button, Google Earth will give you an instant snapshot of the entire surrounding area, nearby development and major space users. It may also highlight potential liabilities in the area which makes it an invaluable tool when making a major purchase in property.
Syndicates
Pooling your financial resources with others to buy commercial property through a syndicate is a common starting point. These are typically run by either specialist syndicate companies or organised through an accounting firm.
Getting into a syndicate can cost as little as $10,000.
Property syndicates have grown in popularity in recent times as many investors became disillusioned with the share market.
Most syndicates are made up of between two and 10 investors -Beyond 10 it becomes a bit unwieldy.
Anyone investing in a syndicate needs to make sure everything is documented -A handshake doesn't cut it anymore -It's very much a corporate marriage and a corporate divorce.
You need to decide how you are going to run it and how you are going to get out when it's time to get out or things go wrong such as death, disability or dissatisfaction.
Syndicates can offer great opportunities but investors should be cautious.
It's best to only get involved with a professionally structured syndicate that has an experienced manager involved.
Syndication usually requires a long-term commitment and does not offer a lot of flexibility to individual investors in the event their circumstances change. Being locked into a syndicate when an unexpected personal financial event may occur can be devastating.
http://www.propertyexpresscrm.com/
COMMERCIAL property investment is not just about investors with deep pockets and buying tall buildings. Ordinary people can own a slice of commercial real estate for only a few thousand dollars, but like all investments they need to do their homework.
There are more things to consider than with residential property investment. Do you go for a tiny piece of a shopping centre by buying shares in Westfield Group? Do you pool your resources with friends or strangers through a property syndicate? Or do you go it alone, either inside or outside of your super fund?
CB Richard Ellis director Philip Rundle says there are four key financial questions every investor should ask before taking the plunge.
Firstly, is the lease secure? "Always read the lease and ask questions where there is any uncertainty," Rundle says.
Secondly, what will the stamp duty cost you?
"Stamp duty can often be a big amount and get forgotten in the purchase calculations," he says.
Thirdly, is the rent net or gross?
It is important to know what the property's outgoings are and, more particularly, who pays for them. The final question is: Does the yield reflect the quality of the improvements to the property, the terms of the lease and the strength of the tenant?
It's likely to be a lot tougher to find a new tenant for your office or warehouse than a three-bedroom townhouse on the city fringe.
Going solo
As most commercial properties won't give you much change from $1 million, this is the most expensive way to get into commercial property investment.
But investors can be creative. For example car park spaces are a form of commercial property and can be bought for less than $50,000 a space.
Solo investors tend to stick with what they know. Savills national head of research Tony Crabb says they often target "the ever-popular bank branches, fast food outlets, occasionally a service station, and the street-front shop".
"Sometimes they run their own business out of it," he says.
"These properties are regarded as having stable returns.
"Most remain occupied for a long period and are rarely vacant."
Sean Ryan, director of specialist property law firm FR Law, says research is a key to success, as is "good financial and accounting advice about the correct vehicle in which to structure the investment".
Location
People often think of inner-city high-rise, but there's a substantial amount of investment that occurs in the fringe CBD and even the suburbs-investors can add value by choosing a site that has flexible development guidelines.
People should look for properties in busy areas specific to a particular sector.
Look for opportunities in locations that have been appropriately zoned for a specific use and which are near larger development sites or land users which may require expansion in the future - Google Earth can represent a commercial property investor's best friend.
At the push of a button, Google Earth will give you an instant snapshot of the entire surrounding area, nearby development and major space users. It may also highlight potential liabilities in the area which makes it an invaluable tool when making a major purchase in property.
Syndicates
Pooling your financial resources with others to buy commercial property through a syndicate is a common starting point. These are typically run by either specialist syndicate companies or organised through an accounting firm.
Getting into a syndicate can cost as little as $10,000.
Property syndicates have grown in popularity in recent times as many investors became disillusioned with the share market.
Most syndicates are made up of between two and 10 investors -Beyond 10 it becomes a bit unwieldy.
Anyone investing in a syndicate needs to make sure everything is documented -A handshake doesn't cut it anymore -It's very much a corporate marriage and a corporate divorce.
You need to decide how you are going to run it and how you are going to get out when it's time to get out or things go wrong such as death, disability or dissatisfaction.
Syndicates can offer great opportunities but investors should be cautious.
It's best to only get involved with a professionally structured syndicate that has an experienced manager involved.
Syndication usually requires a long-term commitment and does not offer a lot of flexibility to individual investors in the event their circumstances change. Being locked into a syndicate when an unexpected personal financial event may occur can be devastating.
http://www.propertyexpresscrm.com/
Thursday, November 19, 2009
How buy-to-let investors can maximise rental returns
Even when rental demand is increasing you should ensure that your property is in the best possible condition so that you can attract quality tenants. Make sure that the property is spotless or ask the current tenants to clean up before people are shown around.
It is worth painting rooms in a neutral colour to help potential tenants to imagine their lives in the property. Also, use flowers, candles and the smell of fresh coffee to make the place smell homely. Ask your current tenants to return furniture to its original position and rooms to their original use.
Make time to do your research and pitch the property at the right price. Look on the internet, in local newspapers and speak to letting agents to decide how much you should charge.
You are required to hold an energy performance certificate for your property if you are renting it out to new tenants. The certificate gives an indication of the energy efficiency of your property. It costs about $70 and is valid for ten years.
Legal obligations
You need to inform your mortgage lender of your intention to let your property. If it is a leasehold property, you will need to obtain permission from the freeholder, too.
If you are renting the property furnished, the furnishings must comply with fire and safety regulations. Gas appliances must be checked by a qualified Gas Safe-registered professional and electrical appliances should be checked regularly by a qualified electrical engineer.
Once you have found a tenant you need to have an assured shorthold tenancy agreement drawn up. Landlords are no longer entitled to hold on to deposits, so you need to find a tenancy deposit protection scheme to hold the money. You must be able to provide the tenant with details of the scheme within 14 days of taking the deposit. Landlords who do not sign up for a scheme will find it harder to evict tenants with whom they have a dispute.
Keep informed of changes to regulations by joining groups such as the National Landlords Association or a landlord accreditation scheme run by your local authority.
Dealing with tenants
Carry out security checks on potential tenants and run a credit check, which will help to verify not only that the tenants will be able to pay the rent, but also that they are who they say they are. If you are using a letting agent, it is still worth showing tenants around the property yourself so that you make contact from the outset. Once they are in place, you cannot enter the property without their permission, or when they are not there. Always be courteous and polite to tenants and sort out problems immediately. It is in your interests to ensure that problems are not ignored.
Supply your new tenants with detailed instructions for your property, including guides to operating appliances and boilers, and ensure that they have emergency telephone numbers and your contact details.
Should I use a letting agent?
A letting agent can introduce and vet prospective tenants, prepare tenancy agreements, advise on and arrange inventory and condition reports and changes to utility accounts and council tax. It can also collect the rent and pay the money to your account. Letting agents will usually take about 11 per cent of the tenant’s total rent as a fee.
The agent can also pay bills on behalf of the landlord and inspect the property, recommending, overseeing and accounting for necessary maintenance, repairs and redecoration. This is called a management service and the agent will usually charge an additional 6 per cent of the tenant’s total rent.
http://www.propertyexpresscrm.com/
It is worth painting rooms in a neutral colour to help potential tenants to imagine their lives in the property. Also, use flowers, candles and the smell of fresh coffee to make the place smell homely. Ask your current tenants to return furniture to its original position and rooms to their original use.
Make time to do your research and pitch the property at the right price. Look on the internet, in local newspapers and speak to letting agents to decide how much you should charge.
You are required to hold an energy performance certificate for your property if you are renting it out to new tenants. The certificate gives an indication of the energy efficiency of your property. It costs about $70 and is valid for ten years.
Legal obligations
You need to inform your mortgage lender of your intention to let your property. If it is a leasehold property, you will need to obtain permission from the freeholder, too.
If you are renting the property furnished, the furnishings must comply with fire and safety regulations. Gas appliances must be checked by a qualified Gas Safe-registered professional and electrical appliances should be checked regularly by a qualified electrical engineer.
Once you have found a tenant you need to have an assured shorthold tenancy agreement drawn up. Landlords are no longer entitled to hold on to deposits, so you need to find a tenancy deposit protection scheme to hold the money. You must be able to provide the tenant with details of the scheme within 14 days of taking the deposit. Landlords who do not sign up for a scheme will find it harder to evict tenants with whom they have a dispute.
Keep informed of changes to regulations by joining groups such as the National Landlords Association or a landlord accreditation scheme run by your local authority.
Dealing with tenants
Carry out security checks on potential tenants and run a credit check, which will help to verify not only that the tenants will be able to pay the rent, but also that they are who they say they are. If you are using a letting agent, it is still worth showing tenants around the property yourself so that you make contact from the outset. Once they are in place, you cannot enter the property without their permission, or when they are not there. Always be courteous and polite to tenants and sort out problems immediately. It is in your interests to ensure that problems are not ignored.
Supply your new tenants with detailed instructions for your property, including guides to operating appliances and boilers, and ensure that they have emergency telephone numbers and your contact details.
Should I use a letting agent?
A letting agent can introduce and vet prospective tenants, prepare tenancy agreements, advise on and arrange inventory and condition reports and changes to utility accounts and council tax. It can also collect the rent and pay the money to your account. Letting agents will usually take about 11 per cent of the tenant’s total rent as a fee.
The agent can also pay bills on behalf of the landlord and inspect the property, recommending, overseeing and accounting for necessary maintenance, repairs and redecoration. This is called a management service and the agent will usually charge an additional 6 per cent of the tenant’s total rent.
http://www.propertyexpresscrm.com/
Friday, November 13, 2009
Home Improvements & Tips to Save Money!
Since the property market downturn and general collapse of the world economy, a subject I don't typically write about but nonetheless has been topical for landlords lately concerns the merit of whether or not to invest in home improvements and if so what guidelines should be followed. I thought I would take some time out to list some quick and easy tips for Landlords considering future home improvements -
Firstly, if you plan to make improvements - Do not spend a fortune doing up your home - you will not get your money back. As house prices continue to fall, research shows that previously profitable improvements, such as extensions and new kitchens, can leave you out of pocket by many thousands of dollars.
Firstly, if you plan to make improvements - Do not spend a fortune doing up your home - you will not get your money back. As house prices continue to fall, research shows that previously profitable improvements, such as extensions and new kitchens, can leave you out of pocket by many thousands of dollars.
According to the study, the more you spend the more you stand to lose because the cost of the work will not be reflected in the sale price. The average cost of an extension, for example, is $33,800 but it would add only $13,568 to the property's price.
Despite that, reports indicate a near 20 per cent jump in the number of people who want to borrow money to improve their home compared with the same time last year. Some homeowners have decided to expand their properties rather than move while others are hoping that their improvements will help them to sell at a better price. So how can you boost the value of your home?
Get the decorators in
This is the only home improvement that will really boost your returns. Lets say that the average cost of painting and decorating a home is $1,330, but the cosmetic improvement adds $3,557 to the value of the property. Opt for neutral colours and don't forget the woodwork.
Avoid big names
Installing designer kitchens and spa-quality bathrooms used to be a fail-safe way of adding thousands of dollars to the value of your home. Not any more. These days a new kitchen costs about $18,700 but will add less than $5,000 to the value of a home. The average price of a new bathroom is $7,700 and will add just $2,892 to the property price. So stick with the basics if you are redoing these rooms.
Know the right price
In the UK for example the cost of home improvements has risen significantly over the past two years, according to the Royal Institution of Chartered Surveyors. RICS blames the rising costs of transport and raw materials, as well as a shortage of tradesmen as Polish builders pack up and return home. Avoid being overcharged by spending £17.99 on The Property Makeover Price Guide published by RICS' Building Cost Information Service (bcis.co.uk).
Do it yourself
One study shows that almost a third of homeowners are planning to save money by doing their own home improvements. However, you will spend even more money and potentially devalue your home if you botch the job.
Clean is beautiful
The easiest, cheapest and most effective way to add value would be to clean ...everything. For $35 you can hire a steam cleaner for the week to sort out carpets and upholstery. Lined curtains should be dry-cleaned.
The white stuff
If your bathroom still looks tired after a good scrub, freshen up the grouting and the mastic. Use a grout pen to rewhiten any discoloured grout lines. It costs $3.98 -you can also buy a tube of mastic sealant for $3.73 (diy.com).
Let there be light...
Maximise natural light. Simon Buhl Davis, who runs Savills' Interior Services, has managed to shift difficult homes by removing net curtains. He recommends installing colonial shutters to the bottom half of the window or slat blinds.
...in every dark corner
Compensate for the lack of natural light in gloomy places such as basements or lower-ground floors by installing twice the number of light fixtures. Fit dimmer switches.
Get rid of clutter
You might not need to move at all once you have got rid of surplus belongings. Use eBay and Gumtree but save time and postage by asking buyers to pick up their purchases. Donate or swap your stuff on freecycle.org.
Hide the dog/children
Smelly pets and messy children put buyers off. Ben Rymer, of Strutt & Parker, recommends packing them off to Granny's and dressing your home with fresh flowers and glossy lifestyle magazines. However, buyers are more price-sensitive than ever. So if your home really will not sell, the first thing to change might be the asking price.
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