Need to Know | Where to Start with Property Investing

Candice: [00:00:04] Hi and welcome to talk money to me, I'm Candice Bourke 

Felicity: [00:00:07] and I'm Felicity Thomas and this is your need to know wealth podcast where we make the complex simple talk money to me is a podcast where we draw on our extensive expertise and experience to help educate you on all aspects of your financial landscape. 

Candice: [00:00:21] But before we get in today's podcast, yep, you guessed it. Just bear with us for this quick financial disclaimer, even though we are registered financial advisors. Please note this podcast and the content discussed does not constitute financial advice, nor is it a financial product. The content on this podcast is genuine nature, and you should seek appropriate professional advice before making any financial decisions. Alrighty, let's get stuck in today's conversation, Felicity, as it's our need to know episode where we're going to be talking about all things property investing. So get ready, folks. Today we're going to be talking about, firstly, the principles of property investing. Then we're going to talk about the actual process and the steps involved. And finally, the structures you can choose from. 

Felicity: [00:01:03] Exactly. So we're going to cover off a lot, so you need to be in the right mindset. So whether you're thinking about buying a property or you're already managing a large property portfolio, there will be something useful for you in today's episode. You know, Candice, I honestly think we talk about property with our clients on a daily basis. The property market is very hot right now, and let's be honest, it has been for the last decade, I could even say two decades in our thanks to all time low interest rates. The prices for both residential and commercial property here in Australia have skyrocketed. I wanted to give you some kind of exciting stats. So according to the Australian Bureau of Statistics, in the 12 months from the June quarter 2020 to June quarter 2021, major cities around Australia have experienced an extremely strong rise in residential property prices. Now you can probably guess the top performing Australian city, right?

Candice: [00:01:52] Can you? Yeah, I'm going to say Sydney, and I'm going to say Bondi in particular Bondi 

Felicity: [00:01:56] , not the inner West. All right. So Sydney at 9.3 per cent now you're not going to get this one at all. We've got Canberra at 9.1 percent and we've got Hobart seventeen point seven, Melbourne up 15 percent, Perth 15 percent, Brisbane fourteen point six percent, Adelaide fourteen point two per cent and poor Darwin at twelve point eight per cent, but to be honest, still double digits.

Candice: [00:02:20] Yeah, no, that's impressive. And someone has to come unfortunately lost in every race. 

Felicity: [00:02:24] Exactly. So essentially putting this into a national figure, the weighted average of the eight capital cities residential property price index rose by six point seven per cent this quarter and sixteen point eight per cent over the last 12 months. And what's amazing is the total value of residential dwellings in Australia rose from five hundred ninety six point four billion to eight thousand nine hundred twenty four point six billion in the recent June 2021 quarter. Now that's just the direct residential property market. As you know, we can also invest in the listed market via rates. So for our listeners, Candice what's a rate?

Candice: [00:03:00] A rate is a real estate investment trust, so it's essentially a company that makes investments in income producing real assets on behalf of the shareholders. Known examples of of a rate which you might be familiar with a chart, a whole group Goodman Group, Citigroup, Mirvac and Stockland Group are probably the most famous ones, but we're not here today to talk about rates. In fact, we're here to talk about the world of direct property investing. So property investing sounds simple enough on paper, right? You go out, you find the property you like, you make an offer and involving, but boom, you get the keys you move in. 

Felicity: [00:03:32] I wish it was this simple.

Candice: [00:03:34] I know because in reality, purchasing property is very complex and it requires substantial amount of homework, preparation and financial decision making, in our opinion. We've both gone through the property purchasing process quite a few times for city, and I think for us, you know, breaking it down the basic principles when it comes to property investing. There's a few that I'm going to mention. So first thing it's important to get your ducks in a row 

Felicity: [00:03:59] and you don't mean daffy ducks, right?

Candice: [00:04:01] No, not kind of. Not the cute little quirky, quirky ducks. No.

Felicity: [00:04:03] What kind of ducks are you talking about? 

Candice: [00:04:06] What I meant by ducks was clearing out my credit card balance, you know, clearing out unnecessary debts I didn't need before I even thought about searching for my property. I also made sure that my financial budget was up to date, so I knew exactly what I was earning at that time and how much I was spending, and therefore I could roughly work out, you know, a budget and the right price bracket to go looking at. Then comes the second part, which is the searching in the researching pot, which honestly can take people years from start to finish. You know, you and I, Felicity, were kind of lucky and blessed in this sense because I think you were looking for like five months or so.

Felicity: [00:04:43] No, I was looking for ages. I had no. My luck was bad. 

Candice: [00:04:46] Maybe for some reason I thought you were looking really quickly. Maybe the time went by quickly. Mine was quick. I remember looking for about five months, which is that's pretty fast in the property world, I reckon, because your

Felicity: [00:04:58] markets as well, right? We were buying in different markets, so. 

Candice: [00:05:01] Exactly. It depends on the market, very much so. But there's so many books out there and online articles and, you know, property gurus claiming that they know exactly the secret formula and the best hot tips and investing principles when it comes to the property market. But for us, we like to look at property investing as the same process and principles like when you're making an investment decision on your share portfolio. So I've spoken about in our previous episodes, you know, our investment philosophy. But just to give you a quick recap, what we look out for investments are, you know, are they being offered at a discount to the market or the piece is the investment, you know, very leveraged a lot of debt. What is the management looking like in the board? And has the investment got a solid growth outlook ahead? These principles can essentially be applied to property investing. So firstly, you want to look for a property that's being offered at a discount to what the market's offering or look at, you know, potentially a discount close by any recent sales with similar metrics, you know, so it was silly for me to look for a seven bedroom house. What was that selling for when at the time I was trying to purchase a two bedroom house? You've got to look for apples to apples, and essentially you don't want to get caught out by having paid too much or top dollar on the valuation. And I like this saying, you know, I won't enjoy it if I pay too much. I always have that in the back of my mind where the purchasing apples in the grocery store or stocks on the market or property, you know, if you're going to pay too much, you're not going to enjoy it.

Felicity: [00:06:36] Look just like share investing. It's crucial you do your research on the valuation and asking price and keep asking yourself and the real estate agent, is this price realistic? Is this price a good indication of what the market is indicating? It's worth, I mean, going to an auction. Things can get a little bit carried away. So to help us answer these questions, we like to utilise the sales comparison tools that you can actually find on property apps like real estate, dot com and domain.

Candice: [00:07:01] Exactly. And I think also to your point, Felicity, just that. Remember, at the end of the day, the agent's job is to sell the property, so they're going to hype it up to make the market get excited, right? We just can't get too involved in that. And one of the ways like you've alluded to to make sure you're, you know, making the right offer on the right price for the right property is, you know, using those tools like real estate or common domain to see what the market's comparing. So secondly comes into the next part of the equation. Is the leverage aspect, right? So this is where you think about your personal balance sheet, and I personally think you don't want to have a huge, unrealistic mortgage that's not sustainable to repay in the years to come for you and your family. Anything can happen as we know, like wages and the Covid environment has taught us that income can be volatile. So you want to look for the right property at the right price in the right straight, as they all say, to avoid taking out a large and unsustainable level of debt. 

Felicity: [00:07:59] And if it's an investment property, the right rental yield? 

Candice: [00:08:02] Yeah, exactly the right investment metric for you, for what you're looking for. Because the RBA and the Aussie banks are signalling and telling us at the moment that the households are struggling with their mortgages. In fact, Australian households are the second most indebted nations in the world, according to the OECD. That's not a race. We want to be winning here, guys. So my point being, don't get sucked into paying too much of a high price. And finally, when we look at a company's growth outlook, you know, we're looking for positive financial trends like, is there a dividend yield going up? The same can be implied for when you're investing in property as an investment purchase. Can you say the rental yield going up in the years to come due to the area that you're purchasing in? You know, is it super highly popular for people to live there? This applies. It's the same principle, right? So for Maine residents, it's important to look at the surrounding infrastructure and how is a population growing in the area? These aspects of your property's potential growth outlook is where you can help to look out for making the right decision. 

Felicity: [00:09:02] So true. And look, that's where the saying comes from. Don't be afraid to look for the worst house in the best street. Now, in a moment, we'll talk more about the steps involved and things to consider when you're getting your pre-approval. But before we do, we're going to hear from our sponsors. 

Candice: [00:09:18] So we've covered off the basic principles or some of them, what are the next steps and I guess the process involves buying a property, so 

Felicity: [00:09:25] purchasing direct property can be somewhat stressful and really emotional process. So we want to share with you simple steps on where to get started. Step one The first step that we actually recommend is see a mortgage broker and seek pre-approval. A mortgage brokers honestly on your side, and they'll help you determine what the property price point you can be searching for and to how much the banks will lend you. There's absolutely no point searching and attending auctions for two million dollar houses when the bank will only lend you one million and you only get a deposit of $300000 plus stamp duty. So you need to consider that which is different in each state. 

Candice: [00:09:59] I hate stamp duty. 

Felicity: [00:10:02] I said, Do I pay my mortgage? But that's

Candice: [00:10:04] another thing, but you got to let you go 

Felicity: [00:10:07] now. They will go through your financials and package it all together so that your current financial position is then submitted to the lender they believe is going to be the best for your situation. Keep in mind, some lenders are better for self-employed than others. Your mortgage broker will know that now if the property is to be an investment property, the banks will also consider the rental income of the investment property as part of the serviceability. Going through this process will then give you pre-approval. Remember, stamp duty is also payable and is on top of the purchase price. You need to have funds available for that deposit 

Candice: [00:10:41] and just quickly, Felicity for our listeners, because there's a lot of jargon here. What is serviceability actually mean? 

Felicity: [00:10:47] So serviceability means whether you can actually afford the loan repayments. That's why they add on the rental income because it helps with your service ability. They'll take your income and they also look at interest rates in regards to serviceability. You know, yes, you can service a mortgage at three per cent, but can you service it at seven? You know, that's something that we're going to get one of our expert mortgage brokers to go in with a little bit more detail. 

Candice: [00:11:11] I can't wait for that. I'm going to be asking so many questions when it comes to that. So step two, Felicity, what is the next step?

Felicity: [00:11:18] So now that you've got pre-approval, you can start the serious search for your property. 

Candice: [00:11:22] I love that. So now my serious search kicks in, right? So no longer my scrolling aimlessly. I got 15 20 ideal properties I want to buy. I've narrowed it down to two. But Felicity, what do I need to look out for next? Like, what are the next steps right to really make that right decision? 

Felicity: [00:11:39] OK, so you've got your pre-approval, then I always say, look around the neighbourhood that you're interested in investing or living in. I personally would not buy a property in an area that I wouldn't live in. Obviously, everyone's different, but that's just my little ethos. Now you may need to engage a buyer's agent here to help you, especially if you're time poor. So it's time to think about what's important to you. Is it the location of the property? Is it close to shops, hospitals, restaurants, parks, cafes, public transport in schools, even if this is an investment property and not where you're going to live? All of these points are important as your renters will be looking at these aspects too, as they're generally important to most people. Now, the design of the house is also important from a rental perspective. For example, the kitchen is the heart of your home, so the layout will be important for a family with small children. Can the parents be in the kitchen making lunch and see their kids playing in the garden or play area? 

Candice: [00:12:36] It's so funny you say that because for my partner, the heart of the home is the garage, so I had to make sure my filters included the world's best, you know, two three car garage.

Felicity: [00:12:46] The second one is go to your local council and see if any housing plan surrounding you have been submitted. What's the zoning for your area? The last thing you'd want is potentially to have an apartment block or new highway proposed that you don't know about. You know there's so much redevelopment going on. Well, for example, another house blocking your views. Also consider Are you buying brand new or you potentially going to renovate? Or is it a knockdown rebuild? You know, what are the council requirements that you can develop on the land, i.e. zoning and FSR, which is your floor space ratio? Another important thing is is the property heritage listed or conservation? And will that affect any proposed renovations? For example, my house is on a decent sized plot of land for my area. It's an older house with three bedrooms, but has the floor space ratio to renovate four bedrooms and increase the upstairs, thus adding value. We also need to keep the facade as we're in a heritage conservation area to appease the council when we plan to renovate. 

Candice: [00:13:47] So we've talked about stamp duty Felicity, but what other costs are involved prior to purchasing property?

Felicity: [00:13:53] So the other surprising costs are your solicitor fees title search survey. If it's not in the contract, I know that we had to buy a quantity surveyor. We had to engage a quantity surveyor to do a survey of our property because the boundaries were not

Candice: [00:14:08] properly documented with the council.

Felicity: [00:14:11] That's it. And strata records if it's an apartment. Make sure you look at strata records and. The sinking fund, you do not want to buy an apartment that has no money in the sinking fund, that essentially means your strata payment 

Candice: [00:14:25] is going to go up. 

Felicity: [00:14:26] No one wants you started to go up on top of your mortgage. And then when you're really serious about a property, ensure that you pay the couple of hundred dollars. It is to engage a professional for the pest and building inspections. That's really important. You don't want to learn that your house that you just bought has asbestos,

Candice: [00:14:43] and then don't forget the house itself. You've got to pay for that as well.

Felicity: [00:14:46] Correct. And here is an important, important tip. Don't be fooled. Usually, the property will be styled, so look for the floors and not the furniture. I know when I moved into my house without furniture, I was shocked. Not in a good way. But then I put my furniture and it looked great 

Candice: [00:15:02] because you saw all that. You saw all the issues, right? You were like, Oh no. 

Felicity: [00:15:05] Correct. I mean, we moved the dryer and behind that, there was a hole in the wall. But that's another story. Don't worry about my misfortunes. Just don't make them yourself. And then you need to think about what your must haves and what are your wants. I mean, what aspects are non-negotiable? Is best negotiable in your opinion? For example, I really wanted a pool. However, the house I bought does not have a pool, but it has the ability to add a pool as a garden is large enough. Upon further research, the house actually did have a pool once upon a time that was filled up by the previous owners. So it actually makes preapproval for the pool a little bit easier when I do decide to renovate how 

Candice: [00:15:43] annoying that you do the homework. And once upon a time there was a pool there. Don't you just wish it was still there today? 

Felicity: [00:15:48] I know, but that was the pool was literally the whole garden. 

Candice: [00:15:51] But don't forget, you can always go on, you know, fantastic websites like Kmart or catch and buy yourself a portable inflatable pool. 

Felicity: [00:15:58] I did do that and I ruined the grass. 

Candice: [00:16:01] Oh, OK. All right. So now we've we kind of went through the steps and we've got pre-approval and we know, I guess, what to look out for in the areas that were purchasing. Now I want to switch more towards the structures your mortgage broker might talk to you about. You want a bit of a role here, Felicity's. So I'm going to just pass it back to you here because I know you love this part of property investing being this strategic advice of side of things. So let me ask you what options and structures are available to us? 

Felicity: [00:16:29] Okay. So only going to go through two of them today. So this is deciding which way to purchase the property. The structure you use will really depend on whether it's an investment or not. And you'll definitely need professional advice on what's best for you in your own circumstances as everyone's different. However, the standard options. Firstly, you can invest in your personal name again, fairly self-explanatory. If it's your main residence, you'll have the main residence CGT exemption, which means no tax on the sale of the home. If it's an investment, then you'll be eligible upon sale for the 12 month CGT discount, which is 50 percent if held for more than 12 months. All income will go to your taxable income, as well as the deduction, so you get both. 

Candice: [00:17:11] And what about first time buyers? 

Felicity: [00:17:13] Well, for first home buyers, you can be eligible for potential first home buyer concessions. But remember, you do need to live in the property. It does need to be your first home rather than an investment. The second option is you can purchase it in joint names. The previous points to apply. However, there's other key terms that you'll hear you'll hear about joint tenancy, so all of the interest must be equally split. So if you purchase with someone else, it's going to be 50-50. If it's three people, it would be one third and so forth. So the important difference between joint tenancy and other tenants in common is survivorship. So upon the death of the joint tenant, the surviving joint tenant or tenants will receive the deceased joint tenants interest that leads us to tenants in common. 

Candice: [00:17:58] So tenants in common is essentially holding a title as tenants in common, allowing the interest in the property to be unequal. So this means, for example, that one owner could have, you know, 60 percent undivided interest in the property. Second owner having 25 percent interest and the third being the balance 15 percent. So also with tenants in common are deceased owners interest passes to his or her beneficiaries of the estate not to automatically the other owners of the property. So this feature, combined with the ability to, you know, structure the different ownership cyclist you mentioned, makes his type of holding title versatile for investors in particular. You also need to consider land tax on multiple property purchases, which is determined by your state government. So let's break that down. For FY21, the general threshold is 750 5000 and the premium threshold is four million six hundred sixteen thousand. 

Felicity: [00:18:53] And important to note, you won't be paying land tax on your main residence. It's only for investment properties. So we've gone through two of the ways to purchase a property will go through the other structures in the next need to know episode. So let's move on to step four, which is the fun part. Making an offer or attending the auction. 

Candice: [00:19:10] This is the fun part riots. And now you found your property and it meets your purchasing criteria. This is where the negotiation. Starts to kick in, so the nature of these negotiations will differ, obviously from property, property. Different regions, etc. But throughout these negotiations, you will have access to all of the important contractual information, such as the land title. The Council plans and so on and so forth, like we've mentioned earlier. Make sure we stress it. Make sure you engage a solicitor or conveyancer at this point in time, as they're the ones that speak on your behalf to the vendor's legal team. So your conveyancer or solicitor will give you, firstly, an overview of the contract. This is where the lay of the land is, etcetera, ensuring that you think everything is in order before you sign. However, if you have any, I guess points that you want to raise is the time to do it, because this is where additional provisions or conditions can be added or required before you sign any paperwork. So you could honestly go back and forth a few times sorting out the contract. I know personally from my recent property purchase, we did do that. The contract was very complex and it didn't make sense even to my lawyer, but we did figure it out was 

Felicity: [00:20:21] a bit concerning. 

Candice: [00:20:22] I know it was very it was draughted, very funny. And honestly, solicitors could spend a lot of time just going, you know what is going on here with all the contract

Felicity: [00:20:31] was for mine because you bought off market, right? I bought an auction where, you know, I didn't really have much choice in the contract because I either need to be in it or someone else is going to buy it. 

Candice: [00:20:42] Exactly. So either way, whatever style of property you're buying or how you're buying it, just be prepared for lots of emails and back and forth and phone calls in the negotiation stage. The property laws in at least an Australian state, you know, we know that they vary state by state, and this is where it conveys expertise will prove its worth. Now that you've agreed a purchase price that you're happy with, your solicitor or conveyancer will finalise this information and let you know when it's ready to proceed to sign. Remember, this is a negotiation stage, so this is where you're allowed to bargain and use opportunities to secure the property to beat the other buyers. If you're competing so things like, you know, we're happy to negotiate with a 10 per cent deposit or even more to secure the property, we have pre-approval done because we have a fantastic mortgage broker, so we have no issues with lending. You know, we can have a shorter settlement period. These are your tools and ammunition to get the deal done or

Felicity: [00:21:40] you're a cash buyer. Everyone loves a cash buyer. That's right. Now, if you've bought through a private treaty, you'll also have a cooling off period. So you got a cooling off period, right? This is not available when a sale is made via auction. Now, during the cooling off period, you can cancel the sale if you do change your mind, but you will be required to pay a penalty and look. The cooling off period does vary state by state. In the time between exchange and settlement, it's generally six weeks. You should be busy arranging the balance of the selling price by finalising the finance signing the mortgage. You'll also want to show your property as you'll be required to take out building insurance. Now, once the balance of the purchase price and stamp duty is paid, the settlement of the properties we made you will receive the keys and the title deed. Hooray. Yeah, you've got a property. Yeah. Now essentially, the lender will transfer your money to the seller and the property is ready for you to occupy or rent out. So as you can see, there are quite a few steps involved when it comes to investing in property or purchasing your first property. And we hope he took something useful away. 

Candice: [00:22:42] But before we leave you, we want to say a special thank you and shout out to one of our listeners, Jesse. Jesse, you asked us what we think about structuring trusts as an investment vehicle for your assets and I guess the pros and cons when it comes to a relationship. 

Felicity: [00:22:55] That is a great question, and it's one we often discuss with our clients because we know sadly, 51 per cent of marriages today actually end in divorce. You know, we're going to need a full episode to get through trusts and the structure and how it kind of works. So stay tuned because we'll definitely do that before the end of the year. 

Candice: [00:23:13] Yeah, Jesse, hold us to it. We will answer your question in a lot of detail. So that's a wrap for today's episode. And remember, although Felicity and I are financial advisors, please note our discussion today does not constitute financial advice. As always, you should seek appropriate professional advice before making any financial or investment decisions. Thank you again for the great question. If anyone else has one burning question that you want to ask us, feel free to do so by signing is an email to team team at Equity Mates dot com or jump into our socials and send it that way.

Felicity: [00:23:47] Yeah, exactly. I mean, we might not be able to answer the next episode, but we'll definitely consider doing a full need to know episode on it. So with that in mind, we have a really exciting interview planned with Simon Cohen coming up next week. And if you're not familiar with the name, it's Simon East from Cohen Handlers buyer's agent, which is one of the best buys agents in Australia and is also the star of Amazon Prime's show Luxe. The listing. It's our very own million dollar listing now. He's an expert at buying property, so we really look. Hearing his insights, and if you'd like to get in contact with either Candice or I. All of our details are in the show notes below. Until next time.