Property Review Video – August 2023
Stay up to date with the latest developments in the property market over the past month. Our video takes you through an overview of the state of...
Rental yield is key when sourcing a property in a quality area for the long game.
A location must offer a great capital growth potential. But be mindful of your out of pocket expenses. Plan for this up front so you don’t struggle with the interest repayment and running costs.
If the demand for rental property in the area goes up, so does demand and you can push up your rent and your yield goes up too.
You have an opportunity! So if you buy a property in an in demand area when you move out you want renters to trip over themselves to rent from you.
Interestingly if the value of the property increases, your rental yield decreases.
A rise in value means your property is in a growth location. That means increased demand.But is it just part of the cycle.
If demand goes up, that’s great news for your rental yield. However, other investors will notice this increase in demand too. They start buying in the area, which pushes the property prices up.
And this is where the opportunity lies for you…
But keep an eye on the numbers.
Factors That Affect Rental Yield
And keep on top of rental reviews and opportunities to increase your rent. But there is something that is even more important than rental yield!
Feel free to book a time to talk with one of our mortgage broker experts https://investorschoice.com.au/bookatime
First Home Loan Deposit Scheme (FHLDS) is available to the first 10,000 eligible applicants. A single person needs to earn less than $125,000 and a couple less than $200,000. There are also caps on each State and city as to the purchase price.
Check out our ‘Guide to Australian First Home Buyers Grants and Concessions” to see if you are eligible http://firsthousebuyer.com.au/
Rental yield is a percentage figure from dividing your yearly yield by the value of the property.
For example, let’s say you’re picking up $15,000 per year in rent from a $300,000 property.
15,000 / 300,000 = 0.05
That’s 5% , which is actually an excellent yield. Most capital cities range from 2.8 – 4.5%pa yield.
But then you have to look at interest rates. Over the last 10 years, the average interest rate for a loan in Australia has been 7.3%.
Now, imagine you have that 5% yield. That means you’re going to have to find another 2.3% out of your own pocket to pay the interest.
Suddenly, this starts to sound difficult…
And that’s not all…
You also have to cover the ongoing costs of running the property. Between insurance, maintenance, and property management fees, you’re paying out a lot of money each year.
You’re going to have to dedicate between 20% and 30% of your rental income to those fees. Otherwise, you’re paying them out of your own pocket again.
These are all things that you’ve got to look out for when you #Source It. PS Currently interest rates are less than 4%pa and although rates aren’t assumed to rise for years it is a good tactic to take into account the higher rate when doing your calculations so you can plan for future years.
When it comes to real estate, location is key. That’s especially true when it comes to buying your first investment property.
Remember, this property is ultimately for investment – not your personal use. You might live there for a year or two, but your feelings about the neighbourhood aren’t that important. You need to make sure the suburb is in the right location to make you money. It doesn’t have to be a place you’d want to live in.
You won’t live there forever. After all, if you’re following our Framework you will be buying a property that will be your investment property for many more years than it is your home. So let’s treat your first home right up front as an investment property and discuss the factors that make for a great investment.
Great features, such as high ceilings and plenty of storage, are nice to have in a home. But the right location can make you money forever.
It’s the tenants who determine where they want to live. So, they, in turn, will have a major impact on the location you consider buying. Since you’re considering an investment property, you need to buy one that tenants will want to rent.
Our number one criteria is to look for a suburb where more than 30% of the residents are renters. Since you’ll be renting out your property, it’s a good idea to look for a location that’s suitable for renters.
So, how do you find a property with great investment potential?
Buying an investment property involves a different mindset than buying a property to live in it. When choosing a suburb, you need to look at:
Can you really predict the future growth of a suburb you’re considering?
You may not be able to predict the future, but you can look at certain indicators to get an idea.
Look to the past to get an idea about area growth over the years. Also, don’t forget to research all the factors that can impact your property’s capital growth. Things like:
Expert reports are another good source to find out about future growth.
Generally, these reports analyse whether an area is going up or down in value. They look at a variety of factors to make their own predictions about an area.
If you do use these reports, though, always check where the numbers are coming from. Write down your source so that you can compare the numbers to other reports you receive.
You may not agree with what’s published, and you don’t necessarily need to. They’re expert opinions based on what they see. But it may not be how you see the future growth of the area.
Even if you disagree with their findings, it’s a good idea to find out their reasoning behind the report. This can serve as a starting point for you. Integrate their findings into your own research and predictions.
Generally, demographics refers to the breakdown of an area’s population.
So, what do demographics tell you about a potential investment property area?
Usually, infrastructure and demographics go hand in hand. It’s a symbiotic relationship. For example, areas that have a lot of young families may also have many local schools to accommodate those children.
The variety of schools, in turn, attracts more young families to the area.
Areas with a lot of commuting professionals may have more access to better transportation options. That may include better infrastructure like freeways, on-ramps, and public transportation.
The reverse is also true. When a suburban area has these amenities, it may also attract more commuting professionals.
There are also other aspects to consider.
Why do people choose a suburb over inner city? Suburbs are generally more peaceful and quieter than an urban area. They also have relatively lower crime rates.
There are many major drivers that affect a suburbs’ growth. But many of them may be in place already in the suburb you have your eye on.
The main reason we look at demographics is so you know what the “typical” renter looks like. When it comes time to sell, having the typical property will allow you to market to the majority of the market. By knowing your market you can make sure you have the right property for them. You can even find out what streets renters prefer to live in using census data.
Some trends to keep your eye on include:
Ripple Effect
The ripple effect happens when buyer demand and increased property prices causes a “ripple” outward into other suburbs.
This means that buyers who can’t afford the suburb of their choice because of price increases look to the next-best suburb. Often this nearby suburb is lower-priced – until the subsequent demand reaches them. And then the ripple effect pushes into the next suburb…
Suburb Gentrification
Simply put, gentrification is a change of fortune for the suburb. This may mean a change in the people who live there.
Generally, it refers to a different class of people moving into the area. This new class invests their money and time into creating changes. The changes tend to increase property values, too.
Population increases and changing infrastructure may also play a part in changing the demographics of an area. Here are some of the more fun things to look out for: organic shops or doggy daycares popping up in an area. These are sure signs that a suburb is gentrifying.
How does supply and demand factor into your suburb choice? If you have a budget, as most homebuyers do, it plays a major factor in your decision-making.
Property prices at a suburb, including the ones that you want to buy in, depend on the law of supply and demand. So, when there’s a high demand for properties in the suburb but the properties are scarce, prices soar. That’s when it’s a seller’s market.
On the other hand, if there is a large number of properties for sale or for rent on the market, that can cause prices to drop.
Under-supply or scarcity also affects property prices.
Let’s say that a suburb will host the new headquarters of a major company. All of a sudden, the area floods with people looking for property so they can minimise their commute. So this headquarters will increase overall property value, sometimes even causing it to skyrocket.
Why does this happen?
You have many buyers in one area looking for properties. There’s a limited supply so, once again, it’s a seller’s market.
Knowing what the market is doing allows you to work out your negotiation strategy, which is part of our #Slam It segment of the Financial Freedom Framework.
If you are in a seller’s market, they are often getting the asking price or above – so there is no discounting going on. If you are in a buyer’s market, then the owner is often discounting from their initial price.
So if you see that the discounting figure in a particular suburb is -5%, then you could put in an offer of -7% and negotiate up to the acceptable going price in the suburb. For example, if the asking price is $400,000 and the discount is -5% for the suburb, then instead of offering $380,000 you might offer $365,000 first. Knowing the supply and demand and discounting in a suburb gives you an advantage when it comes time to make your offer.
Before you buy an investment property, research is key. You may not be able to predict the growth of a particular suburb. But you can look for certain indicators that point towards whether an area is on the rise or otherwise.
Checking rental demand for the area and buying the typical property will also allow you to have a property with little risk of it being vacant.
There are many things to consider when buying your first property – and getting it right so it’s set up forever as a growing asset you don’t need to worry about. It may cost you a little out of pocket initially, but in the long run the location is key.
Investors Choice Mortgages can help you get yourself set up to buy your first home (i.e. investment property), not just locate the right property but also get the finance to suit your needs.
Here’s what you can do to learn more.
For years, the Australian property market has been experiencing an affordability crisis. Many first-home buyers have found it hard to get the home that they want, where they want to live.
Things have started to get better though. Ironically, you’d have to credit the downturn. All of a sudden, homes are more affordable then they were but the market is rebounding and prices are rising again.
Are Australian homes cheap?
Not at all. Many people still find the required 20% deposit hard to come by.
Luckily, the Government wants to change this, at least for the average first-home buyers. The First Home Loan Deposit Scheme (FHLDS) can make your desired home much more accessible.
Let’s take a look at what it is, before showing you what you can do to make sure you qualify.
The FHLDS is a Government initiative that’s scheduled to go into effect on January 1st, 2020. It eliminates the need to put up a 20% deposit when buying a home. Eligible first-home buyers will be able to purchase a home with as little as 5% down. The way it works is that the Government will guarantee the remaining 15% needed to reach 20%.
You might think that you’ve seen something like this before. After all, there are other loan types and programs that allow people to buy a home with a 5% deposit. However, there’s a big difference here.
Traditionally, if you only put down a 5% deposit, your lender would require you to take out Lenders Mortgage Insurance (LMI). This protects the lender in the event that the borrower defaults on the loan.
LMI can be rather expensive. You’d have to pay a premium in the range of thousands, or even tens of thousands depending on how much you’re borrowing.
The best thing about the FHLDS is that the Government guarantee did away with LMI. You still have to pay back the 15%, but you now only have to save 5% to buy your first home, and without any penalty at that.
What’s more, you may also be eligible for stamp duty concessions. The requirements and availability vary between States and Territories, but it’s usually a significant chunk. For example, you can save up to $36k (6%) on a $600k home in Melbourne.
As mentioned, the initial rollout does come with a catch. Only 10,000 people initially will be eligible for the FHLDS and there are caps on the maximum purchase price based on where you are buying. Let’s take a closer look at the requirements.
The 10,000 cap is about 10% of all first-home buyers in Australia in 2018. But this shouldn’t discourage you, as it’s possible to be one of the lucky ones.
It’s a program targeted at Australians of average income. The FHLDS is available to singles earning up to $125,000 per year. For married couples, that threshold goes up to a combined income of $200,000. They both must not have previously owned a home, i.e. two first-home buyers.
The federal Government has also put a cap on the property value. This means that it will vary from region to region based on average property prices.
The price caps are as follows:
Your income will also be a limit after all the lender has to be confident you can repay the loan. For one, the lender isn’t going to approve a $1 million loan if you’re making $125,000 or less per annum.
For now, this is all the information that’s available on the eligibility criteria for the FHLDS. But you might imagine that the Government will be firming up all the details and criteria before the turn of the year. At this stage it is expected that the allocation of funds for this scheme is exhausted in the first 6 weeks so getting ready early is a priority.
So, will you be one of the ten people on average who’s selected for the Scheme? Your chances are higher if you act fast. The National Housing Finance and Investment Corporation (NHFIC) will handle the guarantees. They’ve started to consult with different lenders that will participate in the programs.
But that’s not the only reason why you should start preparing right now.
As you can imagine, many first-home buyers will try to apply for the FHLDS. Most experts are sure that the demand will outstrip the supply.
A group of wealthy home builders has joined forces with Simonds Group to start their own private initiative. Piers O’Brien, the director of Simonds Group, explained:
‘There’s going to be significant over-demandTime on what the Government is going to be able to meet.’
This is all the proof that you need about the projected demand for the FHLDS. This is why you need to put yourself in a prime position to be one of the 10,000. This means following the news closely and making sure that you’re not just eligible but ready to apply as soon as any new criteria show up.
For now, let’s go over some things that you’ll want to keep in mind.
Although the Scheme is quite targeted, there are things that you can do to make sure that you get it. The most important thing is to look at the eligibility criteria like you would any loan or grant.
Prime Minister Scott Morrison explained that the Scheme isn’t free money – as stated, you still have to pay the Government guaranteed 15% back. So you will have to contribute 5% down and borrow 95% of the purchase price (without any LMI). Per the Prime Minister, lenders ‘will still do all the normal checks on the borrowers to make sure they can meet their repayments.’
So, if you haven’t qualified for a loan before, you have work to do before January 2020. You need to inspect your credit report and see what you can do to improve your score. You should be thorough and make sure that there aren’t any red flags that would get your application declined. Now would be the perfect time to revisit your spending habits and see what you can do to make you a more reliable borrower in the eyes of lenders.
Of course, it also means that you’ll want to pay off as much of your current debt as possible, as long as it doesn’t affect your deposit. You should have an expert mortgage broker assess this for you before you start paying down debt. In addition, you might not want to apply for any new debt, like a new phone or credit card increase. You’ll want to keep your credit profile clean as possible to improve your credit score.
Another important thing to remember is that you can combine the FHLDS with other grants and concessions. For example, you can use it in conjunction with the FHOG and stamp duty concessions, along with the FHSSS. This might help you save even more and get into the market sooner. For instance if you buy in Melbourne a $600,000 property, you can save $31,000 in lenders mortgage insurance and $29,000 in stamp duty. All with a $30,000 deposit ( you will need $200 more for legal and inspection costs).
Just be careful about refinancing your loan under the FHLDS. The Scheme would expire if you refinance and get out of the original loan. Normally, the Scheme will go away as soon as the outstanding principal falls below 80% of your home’s purchase price. It’s not needed anymore since you’ll have have 20% in equity. Therefore, you might want to wait until then before refinancing your loan.
Lastly, you’ll want to keep the loan-to-value ratio (LVR) in mind. The FHLDS helps first-home buyers purchase a home at a very high LVR thanks to the Government guarantee. Since the 15% is a guarantee and not free money, you’ll be borrowing 95% and so there’s a fair risk of getting into negative equity if you buy a property over the market price or if it loses value. This is where the outstanding loan balance is higher than the value of your property.
As you can see, the FHLDS can be an excellent way to get into the property market for those who qualify. You can avoid having to pay for LMI and furthermore you can combine this with other grants and stamp duty concessions, meaning you need less than you think to buy your first home. Considering that this can add up to tens of thousands of dollars, it’s definitely worth doing everything in your power to get your hand on the Scheme.
Don’t forget to stay up-to-date with all the latest news about the FHLDS and all the eligibility criteria. This will give you a big advantage and raise your chances of becoming one of the 10,000 buyers earmarked for the grant in 2020. To do that, you’ll want to be the first one to get in touch with your preferred lender as soon as the Scheme becomes available.
Of course, you don’t have to do all of this on your own. We can help you prepare for the FHLDS through our dedicated Home Loan specialists specialising in assisting first-home buyers.
All you have to do is contact us today at Investors Choice Mortgages. We will assess your borrowing capacity, we will purchase a credit report for you so we can check your credit score (no nasty surprises), and assess your potential eligibility to meet the FHLDS requirements. We will provide you with a lending proposal, a strategy call, access to the First Home Buyers Course (RRP $495), and access to research tools like CoreLogic RPData (RRP $150pm). Aside from this, you’ll receive buying checklists, inspection checklists and a complimentary credit report, as well as support in preparing your loan application, liaising with your conveyancer and completing your FHB Grant and Concession paperwork.
Get yourself setup so you are in the best position to be one of the lucky 10,000. Book a time to speak to one of our first home buyer specialists by clicking the link below. https://investorschoice.com.au/bookatime
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