Goodbye Renting

by Tracy Lee Harvey

  order to get your foot in the door you will need to make some personal

  sacrifices and a change in the way you look at home ownership.

  This concept could be one of the building blocks that helps get you to

  the house you so desire. It is possibly a small step which can leap you

  51

  into your own house at a much faster pace.

  When talking about global warming, Al Gore once said, “You need to

  phase down the danger and see this as an opportunity.” To me, this could

  be said for all other problematic areas of change but in this case as a way

  to overcome the obstacles to home ownership.

  Investment property requirements

  For the most part (but not always, which is why it is imperative you

  do your homework on loans) you may still need a deposit of at least 10%

  (unless you already have an existing property with equity.) This sounds

  like a great deal of money, and it is, but that’s why you need to consider

  the ways and means of getting that deposit together (see suggestions for

  saving) and be realistic with the location and price of your investment

  property choice.

  The other aspect of this transaction usually involves ‘mortgage

  insurance’.

  What is mortgage insurance?

  Mortgage insurance is the insurance that financiers require you to

  take out (at a considerable cost to you), to ensure that should you default

  or run into your own financial difficulties and the property needs to be

  sold, the financier is covered for the amount owed and will recoup all the

  monies owing via the insurance. This insurance is about the financier

  limiting its risk.

  The amount of mortgage insurance payable is dependent on the loan

  and the amount you will need to borrow but, as a guide, the general cost

  of mortgage insurance goes up from 0.8% of the entire loan for the first

  5% extra borrowed to as much as 2% for an extra 15% borrowed.

  Example:

  80% of the loan borrowed = Nil mortgage insurance.

  85% of the loan borrowed = 0.8% which could equate to an extra

  $2,000.

  95% of the loan borrowed = This could mean that mortgage insurance

  is as much as 2% or in dollar value around $5,000.

  This is based on an average loan of about $250,000.

  Rates may differ slightly with each particular lender. The rates are

  dependent upon the structure of the loan and the various deals in place to

  procure you, the customer. In some cases the lender may incorporate the

  mortgage insurance into the loan but either way it is an expense that

  52

  needs to be considered when budgeting for the cost of the property.

  If it is at all possible you should find a property that requires you to

  only borrow 80% of the purchase price (which is all the more reason to

  think in the lower price bracket). This is because if you kick in the larger

  deposit, the lender/financier will usually cover the cost of the insurance

  premium.

  Once upon a time mortgage insurance was a frightening prospect that

  most people tried to avoid like the plague and for very good reason. It

  was an expense that added cost to the home without anything to show

  for it. When the property was bought for investment purposes the cost of

  mortgage insurance made the investment much less appealing. All of a

  sudden the price of the property became might higher and therefore the

  investment was considered much less rewarding or viable.

  Now, as much as it is a burden, it can also be seen as just another

  necessary expense. I for one see mortgage insurance as a necessary evil

  and another expense, but still another option available that can and will

  see you into the property market.

  This is particularly important if you are already saving madly for your

  first home during a property boom. While you are trying desperately to

  save enough for a 20% deposit during a boom, you could also miss the

  boat completely. This is because while you’re saving and not taking

  action in the market, the market price on property is going up thousands

  of dollars each week, constantly putting you behind. Let’s face it, if

  you’re on an average wage or income it is virtually impossible to save

  $2,000 to $3,000 per week. If you can, you don’t need to be reading this

  book!

  So in this case it is much more beneficial to forego the saving for a

  20% deposit strategy in favour of a quicker and ultimately more

  profitable solution. Mortgage insurance in this case may be an upfront

  cost initially, but the increased capital gain over the boom period could

  put you well and truly in front in the long term.

  This is why I urge you to be aware and informed about what is

  happening in the world markets. It can help guide you when making

  very important decisions like this one.

  If I did use this strategy… What sort of investment

  property would I buy?

  Look, there are many, many types of investment property choices out

  there. They can range from commercial property for businesses to a

  53

  penthouse suite for the elite. The type of property can be one that you,

  the individual, feel comfortable with, but you have to make sure the

  figures are workable plus ensure a level of certainty that you can manage

  the loan. There are other considerations and they depend largely on what

  works for you. What I am trying to say here is that some people feel at

  home with holiday letting apartments, while others steer away from this

  type of investment, preferring to focus on commercial investment. One

  is neither better nor worse than the other, but the dynamics of how they

  are let and the rate of return can differ immensely. Either way a person

  may find that one or the other fits with their lifestyle, personality or just

  plain comfort zone for investing.

  What I recommend is the one that holds the least amount of risk, at

  least in the initial stages. For me, it is residential ‘stand alone’ property.

  Stand alone means that others don’t get a piece of the action, such as a

  property consortium.

  As well, I generally pick the lower to middle of the road type property

  which provides a reasonable rent for the people most looking to rent.

  Furthermore, with demand higher in these areas, the chance of

  potential growth is also higher. On the other hand, in a premium market

  usually only an exclusive group has the ability to buy, which limits the

  prospects for future capital gain. That’s not to say that the cost of the

  property won’t rise sufficiently, but with the money it would probably

  take to purchase one prestigious property (not withstanding the risks

  attached), I may have been able to purchase three properties in an area

  with higher demand. This could give a higher return, less risk of not

  finding a tenant and provide more capital growth.

  This practice continues to work for me so I stick to it. I have,

  however, moved out of my comfort zone and bought into other

  arrangements and then come unstuck. It was not that the other

  arrangements didn’t provide a return on my investments, but for me the

  return
was never as good as residential property. In addition, there were

  too many limitations attached and the potential for capital growth was

  restricted by the fact that so many other properties were available in the

  same block. Competition!

  So I have found what I feel comfortable with and what works for me.

  A property which will always have a demand for tenants is the way to

  go. That means buying in the low to middle range. Even if the tenant

  seems to pay a lesser rent than what is achieved in the so-called better

  areas, you’re more likely to get recurring, ongoing rent, which makes the

  rent return more definite.

  54

  Not so at the higher end of the market. People w2ho usually rent at

  the higher end are more likely than not to be temporary residence, who

  have moved because of a job transfer or are waiting for their own house

  to be built or located. The better the area and house the higher the

  income needed to rent it, which requires higher income earners. IF a

  recession hits or there is a glut in the market it is usually the higher

  priced rental properties that feel it. Whereas, the low to middle range

  remain in demand because people need to live somewhere. As housing

  prices continue to rise, more and more people will be looking to rent and

  the lower end of the market covers a higher proportion of the population,

  for example: young people starting out; low to middle income earners;

  people building their own homes who need reasonably priced

  accommodation while their house is under construction; welfare

  recipients; immigrants, those with job transfers etc, etc. Most people

  know that the less money they spend on renting the more they will have

  in their own pockets for purchasing later on.

  The second thing to look for when buying an investment property

  (and for that matter your own home), is the land content, that is, the

  amount of land associated with the purchase of the building. An ideal

  ratio of land apart from the building is 40% or more.

  Why? Because land appreciates and buildings

  depreciate. In fact, most buildings only have a life

  span of around forty years. That’s why from the

  moment you purchase your investment property you

  can claim depreciation of the building on your tax,

  while the land content appreciates in value over

  time.

  I own many units and townhouses and have been fairly successful

  with capital growth, but I soon realised I could have done much better

  had I purchased a house rather than units simply because there is limited

  land content in my purchases.

  I knew about land content, but never really took it seriously enough.

  Through research and experience I have learnt that the land content of a

  property is what grows in value not the building. As I said, the building

  in fact depreciates, but provides the best means to getting back some of

  your hard earned tax.

  The other problem with units and townhouses is the ongoing body

  corporate fees. The cost associated with those fees has continually eaten

  into my cash-flow, preventing me from progressing forward at a faster

  rate.

  55

  I guess one other factor which will help towards making a sound

  investment is location. Location involves the infrastructure around the

  property and what future plans are in the pipeline. If the basics are in

  place such as schools, shopping centres and medical facilities, the

  chance of it being a good location is fairly high, particularly when it is a

  growing area and employment can be easily accessed. Many would

  argue that being close to cities is the only way to go, but I disagree. I

  don’t believe rural areas and remote locations should be overlooked if

  you do your research and find out what is happening in that area and

  what potential growth there might be in the future.

  Now, you may not get capital growth on a remote property, like that

  of a city dwelling, but there is one huge advantage of owning an

  investment property in a remote area, especially when it is close to a

  mining or industrial development. That advantage often involves a very

  healthy cash return. In other words, you can often purchase houses much

  more cheaply in remote areas than those on offer in the cities, and the

  remote rents are usually much higher, providing you, the investor, with a

  great cash flow return for your investment.

  Why is this so?

  Basically, the workers of remote areas have to be housed somewhere.

  Often, the workers are on contracts for a period of time and therefore

  don’t want to commit to purchasing when they know they’re going to be

  moving back to wherever home might be. Furthermore, the long-term

  capital gain is a bit more risky, given that mines can close down and

  ‘ghost towns’ can emerge, so people tend to be a little more hesitant

  about investing in mining or industrial townships.

  A good example of what can happen is the demise of the

  asbestos mine at Wittenoom, in Western Australia. The once-

  thriving township of Wittenoom was home to 20,000 people

  and had the infrastructure of schools, shops, an airport and

  cinema.

  My uncle emigrated from Scotland to work in the mines and

  settled with his wife in Wittenoom in the 1950s and 60s. The

  township was constructed in 1947 following the discovery of

  asbestos in 1943.

  In 1962, Dr Jim McNulty made the first documented

  diagnosis of malignant mesothelioma, a form of cancer

  relating to the exposure of the asbestos. It is the outer

  membrane of the lungs which would result in a horror finding

  56

  for the people who worked and lived in Wittenoom.

  My uncle was one of those residents who did eventually die

  from the condition.

  The mine closed down in 1966 and with it went the residents.

  I visited Wittenoom in 1980 and marvelled at the eeriness.

  The signs around the town gave a strange reminder of the

  dangers involved by living there, even breathing in the air.

  Shops and homes were boarded up and the place really did

  feel as though it belonged to ghosts!

  Nevertheless, you would hope that we have learnt from past mistakes

  and have put all the right checks in place to ensure a catastrophe like that

  never happens again. The bottom line is that the risk needs to be

  weighted up and if the area you’re planning to invest in is researched

  properly, you may find that the mining company has a 99-year lease in

  place and the mind has enough resources available to last hundreds of

  years. So get informed!

  In some cases the mining company will lease properties for the

  employees and their families, or the employee themselves will seek

  rental accommodation. Either way a demand is created in areas where

  building developers don’t usually invest time and money into developing

  pockets of land and building homes, mainly because the room for growth

  is restricted. When the demand is high and choice is limited you have the

  opportunity to get a premium price for rent, which often leaves a

  cons
iderable amount of money in the hand over and above expenses.

  Another aspect to consider, if you do decide to go this way, is that

  any extra income derived from the tenant’s rent is taxable, but it is also

  extra income that you didn’t have before, which can be used for

  purchasing your own home. First, this shows a better income to the

  lender, by improving borrowing capacity. Second, it puts more money in

  your hand to re-invest… hopefully into your own home.

  If you find that purchasing a house is going to be

  harder and take longer than acquiring a unit,

  then whatever you do, don’t hang back (don’t

  wait). Sure, you may not get the same level of

  capital growth as a house provides in the long

  term, but a unit can still be a very good start.

  Remember, getting into your own address is the

  aim of the game and the sooner the better. Don’t

  put off today what you can in effect do today!

  57

  P.S. My first solely owned address was a unit and it gave me my

  start!

  Where do I invest?

  I guess the best part about investing in your first property is the

  ability to get into the market without necessarily struggling with high

  local market prices. If, for example, you live in the heart of Auckland

  NZ, or Sydney Australia, you are in a premium price bracket for housing

  that very few people could actually buy into as their very first property.

  Even if you can get a loan, the pressure placed on you to meet high

  repayments can be detrimental to a quality of life.

  On the other hand, the benefits of investing are many and varied. One

  of the biggest incentives involves the ability to choose a less expensive

  area to invest in. Investing gives you the ability to buy in another

  locality, State or country area at a much more affordable and therefore

  manageable price range.

  So where should you invest?

  All the way through this book I emphasise the need to stay informed.

  Read about what is happening in the world in credible journals and stay

  in touch with world trade issues. Influences in the world can and do have

  a large impact on investing and I cannot emphasise this enough.

  My Example

  My first attempt at investing further afield, but I didn’t, was in

  Western Australia. The property market hadn’t risen in price to the same