When property investment goes wrong

When property investment goes wrong

Last week’s RBA rate hold announcement was great news for Australian property investors. With the cash rate set to stay at 2.5 percent, a high demand for rental properties and property prices across Australia booming, it presents attractive market conditions for property investors.

In March, 39.6 percent of all new home loan applications were processed for investors, that’s two out of every five new home loans, according to mortgage lenders Australian Finance Group (AFG).  If this current trends continues, many Australians will buy their first property investment in the next 12 months but just because the market is favourable doesn’t mean there aren’t also risks to property investment.

Here are some of the things that can go wrong in property investment:

Buying the wrong property

Yes, property increases in value over time – but some properties increase in value faster and at more significant rates. And some properties can lose money, such as apartments in Melbourne’s Docklands that have failed to increase in value in the past 10 years due to an oversupply.

“Everyone is looking for the perfect property they can buy for cheap and rent for a lot of money, but tenants want to live in areas with a great lifestyle,” estate agent Ercan Ersan of Bresic Whitney Glebe said.

“We’ve heard horror stories of investors buying off-the-plan properties in the western suburbs of Sydney thinking that will be the next growth area, but they’ve ended up selling for a loss.

“With investment properties, it is always about location and making sure you are close to schools, universities, hospitals and amenities.”

To avoid a financial loss, do your homework and steer clear of areas with an oversupply of apartments and buy in an in-demand location attractive to renters and with a long track record of capital growth.

Choosing the wrong tenants

If you buy the right property, finding the right tenants should be easy. And it should help avoid the problem of lost income through not being able to rent out the property. There are many things to consider when it comes to finding suitable tenants: for example, young families may provide more stability as they tend to stay in one place for years but young children and pets can also cause more wear and tear to the property.

You may also find yourself stuck with tenants who damage the property through neglect or ones that are always late in their rent payments. Managing investment properties – whether it’s a single property or a portfolio of several properties – takes a lot of work and a good rental property agent can be the deciding factor in success or failure in the property investing game.

“The biggest mistake people make is not screening tenants adequately,” Ersan added.

“They look at the short-term return of who will give them the highest rent instead of choosing tenants with a good rental history and references.”

Not having enough cash flow

Property investment is like owning a business. Having a cash reserve to fall back on in tough times will help you hang on to your property and allow you to attend to any unexpected repairs or even hold out for a more suitable tenant.

Ersan advises holding 10 percent of the value of a property in savings to meet unexpected costs, such as special levies or urgent repairs.

“The costs don’t just stop with the mortgage repayments, and that’s where some investors can go wrong by over-extending themselves,” he said.

“Often people don’t realise how much the whole process will cost, so it’s important they do more research before buying an investment property.”

Not having a strategy

One of the most important keys to success in property investment is having a strategy in place and sticking to it, according to property investment expert Michael Yardney, CEO of Metropole Property Strategists. A lack of strategy can lead to financial losses.

“The problem is that if you don’t have a strategy it’s easy to get distracted by all the so-called ‘opportunities’ that keep cropping up, many of which don’t work out as expected,” Yardney wrote on his blog last month.

“Just look at all the investors who bought off-the-plan or in what they hoped would be the next ‘hot spot’, only to see the value of their properties underperform.”

To avoid wasting your time and more importantly money on unsuccessful property investments, Yardney recommends buying high growth properties and adding value to them through renovations or redevelopment over a 10 to 15-year period.

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Learn more about home loans

What is my property value?

Your property’s value is how much your property is worth to a bank or mortgage lender, when it comes to securing a mortgage over a property and calculating the loan to value ratio (LVR).

A professional valuer assesses a property’s value based on data about the property, its sale history, and other recent sales in the area. The valuer may also visit the property to assess its condition in person.

A property’s value may be different to a real estate agent’s appraisal, which indicates how much a property may sell for. It’s also often different to a property’s sale price at auction or private sale, which shows how much a buyer thinks it’s worth in the current market. 

What is a property report estimate?

A property report estimate is an approximate calculation of a property’s value, found in an online property report. These estimates are typically based on the property’s age, size, location, and number of bedrooms, bathrooms and car spaces. The property’s history of previous sales, plus recent sales of similar properties in the local area, may also help to calculate the property’s current value. 

When does Commonwealth Bank charge an early exit fee?

When you take out a fixed interest home loan with the Commonwealth Bank, you’re able to lock the interest for a particular period. If the rates change during this period, your repayments remain unchanged. If you break the loan during the fixed interest period, you’ll have to pay the Commonwealth Bank home loan early exit fee and an administrative fee.

The Early Repayment Adjustment (ERA) and Administrative fees are applicable in the following instances:

  • If you switch your loan from fixed interest to variable rate
  • When you apply for a top-up home loan
  • If you repay over and above the annual threshold limit, which is $10,000 per year during the fixed interest period
  • When you prepay the entire outstanding loan balance before the end of the fixed interest duration.

The fee calculation depends on the interest rates, the amount you’ve repaid and the loan size. You can contact the lender to understand more about what you may have to pay. 

Cash or mortgage – which is more suitable to buy an investment property?

Deciding whether to buy an investment property with cash or a mortgage is a matter or personal choice and will often depend on your financial situation. Using cash may seem logical if you have the money in reserve and it can allow you to later use the equity in your home. However, there may be other factors to think about, such as whether there are other debts to pay down and whether it will tie up all of your spare cash. Again, it’s a personal choice and may be worth seeking personal advice.

A mortgage is a popular option for people who don’t have enough cash in the bank to pay for an investment property. Sometimes when you take out a mortgage you can offset your loan interest against the rental income you may earn. The rental income can also help to pay down the loan.

When do mortgage payments start after settlement?

Generally speaking, your first mortgage payment falls due one month after the settlement date. However, this may vary based on your mortgage terms. You can check the exact date by contacting your lender.

Usually your settlement agent will meet the seller’s representatives to exchange documents at an agreed place and time. The balance purchase price is paid to the seller. The lender will register a mortgage against your title and give you the funds to purchase the new home.

Once the settlement process is complete, the lender allows you to draw down the loan. The loan amount is debited from your loan account. As soon as the settlement paperwork is sorted, you can collect the keys to your new home and work your way through the moving-in checklist.

Why does Westpac charge an early termination fee for home loans?

The Westpac home loan early termination fee or break cost is applicable if you have a fixed rate home loan and repay part of or the whole outstanding amount before the fixed period ends. If you’re switching between products before the fixed period ends, you’ll pay a switching break cost and an administrative fee. 

The Westpac home loan early termination fee may not apply if you repay an amount below the prepayment threshold. The prepayment threshold is the amount Westpac allows you to repay during the fixed period outside your regular repayments.

Westpac charges this fee because when you take out a home loan, the bank borrows the funds with wholesale rates available to banks and lenders. Westpac will then work out your interest rate based on you making regular repayments for a fixed period. If you repay before this period ends, the lender may incur a loss if there is any change in the wholesale rate of interest.

What is a secured home loan?

When the lender creates a mortgage on your property, they’re offering you a secured home loan. It means you’re offering the property as security to the lender who holds this security against the risk of default or any delays in home loan repayments. Suppose you’re unable to repay the loan. In this case, the lender can take ownership of your property and sell it to recover any outstanding funds you owe. The lender retains this hold over your property until you repay the entire loan amount.

If you take out a secured home loan, you may be charged a lower interest rate. The amount you can borrow depends on the property’s value and the deposit you can pay upfront. Generally, lenders allow you to borrow between 80 per cent and 90 per cent of the property value as the loan. Often, you’ll need Lenders Mortgage Insurance (LMI) if the deposit is less than 20 per cent of the property value. Lenders will also do a property valuation to ensure you’re borrowing enough to cover the purchase. 

What is an investment loan?

An investment loan is a home loan that is taken out to purchase a property purely for investment purposes. This means that the purchaser will not be living in the property but will instead rent it out or simply retain it for purposes of capital growth.

What are the features of home loans for expats from Westpac?

If you’re an Australian citizen living and working abroad, you can borrow to buy a property in Australia. With a Westpac non-resident home loan, you can borrow up to 80 per cent of the property value to purchase a property whilst living overseas. The minimum loan amount for these loans is $25,000, with a maximum loan term of 30 years.

The interest rates and other fees for Westpac non-resident home loans are the same as regular home loans offered to borrowers living in Australia. You’ll have to submit proof of income, six-month bank statements, an employment letter, and your last two payslips. You may also be required to submit a copy of your passport and visa that shows you’re allowed to live and work abroad.

What is appreciation or depreciation of property?

The increase or decrease in the value of a property due to factors including inflation, demand and political stability.

What is a valuation?

A property valuation is a formal assessment of how much your home is worth, to determine the Loan to Value Ratio (LVR) when you’re applying for a mortgage.

A valuation is carried out by a certified practicing valuer on behalf of a bank or mortgage lender, and is often based on available data about the property and recent sales of other similar properties in the local area. The valuer may also visit the property to assess its condition in person.

A valuation is typically different to an appraisal from a real estate agent, which is an informal estimate of how much a property could sell for at auction or via private sale.

What is a line of credit?

A line of credit, also known as a home equity loan, is a type of mortgage that allows you to borrow money using the equity in your property.

Equity is the value of your property, less any outstanding debt against it. For example, if you have a $500,000 property and a $300,000 mortgage against the property, then you have $200,000 equity. This is the portion of the property that you actually own.

This type of loan is a flexible mortgage that allows you to draw on funds when you need them, similar to a credit card.

What is equity and home equity?

The percentage of a property effectively ‘owned’ by the borrower, equity is calculated by subtracting the amount currently owing on a mortgage from the property’s current value. As you pay back your mortgage’s principal, your home equity increases. Equity can be affected by changes in market value or improvements to your property.

What is bridging finance?

A loan of shorter duration taken to buy a new property before a borrower sells an existing property, usually taken to cover the financial gap that occurs while buying a new property without first selling an older one.

Usually, these loans have higher interest rates and a shorter repayment duration.