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

Why should I get an ING home loan pre-approval?

When you apply for an ING home loan pre-approval, you might be required to provide proof of employment and income, savings, as well as details on any on-going debts. The lender could also make a credit enquiry against your name. If you’re pre-approved, you will know how much money ING is willing to lend you. 

Please note, however, that a pre-approval is nothing more than an idea of your ability to borrow funds and is not the final approval. You should receive the home loan approval  only after finalising the property and submitting a formal loan application to the lender, ING. Additionally, a pre-approval does not stay valid indefinitely, since your financial circumstances and the home loan market could change overnight.

 

 

How can I get ANZ home loan pre-approval?

Shopping for a new home is an exciting experience and getting a pre-approval on the loan may give you the peace of mind that you are looking at properties within your budget. 

At the time of applying for the ANZ Bank home loan pre-approval, you will be required to provide proof of employment and income, along with records of your savings and debts.

An ANZ home loan pre-approval time frame is usually up to three months. However, being pre-approved doesn’t necessarily mean you will get your home loan. Other factors could lead to your home loan application being rejected, even with a prior pre-approval. Some factors include the property evaluation not meeting the bank’s criteria or a change in your financial circumstances.

You can make an application for ANZ home loan pre-approval online or call on 1800100641 Mon-Fri 8.00 am to 8.00 pm (AEST).

How long does Bankwest take to approve home loans?

Full approval for a home loan usually involves a property valuation, which, Bankwest suggests, can take “a week or two”. As a result, getting your home loan approved may take longer. However, you may get full approval within this time if you applied for and received conditional approval, sometimes called a pre-approval, from Bankwest before finalising the home you want to buy.  

Another way of speeding up approvals can be by completing, signing, and submitting your home loan application digitally. Essentially, you give the bank or your mortgage broker a copy of your home’s sale contract and then complete the rest of the steps online. Bankwest has claimed this cuts the approval time to less than four days, although this may only happen if your income and credit history can be verified easily, or if your home’s valuation doesn’t take time.

Can I apply for an ANZ non-resident home loan? 

You may be eligible to apply for an ANZ non-resident home loan only if you meet the following two conditions:

  1. You hold a Temporary Skill Shortage (TSS) visa or its predecessor, the Temporary Skilled Work (subclass 457) visa.
  2. Your job is included in the Australian government’s Medium and Long Term Strategic Skills List. 

However, non-resident home loan applications may need Foreign Investment Review Board (FIRB) approval in addition to meeting ANZ’s Mortgage Credit Requirements. Also, they may not be eligible for loans that require paying for Lender’s Mortgage Insurance (LMI). As a result, you may not be able to borrow more than 80 per cent of your home’s value. However, you can apply as a co-borrower with your spouse if they are a citizen of either Australia or New Zealand, or are a permanent resident.

Can I get a NAB home loan on casual employment?

While many lenders consider casual employees as high-risk borrowers because of their fluctuating incomes, there are a few specialist lenders, such as NAB, which may provide home loans to individuals employed on a casual basis. A NAB home loan for casual employment is essentially a low doc home loan specifically designed to help casually employed individuals who may be unable to provide standard financial documents. However, since such loans are deemed high risk compared to regular home loans, you could be charged higher rates and receive lower maximum LVRs (Loan to Value Ratio, which is the loan amount you can borrow against the value of the property).

While applying for a home loan as a casual employee, you will likely be asked to demonstrate that you've been working steadily and might need to provide group certificates for the last two years. It is at the lender’s discretion to pick either of the two group certificates and consider that to be your income. If you’ve not had the same job for several years, providing proof of income could be a bit of a challenge for you. In this scenario, some lenders may rely on your year to date (YTD) income, and instead calculate your yearly income from that.

Remaining loan term

The length of time it will take to pay off your current home loan, based on the currently-entered mortgage balance, monthly repayment and interest rate.

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 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 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.

What is appraised value?

An estimation of a property’s value before beginning the mortgage approval process. An appraiser (or valuer) is an expert who estimates the value of a property. The lender generally selects the appraiser or valuer before sanctioning the loan.

What is stamp duty?

Stamp duty is the tax that must be paid when purchasing a property in Australia.

It is calculated by the state government based on the selling price of the property. These charges may differ for first homebuyers. You can calculate the stamp duty for your property using our stamp duty calculator.

What is a loan-to-value ratio (LVR)?

A loan-to-value ratio (otherwise known as a Loan to Valuation Ratio or LVR), is a calculation lenders make to work out the value of your loan versus the value of your property, expressed as a percentage.   Lenders use this calculation to help assess your suitability for a home loan, and whether you need to pay lender’s mortgage insurance (LMI). As a general rule, most banks will require you to pay LMI if your loan-to-value ratio is 80 per cent or more.   LVR is worked out by dividing the loan amount by the value of the property. If you are looking for a quick ball-park estimate of LVR, the size of your deposit is a good indicator as it is directly proportionate to your LVR. For instance, a loan with an LVR of 80 per cent requires a deposit of 20 per cent, while a 90 per cent LVR requires 10 per cent down payment. 

LOAN AMOUNT / PROPERTY VALUE = LVR%

While this all sounds simple enough, it is worth doing a more accurate calculation of LVR before you commit to buying a place as there are some traps to be aware of. Firstly, the ‘loan amount’ is the price you paid for the property plus additional costs such as stamp duty and legal fees, minus your deposit amount. Secondly, the ‘property value’ is determined by your lender’s valuation of the property, not the price you paid for it, and sometimes these can differ so where possible, try and get your bank to evaluate the property before you put in an offer.