Inflated Property Returns

I was talking to someone recently about our property in Florida, and was saying how the expenses were higher than we first imagined, and in turn our return is a bit less than what we were hoping for. Initially I was hoping for a net yield of around 8.00%, I thought this might be a bit optimistic but going through the numbers before purchasing a property, it seemed like a realistic value.

But after obtaining our property in Florida and seeing first hand the expenses, it seems that despite being fairly conservative in our initial assumptions, the return is still less than what we initially hoped for. However, if you rearrange the numbers a little, the investment looks better and perhaps even a bit more realistic as well. See below for the initial and subsequent calculations which show net yield returns.

Initial Calculations

The Net Yield of 0.56% is less than desirable, and if we were told we would be getting this return then I don't know if we would have taken the leap to invest in the US as the hassle would just not be worth it. Although I did not include any capital gains on the property (as our plan is for cash flow) this can be  disregarded as the cash flow target simply has not been met.

But by making some adjustments to the calculations, like shifting some of the expenses to the capital (moving the cost of the A/C unit and the whitegoods under capital expenditure), the numbers start to look much better. This is realistic as these expenses are not a yearly expense and you would hope that a new A/C unit would last a few years at least, the same with the white goods. Further, you can remove the cost of PI  insurance (as this expense is not dedicated to this single property and will cover all properties under the LLC) and include it as part of the LLC's general overheads.

Adjusted Calculations

As you can see by adjusting the calculations to perhaps more realistic figures, we have now obtained our 8.00% Net Yield that we were hoping. It is important to note that both situations are essentially identical with all expenses included in both examples (with the exception of PI Insurance), yet it is simply a different way of
calculating that gives you a very different result.

I think this is a good sign to be careful when seeing advertisements purporting unbelievable returns. You should always look through the numbers yourself and satisfy yourself that what is being advertised is achievable. You should also always check whether the returns are 'gross' or 'net' yield and what expenses have been considered.

The Business of Property Investing in 2013

With a new year under way, now is the best time to organise your financials and plan for a prosperous year ahead. These four tips will assist you in making 2013 your strongest investing year yet.

Number 1 – Set goals

You’ve probably heard this one a bunch of times, each time brushing it off as unnecessary or something to look at later. It took me quite a few years of doing just that before I finally realised the benefits of setting goals at the start of each year.

Setting goals will help you focus your energy and give you some direction throughout the year. It doesn’t need to be an onerous exercise but each goal does need to be actionable and measurable. For example, ‘purchase another investment property’ or ‘increase passive income to $500/week’ provide clear benchmarks to aim for. ‘Get rich’, on the other hand, won’t really do.
Make sure that each goal:

• can be achieved within a year
• is something that you can measure your progress against
• is, most importantly, something that you’re passionate about achieving.

The goals that you set at the start of the year can be amended and updated as things change.

 

Number 2 – Undertake an end-of-year review

 

An end-of-year review is something everyone should do, regardless if you set any specific goals the previous year or not. When you treat your investments as a ‘business’, your overall results will improve.

Undertaking a review doesn’t need to be too complicated. Start off by asking yourself simple questions such as, ‘Am I happy with what I achieved this year?’ and ‘What area could I have improved in?’.

 

Next, list your achievements for the year (this doesn’t need to be limited to your financials) and areas where you lost a bit of focus (for example, sticking to a budget).

 

The final step is to review all of your current investments to see how they are travelling.

 

Number 3 – Set a budget

 

Budgeting ties in nicely with the first two tips. Once you’ve set your yearly goals and undertaken a review of the previous year, you’ll be in a much better position to move forward with all of your financial pursuits.

 

Find a basic budgeting spreadsheet on the internet and fill it in as accurately as possible. If you’re unsure about any numbers, make an educated guess, but do try to be as comprehensive as possible.

With your budget complete, you will be able to see exactly where your money is going on a weekly or monthly basis. This will also assist you when you undertake your next end-of-year review.

 

Deposit a portion of any excess income into a high-yielding online savings account where it can stay until the next deal comes along.

 

Number 4 – Keep good records

 

Start each year with a relatively clean slate when it comes to records. It’s easy to be overrun with too many emails, RSS feeds and ‘to-do’ lists. Give your inbox a thorough clean-out and try to keep it clear by archiving old emails. Keep one ‘to-do’ list (preferably one that you can access everywhere, for example, with Evernote), then write down each day’s actions on a Post-It note.

 

Lastly, file everything (electronically and hard-copy) that is important using a clear folder structure.

Interest rates: are your investment decisions sending you to an early grave?

On the first Tuesday of every month something happens that gets every property investor and commentator curious.

I am talking about the meeting that the Reserve Bank of Australia (RBA) has every month to talk about all things interest rates. 

It may seem insignificant to change interest rates by 0.25%, but 0.25% means millions of dollars for banks and financial institutions. If property owners are treading that fine line of only just being able to service their loans, then one rate change in the wrong direction could leave them struggling to make ends meet, and a couple rate changes could leave them close to having to sell their home or even facing bankruptcy.

This is why it is so important that people take into consideration the potential consequences of rate changes before they sign up to a new loan. A property loan is a long-term deal. Even with refinancing you could still be locked in for up to three years - and facing 30 potential rate changes in that period.

It's a matter of needing to hope for the best but plan for the worst.

I still remember when I got my first home loan ... the standard variable rate at the time was about 5.80% per annum and with that rate I was comfortable making the repayments, even being able to manage some extra repayments. But before I finally signed off on the contract, I wanted to make sure that changes to the interest rate wouldn’t leave me bankrupt. Having done the sums, I would have still been able to make the repayments if the interest rate rose to 10.00% per annum.

A simple way to check is to add 3.00% to the current standard rate and see if you are still able to make repayments. If you can then you should have no problems servicing the loan.

It’s interesting to note that most financial institutions don’t advise you to carry out this sort of simple, yet very important, check. I was given pre-approval for a loan amount way out of my limit. Add to that a few rate changes in the wrong direction and I would have been on the brink of not being able to service the loan.

In my opinion, this is just pure greed on the part of financial institutions and is plain negligent. A lot of people will take the pre-approval amount and start looking for properties up to this price range, completely unaware of the precarious position they are putting themselves in. Add to this the tendency for Australians (at least in the past) to live way above their means and you have a perfect recipe for disaster.

At the end of the day, however, people still need to take accountability for their own actions and should take a greater interest in their finances. Getting finance is the most powerful tool property investors have in regards to building wealth, but, like most things, it is a double-edged sword. You need to take stock of your current situation and plan for the different circumstances that could arise in the future.

I have watched my parents worry about bills as they come in and get stressed at the increases to grocery prices. One of the things that they did do right was to pay off their home loan as fast as they could. Couple that with a large deposit and they didn’t need to wait for RBA’s monthly interest rate announcement with sweaty palms.

It is this mentality that I have emulated. When I see the interest rates change, I know my large buffer will keep me going before things get tight. As I increase my investment property portfolio, I make sure that I use these ideals in every investment decision. The last thing that I want is to be watching the news once a month, praying that the RBA does not increase interest rates, knowing that if they do, it would lead to financial catastrophe.

Investing is about growing wealth, not about growing stress.


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Disclaimer: By viewing this website, you acknowledge that it is for informational purposes only and does not imply any contractual agreement, promises of returns or legal expertise. All investors should consult with legal representation and appropriate accountants before making any investment and should ensure that individual due diligence is done. Any information provided here is for educational purposes only and should not be taken as financial advice.

The Myth of Negative Gearing

I remember when I was younger, asking my mum what Negative Gearing was. I had seen it advertised everywhere, from free seminars on television to articles in magazines and newspapers, it seemed to be the buzz phrase of the day. My mum explained that negative gearing was when you buy a house and rent it out to a family and let the rent pay for the mortgage. I guess she kept it simplified because I was not even a teenager at that stage but even still, it sounded like a good idea to me, you basically get a house for free! So what could possibly go wrong?

A few years later, when I really started to look into investing, I began to see the “negative” part of negative gearing. I guess the answer was always in the name, if something is called negative, then it is never going to be a good thing, right?

So, what is negative gearing? Put simply, negative gearing is purchasing a property as an investment, where the money coming in (rent) does not cover the money coming out (loan repayments, maintenance, agent's fees etc.) and you are forced to use your own income to cover the difference.

But so many people have made so much money out of negative gearing, "how can it be a bad thing?" I hear you ask. Well to make money out of a negatively geared property, the value of the property needs to rise consistently over the medium to long term of the loan. Back when negative gearing was really popular, this was the case but in the not-so-flash property market of today, you need to give things a second and third look before jumping in. In a rapidly rising market like Australia had during the 2000s, it was next to impossible to lose money investing in property. In the end, all these people who invested in negatively geared property were able to still make money despite an unsustainable investment strategy.

So, what makes it so unsustainable? Well it is a fact that the majority of property investors own 2 or less properties, I cannot remember the exact percentage, but I believe it is something like 90% of property investors 'only' own 1 or 2 properties. The reason for this is simple, the majority of properties are negatively geared; they cannot afford to hold any more. 

As an example, let’s say you have $1,000 extra cash flow a month. Because a negatively geared property is taking money out of your pocket, assume it costs you $500 per month to maintain the loan (cover the difference between the rent and the loan repayments). Already you can see that you are only able to cover 2 properties, as after that, you are out of extra cash flow.

So why do people negatively gear into property? Well again, the answer is simple. They have to. They want to invest in property because according to a lot of people, it is a great way to invest, just about risk free, just about a guarantee to make a return and the saying “safe as houses” does come from somewhere after all. 

As it stands now, if you want to invest in property as part of your portfolio, you will see that almost all of the available properties are negatively geared. This is mainly due to the extremely high house prices in Australia, particularly in the major cities. House prices rose dramatically over recent times, and the increase in rent simply did not keep up. I remember when I was renting back in 2009; we paid $550.00 per week for a 3 bedroom house in Sydney. Looking at comparative sales nearby, the house would have been easily worth about $800,000. Assuming an interest rate of 7.00% per annum, that gives a weekly interest repayment of $1,076.00. Repayments at this level don't even begin to "eat" away at the principal amount as the rent is nowhere near the amount needed to service the loan. This is the situation across most of Australia, rent prices just do not come close to the loan repayments and all the properties have to be negatively geared.

Another reason that people invest in negatively geared property is to reduce their tax bill. People are under the illusion that they can end out better off because they're paying less in tax. Of course it is true that you can claim expenses on the house on your tax return, but this is offset by the money out
of your pocket to service the loan, so you still end up out of pocket. Let me show you an example:


Your initial taxable income is $150,000 per year

Tax rate of 45%

Rent collected of $600 per week

Interest repayments of $1,100 per week

Other deductions of $5,000 per year (property maintenance, fees etc)

 

Option 1 – Not investing in property

Taxable Income = $150,000

Tax Paid = $150,000 - [$150,000 x (1 – 0.45)] 
               = $67,500 (approximately)

Net Income = $150,000 - $67,500
                   = $82,500

Option 2 – Investing in property

Taxable Income = $150,000 + $600 x 52 - $1,100 x 52 - $5,000
                         = $119,000

Tax Paid = $53,550

Net Income = $119,000 - $53,550 
                   = $65,450

So as you can see, your net income is almost $20,000 less in this example, so just to break even with a negatively geared property, you need to ensure there is at least $20,000 in capital gains over the course of a year. Now as I said earlier, when the property market was going well, this was fine, but without the large rises, negative geared property should be heavily scrutinised before committing to buy.

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Disclaimer: By viewing this website, you acknowledge that it is for informational purposes only and does not imply any contractual agreement, promises of returns or legal expertise. All investors should consult with legal representation and appropriate accountants before making any investment and should ensure that individual due diligence is done. Any information provided here is for educational purposes only and should not be taken as financial advice.

Tips and Tricks to Help You Get Ahead of the Pack

Property investing should be fun. It’s by no means an easy task but making money should at least be enjoyable. To help ease some of your stresses, we here at Streamline Investing have come up with a few key tips and tricks that will put you in front of the pack.

Time is Money – no matter if you are planning on renovating, investing for a high rental yield or purely purchasing a property as your primary place of residence, time is money. Over-runs can cost you thousands of dollars. Delays in finding a tenant or commencement of renovation work can severely eat into your profit. You must be ready then to start doing what is required immediately after settlement takes place.

To assist with this, it is always good practice to put a clause in the contract which provides that the seller will give you access to the property before settlement at reasonable times and upon reasonable notice. A suggested clause could be the following:

"The seller will allow the buyer or the buyer's trades people and manufacturers access to the property, at reasonable times and upon giving reasonable notice to the seller in writing before settlement, to allow the buyer and its trades people and manufacturers to take measurements and obtain quotes for the cost of carrying out work for the buyers following settlement."

A clause such as this will allow you to progress with your plans for your new property without delay, while maximise any potential profits.

Another reason to agree on a long settlement period is to reduce the time it takes you to find a tenant. If you can agree with the seller to show people through the place during the settlement period, it can mean you gain an extra 4-8 weeks’ worth of rental payments. This is something that is easily forgotten during the purchasing phase.

Conditional Clauses – These can be double-edged swords and must be used with caution. I’ve heard of dodgy buyers adding “subject to building inspection” clauses in their contracts and subsequently asking the seller to agree on a lower price due to a negative building inspection. This is fine when it’s true but if you use this as a way of bargaining down, it won’t be long before the seller catches on. You don’t need an upset seller, especially if you’re also trying to get a long settlement or have the seller rent the property back from you. The key message here is to be honest and not to try and ‘pull the wool over the seller’s eyes’. Adding ‘subject to property inspection or valuation’ clauses can be a good strategy as long as you use them the right way.

Buying Off the Plan – This one is simple. Don’t do it. There are numerous reasons (and cases supporting those reasons) as to why buying off the plan is a bad idea. Over-stated prices, dodgy contract conditions and simply not knowing what the workmanship is going to be like are only some of the negatives. I really can’t see too many positives in this kind of purchase so my only advice is to not buy off the plan.

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Disclaimer: By viewing and using this website, you acknowledge that it is for informational purposes only and does not imply any contractual agreement, promises of returns or legal expertise. All investors should consult with legal representation and appropriate accountants before making any investment and should ensure that individual due diligence is done. Any information provided here is for educational purposes only and should not be taken as financial advice.

The Evil Insurer - Tips and Tricks to Help You Come Out on Top

Insurance is an evil industry. It never ceases to amaze me when yet another insurance policy is invented to protect the unsuspecting public from ridiculous events that are extremely unlikely to occur. I know this sounds pretty negative but when you ask just about anybody who has had to deal with an insurance company, they will be just as cynical as I am. Now I’m not saying to abandon all of your insurance policies, as some are warranted and can protect you from horrible, unforseen events, what I’m saying is, you need to do a hell of a lot of research before signing up. Before I get started, let me just tell you what the number 1 thing that you ALWAYS need to ask before considering a new insurance policy, “What’s not included?”.

This is something that is almost always overlooked by people seeking an insurance cover. Insurers produce exhaustive lists of what is covered but rarely, if ever, list what is not included. This just means that unless your loss occurs due to one of the items on the list, you are not covered at all. Your cover is always more inclusive when the insurer produces a list of what’s not covered in your policy.

Below are some more common traps:

Under insurance – there is a clause in most modern policies which states “This type of clause requires you to bear a proportion of each loss or claim if the sum insured is inadequate to cover the full potential loss. In effect, you are taken to have self-insured a proportion of the risk, because you have not insured the full value of the risk.”

So, for example, you bought a house for $300,000 ten years ago and insured it for its replacement value at the time ($300,000). Fast forward to today, property prices have risen, you’ve done some upgrades on the property but have left the insured amount at the same level due to laziness or being comfortable in knowing that you’ll at least get $300,000 should something unforseen happens.

In a horrible turn of events, your house is burned down. You go to your insurer and make a claim for the $300,000, although your house is now worth $500,000. The above clause means that your maximum claim will be:

$300,000/$500,000 x $300,000 = $180,000

In summary, you should review your insurance cover every couple of years but make sure that you don’t over-insure as this won’t provide you with any extra cover. It’ll just mean you pay higher premiums for no good reason.

Insure ASAP – When you enter into a contract for the purchase of a property, you’re instantly liable for the property. To avoid entering into a hasty, long-term insurance contract, you can take out interim insurance with most insurers. If for some reason you can’t take out an insurance policy upon signing the contract, you can put a clause in the contract that will pass all liability to the seller until settlement. I would suggest contacting a solicitor to get the correct wording of such a clause.

Two Policies – A common question by a seller usually arises when a contract is signed. “Should I now cancel my policy as the buyer is now responsible for the property?” The answer is no. You never know what kind of policy a buyer has taken out and whether or not everything has been disclosed. If something goes wrong and the buyer’s insurer cancels the policy, your property is in effect not insured at all.

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Disclaimer: By viewing and using this website, you acknowledge that it is for informational purposes only and does not imply any contractual agreement, promises of returns or legal expertise. All investors should consult with legal representation and appropriate accountants before making any investment and should ensure that individual due diligence is done. Any information provided here is for educational purposes only and should not be taken as financial advice.

How to Choose the Right Property Manager

So, you’ve just purchased your property. You’re over the moon that you’ve finally made the leap into the property market and can now start reaping the rewards. Well, unfortunately the hard work is not over. The number one, most critical decision outside of when to buy and sell a property is choosing a suitable property manager.

A property manager’s role is broad and can cover anything from choosing a tenant, collecting rent, carrying out repairs, and providing sensible advice on management decisions. A good property manager will do this and more, covering all of the little, but very important things as well. These should include, but are not limited to:

• Find prospective tenants
• Check a potential tenant’s criminal record
• Prepare the lease documentation
• Advertising
• Maintenance
• Take initiative with undertaking repairs under a nominated dollar value
• Organise bond documentation
• Pay authorised account and statutory charges
• Undertake regular property inspections and provide good feedback back to the landlord
• Check a potential tenant’s credit history
• Give you up to date advice on rentals and the property market
• Administer rent reviews
• Pass on the rent payments to you promptly
• Provide regular statements
• Handle arrears

So, how do you choose a good property manager? There are a number of ways that good property managers can be found. It’s rare that the best one for you will be the buyer’s agent. It’s much more common to find good property managers through word of mouth, looking through investment forums etc. Here are some tips for finding a good property manager:

• Always contact the property manager’s current and previous clients to get a bit of perspective on his or her character
• Have a clear contract set up with your property manager which outlines all the services that will be provided
• Generally, try and steer clear of really cheap property managers as it’s likely the services will be of a much lower quality and will end up costing you more money in the long-run
• Try and gauge the reputation of the company that the property manager works for by looking on the internet and contacting other professionals in the industry
• Find a property manager that specialised in the types of properties that you are planning on buying

Here are some other articles that you might be interested in:

 

How to Set Up a US Bank Account

Advice on American Real Estate Agents

American Real Estate Listing System

If you have any questions or comments feel free to email us at streamlineinvesting@gmail.com

 

Disclosure: The article is not to be taken as investment advice and the views expressed are opinions only. Readers should seek advice from someone who claims to be qualified before considering allocating capital in any investment.

 

How to Find a Buyer's Agent

Finding a good buyer's agent and property manager can be the difference between having a very successful and prosperous investing experience, compared to having a horror one.

A buyer's agent will be your point of contact when purchasing a property in the US, they will put offers in on your behalf and also keep a lookout for properties that you might be interested in. Because we are purchasing a property on the other side of the world, in an area we have not even visited before, let alone researched significantly, it means we are putting a lot of trust into the buyer's agent to find us a property that suits us, and give us an honest price guide on the property. Because an agent works on commission, i.e. they make money by selling houses, it can be easy to believe that an agent does not have your best interest at heart and they simply just want to make the sale and collect their cheque.

Of course in my opinion I believe the agent should do everything they can to be honest and trustworthy to the seller, especially in our case. For our first property, we were simply trying it out to see if investing in the US worked well for us, if it did, then there is no reason why we would not be investing significantly more into the US property market. So by being dishonest and collecting a smaller commission, they are potentially missing out on building a solid relationship with us which will benefit both of us financially in the long term. We were lucky that the buyer's agent we ended up going with was on the same line of thought with regards to this. She is initially from Australia, and now lives in Fort Myers, Florida, so being initially from Australia, she is able to better understand our concerns with regards to investing overseas, and is also able to decipher the jargon that is sometimes used in the US and relate it back to Australian terms that we understand better.

While we were looking at houses to purchase, we would have contacted probably around a dozen buyer's agents in the Lee County area, and just about all of them were very responsive and seemed very eager to help us with regards to purchase a property, but I guess we just did not feel as comfortable as we did with the buyer's agent that we ended up going with. It is important to note that the system in the US is different to Australia with regards to buying a property. A property is not simply listed with a single real estate agency and sold through them; it is listed on a database, and gives all real estate agents the ability to see all the properties on the market, so it is not like you are missing out on a good property by going with one particular agent. That being said, we were talking with one agent, who claimed she had information on properties that were about to go on to the market, and what price they were looking at. This way, you could put an offer on it instantly as it went on, and get it before everyone else saw it. I have a feeling this was not quite ethical and perhaps even illegal; anyway we did not feel comfortable working with this person.

Building trust with your buyer's agent is another very important aspect of the process of purchasing a US property. You are not going to feel comfortable sending over $50,000 (or more) of your hard earned money into the US if you are not confident you are getting value for money. You want to make sure you are purchasing a good quality house and not getting something that is just going to continue to drain your money. The main way we were able to build trust with our agent was just by constant communication with her, and by continuously asking her questions just to make sure she knows what she is talking about. Another good idea would be to talk to other people who your agent is currently working with, we did not do this as we believed to be confident enough with her to not need to do this.

The process we used to find a house for us was fairly simple, our agent set us up to receive notifications of new houses that met a criteria on the database of properties. Basically all the houses for sale are listed on the database, and by entering certain criteria to find a house you are looking for, such as price, size, location etc. You are sent a list of all the current houses that match your criteria. When we got the list, normally there would be about 40 new houses or so a week, we just sent our agent a list, normally of about 10 or so properties that we thought looked good on the photos. Our agent with local information and being able to see the properties for a property inspection would then review the properties and provide her own opinion. One of the reasons we were comfortable with our agent was that she would reject 90% of the properties we suggested, which lead us to believe that she was not simply in it for the commission, and that she was looking out for our best interests. Our agent would also look at houses herself and send us (and her other customers) a list of all the properties with her review of them.

The last aspect that made us comfortable with investing with this agent, was that she too is a property investor in the area, and quite often with the properties she saw as good value, she would say that we should put an offer on the property, and if we didn't then she would put an offer on the place herself. So if an experienced investor sees a property as a good investment, then it is a good sign that it would be a good place to put our money.

So as you can see finding a good buyer's agent is very important, they are your representative on the ground and you need to work together to make this successful. At the end of the day, you need to find a good, honest, genuine and trustworthy agent that you feel comfortable working with; otherwise the process will just never work out.

If you would like more information and the contact details of our property manager, or have any other questions you wish to ask us, feel free to email us at streamlineinvesting@gmail.com

 

 

 

 

Managing US Property Investment Currency Risk

When investing in property abroad, you should take care to manage your exchange rate risk appropriately, since currency fluctuations can have a significant impact on the overall success of your real estate investment.

Not only is it important to get a great deal on the initial exchange rate that you transfer your local currency at in order to purchase the foreign property, but subsequent exchange rate changes often require management or hedging in order to minimize risks and maximize returns.

The following sections cover some straightforward methods for managing your property investment currency risk efficiently.

Shop around for the best exchange rate when buying property abroad

A key thing to remember when making the initial currency transfer for an overseas property purchase is that you are generally not locked into using your local bank for foreign exchange transactions and forward contract hedges.

This means that you can shop around among various banks for the best forex rate, which can often save you as much as 1-2% on your currency transfers. You can also use reputable currency transfer providers like OzForex, who make sure that all of your currency transfers will be both cost effective and straightforward to perform.

Furthermore, not only can you shop around for the best exchange rate on your large initial property deposit, but you can also get better exchange rates on your regular currency transfers if you plan on making periodic mortgage payments in a foreign currency.

Placing currency limit orders

Placing a limit order with your foreign exchange provider is another way to help you get the best exchange rate on your property-related currency transfers.

When you enter a limit order, you will need to specify an exchange rate level, a currency pair, an amount of one currency and whether you wish to buy or sell that amount at that level.

If the market exchange rate subsequently fluctuates to your specified level, then your foreign exchange provider will buy or sell the specified amount of currency for you automatically based on your instructions.

Limit orders are especially helpful because people cannot be watching the actively fluctuating foreign exchange market all of the time, and so they might miss out on a short lived exchange rate improvement. Although limit orders are often used when dealing through stock brokers, this useful ability is rarer among foreign exchange providers. Be sure to ask whether your currency transfer provider offers limit orders if you think you might wish to use them.

Managing currency risk from foreign property investment with forwards

Most real estate investments have a fairly long time horizon. As a result, people who invest in property abroad typically tend to manage their long term currency risk by using forex forward contracts as a hedge against adverse exchange rate movements.

These contracts permit you to lock in a market-determined exchange rate for a certain amount of currency and a given future delivery date. The forward exchange rate you receive is related mathematically to the prevailing spot rate and the current interest rate differential between deposits in the two currencies involved in the transaction.

Forward contracts can be used as much as two years in advance of when you anticipate actually needing the foreign currency to make payments related to your foreign investment property.

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This article is brought to you by OzForex Foreign Exchange Services. OzForex is one of the world’s leading foreign exchange companies, providing live exchange rates and focused on providing a smarter, online alternative to existing international money transfer services. Established in 1998 with the aim of giving individuals and corporate clients a better deal, OzForex has offices in Sydney, Toronto, London, Hong Kong, San Francisco and Auckland. 

The OzForex Group includes OzForex, UKForex, Canadian Forex, USForex, NZForex, Tranzfers and ClearFX. It is a strategic investment of Macquarie Bank, Accel Partners and The Carlyle Group.

Turning your PPOR into an Investment!

Recently I wrote an article about the comparison of Renting vs Buying. That article was for the initial choice between buying a house compared to renting a place to live and investing the assumed extra cash flow that comes with it. A question was asked of us recently on the benefit of moving out of your PPOR and renting a place, while renting out your PPOR in the meantime.

I remember reading an article a couple years ago about the benefit of purchasing a place that you want to live in some time in the future, basically the typical 4 bedroom suburban home to raise a family in, while you are single and young, live where you want to. The benefits seemed to make sense and this is exactly the situation I was asked about. I now seem to find myself in the same situation. I have been living in my PPOR for the last two and a half years but I am relatively far from the city, not close to many of my friends and not in the most desirable area to live in.

The decision to move out has already been made in my mind; I feel for me at this time, it is a better lifestyle choice. Since I have already balanced the emotional side of the decision, I now just had to convince myself of the financial benefits. I was able to develop a fairly routine spreadsheet to show the financial implications of making such a decision.

Basically, I would be able to rent out the property for $400 per week and to rent out a place that I would like, I would be able to find a property for $250 a week. Already it is easy to see a benefit of $150 per week. However it is important to note there is a lot of additional expenses that will need to be covered when you become a landlord. Landlord insurance is required to ensure your tenants do not take you to the cleaners, contents insurance is also a good thing to have when you are renting. Property management fees will also need to be taken into consideration.

After taking all of the above into consideration, I found out that I would be approximately $100 per month better off if I moved out of my PPOR and rented it out. It should be noted that I did not take into account the tax implications of turning my PPOR into an investment. I realise you would be able to deduct a fair bit due to having the investment property, but this would most likely be offset by the added income due to the rental returns. So in the end, I did not take into account the tax implications, it would have made the spreadsheet a lot more complicated, and I do not believe it would have added anything extra.

If you would like a free copy of this spreadsheet, please click this link Spreadsheets

I have also read about the benefits of exchanging the title of the property into a trust to be able to fully deduct the interest repayments with your tax return; however I have not looked into this in great detail and unfortunately cannot provide any extra information. However if you have paid down the principal significantly (in which case there is minimal interest to claim), then it may not be worth it. As stamp duty will have to be paid when you transfer the title to a trust.

2 Houses Are Better Than 1

One of the first things I noticed when looking to get a loan was just how much interest you ended up paying over the life of the whole loan. To purchase a $400,000 property on a 30 year loan would end up costing you around $1,000,000 (assuming interest rate of 7.00%). So you are effectively paying two and a half times the value of the property.

This didn't seem too appealing so I looked at the best way to reduce the amount paid in interest. The most efficient way I could determine was to reduce the loan period, which means increasing your repayments. To purchase a $400,000 property on a 15 year loan, it would only cost you approximately $650,000. Saving you $350,000! This is almost enough to buy the same property again. I then wanted to figure out other ways to be able to escape this need to pay such a high amount in interest repayments.

Unfortunately, to pay off a property quicker, you need to increase the repayment amount. In the example above, the 30 year repayment was $2,660 and the 15 year repayment was $3,600. So where would you come up with the extra $1,000? Then I remembered sitting with my group of friends and talking about investing in property.

I have talked in another post about the benefits of purchasing a property with someone else, where simply the increase in repayments by using the combined incomes, significantly reduces the loan term and effectively reduces the interest paid. But now I am contemplating something different. Let's say two people purchase a house together and use their combined incomes to pay off the property ASAP. Then the same two people buy a second house, again paying it down ASAP. So at the end of the day, each person has a house each.

There would be a lot of complications between what is an equivalent house for each to own and there may be some issues between the two if one believed the other got the better end of the deal, but avoiding all the emotional aspects, and looking at the pure financial side of things:

Using the following inputs:
- Each person has a monthly saving of $3,000
- Initial cost of a house is $300,000
- Capital Appreciation of 2% Per Annum
- Interest Rate of 7.00% Per Annum

Situation 1 - Each Individual buys their own property

Using this formula in excel - NPER( ) - the repayment period will be 151 months for each person, so a total individual cost of $453,000.

TOTAL COST - $906,000
TOTAL PERIOD - 14 Years 7 Months

Situation 2 - They buy 2 properties together, one after each other

So the total repayment is now $6,000 per month.

1st House will take 60 months to pay off. A total cost of $360,000

To obtain an equivalent house for the 2nd property, assuming the capital appreciation of 2% per annum, the house price of the second house would now be $331,200.00 (after 5 years)

2nd House will take 67 months to pay off. A total cost of $402,000

TOTAL COST - $762,000
TOTAL PERIOD - 10 Years 7 Months

So as you can see in Situation 2, the total cost is $144,000 cheaper than Situation 1. And also the total period of being in a loan is 4 years less, with both people at the end of the day essentially obtaining the same thing.

Keep in mind, this is a very simplified example, and there is a lot I have not taken into account. Firstly, if you do buy a property together, you will only be able to use one FHBG and stamp duty exemption or whatever else your government offers you. Also there is the option of, for instance, say you both purchased a 2 bedroom property, then in Situation 1, each person would have a spare room which they could perhaps rent out for extra repayments, whereas this does not occur in Situation 2, until the second house is bought. It is also important to note the preferred option is typically dependent on the capital appreciation of the property, using a low rate (as I used 2.00%) will generally have Situation 2 preferred, but a higher rate (over 5.00%) will generally have Situation 1 as the better alternative financially.

I have developed a spreadsheet which takes all the above into account and allows for a fairly accurate comparison between the two different methods.

If you would like a free copy of this spreadsheet, please click this link Spreadsheets

Should you pay off your Mortgage or Invest?

A lot of people talk up the benefit of having a mortgage in investment property, so you can deduct all of the interest from your income and effectively save yourself when you pay your money to the tax collector. But the way I saw it was that instead of paying money to the tax man, you were just paying the money to the bank in the form of more interest repayments? So my initial thought is to just pay down your mortgage as quickly as possible.

Now you should note that I am only talking about for investment properties, where the interest paid is tax deductible. A PPOR should have the mortgage paid down as quickly as possible to avoid paying a lot in interest over the years.

After looking into it further, I thought I should actually calculate if I was better off paying down the mortgage for an investment property, or instead of paying down the mortgage, investing the saved money elsewhere. Looking at it fairly simply, I first did some hand calculations pretty much as follows.

There is an existing loan of $300,000 at the start, with 7% interest rate, the interest only repayments become $1,750 per month. Saying now you have an extra $2,000 per month in savings, choosing to either pay down the mortgage amount, or invest it elsewhere. Other assumptions include a $120,000 gross salary (after superannuation) and an investment return of 15% gross for the other investment option. Also assuming this is an investment property returning $1,500 per month in rent.

CALCULATIONS

Paying Down Mortgage - After 1 Year

Monthly repayments of $3,750 on a $300,000 loan at 7.00% interest rate

Principal after 12 months = $256,625.00 (using spreadsheet calculations)

Total Rent Earned = $1,500 x 12 = $18,000.00

Interest Paid on Loan = $19,625.00 (using spreadsheet calculations)

Taxable Income = $120,000 + $18,000 - $19,625.00 = $118,375.00

Tax Paid = $31,745.00 (using Australian 2012/13 Tax Tables)

Net Income = $120,000 + $18,000 - $19,625 - $31,745 = $86,630

Plus bonus of reduced Principal = $300,000 - $256,625 = $43,375

TOTAL VALUE = $86,630 + $43,375 = $130,005

Investing Elsewhere after 1 Year

Principal after 12 months = $300,000 (no principal paid down)

Interest Paid = $1,750 x 12 = $21,000.00

Interest Earned on Savings = $3,574.00 (using spreadsheet calculations)

Rent Earned = $1,500 x 12 = $18,000

Taxable Income = $120,000 - $21,000 + $3,574 + $18,000 = $120,574

Tax Paid = $32,560.00 (using Australian 2012/13 Tax Tables)

Net Income = $120,000 + $18,000 - $21,000 - $32,560 = $84,440

Plus amount in investments = $45,010 (using spreadsheet calculations)

TOTAL VALUE = $84,440 + $45,010 = $129,450

As you can see from the bolded values above, there is a benefit to paying down a mortgage in this instance, this is also assuming a 15% return from a different investment, which is of course a very impressive return.

I developed a spreadsheet to be able to calculate a number of different scenarios and by using different variables. The spreadsheet also acts over a 10 year period so you can see a longer term approach. It should be noted that inputing the above variables into the spreadsheet, after 10 years, paying down the mortgage is still a better option. Typically, the higher the interest rate, the better it is to pay down the mortgage, however this is a general statement and it depends on a number of investments.

But looking at the spreadsheet, it shows that paying down a mortgage can actually be a very good place to invest your extra money. This means that while you are looking for a suitable investment, it is a good idea to just park the money into an offset account attached to the loan and pay down the mortgage and reduce the interest paid, until you find a suitable investment which can provide you the required return.

Also please note I have only talked about the purely finance benefits of investing or paying down a mortgage, there is always emotional conditions to consider. For example I myself just prefer to be debt free and to be honest always loathe it when I owe someone money, and owing the bank is no different. So this is just another reason why I typically choose to pay down the mortgage as fast as possible.

If you would like a free copy of this spreadsheet, please click this link Spreadsheets 

Investing in Mining Properties

Recently someone asked me about investing in mining properties. Mining properties are very interesting and provide a very unique investing option for any avid investor. The main reason for mining properties being so unique is that the rental yields are extremely high. Look below for a typical example that you can find in a mining town.

Mining Property in Moranbah, QLD

Moranbah is a town in QLD, where a friend of mine actually went to go work, when he showed me the properties in the town, that is when I initially found it interesting to see if mining towns actually provided a good investment for myself. Firstly here are some details on the town of Moranbah:

• Population of just over 7,000 people
• 200km West of Mackay
• 1000km North West of Brisbane

Basically, it is a small country town, not near anything of any note. And yet there is a 3 bedroom fibro home that is selling for $700,000? This is higher than most suburbs in Sydney, and a similar town that did not have a mine would see the property only sell for around $200,000 if you are lucky. 

But look at the rent the mining company is paying for this property, $2,000 per week! Just for comparison sakes, you can get a 5 bedroom house in Vaucluse overlooking Sydney Harbour - LINK

So here you get a gross rental yield of almost 15%, higher than probably anywhere in Australia, and comparable with the returns you can see in the US at the moment. So what is the deal? Well the big draw back with a mining property is the capital gains, or should I say, the lack thereof. There is no capital gains to be associated with this type of property, as soon as the mine has finished up, the town will go back to what it was before, with the property value reducing back down to approximately $200,000. Assuming the mine operates for another 10 more years, well that would be an 11% drop in capital appreciation every year for 10 years. 

This is where the big issue is, as soon as the mine is done, your house is done too. Whereas purchasing a traditional property, at least you would hope to see steady capital gains in your property in the long term. This is the advantage with a typical property, the oppurtunity of capital gains, whereas a mining property has next to zero potential for capital gains.

It should also be noted that I do not believe if you purchase a property in the mines, you can rent it out for a year or two, and then sell it for what you paid for it initially. It is typically public knowledge how long the mine will be around for, so as you get closer to this mine closure date, the value of the property will slowly decrease until the mine eventually closes. Of course you may get lucky and be able to sell the property to someone who has not completed their due dilligence and does not realise how long the mine will be there for, and be able to convince them based on the high rental yields. 

So when looking at these properties, you need to think to yourself, are you satisifed with the high cash flow despite the negative capital gains on the property? I guess I was curious to see if it was worth it, so naturally I developed a spreadsheet to test out and compare the two scenarios.

By inputing a couple different variables, I was able to compare investing in a mining property based on investing in a mining property. The results from my calculations were as I expected, although the mining property was better in the short term (first couple of years), the traditional property became a much more profitable option. So for me anyway, it seems that investing in traditional property is more lucrative for making money, simply due to the potential for capital gains. 

If you would like a free copy of this spreadsheet, please click this link Spreadsheets 


If you have any other questions or comments, feel free to email us at StreamlineInvesting@gmail.com


Disclosure: The article is not to be taken as investment advice and the views expressed are opinions only.  Readers should seek advice from someone who claims to be qualified before considering allocating capital in any investment.

Landlord paying Utilities!

I have just been reading a forum post about a concept derived by this person in USA. The concept itself is relatively simple, basically charge a slightly higher rent to the tenant, and in return, you will pay all of the tenant's utility bills, i.e water, electricity and gas. 

At first I was a bit skeptical of the concept, because you have no control what the tenant does with their house, so you are taking an expense out of your hands. But reading the description of how it all works, to be honest it sounds like a really great idea, a definite win win for everyone. Below is a bit of a summary of how it all works:

• The property is first to be fitted out with high energy saving light globes, with timers attached to ensure vacant rooms are not left bathed in light
• High efficient whitegoods are installed to ensure electricity is not wasted when using a dishwasher, fridge, dryer etc
• A thermostat is fixed at a certain temperature, say 23 degrees celcius, all year round. The important feature is that this temperature is fixed. Heating and cooling can be a high expense, and you would not want a tenant to set a temperature up to 30 degrees in the middle of winter and waste all of the electricity that you are using.

By completing all of the above, you would hopefully be able to reduce the typical outgoings of utilities by around 20%. So already there is a benefit to the environment which is always a positive thing. 

Now see below for a working example of this situation, keep in mind these numbers are not based on any real scenario.

Initial utility expenses:

 Gas -          $200 per quarter

 Electricity - $300 per quarter

 Water -      $150 per quarter

With the reductions above, the  renovated utility expenses are:

Gas -          $150 per quarter
Electricity - $250 per quarter
Water -      $150 per quarter

The initial rent for the property was $400 per week, but now with all utilities paid for, this number becomes $450 per week (I believe $50 a week is reasonable given all utilities are paid for)

Rent collected initially would be $400 x 52 = $20,800 annually

Rent collected after renovations would be $450 x 52 = $23,400 annually
However there is the $2,200 to be paid in utilities annually
So the net received becomes $23,400 - $2,200 = $21,200 annually (greater than the initial $20,800)

Looking at it from the tenants point of view now

Rent paid initially would be $20,800 (as before) with the addition of utilities of $2,600 utilities
Total paid by tenant to be - $20,800 + $2,600 = $23,400

With landlord paying utilities the total paid by tenant is $23,400 (same as before)

So as you can see, the tenant does not lose out, and the landlord is a couple hundred ahead. But not only is there the financial advantage. There is also the potential dilemma of services being shut off due to bills not being paid, and then the connection fee providing an added expense for the landlord if the tenant is moved on. Also this will provide you with more tax deductions when performing your tax return, the cash paid on the utilities would be tax deductible! Although this may be countered by the increase in income which will have to be declared, however you still not be in a worse position than before so it is definitely a good move.

So I must state that I have not tried this myself, and the numbers above are purely an example, however I believe the practice should work well in theory, and is another way to get a bit creative with your investing to increase the cash in your pocket. One thing that needs to be looked into is the cost of renovating the property to suit the changes listed above, I feel this may run into the thousands, so it may take a couple years before you fully realise the profit from this change.

Disclosure: The article is not to be taken as investment advice and the views expressed are opinions only.  Readers should seek advice from someone who claims to be qualified before considering allocating capital in any investment.

Buying Properties with Others

Living in Sydney, and being a first home buyer, I saw that it would be near impossible for me to afford a house on my own. I believe this is a situation that many young first home buyers would find themselves in. Now I am not saying that buying a property is the best investment to make, it may very well not be given your particular situation. I am just stating that buying your first property at a young age can be very difficult, and if you have a desirable area to live in, well you can almost forget about being able to afford something for years. 

One option to help out with purchasing a property at a young age, is to not do it alone. You can buy with friends, family, a partner, husband or wife. Adding a second income to your mortgage repayments is definitely one way to ease the financial strain that can be felt when paying off a home loan. Unfortunately there can be a lot of other stresses that come with not doing things alone. 

Let me take you back a few years when I purchased my first property, I was only 22 when I bought my first home (I am 25 now), and the cheapest house that I could afford in a location that I was prepared to live in was around the $300,000 mark. Having a decent job at the time, the bank was prepared to lend me up to the $270,000 I needed with my 10% deposit. But this meant repayments around $1,800 a month for the next 30 years of my life. Not to mention all the other associated costs with the property, and living costs, I would definitely be under a financial strain, my life would be restricted. In my opinion I think it is important that no investment should take away from your quality of life. There is no point making money in your life, if you have no life to live. 

What seemed to be a logical solution at the time was to purchase a property with my brother, he was 29 at the time, he was still renting but was keen to finally have something more permanent. So now not only with the extra savings he brought it, he also had the extra income to pay down the mortgage. Going to the bank, they allowed us to borrow up to $550,000, but this was not what we needed. We were still only hoping to purchase a property around the $300,000 mark. We did this for a couple of reasons: 

1. We did not want to be under a financial pressure for the next 30 years of our life, we wanted to be able to still live a life
2. Our aim was to pay off the property in under 10 years, so by purchasing a long way below our capacity, we should be able to achieve this
3. If one of us lost their income, then the other would be able to cover the mortgage during the other person's down time
4. It gave us some leverage when looking at a property, we could increase our desired mark if we found a particular property that we were interested in

And that is exactly what happened in the end, we found a property that suited both of our needs for $350,000. Slightly higher than our desired range, but it matched everything we wanted so we ended up going for it. 

Now at the beginning, we had to be open to each other about what we both wanted. We both had to be on the same page, otherwise it would never work out. So this was basically how we started, setting up a list of characteristics that the property had to have to suit both of us -

• It had to be near a train station, preferably one that express trains go to (working in the city typically, I needed to be able to travel there easily)
• We had to live not far from my brother's work, he worked in north west Sydney so we could not stray too far from that area
• Had to live on a quiet road (when I rented I was on a main road and the noise was unbearable for me)
• Walking distance to shops (I did not have a car and needed to walk to shops)
• Minimum 2 bedrooms, preferably 2 bathrooms

Above was the basic criteria we had for a property, there were a few other things, but they were mainly just preferred options and not really essential. Once we had that list set up, and the price range. We were able to set on a location. We were searching around Western Sydney as it was the only area we could afford that matched the above criteria, in the end we purchase a property in Seven Hills for $350,000. A 2 bedroom, 2 bathroom townhouse built in 2004. If you are interested in more information about the property feel free to email us and I can let you know more - streamlineinvesting@gmail.com

I thought that buying the property would be the easiest part, but turns out that was only half the issue. We had talked before purchasing the property about how we would make sure everything worked out evenly between us, but nothing was set in stone. Being brothers, although not that close, there was still a strong trust between us, and we both knew that we never try and scam each other, so we were always going to be safe in that respect. But there was still the challenge about how to make sure everything is kept even. In the end, I was able to develop a spreadsheet which tracked all the repayments, and other house expenses. It would be simple to just both pay half the mortgage and half the bills. But because we were hoping to pay down the mortgage as quickly as possible, it was better for us to simply pay off as much as we could. This is where the spreadsheet came into it.

The spreadsheet itself is not too complicated, just tracks all the repayments made by each individual, and other household bills that have been paid. By tracking the repayments it is simple to see who owes who at the end of the mortgage. Before the mortgage I was also able to have a plan on how long it should take to pay off the mortgage, and where we should be at any given point in time. So by tracking the repayments, I have also been able to compare where we are in comparison to where the target is.

I will touch on this topic a bit more in later posts as there is a lot of information to cover, particular in intial agreements that should be developed prior to entering into a sort of deal like this, which involve exit tactics if either member wishes to pull out. Also with the added experience of purchasing an investment property in the US with my business partner, this will provide more valuable information for people looking to do the same.

If you would like a free copy of a loan tracking spreadsheet, feel free to email us at streamlineinvesting@gmail.com

Disclosure: The article is not to be taken as investment advice and the views expressed are opinions only.  Readers should seek advice from someone who claims to be qualified before considering allocating capital in any investment.