What are the top ways to avoid making costly investor mistakes?

Australians have long had a passion for real estate, but all too frequently they forget the basics in the thrill of expanding their portfolio and end up paying the price.

Here are four strategies to steer clear of costly errors:

1. Secure funding first

Banks have been under pressure from regulators and the Hayne Royal Commission to improve their lending standards. This has led to higher interest-only rates, higher rates on investment properties, and in some cases, much lower borrowing ability.

Lenders are now checking income and expense statements against bank data rather than relying just on the clients' statements. It's getting harder for people who previously overstated their actual living costs to get more money.

The main takeaway? Make sure you have pre-approval in place before submitting an offer on a house because getting financing is harder than it used to be.

2. Factor in rate rises

Since July 2016, the RBA has not changed the benchmark cash rate. However, we notice that interest-only home loan rates are increasing. Why? The cost of funding for Australian banks, which borrow their lending funds from the global market, is increased as a result of rising interest rates globally. Although this tendency has been going on for a while, banks are now beginning to pass the cost on to clients, often raising interest rates by 0.17 per cent.

Although this might not seem like a big difference, what if interest rates increase by another 3%? A stress test should be taken into account when thinking about getting a mortgage to determine whether you could still make your payments if interest rates rose.

3. Take the emotion out of it

An entirely different set of considerations should be made when purchasing a home for you and your family as opposed to an investment property. People purchase homes far too frequently in familiar neighbourhoods rather than those with the greatest development potential or highest returns. Like any other investment, investment properties need to be carefully examined, taking into account both the dangers and the potential return.

Are you having trouble making the best decision? Think about hiring an experienced buyer's agent. They not only keep a close eye on economic and real estate trends, but they also frequently have access to homes that have not yet been offered publicly.

4. Get the proper structure in place

It's crucial to get the loan's structure correct from the beginning. Here are a few things to think about:

Tax implications

If your partner has a lesser salary than you, it can make more sense to buy the home in their name because it will lessen the amount of income tax that must be paid.

Loan structure

Consider the effects of taking out interest-only loans without a cushion or borrowing the greatest amount possible. Should your circumstances change, interest rates increase, or your loan converts to principle-and-interest at the lender's request, either of these alternatives can place undue pressure on you.

You might also think about different financing structure options, such as having a business own your asset. Your home might serve as the loan's security, or you might be able to use other, liquid assets like shares. Your interest rate could be lowered, saving you money.

The lender

When a borrower decides to finance their whole portfolio of properties, they may discover that many of their properties are cross-securitized through a single financial institution. In this scenario, the lender assumes security over all of the investor's assets, and in the event of a default, the lender is free to sell any item it sees fit. Want to stay out of this dangerous scenario? One strategy is to use various lenders to finance each property.

Make sure you are not taking unwarranted risks if you want to expand your real estate holdings. Examine every choice you have in a calm, logical manner. And if you think you need a second opinion, don't be afraid to speak with your financial advisor. A brief discussion could prevent headaches now and could save you thousands of dollars down the road.

What is reinvesting, and is it right for you?

Reinvesting may have caught your attention and left you wondering what it meant. Rentvesting is the phrase used to describe continuing to rent a residence while investing in real estate.

Up until recently, real estate costs were skyrocketing, particularly in the suburbs of Sydney and Melbourne. places that many of us would choose to call home. In order to enter the market and maintain their current standard of living, many first-time property owners now frequently use rentvesting.

Mortgage Choice published the results of research a few years ago that revealed how well-liked the movement was growing. In Australia, 20% of the market was made up of investors in 2014. By 2016, that proportion had increased to a third.

Example:

A Sydney-based pair named Simon and Gary are interested in breaking into the real estate sector. They have $250K in money between them and are considering their options:

Reinvest

Simon and Gary may invest in a few lower-priced rental homes in high-growth regions, either interstate or in New South Wales. They may eventually leverage the homes' equity to buy their dream home by using the rental revenue to pay down the loans.

Homeownership

In order to suit their needs, Simon and Gary would have to leave the CBD if they opted to buy their own house. They would have acquired a non-tax deductible asset and been eligible for the first-time homebuyer incentive.

With renovations, Simon and Gary would have the opportunity to make their home genuinely their own. If the couple ever chose to venture into the world of investment properties, they might use this property as equity.

Key things to consider

Of course, this is just an illustration, and you should consider the advantages and disadvantages for yourself.

To Reinvest: the pros

• You can enter the property market sooner
• Flexibility to move around
• Continue to live the lifestyle you’re used to
• Rental income
• Tax benefits
• Invest in high growth areas

To not Rentvest: the cons

• Possibly you'll miss out on first home buyers government grants on opportunities.
• You're paying someone else's mortgage.
• You can’t renovate and improve the place you live in

Questions to ask yourself

It all boils down to personal preference and financial affordability. Here are some important inquiries to make:

Are you entering the real estate market to expand your portfolio?
Are you willing to put off buying a house?
How much can you spend?
What conditions must a property meet?

Understanding your unique circumstances and determining the best course of action for you requires speaking with your accountant, financial planner, and mortgage broker.

Top 5 tips for auction bidding your new investment property

There's a strong probability that you'll be looking at several homes that are up for auction if 2022 is the year you're considering adding to your property portfolio. The increase in clearance rates has been a great sign that following a precipitous decrease in late 2017, real estate prices have stabilised.

Bidding can be intimidating, whether this is your first or sixth auction. It can mean the difference between acquiring the property you want for a fair price, getting carried away and paying way too much, or letting the property go. If you prepare for an auction well, you'll have the best chance of winning it.

You'll be entering the auction process with your eyes wide open and positioning yourself for victory by paying attention to our action purchase top tips:

Get your ducks in a row

Before making an auction bid, make sure your loan or finances are in order. State-by-state regulations vary, but on the day of the auction, you are required to be prepared with a deposit check.

For banks, serviceability is important. A rental market appraisal is a smart move to do before approaching the bank for a loan. It helps you keep track of things and crunch numbers, and it can also enable you to borrow more money to find the ideal residence.

Since there is no cooling-off period after an auction purchase, it is also crucial to conduct any building and pest inspections. The deal is complete after the contract has been signed.

Don’t let emotions get involved. Understand the value of the property

Despite the fact that buying a home can be an emotional experience, try to use rationality when determining the price.

Request comparable sales from the selling agent and other neighbourhood agents. Don't bid more than the property is worth after you have an understanding of what a reasonable market price is for it.

Watch and learn

Prior to the auction, you wish to participate in, go to others in your area with comparable prices. This will help you feel less overwhelmed when the time comes. Attend auctions run by the same auctioneer selling the property you're looking to buy to gain actual insight. It will help you understand style and strategy.

"Practice auctions" can be exciting and enjoyable.

Bid soon, start low and go slow

Avoid placing a last-minute bid when the price is high since it can be stressful. It permits the seller to lower the reserve price by maintaining a slow and low level of bidding. You might be able to find a good deal.

Make sure to call out the total dollar amount rather than the increment while calling out your bids to avoid any confusion.

Stick to your limit

You should be aware of how much you are willing to spend on the property if your funds are in order and you have done your research on its value. Having said that, if you want it, missing out by $5,000 is the most unpleasant thing you can do, so give yourself a little leeway.

Consider utilising a buyer's agent or asking a friend to bid on your behalf if you worry that you could get carried away in the excitement of an auction (it's simple enough to accomplish).

You must pay the deposit, which is typically 10% of the buying price, after the auction. Both a personal check and a bank check may be used to pay for something. If you intend to use a bank check for the deposit, keep a little bit more than 10% of your limit on hand as you won't know the exact amount. It simply means that you will pay back your debt less quickly.

You will be responsible for paying the entire deposit if you need to cancel the order for any reason. Therefore, it's crucial to make sure that the property, timing, and pricing are all appropriate.

Top 3 legal tips for buying a property

If you've ever bought a home, you may be familiar with the hurry and pressure that all parties felt when it came time to exchange contracts and put down a deposit.

To prevent losing thousands of dollars, being dissatisfied with your purchase, or becoming a defendant in a lawsuit, you must take into account the factors outlined below.

1. Is the property fit for your intended investment purpose?

Make sure you give yourself enough time to look into the property-related questions. You must decide whether the property is suitable for habitation because it will provide revenue for you as an investment.

It is advised that before attending an auction, signing a contract, or using your cooling off time, you or your attorney order a pest and building report or a strata report. You can find that the property has flaws or problems. If so, your solicitor must cancel the agreement before the cooling-off period expires; otherwise, you will be obligated to the terms of the agreement and be forced to complete the transaction. You will be responsible for losing the holding deposit if the contract is cancelled before the cooling-off period has run out.

When buyers are interested in purchasing a newly constructed or renovated property, a common misunderstanding emerges. Even though the property could seem to be finished, the vendor still needs to secure a number of certificates to prove that it is. The vendor typically has to get a final occupation certificate (final OC). You cannot list the property for lease without the most recent OC since it is unfit for habitation.

An illustration is shown below:

For the work done at the property, the vendor had only gotten an interim occupational certificate rather than a final one. After analysing the contract, we asked that settlement be contingent upon the issuance of the most recent OC within a given time limit. Only our client had the right to cancel the agreement and receive a refund of the deposit if the vendor was unable to secure the certificate. We asked that the commitment be held by the vendor's solicitor on trust, and that it not be given to the vendor prior to settlement. This reduced the risk that our client would have to get the money back if the vendor spent it.

The final OC was not accessible to the vendor. The contract was cancelled by us, and our client received a full refund of its deposit. We recognise the value of time. But losing time is significantly less expensive than losing a deposit that is worth hundreds of thousands of dollars.

2. Have you arranged your finances?

It is crucial to make sure the property is suitable for your investment goals because your borrowing capacity may be determined in part by the rental income generated by the property. Your bank's appraisal could not be accurate if the property itself is unfit for habitation. If this happens after you have already signed a contract, you will need to make arrangements for the gap, which may be thousands of dollars or more. You run the risk of forfeiting your deposit and becoming liable for damages if you are unable to make the required shortfall payment.

Do not sign any legal agreements before getting your loan approved.

"It is advised that before attending an auction, signing a contract, or using your cooling off time, you or your attorney order a pest and building report or a strata report. You might find that the property has flaws or problems."

3. Always have your contract reviewed BEFORE signing

The terms and conditions of the sale agreement could have a significant impact on how you use the property. In order to help you decide whether the property is an appropriate purchase, a lawyer should advise you on the agreement, special circumstances, trades, and annexures.

Following an auction, a vendor is NOT required to consider requests for changes, and the successful bidder is not granted a cooling-off period. The conditions of the contract and the condition of the property as shown at the auction shall be binding upon the successful bidder.

Easements, restrictive covenants, council policies, sewer service placements, by-laws, special levies, conflicts, or defective works are examples of items that may be obvious in the contract.

Furthermore, the contract could include specific clauses that affect the property or special requirements you want to be included.

An illustration is shown below:

Despite not having the contract read before the auction, a client went and placed the winning offer. They believed that, as indicated on the agreement's front page, the settlement would take place in 42 days. A specific clause in the contract stated that payment was contingent upon the grant of probate. The client was bound by the terms of the contract because it had not been reviewed before the auction and had to wait about three months for probate to be granted before a settlement could take place. Probate might have taken years if a claim had been made against the estate; in this case, it just took a few months.

Always conduct your research because it is the only thing you can rely on, and don't enter a transaction hastily without getting sound counsel.

Summary

Banks have been under pressure from regulators and the Hayne Royal Commission to improve their lending standards. This has led to higher interest-only rates, higher rates on investment properties, and in some cases, much lower borrowing ability. Make sure you have pre-approval in place before submitting an offer. Consider the effects of taking out interest-only loans without a cushion or borrowing the greatest amount possible. Many properties are cross-securitized through a single financial institution.

Rentvesting is the phrase used to describe continuing to rent a residence while investing in real estate. A Sydney-based couple have $250K in money between them and are considering their options. They may invest in a few lower-priced rental homes in high-growth regions. Or they may eventually leverage the homes' equity to buy their dream home using the rental revenue to pay down the loans. Before making an auction bid, make sure your loan or finances are in order.

A rental market appraisal is a smart move to do before approaching the bank for a loan. Don't bid more than the property is worth after you have an understanding of what a reasonable market price is. You must pay the deposit, which is typically 10% of the buying price, after the auction. You will be responsible for paying the entire deposit if you need to cancel the order for any reason. It's crucial to make sure that the property, timing, and pricing are all appropriate.

Even though the property could seem to be finished, the vendor still needs to secure a number of certificates to prove that it is. Only the buyer had the right to cancel the agreement and receive a refund of the deposit if the vendor was unable to secure the final occupation certificate. The terms and conditions of the sale agreement could have a significant impact on how you use the property. A lawyer should advise you on the agreement, special circumstances, trades, and annexures. Contract could include specific clauses that affect the property or special requirements you want to be included.