In Australia, we’re seeing a rise in rental yields, and while a good indicator on a sound investment, an investor shouldn’t rely solely on this information to make purchasing decisions. Here are a few tips on why you shouldn’t rely on rental yield alone when it comes to your next investment decision.

Look beyond rental yield

Rental yield shouldn’t be seen as a guarantee of future growth by hopeful investors, as it is far too simplistic to provide a comprehensive overview of a property’s potential performance. As author of Real Estate Riches Dolf de Roos says, “are we talking gross or net returns? Pre-tax or after tax?”. De Roos goes on to explain that for residential real estate you have to remember to remove insurances, rates and maintenance costs to arrive at the net yield. This alone can often mislead investors. While yields provide some information about the property, it’s merely a snapshot in the overall property performance.

Use the resources available to you

Unlike rental yield, there are resources available to you that can paint a full picture of the property’s current, and potential performance. Many software programs have been developed to help analyse relevant data including vacancy rates, inflation, costs, insurances and maintenance, revealing anticipated yields as well as equity growth.

This level of sophistication is scarcely used by investors and landlords, which is unfortunate considering the true impact it could have on purchasing and investing decisions.

See the bigger picture

Although software can be pivotal in purchasing decisions, it is limited when it comes to individual circumstance or investor questions. There will always be additional factors or queries that a computer simply cannot answer, for instance, “should I invest in the Chinese market if I cannot speak Mandarin?” Each investor is going to have a unique set of circumstances, which is why engaging with a financial planner or with a local real estate agent will assist in making decisions that suit your situation.

Think about the future

Purchasing an investment property is a long-term strategy. Although analysing the current market performance is crucial upon purchase, it’s just as important to think about the future. When you’re weighing up your options it’s worth considering the following;

• Buying below market value
• Buying a property which can be renovated or upgraded
• Buying in an area with good capital growth potential

Rental yield, although worthwhile considering, is not the golden ticket to making a decision. Capital growth is equally as important as it will allow you to sell at a profit. Combining this with a renovation or substantial upgrade, will then allow you to increase the rent in the short term. If you successfully purchase a property in the right location, add value through renovation and therefore acquire capital growth, you’re more likely to be able to use this new equity to purchase another investment to replicate your success.

To discuss your investment options, contact CPS today.

However, as Ross Gittins, Economics Editor at the Sydney Morning Herald, has suggested this ‘doom and gloom’ is in fact overstated. While in recent decades Australia has been significantly impacted by strong economic turns from around the globe, the old saying “When America sneezes, Australia catches a cold” doesn’t seem as relevant as it used to. All signs suggest our economy is still performing very well.

Here is a snapshot of how the Australian economy is performing:

Mining

• The latest figures showed that although the recent decline in mining was reasonably well advanced by September 2015, activity still remained well above its “normal” level.
• Western Australian quarterly engineering construction activity is still performing extremely well with results of $10.3 billion, and the Northern Territory at $2 billion.

Foreign Trade and Export

• A look at the latest International Trade figures shows that over the past quarter Queensland has produced a positive trade balance of $1.2 billion per month.
• With the Gladstone natural gas venture underway with first shipments dispatched, we can expect a positive contribution in 2016.
• More than 20 per cent of Aussie produce is sold to foreigners, which illustrates that the prospects for domestically related industries remain solid. Plus, estimates show the “non-mining economy” has been growing at the healthy rate of roughly 3 per cent per annum.

Unemployment rate

• Throughout 2015, the number of Australian employees grew by 300,000 which is a 2.7 per cent increase.
• This activity ultimately dropped the employment rate from 6.2 per cent to 5.8 per cent.

As an investor, it’s wise to understand the economy and the possible repercussions this may have on your portfolio. However, despite recent commentary about the Australian market’s doom and gloom, there is no immediate threat or need to reconsider investing or selling existing properties.

Contact CPS today to discuss your investment opportunities.

The most efficient way to claim these tax benefits is through a depreciation schedule; a report undertaken by a surveyor, usually when the property is purchased. The surveyor is responsible for providing a physical analysis of a property, clearly identifying materials used throughout the building (including fittings and flooring), internal and external wall treatments and appliances. An estimated value is placed against these items and depreciation is calculated based on the age and value of the property. Most properties regardless of their age can offer investors substantial tax benefits through obtaining this schedule.

Although depreciation can be an annual tax deduction, only one depreciation schedule is required for the property rather than a new schedule each year. However, it should be updated on an annual basis should the property need major repairs or undergo renovation. With Australians spending over $100 million every week on renovations, undertaking a tax depreciation report has never been so important.

There are certain assets within a building that generally have a higher depreciation value, including timber floorboards, air conditioning and solar power systems. Other items which are more commonly claimed for depreciation include hot water heaters, appliances and bathroom accessories, as well as smoke alarms and exhaust fans.

With all of these assets in mind, the cumulative deduction over a five year period can save the investor tens of thousands of dollars. However, to qualify for these tax benefits, it is suggested investors complete a depreciation report for the property as near as to the date of purchase as possible. If you don’t obtain a tax depreciation report then you cannot claim for these substantial tax benefits.

For advice on your investment property and how to claim depreciation, contact CPS Finance today.

So what steps can you take to maximise your property portfolio?

1) Identify your objectives and begin planning

Objectives and goals will vary amongst investors depending on their goals, income, and resources available to them. The one thing that all successful investors have in common, however, is planning. Planning is key to growing a strong and economical portfolio and will help investors move beyond owning a single property, to a multiple property portfolio.

2) Do your research

There is a lot of commentary about the property market bubble and whether or not it will burst. Either way, focus on locations that will make good, long-term investments, rather than what might occur over the next six months. Examine economic and property trends in different markets, read and seek advice, attend seminars – make the most of all resources available to you.

Furthermore, it is important to seek financial advice from professionals who specialise in structuring loans for multiple property investors. With their advice, you can also consider the benefits of an offset account, using your SMSF to purchase property, and how to maximise the equity from your home to invest. Knowing your options will help you make informed decisions to achieve your property goals.

3) Reassess

Once you’ve purchased an investment property, continual monitoring of the economy, interest rates, property trends and changes in legislation will help you to continue to maximise tax benefits and cash flow. Reassessing your financial situation periodically is critical to ensure that your assets are working for you to their full potential.

4) Diversify

As your portfolio continues to grow, the power of diversification will become more prevalent. Diversifying the properties you invest in will minimise the risk and potential effects if the property market should change. Find out more about diversifying your property portfolio.

Growing your property portfolio doesn’t need to be a arduous task. Invest in a knowledgeable team of experts to help you achieve your goals.

Contact CPS Property to discuss expanding your property portfolio today.

How to diversify your property portfolio

Location

It is easy for an investor to favour an area that has proven to be successful for them in the past by providing strong capital gains or high rental yields. However, investing in the same location several times over makes you more vulnerable should natural disasters, population fluctuations or declining employment rates occur. If all of your properties are experiencing the same economic or market changes, it could place strong financial pressure on your assets.

Price point

Another diversification strategy involves purchasing properties at different price points, providing more flexibility should a property need to be sold. Instead of purchasing a property with your entire budget, splitting this over two assets allows you to free up cash by selling one asset, instead of two. It is important to note, diversifying your property portfolio does not mean compromising on the quality of your investment – quality always trumps quantity for long-term investment goals.

Style of property

The benefit of investing in different style properties, is appealing to different segments of the market. For example, purchasing a townhouse in a suburban area will attract the right rental market and candidates. Both re-sale potential and rental demand will benefit from purchasing the right style property in the right locations.

Residential vs. Commercial properties

The fourth diversification strategy is purchasing commercial property as an alternative to residential assets. Investing in commercial property is more focused on rental return of the asset and the security of tenure which is directly linked to the covenant on the property. Generally speaking, net returns are higher for commercial than for residential meaning that most outgoings are paid for by the tenant.

Although investors may not be able to control the property market, local environmental changes, infrastructure or the economy, they can learn to minimise risk within their portfolio through diversification.

Contact CPS Property today to learn how you can offset risk through diversification of your property portfolio.

It’s important not to confuse gentrification with urban renewal; a process of clearing and rebuilding or renovating properties in urban slums. Although both have a positive effect on investment properties, gentrification results from a shift in cultural trends and public opinions of an area (as opposed to the physical changes only) providing more powerful, long term benefits for the area.

What to look for in a gentrified area.

If we look at Sydney, we can see a rich history of gentrification within the past 20 years – for example in Balmain and Kings Cross. These areas were once rife with high crime, low economic status, high unemployment rates and dilapidated housing. Now, they represent two of the most sought out suburbs in Sydney for renters, investors and homebuyers for their appealing and luxurious lifestyle, convenient CBD location, and of course, priceless harbour views. Both of these areas experienced the displacement of the original residents (due to increase of demand, and therefore price), ultimately introducing a new, more affluent demographic to the area; a hallmark of gentrification.

Gentrification does not discriminate based solely on location. Leichhardt is a prime example of where culture was the key factor in its dynamic social shift that helped shape and influence the suburb. Italians originally migrated to Leichhardt in the 1920s, with cultural entrenchment rapidly increasing after WWII through the introduction of restaurants, cafes and local businesses. The modern day example of this cultural gentrification is Harris Park. Harris Park is the epicentre of the Indian community within Australia. It has become well known for its authentic cuisine offering and grocery stores. For an investor, it would be wise to look at this community and analyse the ongoing potential as the Indian population within Australia continues to grow.

Good or bad? Or both?

As with most major societal transformations, gentrification has its pros and cons – attracting both critics and enthusiasts. On one hand, gentrification paves the way for regeneration which in turn increases property prices and overall value. But the flip side of this usually means the original character can be lost; milk bars turn into cafes and local pubs turn into cocktail bars. Now, not all of this is bad if this suits your tastes or lifestyle. But for those who have resided in the area for a long period of time, it’s not uncommon to become emotionally attached to the area’s original character.

What does this mean for property investors?

When an investor is searching for a new property, affordability and potential capital growth are two factors which are considered. Investing in an area that could be gentrified can deliver on both of these items, but the trick is finding these hot spots at the right time. The key to taking advantage of these areas is to look to past trends to predict the future. For instance, we know that higher crime suburbs, if in a good location, may eventually be gentrified. Blacktown is a recent example of this, whereby positive change in the area is seeing investor curiosity and interest rise. Dulwich Hill is an area where the close CBD proximity and untapped social roots has seen businesses and investors take an active interest in the suburb.

Researching local government initiatives, community intentions, location and access to existing or future infrastructure will reveal the area’s potential for gentrification. It’s important to remember to analyse cultural shifts or behaviour in the area (or surrounding areas), so as to not mistake this shift for urban renewal – which still has the investor’s interests at heart, but can be more limiting in terms of long term capital growth.

To seek advice from a knowledgeable property expert about your next property investment, contact CPS Property today.

Four things to consider when seeking out your first property purchase

Location, location, location.

No surprises that the location of your property will play a big part in its long-term success. Research suburbs and locations with signs of strong growth in infrastructure, minimal unemployment, access to public transport and high capital gains.

Find the right price

Once you have found a suburb or area you are keen to invest in, investigate the median house price for the area. Whether the property is renovated or not does not matter at this stage, however if there is room for renovation or improvement it means there is greater scope to add value to the property. As a rule of thumb, it is suggested to consider properties within 10% of the median price which is a good way to know you’re not over-investing.

Future potential

When purchasing your first home, consider your situation in five years time, and how the property will appeal to as many people as possible – including buyers and tenants. Placing emphasis on the long-term investment potential will help you to decide whether to retain the property as a rental, or sell and reinvest. Once you’ve determined these goals, certain features will become more important. For instance, access to public transport (namely trains) will be an attractive asset for renters, but might deter some buyers due to noise pollution.

Get the right finance

Speaking to a financial professional will help ensure that your loan is tailored to your long-term property goals and objectives. Understanding your cash flow, ongoing property costs and potential future rental yield will prove critical information when you decide to tenant or reinvest the property. Laying down the correct financial foundations at the beginning of your investment career will prove to be extremely beneficial in the future.

Like with any investment opportunity, it is advised to set out future goals and objectives before determining how to achieve these. Planning is key to ensure that in the future you can maximise value from your investment.

Contact CPS Property to discuss investment advice today.

What is an offset account?

An offset account is a type of transaction account that can be linked to your home or investment loan to save you money on interest. It is used to reduce the interest you owe on your mortgage by offsetting the credit balance of your transaction account daily against your outstanding loan balance.

How an offset account works

A customer takes out a $500,000 mortgage at 5% interest per annum over 30 years. They decide to put $50,000 in an offset account. As $50,000 is now in this account, the interest is now calculated on $450,000, rather than $500,000. This customer will therefore save $142,211 and will also reduce the loan term by 4 years and 3 months.

It is great for savers as any extra cash you have left over from your wage each month can be put into this account to help reduce your interest even further. You could even put the rent you receive from tenants into this account.

Benefit of an offset account

One major benefit of having an offset account is that it allows you to pay down your mortgage faster so you end up paying less interest in the long run, which is especially ideal on an owner occupied home. It also acts as a transactional account enabling you to deposit as well as withdraw money allowing you to have access to your savings if you require them. This can allow you to move quickly on the purchase of another property if the right deal comes along.

Disadvantages of an offset account

As well as benefits, there are also some disadvantages which you should bear in mind before proceeding. These include:

• It might have an account-keeping fee attached to it.
• It might have higher interest rates or fees compared to a basic home loan.
• A partial offset account only offsets a percentage of the balance whilst a 100% offset account will offset the full amount, but is usually only available for variable-rate loans.

Should you have an offset account?

So should a property investor use an offset account? Deciding on whether to have this type of account or not will ultimately depend on your situation. If you know you are a good saver and have a large sum of money that you can put aside then this option could be right for you. By leaving your money untouched for longer this will help lower your home loan repayments each month and the overall interest you will have to pay.

Before proceeding with an offset account it is important to seek expert independent advice first to know exactly what you can and cannot do. You should also shop around to find the best option to suit you.

Want to find out whether an offset account will work for you? Talk to CPS Finance to discuss your options.

Eligible investments for a PIV include hosting an investment in an Australian managed fund, direct investment in securities exchange-listed assets, proprietary limited companies, property other than residential dwellings and government approved philanthropic donations. Direct investment into residential real estate is excluded from the PIV, as is loan back arrangements (where the investment is used as collateral by the applicant).

An applicant is only permitted to apply for permanent residency after 12 months of maintaining their investment, but there are no minimum residency requirements at this stage and the applicant does not need to live in Australia at all for the 12 month period.

The PIV has created an exciting opportunity for people looking to invest and eventually live in Australia.

For more information, visit Premium Investor Visa

As a landlord it’s imperative to understand both landlord and tenant rights and responsibilities. Knowing the process and protocol in your state will see you navigate your way around legislation correctly, ultimately staying away from tribunals and court mediation.

Here are our tips on how landlords can make sure they and their tenants are meeting their obligations.

Get Educated

In many cases, tenants are diligent with knowing their rights – especially if they’ve rented previously – so it’s important landlords become familiar with the Residential Tenancy Act. The Act aims to respect the rights and obligations of landlords and tenants, covering rents, rental bonds and other matters relating to residential tenancy agreements. There is also an abundance of resources available online for free to the public on government websites, Domain or realestate.com.au. The more knowledge you have, the less likely you are to fall foul of the law and end up with unwanted court fines.

Follow the Process

A landlord should always ensure two things at the beginning of a lease; a bond and a condition report. A bond acts as a security deposit to cover any costs of damages or potentially unpaid rent during the tenancy. The bond, however, must be forwarded to the residential tenancies bond authority who place the funds in a trust. Normally worth four weeks rent, the bond cannot increase during the tenancy.

Once the tenancy has been terminated, the landlord can claim the bond if the property is not in the same condition it was at the beginning of the lease (this does not include general wear and tear). If the landlord has no objections to the condition of the property, the tenant receives the full amount back upon moving out of the premises. On the other hand, the landlord can claim damages caused by the tenants, cleaning costs, outstanding bills or unpaid rent which is paid for out of the bond. If there is a disagreement about the compensation or the claim exceeds the full bond amount, an application can be filed to the state’s Tribunal. This is where a condition report will become imperative evidence to use to make a claim.

A condition report is a comprehensive document which visualises and describes the condition of a property at the time the tenant moved in. Accompanied by photographs of existing damage, the condition report is a handy document to refer to over the months and years of a tenancy. During routine periodic inspections, the condition report can be updated and referred to in order to understand the damage to or deterioration of a property.

Hire Help

A property manager will understand and advise on the rules and obligations landlords are ultimately responsible for, and where needed, act on a landlord’s behalf. A property manager can tap into tools and resources to stay up-to-date on changing legislation for both tenants and landlords, monitor the market and the repercussions this may have on rental prices, as well as carry out periodic reports or manage repairs. They are a vital asset to ensure an investment property is receiving maximum returns and as a landlord you’re adhering to your half of the contract.

To engage with a reliable property manager to assist with your investments, contact CPS Property today.