- Is this property purchase about my financial future or is it about my day-to-day life?
- What do I want this property to do for me in the long-term?
- Am I going to live here?
Whether you a new on the property ladder or an investor looking to snap up a bargain, looking at buying a property at a Mortgagee Sale or Auction could be the way to go. While it seems like it could be a good deal, buyers have to be aware of a few things before they sign the contract.
Is it really a bargain?
A mortgagee sale is an auction and potential buyers can get excited and carried away with their bidding. Always decide on your maximum budget and arrange to get finance before attending the auction. Mortgagee sales are often rushed so the settlement period may be less than a regular sale or auction. It always pays to do your homework before the auction day and get all your LIM and builders reports beforehand. Read the purchase agreement thoroughly because sometimes the agreement that purchasers sign at a mortgagee sale does not include all of the fine print clauses that are there to protect purchasers in standard auction agreements.
Is it in good condition?
While you may go and view the property before the auction, sometime the previous owners may be upset the bank is selling it and trash the place before the settlement date. Always arrange insurance from the day of the auction, just to be on the safe side. Also, it is safe to assume the previous owners fell on hard times financially and haven’t kept up with the maintenance of the property, so any money you save may have to go towards renovations. Be aware that often the chattels are not included in the sale and the previous owners may remove them.
While there are bargains to be found at mortgagee sales, it is definitely buyer beware so always take necessary precautions to protect yourself and your assets.
Have you ever snapped up a bargain at a mortgagee sale?
When you want to buy a property, whether it is your first time or if you are a seasoned expert, it is always a good idea to check out local auctions to try to snag a great deal. Here are 3 tips to being successful at an auction.
1. Do Your Research
Always research the market and talk to Real Estate Agents to ensure you go into an auction fully informed. It won’t hurt to look online as well. You can also attend other auctions to see how they operate. Always get independent, expert help on legal, finance and building matters.
2. Know the Rules
Auctions have very strict rules so read through them beforehand. In Victoria, the auction rules must be displayed at least 30 mins before the start. The auctioneer must tell bidders that the auction will be conducted according to the auction rules and regulations. It is illegal to make a false bid, hinder another bidder, or in any way intentionally disrupt an auction. You can be fined if you are caught doing any of these things.
3. Watch your limit
When at an auction it can be easy to get caught up in the moment and the excitement of bidding. Before you start, have a really clear idea of what your limit is and don’t go over that. Auctioneers are trained to try to get the best price possible so may encourage bidders to compete.
Have you ever bought a property at an auction? Did you snag a bargain or get caught up in the moment and pay too much just so you could win?
Imagine this: You have saved all your hard-earned cash and have been wanting to invest it for some time. But what should I invest it in? After much deliberation and research, you have decided that investing in property is your best option. You start looking for the perfect place. Eventually you find it and sign the papers. Now what?
After completing a few minor renovations you are now ready to rent it out. But to who? As a new landlord, and even if you have been in the game a while, you have the right to be picky. But what is the difference between being selective and down right discrimination?
Well, discrimination against bad tenants is just good business. You’re not discriminating on things such as race, colour, sex or religion. However, you do want to consider the following things:
1. Do they pay on time?
When tenants don’t pay rent on time or at all, it leaves landlords in a tough situation. You have every right to discriminate against tenants who are known to not pay their rent. Or those who don’t make paying rent the first priority instead buying expensive dinners and luxury holidays. Good tenants are those who know that paying rent is their first responsibility, bad tenants are those that don’t.
2. Can they even afford it?
It is vital during the application process to determine if the tenant has a stable job and can afford the rent as well as all their other expenses, especially pay attention to credit card debt and high car repayments. Always remember that what may be stable now, may not be in the future. People can lose their jobs, so it is up to the tenant to prove their income is reliable.
Good and bad tenants come in all shapes and sizes, so while it is important to discriminate on important matter such as their ability or willingness to pay, we should never discriminate based on religion, race or colour.
Have you ever had issues with bad tenants? What did you do about it? Did you know there is a website called Tenancy Bureau, where you can check up on tenants before you sign with them and also report bad tenants you have had. On the flip side, you can also report good tenants which help both them and their future landlords.
There are many reasons to renovate and there are many reasons to move. In general, the goal for most people is to upgrade to a better residence, so that later on you can sell it and make some money. In times of a down market, financial experts tell us to upgrade into a different house when prices are low, but it appears that advice is not always heeded.
When the market looks bleak, potential sellers look at all the costs that are involved – agents costs, marketing and legal fees and the big one- taking a loss on the property. So rather than dive in and sell, or rent it out and buy a new primary residence, more and more people are thinking along the lines of: ‘Well this place is not so bad, we can renovate and add that bathroom and bedroom and in the future it will be worth more.’
The most popular renovation is going up, either converting an attic or adding a new floor. Patrick Houston from Attic & Roof Conversions believes you can double your money by going up particularly if you add 2 bedrooms. ”If you look at a block of flats with two- and three-bedders, you normally find there is a $100,000 to $150,000 difference,” he says.
”Say we add two bedrooms for around $110,000, you are making rooms for roughly $50,000 each. [It is cheaper as you add two rooms, because you don’t have to pay establishment costs again.]”
Typically, if you are undergoing a radical renovation such as adding a floor onto your house, the goal usually is not to sell it immediately, but to make room for more people, either kids, parents, other family members, or even to rent out (depending on the layout of the house).
If you are considering renovating, get an estimate of what your home will be worth afterwards. The biggest problem facing renovators is that the money injected into the the house may not equal a higher selling price. The formula you can use to check the potential value is:
Current home value + extension/home improvements costs = improved home value as a minimum
When you undertake the renovation make sure it is of the highest quality. A ‘quick and dirty’ job will not increase the value at all, nor attract any buyers, but if the renovation is treated like it is an integral part of the home it will be very attractive.
Having said that, if you are not planning on moving anytime soon and you are happy with the location, style, proximity to schools and work plus you love the neighbours, it maybe still be worth it. Think about how much enjoyment you will get from the new house, but only as long as you are planning on staying there long enough to fully depreciate the renovation or if you rent it out, that you will either produce positive cash flow or at the very least neutral.
So would you 1) Sell and move 2) Renovate your home, or 3) Use it as an investment property and buy somewhere else?
When you bought your first rental property was it a negatively geared investment or positively geared? What about subsequent properties?
There is a lot of information out there that will help you understand the difference between positive and negative gearing a property. This post is about negative gearing, next time I will share a great article about positive gearing.
I am not advocating one system over the other, it comes down to your investor profile and your risk assessment. What works for one person, will not work for another.
In a nutshell, negative gearing means that you take a loss on your investment income and then apply that loss to other income (your salary) and that effectively puts you in a lower tax bracket. A positively geared investment means that you get income from your investment month after month but you are taxed on it, along with your salary so it puts you in a higher tax bracket.
A negative geared property is is a property that will not make you money month after month, but you use your expenses on the property to reduce your tax bill at the end of the year. This is often the only way new investors can get into the investment property game. Your intention when purchasing the property is gain long term capital growth, which can be a far more effective wealth-accumulation mechanism than monthly income, which is taxed.
This is particularly true if you are considering property investment to build an asset base to one day replace your salary. It’s important to have the long view and realise that wealth accumulation is achieved through delayed gratification. By finding the right properties in the right locations, and then to refinance the properties to accumulate more and more properties that will provide the future cash you are looking for.
This means your aim is to grow a large asset base and then enjoy the cash flow later. The money you can earn from a single positively geared property is minimal especially after being taxed, and is very unlikely to make a difference to your lifestyle right now. Another thing to consider is that with rising interest rates, the positively cash flow property of today, may become a negative cash-flow property tomorrow.
Negatively geared properties are purchased as high growth properties. You can effectively get higher rents and use the depreciation allowances to convert your low cash flow property into a high growth, strong cash flow property, by renovating and developing your properties. (That is unless laws change in the future). So hopefully you get the best of both worlds.
Negative gearing will give you immediate tax benefits (taking the loss off your overall income), but you will still have to pay the shortfall of the property. So even though at the end of the tax year you can use this as a very nice deduction on your taxes, you still have to pay money month after month to make this investment work. You will have to continue to do so until either expenses fall or income rises.
It’s assumed that you’ll make money from buying a negatively geared property, provided you can hold on for the long-term and wait for property prices to increase. In a rising market this is great, but what about a falling, or stagnant market, how long do you need to wait for? The biggest loses are felt when a property is bought during a boom and then has to be sold at a lose, because the investor just couldn’t ride out the stormy times.
The other issue with negatively geared properties is the number of properties that you can afford to buy using this method. Since you are paying out month after month, there is a limit to the number of properties that you can finance on a regular basis. Therefore, you need to keep working in order to earn a salary to fund the cash drain of owning negatively geared properties. If your goal is to generate passive income and stop working as soon as possible then negative gearing is not a strategy that will make you comfortable.
So what is your view of negatively geared properties? Below are some questions that you might find helpful to ask yourself before committing to a property.
- What’s the end purpose to my investing?
- Will buying this property bring me closer to, or push me further away from that goal?
- Am I saving tax or making money?
- What is the annual cash in or outflow?
- Can I afford to make a sustained loss?
- What is my exit strategy if things get tough?
- What has to happen in order for my property to make money?
- How many of these properties could I afford to own?
- Have I checked and double-checked all the figures and sought independent information to ensure the data I have is realistic?