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GUEST OBSERVATION
The draft proposal to allow first home buyers to access up to $25,000 from their superannuation to buy their first home is absolutely ridiculous.
The whole concept of superannuation itself is to provide compulsory savings for people who are working, so they have a fund tofall back on when they retire.
At some stage in the future, Australia will not have a pension. Superannuation is a forced saving scheme, so people who are working now become self-funded retirees.
If first home buyers are able to access their superannuation in the first stage of their working lives - and most of them are under 30 years of age - they'll be taking a large lump sum of money that will take away massive growth from the early stages of their fund's growth.
What's appears to be a little problem now will turn into a catastrophic event when it's time to retire. It will just create another push on affordability, from a different angle.
If the policy goes through and it sees a big take up, we could see house prices go up, through greedy developers.
When there was the full switch over to first home owner grants for only new properties, you saw prices increase overnight for new house and land packages. One day they were $310,000, and the next day they were $330,000.
Superannuation is a very heavily governed industry. So I'm sure the take-up will not be as big, initially, as ASIC oversees the superannuation industry and it will be heavily regulated. But if it does take off, you will definitely see the sharks out there taking advantage and putting prices up.
Rather than dipping into their funds, and trying to outstretch themselves, first home buyers should rethink where they want to buy. If you can't afford to buy in an area, you shouldn't be trying to live there. If you can't afford to save a deposit for a home after paying rent, that also says you probably can't afford to live there.
Instead of taking money out of their super, first home buyers should think about changing their spending behaviours.
As a society, we have people to mow our lawns, we buy a coffee each day, we have our clothes dry cleaned, we're having our cars washed. We even have our dogs washed! 20 years ago, that never happened. It's about getting back to basics.
Every week, when you get paid, you should be putting some money aside. Some say, "that money simply isn't there". If that's the case, you're probably living in an area out of your budget. You should be able to save some money, even if it means you can't live in the most desirable part of Sydney or Melbourne. People are certainly living beyond their means.
You might need to live in the outer suburbs. Sydney is the worst location for affordability, even in the outer suburbs - so it might mean you need to consider moving to Melbourne. On the outskirts of Melbourne, there are plenty of new houses available for $300,000.
When I bought my first property, it was a little one bedder, and certainly not ideal. I saved by bum off to get a deposit together. And there wasn't a first home owners grant either. Homes are a lot more expensive today, but incomes are also a lot higher.
Of course, some industry organisations will support the proposal. Everyone has an agenda. Everyone wants to see a "good" property market. The developers want to sell properties. The real estate agents have to sell properties. They're obviously going to support it. The building associations obviously support it as well.
In reality, first home buyers need to rethink how they save for their first property.
TODD HUNTER is buyer’s agent, director and location researcher for Sydney-based <a href="https://www.wheregroup.com.au/" target="_blank">wHeregroup</a>.
He reached a personal investment portfolio of 50 properties in 2006 and has also started building an SMSF portfolio.
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Allowing first home buyers access to their super isn't the answer

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GUEST OBSERVATION
I never in my wildest dreams thought that I would be able to buy quality property in Sydney under $300,000…
But the GFC awarded me this moment in time that we absolutely took advantage of it. <a href="https://www.urban.com.au/property-observer" target="_blank">Campbelltown </a>(Macarthur Shire) was the spot.
But why Campbelltown? It made for some great buying, simple!
The south-western Sydney location had all the ingredients of a great investing location with a fast growing population, great accessibility to employment in Sydney CBD or growing commercial and industrial sectors in Minto and Hoxton Park through either the M5 freeway or by train.
The last key ingredient was the GFC. This caused house prices to drop dramatically and consumer confidence to go out the window, allowing me to have no competition with other buyers and allow for some pretty low offers to secure some great deals.
This all happened for us in 2009. I was that confident in the area that I purchased eight properties there. Well, that’s all the past and now is what we want to all hear about, the results.
I am glad to say that we have had a few investors recently sell their properties in Campbelltown for what I would call “very impressive” results.
We were that confident, we even filmed the first property to be auctioned and it went better than expected!
The reason for some of our clients selling is to grab the profits they made from their investment property and pay down their home loan in a lump sum. Imagine having a home loan for $300,000, being able to drop $100,00 plus onto it in one go, making it $200,000.
Wouldn’t that increase your cash flow dramatically?
With a quick loan re-adjustment, it sure would!
But, you don’t stop there – now your cash flow has increased along with the available equity in your home, you go back out and buy two or three properties.
When two of those properties mature in value, you do the same and pay off your home loan in full!
Since this, we’ve had another great result with a client selling their house we purchased for $298,000 and sold for $412,000. 
Back to the story, I congratulate these investors doing what most wouldn’t – invest when everyone else ran away and they will reap the rewards for doing so.
TODD HUNTER is buyer’s agent, director and location researcher for Sydney-based <a href="https://www.wheregroup.com.au/" target="_blank">wHeregroup</a>.
He reached a personal investment portfolio of 50 properties in 2006 and has also started building an SMSF portfolio.
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The investors who bought when everyone else was running away are now reaping the rewards

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We all know how ridiculous house prices are currently in Sydney, Melbourne and Perth – so how are our children ever going to be able to afford a house in 10 or 20 years?
The answer is that they are not.
Well, not without some serious heartache or help from you.
Yep, Mum and Dad, you aren’t out of it yet. They may have left the nest but they are still going to be dependent on you for a while to get a place of their own, unless they have a fantastic well paying job, have a strong business head on their shoulders, or get help from you.
So why not be smart about the help you are probably going to have to give anyway?
Sure, you can tap into some equity in your home in 20 years and give them a deposit for a house. But that may mean you are now back in debt, when you really shouldn’t be.
Or you may not even be in a financial position to be able to offer them that privilege. You should be looking at your own retirement plan and you probably don’t want to have to factor in this huge financial hurdle.
So why not do it now?
Why not get them into a cheap property right now – in the right location of course – and let it sit there for 10 or 20 years and grow in value. Then once the property is sold, they have a ready-made deposit without you having to dip into your own savings or equity further.
Given that kids are not buying their first home until they are in their late 20s or 30s, doing this when they are in their late teens is not too late.
I would stick to cheaper properties as they tend to pay for themselves, meaning the rent pays the interest on the loan, so any extra payments they make go directly off the principal of the loan.
So let’s work this out a bit more for you.
You have one child, 12 years old. You buy a cheap property for them. Now when I say cheap, there is no reason why you cannot buy a property for under $250,000.
Where are they?
All through regional New South Wales and Victoria, Tasmania (where you can buy for $150,000) and regional South Australia in good areas that, over the long term, will perform well enough to help the kids out.
Sure Sydney and Melbourne will be better locations to invest in generally, but remember: we are trying to build a deposit for the kids over a 10 to 20 year time frame.
You also want properties where the rent pays for the interest on the loan. 
You can invest in higher priced properties but this will depend on the level of help you want to give, your affordability to invest and the number of children you have, so we've have kept it at a budget level for you.
As your gift to them, you fund the deposit (under $30,000) on the property and you pay the council and water rates plus insurance each year at around $2,500. You could use equity to fund the $30,000 if you have this available.
Be wary of the trust structure as land tax may kick in and the savings you may think you are making over 18 years can be outweighed by the cost of selling the property and paying CGT and stamp duty again. Talk to your accountant here first.
Now you have invested in a regional location for $250,000, which rents for $290 per week. Given these are long term investments, it would be advisable to lock in the loan at a good fixed rate whilst they are low.
But don’t keep the property a secret, let the children know what you have done.
Let them get an appreciation of what you have done for them along with knowing that the property is theirs, ready for when they want to buy their own home.
You could even go as far as creating a photo folder, so they can look at the property often. This will help spur their interest in bricks and mortar. Let them file the rental receipts and loan statements into the folder so they have a sense of ownership.
Even better, why not get them to start paying off the principal now?
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How?
Start teaching them the value of a dollar, so when they start earning pocket money by doing chores, they start to put 50% of their pocket money onto the loan.
Even if its only $2, make sure they put that aside. At first, they will not want to - but after a while, they will insist that they put it onto the loan.
Teach them the effects of compound saving – there are plenty of websites that can help you explain this.
But you must put this money on the loan, don't forget – and show them the effect of their actions on internet banking.The penny may not drop straight away, but it will. When the loan statements come in for the loan, make sure you give them a copy to put in their folder so they can see the benefits of what they are achieving.
You are teaching them good financial practice.
As the rents increase over time, and the loan starts to become more positively geared, put all the extra rent onto the loan, paying down the principal.
You may even find that they start wanting to mow the lawns of the entire street to earn more pocket money.
This desire will increase when they get their first pay packet in their part time job. Same deal: 50% of their pay packet to go towards their loan.
So by the time they get their first full time job, they will be in tune with the right savings attitude and put aside as much as they can towards the loan. Half of their pay would be ideal, but may be unachievable pending their lifestyle at the time. They should be able to put at least 30% aside if they still live at home.
Now until they have a full time job, the principal will reduce very minimally. But now they are working full time, and earning, say, $30,000 per annum. This means they earn $532 net per week.
So putting aside 50% each means they are putting $266 per week onto the loan. That equals $13,832 per annum.
At this rate, the positive gearing is increasing weekly and creating a snow ball effect, getting bigger and bigger as it rolls on.
From here it gets hypothetical. But let's work on one scenario. The kid stays home until they are 25 years old. They increase their income each year by $2,000 gross from 18 years old til 25 years old. Very easily achievable.
In the time before they've reached 18 years of age, they have accumulated $10,000 onto the loan through doing chores at home and working part time.
I have assumed an interest rate at 5% (although it won’t stay there forever, but you will lock in for the first five years).
They stick to their 50% net income savings regime while living at home. The rent on the property increases by $10 every six months = $20 per week per annum. This would be the loan balance after each year.
<ul>
<li>Year 1 = $214,637   (Principal reduces by $25,363 – includes initial $10k)</li>
<li>Year 2 = $195,408   ( by $19,229)</li>
<li>Year 3 = $173,420   (by $21,988)</li>
<li>Year 4 = $148,530   (by $24,890)</li>
<li>Year 5 = $120,641   (by $27,889)</li>
<li>Year 6 = $89,699   (by $30,942)</li>
<li>Year 7 = $52,551   (by $37,148)</li>
</ul>
So as you can see the snow ball effect is created by an increase in income, increase in rent and compound interest savings.
Now I don’t need to show you that if they went on until they were 30 years old, that they would fully own the property. 
And here’s the kicker: If we use a minimal 4% capital growth (this is low) on the property for the 18 years between the ages of 12 and 30, then that $250,000- property is now worth $526,000 – and it cost you around $75,000 ($30,000 initially, plus 18 years of $2,500 holding costs per annum).
Now we’re talking. $500,000 will certainly get them started in the property game.
TODD HUNTER is buyer’s agent, director and location researcher for Sydney-based <a href="https://www.wheregroup.com.au/" target="_blank">wHeregroup</a>.
He reached a personal investment portfolio of 50 properties in 2006 and has also started building an SMSF portfolio.
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Cheers Mum and Dad: How you can invest in your child's future

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GUEST OBSERVATION
We have had a client that has had their loan declined in recent times due to the minutest details and strange circumstances.
Let me paint a picture – They are existing clients with one of the majors and they have an investment loan, credit card and savings account all with the same bank. So they are loyal bank clients.
Being very diligent with their money, they put everything they earnt onto their home loan and left a small amount in their savings account to live off. Then when their loan repayment was due, they would redraw money from their home loan account and put it back into their savings account. The bank then direct debited their loan repayment from their savings account.
A small oversight saw their savings account overdrawn by $100 with a direct debit they forgot about.
So now, when they applied for a new loan, we obviously went with that same bank and the $100 overdrawn account sent a red flag to the lender.
Upon further digging, they then assumed that these clients were redrawing funds to simply make their loan repayment. Now this was true, but only because they were putting everything onto their home loan to save on their interest, but the lender did not see it this way.
Even though they had over $80,000 in their redraw.
It does beg the question as to why the bank allowed them to over draw a savings account in the first place? If there is no money in the account, then they shouldn’t be able to access credit. Were they ever approved for this credit? Was there an application? I think not.
There was also no practicality taken into account for this decision; it was a pure black and white policy that they adhered to. As a consequence, they lost that client and will now lose all their business in the near future.
And it’s this kind of stupidity that clients remember for life.
So what can you do to ensure you have everything up to scratch when you apply for a loan? 
<ol>
<li>Make your everyday account an offset account, that way there is no shuffling of money. 
</li>
<li>Always have a buffer in your working accounts – lenders frown upon overdrawn accounts now with the new credit reporting. 
</li>
<li>Regular ATM withdrawals from clubs and pubs (if you love a beer or a punt, then get your cash out from the banks ATM’s prior), lenders see everything now. Think twice before you withdraw funds at these type of establishments. Not to mention, it will also save you the $2.50 plus ATM fee. 
</li>
<li>Credit cards, do not go over your limit, another big no no. Regardless of whether you pay the whole credit card off at the end of the month, as soon as you start going over your limit, it’s a red flag and even the best of applications get declined for this reason alone. 
</li>
<li>Any bills that are late, even your phone bills, by more than five days etc, these are all recorded on the new credit reporting system. So if you think you are winning by paying late, be prepared for a surprise the next time you apply for a loan. Regardless of what you earn. 
</li>
<li>If you do move money around a lot to save interest, then set automatic transfers in case you forget.</li>
</ol>
So, I guess the moral of the story is pay your bills on time, every time.
TODD HUNTER is buyer’s agent, director and location researcher for Sydney-based <a href="https://www.wheregroup.com.au/" target="_blank">wHeregroup</a>.
He reached a personal investment portfolio of 50 properties in 2006 and has also started building an SMSF portfolio.
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Six tips to make sure everything is up to scratch when you apply for a loan

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GUEST OBSERVATION
In the past few weeks, I have spoken to several people who all think that property prices never fall and will only plateau. 
One guy even convinced himself that house prices didn’t go down in the global financial crisis (GFC). 
Wow, memories are short lived and the power of current day marketing can sure twist and make people believe whatever they publish. 
It’s scary to think that people are so naïve to think property always goes up. Look at historical numbers, it’s not the case. In fact Google it and see for yourself. 
Now some may call me a 'doomsdayer', but nah, I’m a realist who has lived through two major price corrections in the property market, along with a few smaller ones too. 
I’m sure the owners and investors on the Gold Coast would agree with me. The GFC took a hard hit on this region, in particular places like Hope Island, with the median house price dropping 19% over four years. Yes that’s right, for four years the house prices keep reducing. Even today, they are still not back to 2009 levels. 
We all remember the huge unprecedented WA boom of 2005-2007. House prices in Wannanup (Port Bouvard) dropped 17% in two years. So think about it this way, your $60,000 house is now worth $500,000 two years later. 
But given that Sydney is immune to this, lets look at Caringbah (where I live). The median four bedroom houses in 2010 was $997,500 and then it went down to $884,500 in 2012.
Huh? No way, it can’t go down, Caringbah. In Sydney. Must be a misprint.
No – it did drop, and dropped by 11% in two years, only two years ago. 
Sure, prices have since jumped again and surpassed previous levels but there were many who realised that loss. Remember, the median can only be calculated by actual sales, meaning many in Caringbah sold cheap for those two years. 
We have been purchasing houses in Brisbane that were sold to investors in 2007 for $460,000 and seven years later we are picking them up for $360,000 – $375,000. That’s a lazy $100,000 loss plus stamp duty and legals and real estate sales commissions, so it’s more like $130,000. Or around a 22% drop in value. 
Units have a similar story. Don’t be the owner of a two bedroom unit in Crestwood NSW (near Canberra) as they have had negative growth for over three years totalling 16%. 
Now I can already hear some of you saying “well you only lose if you sell”. Well yes, if you like to sell it to yourself that way then that’s fine, but the value of your property has reduced. 
Let’s explain it in a different way – if you had $460,000 in a cash management account and then seven years later you only had $360,000 would you think about it the same way? I don’t think you would; the same way self-funded retirees don’t.
Now the figures I have quoted are on house sales or actual experiences and not the general median house price. The reason is because the general median house price is incorrect. I have<a href="https://www.wheregroup.com.au/the-median-measurement-is-misaligned/" target="_blank"> written this previously</a>.
Well, the winners of this huge upswing in houses prices, particularly Sydney property owners, are those who are selling or those who are taking advantage of higher valuations and using the equity to invest in more property. But not those home owners who sell and buy in the same market, they are virtually in the same place. 
Article continues on the next page. Please click below.
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Those buying now in Sydney are nothing short of crazy in my opinion. Even if Sydney continues to rise a little more, all that means is the correction will hurt even more. Historically low interest rates and borrowing to your maximum borrowing level is suicide. Rates are going to go up at some stage. 
Now if you have been living in a cave lately and not up to date on whats going on in the Sydney/ Melbourne markets, let me explain.
List prices are set by real estate agents as the properties fairly true value. Negotiations generally take place from there, downwards. But of late, the list price is a starting guide to head upwards from. Auctions see the hammer falling far beyond the reserve price and by all accounts foreign investment is also driving prices above where they should be. 
Looking at that practically, when you pay more than retail, are you not buying your own future capital growth? 
In what world does that make sense? 
It seems I am not the only one here either. Bank of Queensland (BOQ) recently announced it is restricting all lending for Sydney and Melbourne securitized loans. All of the majors have tightened their belts in relation to investment lending and high LVR loans are more and more difficult to get approved. 
It would appear the hierarchy hob knobs are also getting a little nervous.
But it’s not the same picture in all capital cities, so here are my thoughts on each of them: 
<ul>
<li>Sydney – Don’t touch, not until interest rates are over 7% and prices drop dramatically. </li>
<li>Melbourne – Don’t touch, major oversupply issues in many markets. Not sure when it’s a good time to re-enter at this stage. </li>
<li>Adelaide – some good buys but yields are low.  </li>
<li>Hobart – some good buying, timing is right but stay to low purchase prices under $250,000.  </li>
<li>Darwin – sorry haven’t researched of late but never found anything worth while buying up there.  </li>
<li>Canberra – timing is right but be wary of oversupply issues in Gungahlin area.  </li>
<li>Perth – coming off the boil. Some opportunities will start to reveal themselves soon.  </li>
<li>Brisbane – Market is hitting full swing, still some good buying opportunities but you must be Johnny on the Spot and make quick decisions.</li>
</ul>
So be smart, don’t be a statistic! Do your numbers on a minimum 9% interest rates and if you can afford the mortgage at that level then you should be fairly safe to proceed. That is, of course, that your own personal circumstances don’t change in the future. 
And don’t kid yourself that interest rates wont go up. From late 2010 til early 2012 (18 months) they were over 7% and from early 2008 til early 2009 they were almost 9%. That’s twice in the last six years. 
Now, I know I am just barking and no-one is going to really pay attention to this… blah blah blah… but when I invest: 
<ul>
<li>I do my numbers at principle and interest at 9%. </li>
<li>Invest with an exit strategy in mind as you never know what life throws at you. </li>
<li>Always have rainy day money aside.</li>
</ul>
So I guess time will tell, one thing I know is, that I will be cashed up ready to pounce for when rates go up and Sydney house prices go down.
TODD HUNTER is buyer’s agent, director and location researcher for Sydney-based <a href="https://www.wheregroup.com.au/" target="_blank">wHeregroup</a>.
He reached a personal investment portfolio of 50 properties in 2006 and has also started building an SMSF portfolio.
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Time for a reality check: Property prices certainly can, and do, go down

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GUEST OBSERVATION
So two weeks ago I babbled on about how <a href="https://www.urban.com.au/expert-insights/38589-time-for-a-reality-check-property-prices-certainly-can-and-do-go-down&amp;sa=U&amp;ei=xlGTVKj0IKirmAXS14DICg&amp;ved=0CAYQFjAA&amp;client=internal-uds-cse&amp;usg=AFQjCNGFXFdD1_onPGFfIQQOa8KwxvEPKw" target="_blank">Sydney property prices will go down in value</a> and how many property buyers live in a fantasy world where they don’t think it will or has ever decreased.
So I thought I would go into one Sydney suburb, diagnose the stats and show you that it can be a reality for this suburb.
There was no science in choosing Castle Hill as the suburb of choice. I didn’t troll through pages and pages of data to choose this particular suburb though.
Looking at the latest CoreLogic RP Data stats as at September 2014, <a href="https://www.urban.com.au/property-observer" target="_blank">Castle Hill</a> has a median house price of a whopping $982,000.
Yep that’s right, its going to cost you just shy of a $1 million to buy in Castle Hill. In fact, it will probably cost you more. Even a three bedroom unit sold over weekend for $920,000. Yes, a unit.
According to CoreLogic RP Data it has grown in value 19% in the last year and 49% over the last five years. So in English, in 2009 you could buy in Castle Hill for $650,000.
With an average ‘days on market’ of 29 days, it is showing that the market is still red hot. So I would assume that we will see the magic million mark passed by Christmas, if not already.
Yields have failed to keep up, like many Sydney suburbs. They do their best work in a quiet market where no new houses are being built and the supply dries up. That said, the median rent is $650 per week.
So forget investing there, with a yield at 3.4% you can achieve this in a bank account without the risk. It’s one of those suburbs where it is cheaper to rent than to purchase! And the volume of sales, 576, shows significant numbers that can be relied upon. Be wary of sale figures in a low sales volume environment.
Now we need to add some income and other fun facts into the mixing bowl from the 2011 Census. Of all the working families, 41% had one major breadwinner whilst the other partner either worked part time or not at all. The suburb averages three people per dwelling and they own two cars.
The median family income is $2,059 per week – that’s a tidy $107,068 per annum.
But hang-on, that’s the whole household income and that’s gross before tax. So take home in hand is $1,487 per week, well for 41% of families it is.
Now lets go back and look at the house figures again and put the income and other stats in.
Let’s stick with the median house price at $982,000. If you were to purchase with a 20% deposit you would require around a $230,000 deposit and have a loan for $785,600. With an interest rate of 4.8% the principle and interest payments it equals $951 per week over 30 years.
That’s a whopping 63.9% of your net income per week going towards your mortgage. Does that sound like it makes financial sense? Better hope interest rates do not ever go up, or that you have a child, or both. That’s a recipe for bankruptcy.
But hang on, wasn’t the average people per household three? Oh, so they do want to have a family and a house in Castle Hill. Uh oh.
Now I have gone and checked with the banks that they would even lend you the money, and I can confidently tell you that even the banks are not that crazy. So if that’s the case, then how are people affording to buy these properties if the banks wont give them a loan that size?
Well, there are possibly several answers here:
<ul>
<li>They have larger than 20% deposits</li>
<li>They could be investors from other suburbs, so their incomes are different</li>
<li>The lower incomes earners may have owned property for a while when prices were lower</li>
<li>The higher income earners are buying the properties today</li>
</ul>
As the median income is the middle income achieved in the area, this means there are certainly income earners on a higher income than $107,000. It is more than likely these people, who are on incomes of $135,000 or higher, who are purchasing properties at this level. Doing some numbers here on servicing and income categories, it is those families in the top third percentile that could only realistically afford properties at this level. 
But hey, let’s go crazy and pretend interest rates will go up (we all know that never happens) and let’s say they go up to 8% – that same scenario above with the higher income earner at $135,000 can no longer afford to get that loan.
Can they afford to make the loan repayments though?
$785,600 principle and interest at 8% equals $1,329, which equates to 73% of their income, which leaves them $485 per week for:
<ul>
<li>Food to feed a family of three</li>
<li>Fuel for two cars</li>
<li>Rego</li>
<li>Council &amp; Water rates</li>
<li>Alcohol and possibly cigarettes</li>
<li>Bills</li>
<li>School fees</li>
</ul>
So it could potentially be done, but you would be living on bread and water and in reality this family would go bankrupt.
Remember my tip: Always do your sums on 9%.
And the figures are telling me that this is going to be a common story for Castle Hill in the coming years.
The numbers are leaning towards a suburb that is living well beyond its means and I would say that there a little of the “keeping up with the Joneses” going on here too and that’s a recipe for one mighty price correction.
TODD HUNTER is buyer’s agent, director and location researcher for Sydney-based <a href="https://www.wheregroup.com.au/" target="_blank">wHeregroup</a>.
Picture of a Castle Hill house courtesy of Wikimedia Commons.
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Falling down Castle Hill: Diagnosing a suburb living way beyond its means

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GUEST OBSERVATION
The performing Sydney and Melbourne property markets are no secret. They are all over social media and the news.
And for those home owners and investors who have had the great fortune to see their property values skyrocket, what’s next?
Why not take advantage of the fantastic values currently on offer and tap into some of that equity and keep investing?
But what does “tap into our equity” actually mean?
Similar to when you purchased your property, the banks would only allow you to borrow up to so much of the value of that property. This is called your Loan to Value Ratio (LVR). Well, provided you can service the debt at the increased amount (make the repayments), the banks will allow you to increase your loan up to a certain LVR and use that cash for a deposit on an investment property.
The great part about that is, that the increased amount that you use as the deposit on another property is tax deductible, even though the banks used your home as security for the funds.
Why?
Purely because what makes a loan tax deductible is the purpose for which those funds were used.
Like usual, let’s number this out.  
Say three years ago your home was worth $600,000 and your home loan was $480,000. Your LVR is 80% because $480,000 is 80% of $600,000. But in the last three years your home has seen some great increases in value and it is now worth $850,000.
The banks will now allow you to increase your loan to 80% of $850,000. So your new loan would be $680,000. But you only owe $480,000 so there is $200,000 available for you in available funds, in your offset account or in redraw ready for you to use when you locate another property.
Now to keep your accountant happy, it is best to split the $680,000 into two loans, one split for $480,000 and the second as $200,000. That way your accountant can easily work out the interest on the loan that they can claim on your tax each year.
Obviously, this is how we would structure your loan and explain all this to you as we go.
At the same time as arrange the extra cash for you to use as a deposit, we would arrange a pre approval for you so that you could purchase an investment property.
Even if you have some extra money paid off your home loan, do not use this but instead continue to make the extra repayments on your home loan to pay this off first. Simply because this debt is not tax deductible.
You should restrict the maximum amount you aim to spend on an investment property, and that should be nowhere near the value of your home.
Even as a professional investor I don’t spend over $425,000 on a property. My last four purchases were for:
<ul>
<li>$410,000 – ACT</li>
<li>$40,000 – in the USA</li>
<li>$356,000 – QLD</li>
<li>$134,000 – Tassie</li>
</ul>
The advantages of spending less are:
<ul>
<li>Diversify</li>
<li>Less to lose, if by some chance everything turned pear-shaped (always invest with worst case in mind)</li>
<li>Potentially be able to invest in different markets and take advantages of different property cycles</li>
<li>Baby steps – especially if this is your first go, I see couples where one of them wants to invest much more than the other, and it’s not worth fighting over. You’ve only got one life and it ain’t no dress rehearsal. (Sorry if I just went all Dr Phil on you)</li>
<li>Yields are generally more attractive and the properties will pay for themselves</li>
</ul>
So back to the story, we have set up a pre-approval at the same time for you for a purchase price of $375,000. The loan would be for $300,000 which is an 80% LVR.
But there are some set up costs along the way to, for example:
<ul>
<li>Stamp duty – varies state to state</li>
<li>Legals to purchase</li>
<li>Building inspection report</li>
<li>Pest nnspection report</li>
<li>Depreciation schedule report – for tax purposes</li>
<li>Government charges</li>
<li>Buyers agent fees – because you will want me to buy you a property</li>
</ul>
The great thing here is that you can pay for all these from the $200,000 loan you have already set up.
Yep, that’s right nothing from your pocket and the interest these fees attract on that loan is also tax deductible.
Now to make that transaction work you only require around $100,000 and you have borrowed and extra $200,000, meaning you have the option later on to possible purchase a second investment property. But by tapping into the equity now whilst the values are high, could give you the option at a later date. When values go through a correction you may not get that privilege. And you only pay interest on the money that you have used, e.g. the $100,000.
Now, not everyone is in a position to tap into their equity and invest, as they may have borrowed 95% of the purchase price when they recently purchased.
What you may have been experiencing, is that there are some much better interest rates on offer. They can be as much as 0.5% better.
So what can be done about this?
Firstly, interest rates are now allocated as rate for risk, meaning those higher risk borrowers to the banks are not on the same interest rates as those borrowers who own 20% or more of their properties.
And this risk is judged on the value on the day that a valuer puts a dollar figure on your property. So as we have experienced some great growth in the Sydney and Melbourne property market, you may now find that you do own 20% of the property value now.
But be quick, because this great market isn’t going to stick around much longer and you want to capitalize on the maximum value you can achieve.
TODD HUNTER is buyer’s agent, director and location researcher for Sydney-based <a href="https://www.wheregroup.com.au/" target="_blank">wHeregroup</a>.
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Time to tap in to some equity and keep investing: Todd Hunter

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GUEST OBSERVATION
Why is it that people say property is forever and that we never sell?
Talking to as many investors as I do each year, I pick up on similarities that investors have mentioned to me after they have spoken to other property companies.
And it’s scary stuff.
We recently did a 'James Bond secret spy mission' and did some research on other companies, what they offer and their sales speeches compared to what they actually do.
It meant we had to make dummy customer calls, pretending to want to invest and ask them all about what they do and offer. We also ordered a ton of those free reports online, where you put an email address in and get a free property report.
We even have attended seminars and heard all the hype first hand.
And I will say it again, boy it’s scary stuff!
Now, company names will be left out of this, along with locations, but we are going to reveal the latest shark scam.
The problem is that it is so basic and consumers are buying into it.
It is simply sharp sales people earning peoples trust then bam, they get blindsided.
So what am I talking about; all over the internet, throughout all the investment magazines, inundating social media and being promoted through thousands of emails every month are property companies and so called "buyer's agents” saying one thing, and then offering the complete opposite.
To try and gain credibility in the market place these so called experts offer commentary and advice on all topics relating to investing in property.
Now I am for various people making comments on different types and ways to invest but if you do offer commentary on certain topics as a great way to invest, then you should also be practicing the same way in your business.  Practice what you preach.
The classic one that comes to mind is buying properties that are under market value in locations that you get the inside word on before all the herds come running in and pump up the values.
Pretty much what we do.
They even offer tips on how to negotiate a huge discount on the purchase price.
Then you call them and they then earn your trust to then simply offer you a house and land package or townhouse or unit development off the plan.
But weren’t you just telling me how to negotiate a property under market value?
But there’s no negotiating price on a house and land package? You are actually paying retail and, in most cases, well beyond the retail price because of the huge hidden kickbacks up to $60,000 per property.
How’s that under market value in a location secret to all other investors?
Then the classic property investing line comes into play, you never sell property because it’s a long-term investment.
Ever wondered why they say that?
Because you just paid $60,000 over retail in the way of hidden kickbacks and that property market requires a good ten years to recover.
To recover the $60,000 loss on top of the retail price you paid but also because some of those investors will liquidate after a few years and take a huge loss, creating a downward spiral effect in that suburb.
That loss can be as high as $140,000 on houses that were worth $480,000 when sold.
And guess who’s there ready to buy these houses at that point. Yep that’s right, the guy who practices what he preaches.
And that is why so many property companies say property is forever, to cover their bum.
So if your looking to invest shortly, do yourself a favor and read through the magazines, websites, social media and You Tube videos and make notes on who says what. Then call em and have a chat and see if they back up what they say.
TODD HUNTER is a buyer’s agent, director and location researcher for Sydney-based <a href="https://www.wheregroup.com.au/" target="_blank">wHeregroup</a>.
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The latest property shark scheme catching buyers out: Todd Hunter

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GUEST OBSERVATION
It’s no secret that when I invest I am looking for a bargain.
In fact, I am looking for the property owner who needs to liquidate and exit from their property (either home or investment) fast and take a significant loss in the process.
But with interest rates at historic lows, this task can become a lot tougher and probably more difficult, as we look like having another interest rate drop or two.
That said, it may surprise you that even in an awesome property market, like what Sydney is experiencing right now, that 2.7% of all property sales were sold for less than what they were paid for.
And if we were to include entry and exit costs like:
<ul>
<li>Stamp Duty</li>
<li>Legals to purchase</li>
<li>Loan application fees</li>
<li>Transfer registration fees</li>
<li>Mortgage registration fees</li>
<li>Building reports</li>
<li>Pest inspection reports</li>
<li>Depreciation Schedules</li>
<li>Ongoing council rates</li>
<li>Ongoing water rates</li>
<li>Legals to sell</li>
<li>Real estate sales commissions; then this percentage would probably be more like 15%.</li>
</ul>
Now, ‘time in market’ could, and can, play in whether you make a profit on a property or not. But that said, 3.2% of those sellers who owned their properties for between 10-15 years sold for a loss. Work that one out.
I know who would be happy, those Sydney purchasers who made it into the 2.7%.
But I thought property prices never went down? Ha, try and tell that to these old owners.
Now the vast majority of property sale losses occurred for owners who only owned their property for three to five years (18.2%) and five to seven years (15.6%).
Basically from the global financial crisis (GFC), but not limited to.
Now not to pick on Sydney, but they got off the lightest. Their percentage of losses in sales were low, but the number of property transactions are high.
Nationally the numbers are scarier, with 9% of all sales making a loss for the June 2014 quarter. That’s 6,332 property owners across Australia who sold their property for a loss within that three month time frame. Units in Cairns, Queensland and Widebay, South Australia were the worst performers though, with close to 50% of sales losing money.
And backing what I have been yabbering on about for many years now, are the oversupply of units in Melbourne, with 18.3% losing money. That’s almost one in five properties sold for a loss. It’s an interesting figure given the buoyant property market there currently.
So, what’s the point in all this?
In trying to locate a deal on a property purchase, they are still there, but you need to be more diligent on your research to find these awesome deals. They are still around in ‘hot’ markets like Sydney and Melbourne but are much more prevalent in cooler markets like Adelaide or ACT.
For our recent investors though, in locations like the Gold Coast (15%), Bunbury (15%), Wyong (7.8%) Mandurah (18.9%) Armadale (6.4%) and Townsville (27%), you can be happy knowing that we have located deals for you in these small percentiles of owners who made a loss.
TODD HUNTER is buyer’s agent, director and location researcher for Sydney-based <a href="https://www.wheregroup.com.au/" target="_blank">wHeregroup</a>.
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Sometimes, someone else's loss can be your gain: Todd Hunter

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GUEST OBSERVATION
My most read and commented on blog was <a href="https://www.urban.com.au/news/25963-sept-5-flicker-3-todd-hunter-&amp;sa=U&amp;ei=7FMrVdjsLILksAXor4DgBQ&amp;ved=0CAQQFjAA&amp;client=internal-uds-cse&amp;usg=AFQjCNGqLbshlgPB4R7fTCAJq4VGF2NneA" target="_blank">my thoughts on the NRAS “scheme</a>”.
Well, I can say I was right and the story of this “scheme” only gets worse I’m afraid.
Earlier this year I had a client call me and let me know her NRAS property in Sydney that she purchased through another property company had been trashed. She only found this out after not receiving rent for two months. This sparked her to inspect the house to find they had fled the house and left it damaged along with rubbish everywhere.
When she investigated it further, she found that four bedroom house had eight people living in the house. The lease agreement was only approved as having four people living there. The consortium managing the property had not done any of the required property inspections, like they had said they would do.
And funny enough, they now don’t return her phone calls.
So after spending several thousands of dollars in repairing and cleaning the house, they thought they may want to sell it. The bad experience had put a foul taste in their mouth. I offered to refer her to a friend who is an agent, who works in the area and they have done an inspection. Now the fun begins…
The agent gave them what they believed to be fair market value price in a strong Sydney market and this dollar figure was still $80,000 less than what they paid for the house.
So, now they have a house that has been trashed, now vacant and worth far less than what they paid for it.
Could it get any worse?
Yes it can.
Now I don’t know the reasons why, but it would appear that the government department responsible for NRAS has amalgamated with another government department and as a consequence many (and quite probably all) of the tax refunds for NRAS were not paid for the last financial year, due to a software glitch that they couldn’t repair.
These payments amount to close to $10,000 per annum that the investor is supposed to receive back in compensation for letting out their property 20% below market value.
To make it even better, they have no ETA on when the problem will be fixed, if at all.
This was money these investors could have really done with to help pay for the trashed and damaged property they have been left with.
So I am sorry, but have I missed the positives of NRAS?
TODD HUNTER is a buyer’s agent, director and location researcher for Sydney-based <a href="https://www.wheregroup.com.au/" target="_blank">wHeregroup</a>.
He reached a personal investment portfolio of 50 properties in 2006 and has also started building an SMSF portfolio.
This article was originally posted on <a href="https://www.wheregroup.com.au/blog/todd-hunter/" target="_blank">Todd's blog</a>.
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Todd Hunter

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