Business – The Australian Lending & Investment Centre

8 Key Considerations For Converting Your Home Loan Into An Investment Loan

Kevin Agent — Wed, 13 Dec 2023 04:57:59 +0000

Converting your home loan into an investment loan when you turn your primary residence into an investment property in Australia is a significant financial decision that comes with potential tax and financial implications. Here’s an in-depth analysis of this transition:

1. Increasing Existing Loan

It’s crucial to understand that you can’t merely expand your existing home loan to create more tax-effective debt. Australian tax laws mandate a clear separation between the portion of the loan used for investment purposes and the portion used for personal or non-deductible expenses. Failing to maintain this distinction can jeopardise your ability to claim deductions effectively.

2. Mortgage Structure

When converting your home into an investment property, consider re-evaluating your mortgage structure. This may involve adjusting the loan type, interest rate, or repayment frequency to align with your investment objectives and optimise cashflow. For instance, an interest-only loan can lower your monthly payments, but it typically necessitates a robust strategy to repay the principal down the line.

3. Loan Structuring

To ensure the tax efficiency of your investment loan, it’s essential to collaborate with a lender or advisor to establish a new loan. This often involves creating a distinct loan account for the investment property, specifying the loan’s purpose, and maintaining meticulous records of how the borrowed funds are allocated for investment-related expenses.

4. Interest Rate and Terms

Keep in mind that the interest rates and terms for investment loans may differ from those applicable to owner-occupied loans. It’s wise to conduct due diligence by comparing offerings from various lenders to secure a competitive rate and terms that align with your investment strategy.

5. Interest Deduction (Negative Gearing)

Transitioning your home loan into an investment loan enables you to claim tax deductions on the interest paid. This can substantially reduce your taxable income and overall tax liability. However, it’s imperative to maintain a clear separation between your investment loan and personal expenses to ensure you can make these deductions correctly.

6. Principal Repayments

Consider how you plan to address principal repayments on your investment loan. While interest payments are tax-deductible, the principal portion is not. Deciding whether to make principal repayments should align with your investment strategy and long-term financial goals.

7. Tax Compliance

Adhering to loan structuring and record-keeping requirements is critical for tax compliance. Non-compliance can lead to tax complications and potential disallowance of deductions. Thorough documentation and consultation with a tax professional are essential to ensure adherence to all tax regulations.

8. Professional Advice

Given the complexity of this financial transition and the potential tax implications, it’s advisable to seek guidance from a financial advisor or mortgage broker who specialises in investment property finance.

In summary, when transforming your primary residence into an investment property, it’s crucial to carefully follow tax compliance and loan structuring rules. Ensuring a clear separation of the loan accounts for personal and investment use is vital to maintain the tax-deductibility of interest. We highly recommend seeking professional guidance throughout this process to avoid potential tax issues down the road. If you have any questions or would like to discuss the above further, the team at ALIC specialises in investment lending and is here to help you along the way.

The post 8 Key Considerations For Converting Your Home Loan Into An Investment Loan appeared first on The Australian Lending & Investment Centre.

Property Intelligence Report Q1 2023

Mark Davis — Fri, 08 Dec 2023 02:54:07 +0000

Property Intelligence Report Q1 2023

Mark Davis
Business, Development
December 8, 2023

Disclaimer

Before you start reading, keep in mind that all information contained on this page is either Mark’s personal opinion or information from third-party sources. None of this information represents the views of ALIC or related entities, nor is it investment or property advice. You should not make any financial or investment decisions based on this information.

If you need property advice, book a meeting with one of our brokers for a referral.

Changes in Australian Housing Markets

At ALIC, we help our clients create wealth through property – and that means making sure they’re investing in the right places.

To stay on top of the markets, we hold fortnightly meetings with some of Australia’s leading property experts.

Here’s what they told us.

Blue-Chip Markets Primed for Growth

Over the last three months, the cost to buy certain blue-chip properties in Melbourne and Sydney has been exceeded by their replacement costs – thanks to a string of builder collapses and rising material costs.

For example, if a high-end property costs $3.2 million to acquire, you might pay $4 million in replacement costs.

Why does that dynamic matter?

Because, as soon as interest rates experience downward pressure, many property advisers predict that those blue-chip markets will pick up drastically.

A Shaky Landscape, Firming Up

Personally, with three consecutive on-hold calls from the RBA, I’ve seen our clients’ cash flows starting to stabilise and become more consistent.

People are beginning to have a better understanding of their finances and the landscape they’re operating in – and that confidence could potentially lead to greater investment activity in high-opportunity markets.

(Property advisers we work with are currently recommending places like Toowoomba, Mandurah and Rockingham.)

If and when the RBA does decide to lower rates – CBA is predicting a drop in early 2024 – we could see increases in those markets to the tune of 20%.

Opportunity Snapshot

Here are some of the locations we’ve seen property advisers recommend to our clients.

Brisbane

$750,000 – $1M

Perth

$750,000 – $1M

Adelaide

$750,000 – $1M

Toowoomba

>$750,000

Mandurah

>$750,000

Don’t make financial decisions based on this information. Always seek the advice of a professional property adviser.

Hike and Balance: Maximising Rental Yields

Rental demand has increased drastically across Australia over the past year – the only capital city that’s seen sluggish growth is Melbourne.

But, with supply continuing to tighten, it’s likely that Melbourne is on track to catch up with rental rates in the rest of the country.

So, what can investors do to maximise rental yields and cover their increased costs?

The most obvious step is to increase rent to match the rest of the market.

Many of our clients are also re-balancing their portfolios to combine lower-yield properties in capital cities with higher-yield regional assets.

For example, if someone owned properties in Sydney or Melbourne with a 3% yield, they might look to properties in regional Queensland or Western Australia with 5 or 6% yields to ease cash flow pressure – which is particularly important for investors with large debt.

Construction Costs Responsible for Low Supply

Everyone in Australia is aware that construction costs – thanks to builder collapses, material prices, and labour constraints – are impacting the housing supply.

But many people still hold a misplaced faith that those costs will return to a pre-COVID baseline.

In my opinion, that’s not likely.

Supply and demand will continue to outstrip any minor reductions in prices, and, in all likelihood, we’ll see building costs actually go up as demand swells over the next few months.

The best we can hope for is the type of softening that we’re already experiencing – a deacceleration, not a reversal.

Understand. Plan. Act.

Know your cashflows and understand which properties you can and can’t afford to invest in. Your broker can help you calculate your borrowing power.

Speak to the right experts and develop a plan. Don’t borrow more just because you can – talk to your broker and property adviser about investments that will improve your financial position over time.

Then act on current market opportunities. Waiting for ultra-low interest rates to return is unlikely to bear fruit.

Q&A

Mark answers frequently asked questions about property investment and lending.

When a lender is assessing income for an unconditional approval, do they factor in the rent you’d likely receive from that property?

Yes, most lenders do consider potential rent from an asset for which you’re seeking lending approval.

They typically conduct a valuation of a property to determine its probable rent, although some lenders might get a real estate appraisal instead.

Once they’ve determined the asset’s potential rental yields, they’ll factor 80% of that number into their calculations.

That’s the case for the vast majority – around 90% – of institutional lenders.

Second-tier lenders, which aren’t as heavily restricted by regulators, are more lenient and may include up to 100% of your potential rental yields.

Keep in mind that you can also borrow more money generally through second-tier lenders due to the way their servicing calculations work.

What sort of advice have you seen property advisers and buyer’s advocates give in relation to those sorts of properties?

Each loan scenario is unique. Some loans, such as vehicle loans, settle faster than others, but timelines depend on your personal circumstances, the amount you’re borrowing, the value of the asset(s) you’re acquiring, and the policies of individual lenders.

On average, a home loan takes four to six weeks to go from application submission to settlement. That doesn’t include time spent with your broker discussing your goals, collecting your information, or preparing your application.

Note: A-grade properties, like those found in exclusive Melbourne suburbs, can be extremely hard to acquire and may not necessarily see the same capital gains that assets in faster-growing suburbs do.

The Next Three Months

The RBA’s last three meetings have seen the cash rate unchanged – and there’s a possibility that we won’t see any more increases at all.

That means Australia’s housing markets will likely open up for investments.

Buyers will regain their confidence, and, as activity increases, we’ll see rental yields continuing to accelerate thanks to the ongoing supply-side issues.

Renters will continue to struggle – but, for investors, the October–December period could be highly appealing.

Got a question for Mark?

Book a consultation with Mark for personalised advice about borrowing – or, for Mark’s general opinion on markets, property, and the economy, submit a question and have it answered in the next Property Intelligence report.

The post Property Intelligence Report Q1 2023 appeared first on The Australian Lending & Investment Centre.

ALIC Makes The Adviser’s Shortlist of Top Australian Brokerages

ALIC Media Centre — Tue, 28 Mar 2023 01:29:15 +0000

ALIC Makes The Adviser’s Shortlist of Top Australian Brokerages

The Australian Lending & Investment Centre has been recognised as one of Australia’s leading mortgage brokerages after securing seventh place in The Adviser’s Top 25 Brokerages 2023 ranking.

The Top 25 Brokerages ranking, developed in partnership with NAB, has been revealed in the February 2023 edition of The Adviser magazine, Australia’s top publication for mortgage and finance brokers.

Now in its 14th consecutive year, the Top 25 Brokerages ranking shines a light on high-performing brokerages that have consistently achieved high scores and set the benchmark for excellence for the rest of the industry.

Coming in at seventh place is a massive achievement for ALIC after it successfully placed 10th in the 2022 edition. 2023’s ranking cements the organisation’s progress and unwavering dedication to continually improving its services and performance year after year.

The rankings took into consideration key business metrics and overall productivity. Scores determined the final rankings in six key metrics across the 2021–22 financial year (FY22):

Number of loans settled in FY22
Value of loans settled in FY22
Overall loan book size
Average annual loan book growth (overall loan book size divided by years in business)
Total number of brokers
Broker efficiency (volume of loans divided by the number of active brokers)

“It’s great to be recognised and lauded for all our efforts over the last 12 months,” said CEO Damian Brander, who was thrilled with the result.

With unsettled markets and rising interest rates, it hasn’t been smooth sailing, either.

“We’ve had to work extra hard during this period and ensure we’re not dropping the ball for any of our clients – to make the top 10 is an incredible achievement, and I’m proud of every single member of our staff for their contribution in making it happen,” said Brander.

ALIC’s goal is to continue its progress up the annual list with a top five finish next year. The company will earn its 2024 position by maintaining and improving its stellar commitment to clients and unwavering work ethic now and over the coming year.

ALIC Media Centre

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Changing Times: From Tactical Loans to Strategic Broking

ALIC Media Centre — Tue, 06 Dec 2022 17:54:24 +0000

Changing Times: From Tactical Loans to Strategic Broking

Lewis Johns has always dealt in home loans, broking mortgages for both established institutions and fresh-faced digital lenders. But the industry is changing – and brokers like Lewis need to evolve to survive.

One point one million,” says the voice on the other end of the phone. “Based on the values of the surrounding properties and the way the market’s moving, that’s our best estimate. Congratulations, mate.”

The call is from Lewis Johns’ real estate agent. The news: the Brisbane property he purchased in June 2020 has jumped in value from $730,000 to $1.1 million – a staggering leap of nearly 50%. But, as a veteran mortgage broker, Lewis isn’t surprised.

He’s spent the past decade helping medical professionals obtain home loans. Now, he’s seeing the fruits of that expertise in his own portfolio, and he isn’t done yet.

“I’m holding for the long term,” he explains. “Brisbane markets are projected to experience good growth over the next five to ten years – thanks to the Olympic Games in 2032 – so I’m anticipating even larger capital gains over that period.”

Lewis has even leveraged the equity in his current property to purchase a second investment property, a tactic that he’ll look to repeat in 2024. It’s the second big move he’s made since emigrating to Australia from the UK. The first: joining the Australian Lending and Investment Centre (ALIC).

For Lewis, it’s not a superficial job change. The fundaments of his new role are vastly different – at ALIC, he helps clients build wealth through property. That can and often does involve broking home loans, but it also demands a longer-term view, one that looks past the settlement date and towards the client’s ideal future.

It’s a world apart from his first finance job in the UK. A native Scotsman, Lewis studied accounting and financial planning, before landing a role as a mortgage adviser at Nationwide Building Society, a goliath credit union with more than 16 million members worldwide. There, he was tasked with broking on demand – getting members the mortgages they wanted as quickly as possible.

In 2013, he moved to Brisbane, Australia. After a stint with Macquarie’s life insurance division, he moved to private banking at BOQ Specialist, a division of Bank of Queensland. His new world was thirty-degree summers, Queensland beaches, and specialised lending for doctors, dentists and vets.

“I was one of the top performers at BOQ Specialist, and then a smaller company came along called Credabl, which was started by a few of the ex-BOQ staff,” Lewis says. “They were doing lending for medical professionals again, but more in line with mortgage broking, rather than bank-based lending, which meant we actually had multiple banks and institutions that we could use [to get loans for our clients].”

Digital banks like Credabl rely on flexible financing, frictionless customer experience, and agile lenders – the perfect environment for Lewis to hone his broking skillset. But, three years in, he was presented with an even better opportunity: the chance to work alongside some of Australia’s top brokers at ALIC, a company with a unique market perspective.

When asked what made him say yes to the recruiter’s offer, Lewis pauses for a moment. “[ALIC have] been the number one mortgage broking firm in Australia multiple times. And then Mark [Davis], who I’m actually working with in Brisbane, he’s personally been the number one broker in Australia multiple times as well.

“So it was more than just [ALIC’s] credentials. They’re actually one of the very top, if not the number one, mortgage brokering company in the country.”

He draws a distinctly British comparison between ALIC and his other jobs: stepping up to the Premier League from the EFL. But he’s quick to clarify that his time at Credabl and BOQ Specialist was invaluable.

High-income earners – whether they’re doctors, CEOs, or investment bankers – tend to be time-poor. Their wealth comes at a temporal price, and that means they look for efficiency and acuity in their professional advisers. They want the facts, fast, not a meandering conversation where they repeat themselves again and again.

Both Credabl and BOQ Specialist lend almost exclusively to high-income earners, which meant Lewis was already well-versed in the right tempo. Since joining ALIC in September, he’s been putting those skills to use with Mark Davis, familiarising himself with new client structures and learning how to realise optimal outcomes.

The key to those outcomes, Lewis says, is an exceptional level of service. “High-income earners don’t want to be going into a bank or a branch and having a meeting with someone. They don’t have time.”

He points to digitisation as a major turning point. COVID-19 normalised remote collaboration, and, armed with tools like Teams and Zoom, ALIC’s brokers have been pursuing a digital-first meeting strategy that maximises both their and their clients’ time. Instead of being forced to meet before or after work, clients can now work around their schedules – a lunch break, a gap in meetings, the commute home. Flexibility and client-centrism are the new table stakes in the broking world.

“You could have a husband and wife working in different locations,” Lewis explains. “But then you can get both of them on their lunch break over Zoom, and they don’t have to try to create time when they’ve finished working. They can be at home spending time with their family instead.”

Lewis isn’t only interested in high-income earners, though. The people he wants to collaborate with are individuals with an investor mindset – the ones who, like him, can see five, ten years down the track, and understand that laying the foundations now is how future wealth is created.

“At ALIC, we help people who want to invest in property, but don’t necessarily know how to do it themselves,” Lewis says. “Should they be buying apartments to rent out? Or should they be upgrading the family home to get a bigger house to rent out the first place they bought? Or should they be buying in Brisbane, or in the Gold Coast? That’s where we step in to be able to show them how to borrow and how to build their wealth in the right way.”

A crucial part of the ALIC methodology is supporting their clients with the right professional team. Where other brokers end with settlement, ALIC’s lending managers introduce independent advisers into the equation – buyer’s advocates, accountants, and financial advisers. ALIC is limited to providing lending scenario advice, so those professionals help clients do things like choose the right property, minimise tax exposure, and execute long-term financial goals.

And that’s been the biggest adaption Lewis has had to make by joining ALIC – moving from a limited, loan-oriented perspective to a holistic, long-term view that focuses on client outcomes. There’s no more ‘here’s your interest rate, here’s your loan, off you go’. Instead, he looks at how mortgages can be structured to support both five- to ten-year goals and later-life aspirations. In other words, he’s transitioning from being an excellent tactician to a true strategist.

“Where ALIC differentiates itself [from other brokerages] is those professional support networks, as well as the focus on strategy, structure and planning,” Lewis explains.

In the next few years, the company’s strategic approach could well become the demarcation between successful brokerages and those that spiral into stagnation. As of this article’s writing, the average Aussie home buyer is holding back, wary of a chaotic market and climbing interest rates. ABS data is already showing an 8.2% drop in new housing loan commitments – bad news for firms who do broking-on-demand.

But, for Lewis’s new clients, the chaos is an opportunity to buy low and appreciate. In the words of ALIC CEO Damian Brander, “buy in the gloom, sell in the boom”. While Lewis is always careful to avoid giving property advice, he’s happy to talk about the lending structures that can help investors win, even in cooling markets.

“With mortgages, you’ve got the benefit of leveraging your deposit. So if you had $200,000 available, it’s actually worth $1 million, because lenders will generally lend you five times whatever cash you have. So you can use that to get into the market, which is something not a lot of people understand. They don’t understand the risks and they don’t understand how to structure loans properly, which is where we come in.”

Lewis only joined ALIC in September 2022, but he’s looking forward to supporting past and future clients through strategic lending advice. With his skillset being fostered by industry veterans like Mark Davis and Kevin Agent, he’s ready for whatever 2023 has in store.

Book A Free Consultation With Lewis

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Rentvesting: A Guide for First-time Investors

Damian Brander — Wed, 07 Dec 2022 02:45:26 +0000

Rentvesting is a strategy that more and more Australians are using to jump into the property market quickly. In this article, we explain what rentvesting is, how it works, and the pros and cons of pursuing it as a property acquisition method.

What Is Rentvesting?

Rentvesting is a portmanteau of ‘rent’ and ‘vesting’ – it’s a wealth creation strategy that involves purchasing an investment property while continuing to live in a rental property.

At first, rentvesting can seem illogical. Why would anyone want to waste money on rent if they could afford to buy their own home? Done correctly, though, rentvesting can help you pay off your mortgage faster and more comfortably than a traditional owner-occupier approach.

How Does Rentvesting Work?

The process for rentvesting is more or less the same as buying a normal home.

Start by saving for a house deposit. Although 20% of a property’s value is an ideal deposit size, your mortgage broker may also be able to help you secure a loan with less (although you may have to pay LMI and face less favourable loan conditions).

Once you’ve accrued a reasonable deposit (think $40,000–$60,000), talk to your broker about your options. They’ll be able to help you set up the best loan structure for your situation, and can also direct you to other relevant professionals, like buyer’s advocates.

Remember: don’t romanticise your first property purchase. Buying a house is an incredibly exciting step in your financial journey, but this isn’t your dream home – take emotion out of the equation and instead focus on finding a property that represents good value for money and is likely to appreciate. Broaden your search beyond local markets, too. Even if your home city seems unaffordable, there might be opportunities in other states.

Once you’ve secured a mortgage for your new investment property, you can use a property management agency to find tenants. Ideally, the rent you charge for the property should be more than what you’re paying in rent. That way, rentvesting can help you pay off your mortgage faster than owner-occupying.

For example, let’s say you currently pay $500 per week in rent. You save up $50,000, giving you a 10% deposit on a $500,000 house, so you take out a mortgage with a term of 30 years and a rate of 5.64% per annum.

Your principal and interest repayments would come to $599 per week – $99 more than your rent. Instead of paying that extra money as an owner-occupier, you’re passing the cost onto another renter.

Now, let’s compare rentvesting to owner-occupying over a 30-year term (we’ll ignore inflation and rate rises for now). Over 30 years, your mortgage will cost you $932,416, whereas rent will cost you just $780,000. Even without considering appreciation or home improvements, you’ve saved $152,416 – enough for three additional mortgage deposits at $50,000.

Rentvesting does have some detriments, which we’ll talk more about shortly, but, from a purely financial perspective, it can be an extremely effective strategy.

How Does Rentvesting Work?

Pros

Earlier property market entry
Flexibility in lifestyle and location
Appreciation of your property

Cons

CGT liability when you sell
No use of First Home Owners’ Grant
Lifestyle compromises with renting
Property costs like repairs, rates and insurance

Rentvesting Pros

Earlier Market Entry

One of the biggest reasons to consider rentvesting is that it allows you to step onto the property ladder sooner than owner-occupation.

When you’re purchasing an investment property, you don’t need to worry about location constraints. While you might need to live in Melbourne CBD for the foreseeable future, for example, you might choose to buy a much more affordable property in Perth, giving you earlier access to capital gains.

You also don’t need to worry as much about affordability. Even if you couldn’t afford to step up from $500 a week to $599 a week in the example we gave earlier, rentvesting allows you to enter the market while still maintaining your current expense levels (excluding, of course, property-related costs, which come with both investment and owner-occupied properties).

Tax Deductions

Expenses incurred by investment properties are, unlike those for owner-occupied homes, tax-deductible. That means you can write off everything from property management fees and insurance to building improvements and rates.

The most significant deduction you can claim is the interest on your mortgage. In the example we gave earlier, your home loan interest would come to around $16,080.50 per year, which means, at a tax rate of 37%, you’d save $5,949.785 per year in tax.

Flexibility

Rentvesting also affords you huge flexibility. Rather than staying tied down to a specific location or home, you can experiment with different lifestyles in different suburbs and change jobs more easily.

Alternatively, if you’re lucky enough to hold a remote-work role, you can even use rentvesting as a gateway to digital nomadism, journeying across countries and continents as your investment property keeps appreciating.

Appreciation

When investing, there are three key wealth-building mechanisms: value storage, passive income, and appreciation.

Value storage is a way of protecting your money from inflation. By buying assets that don’t decrease in value or have their value diluted over time, you can preserve the wealth you already have.

Passive income comes in forms like rent, dividends and distributions. It’s money being generated passively (without your input) by your investment.

Appreciation is the difference in your investment asset’s value between the purchase price (combined with any improvement costs) and what it’s worth today. For example, if you bought a property in 2020 for $700,000 and it was worth $1.05 million today, it would have appreciated by $350,000 (50%). Appreciation is only realised when you sell the asset.

Investment properties leverage all three mechanisms to help you build your wealth, but you can make the most money through appreciation. Rentvesting allows you to get into the market earlier, which, in turn, means you’ll likely earn more through appreciation.

Property markets do move in peak-and-trough cycles, but, over the past sixty years, Australian property prices have been steadily moving away from CPI inflation, indicating that demand for housing has increased and that house prices will keep going up – and, with an ever-growing world population, there’s no reason for that trend not to continue.

Rentvesting Cons

CGT Liability

Under Australian law, the property that is your main residence is exempt from capital gains tax (CGT) when you sell it. CGT exemptions are granted under a few conditions:

The property must have been the home of you, your partner, and other dependents for the whole period you have owned it.
The property can’t have been used to produce income (for example, via house-flipping, renting, or running a business from it).
The property is a block of two hectares or less (you can choose which part of your property is exempt from CGT if it is larger than two hectares).

As a rentvester, you are renting out your investment property, which means you’ll incur CGT when you sell it. CGT applies to your capital gains – the difference between how much you bought and improved the property for (the cost base) and how much you sold it for. Capital gains are taxed at your marginal tax rate (that is, added onto your income tax), but, if you owned your investment property for more than 12 months, you’re eligible for a 50% CGT discount.

Remember that the cost of any improvements to the property (such as renovations) are added to the cost base, so always keep track of any value-adding changes you make.

First Home Owners’ Grant

Rentvesting also means you can’t use the First Home Owners’ Grant to buy your investment property, a subsidy for Australians who have never owner-occupied before. Provided you didn’t own residential property before 1 July 2000, you can apply for the grant under certain conditions.

Importantly, though, rentvesting doesn’t exclude you from ever applying for the First Home Owners’ Grant. If you do decide to buy a home to live in at a later date, you can apply for a grant (assuming you meet all the relevant conditions).

Lifestyle Compromises

One of the biggest detriments to rentvesting – at least, for some people – is the lifestyle compromises that need to be made while renting. You can’t make improvements to the property without the owner’s consent, you may be limited in what you can and can’t do with the property, and you’ll have to deal with quarterly inspections and any conditions in your rental agreement.

You also could be given notice by your landlord under a number of different circumstances, leaving you with 30 to 90 days to find a new home.

Many rentvesters feel that those impositions are minor in comparison to the financial benefits rentvesting can deliver, but, if you’re someone who values home stability and freedom of choice, it’s worth weighing up the potential issues.

Extra Costs

As an investment property owner, you’ll be responsible for improvements, repairs, council rates, water rates, building insurance, landlord insurance, body corporate fees, land tax, property management fees, and maintenance costs like pest control. Although these asset costs are tax-deductible, you’ll still have to pay them up front.

You might also have to shoulder the cost of mortgage repayments if there’s ever a gap in tenancies. Australia’s rental market is incredibly hot at the moment, but it may cool once housing affordability improves and the issues facing the construction sector ease. You can minimise the risk of tenancy shortages by making your property as desirable as possible, investing in good marketing when you need new tenants, and pricing rent relative to the market.

Leveraging Rentvesting for More Investments

The example earlier in this article showed that, by rentvesting instead of owner-occupying, an investor in that scenario could theoretically save $152,416.

One overlooked benefit to rentvesting is the use case for those extra savings. In that example, you could buy an additional three properties with deposits of $50,000 each, two more expensive properties with $75,000 each, or even look at subdividing your existing property with a development loan.

Leveraging your savings to build your investment portfolio can help you quickly accrue a suite of different properties that all benefit from the same wealth-building mechanisms: value storage, passive income, and appreciation.

Why Do Some People Think Rentvesting Is Bad?

The argument against rentvesting is mostly an emotional one. Many Australians still view paying rent as ‘dead money’ – paying off your own mortgage can feel like a more sensible decision. CGT can also be a big deterrent. Losing up to 45% of your capital gains to the government is never fun, but, provided you hold your investment for at least 12 months, you’ll only have to pay a maximum of 22.5%.

For other people, rentvesting may not be the right pathway to building wealth. Everyone has individual circumstances that need to be factored into their financial planning, which is why discussing your options early with professionals like mortgage brokers, financial planners, and buyers’ advocates is so important.

Rentvesting vs. Owner-occupying

When you weigh up rentvesting against owner-occupying, the key consideration should always be how far you come out ahead. Leave emotion out of the picture. Get the help of your accountant and financial adviser to crunch the numbers with the input of your broker and advocate, and see which option is most likely to lead to the best financial outcomes.

You also need to take into consideration factors like work, family, and lifestyle. For some people, the lifestyle flexibility that rentvesting affords might trump any financial benefits. For others, rentvesting can be a way to get into the property market early while still living in expensive suburbs close to work.

If you’re interested in talking through how you can use mortgages and property strategies like rentvesting to build wealth, book a free consultation with one of our industry-leading brokers. As one of the top brokerages in Australia, we’ve delivered more than $6.389 billion in loans to over 14,000 Australians. One of our principals, Mark Davis, has also been recognised as Australia’s top broker multiple times, and we’ve won dozens of awards since we opened in 2011.

Book a meeting to find out how we can help you find the right loan for your situation.

The post Rentvesting: A Guide for First-time Investors appeared first on The Australian Lending & Investment Centre.

Property Intelligence: Q1 2022

Mark Davis — Thu, 27 Oct 2022 23:28:12 +0000

Property Intelligence: Q1 2022

Mark Davis
Business, Development
October 27, 2022

Disclaimer

If you need property advice, book a meeting with one of our brokers for a referral.

Changes in Australian Markets From July to September

At ALIC, we help our clients create wealth through property – and that means making sure they’re investing in the right places.

To stay on top of the markets, we hold fortnightly meetings with some of Australia’s leading property experts.

Here’s what they told us.

The Melbourne Situation

AAA-grade properties in Melbourne are holding relatively firm against rising interest rates, with a 5% dip in market value.

B- and C-grade properties, by comparison, have dropped 15–20% (although that figure varies across different sub-markets).

Looking Interstate

In Perth, our property advisers tell us that the market is still strong, up around 18% since November 2021.

In their opinion, it’s a market that will continue to grow over the next six to 12 months.

In most other markets – a few exceptions aside – property cycles are moving from the ‘boom’ phase to the ‘gloom’ phase.

We’re entering a cooler property climate, and what that means depends on whether you have an investor mindset or a non-investor mindset.

An Investor’s Viewpoint

In property investment, a dip in the market can often represent an opportunity for investors.

And, based on what we’re hearing and seeing, that’s holding true in the first quarter of 2022/23.

Many of our customers have started investing in response to a cooling market – according to our adviser network, the market has dropped as much as 30% for B-grade properties in major cities.

To help our clients respond quickly when markets do hit bottom, we’re encouraging them to think about lending strategies that they can use to action their property advisers’ advice.

Starting those conversations now – versus, for example, in a few months’ time – means we can execute lending scenarios faster, enabling our clients to take advantage of market opportunities.

Opportunity Snapshot

Here are some of the locations we’ve seen property advisers recommend to our clients. As always, this isn’t investment advice, nor should it be used to make investment decisions.

Bendigo

Perth

Adelaide

Select Brisbane suburbs

Has Housing Affordability Started to Increase?

As rent continues to skyrocket, it’s the question every Australian wants answered: has housing affordability increased?

Are the RBA’s efforts to cut the fat out of the market working?

Or does a mortgage remain frustratingly out of reach for the average Aussie?

“Housing prices have gone down, but [interest] rates have gone up,” Mark tells us. “[Affordability] is a combination of the two.”

“If you’re buying AAA-rated properties out of Melbourne [where prices] have only dropped 5% and rates have gone up 2.5%, then it’s not more affordable.

“But, if you’re buying a B- or C-grade property – which is not necessarily a bad property – we’re talking about markets that have dropped 15%, 20%, and rates have gone up 2.5%, then, if we can negotiate a really good rate, then [that property] can look like it’s more affordable than six months ago when rates started to move.”

In other words, property affordability has increased – but only in markets where the housing price drop has exceeded the rise in interest rates.

Investor Mindset

We typically see clients with investor mindsets make good long-term decisions in economic climates like the current one.

They understand that banks still want to lend.
They make decisions based on advice from property advisers and mortgage brokers.
They see ‘the gloom’ of a down market as an opportunity.
They understand ‘the market’ is a composite of many smaller sub-markets, each with its own unique mechanics.
They choose investments based on total asset yield and appreciation opportunity.

VS

Non-investor Mindset

Often, buyers with non-investor mindsets struggle to make money in down markets.

They assume stricter lending requirements mean banks are less willing to lend.
They make decisions based on cash rate fluctuations, not professional advice.
They’re afraid to invest in cooling markets.
They view the property market as a monolith with nationwide troughs and peaks.
They choose investments based on interest rates and trends.

Home loan rates aren’t any higher than
they were four years ago.

Don’t get spooked by media headlines about rising interest rates. They aren’t any higher than they were four years ago.

Although the cash rate is slightly higher, the big banks have reduced their margins, keeping home loans at about the same rates.

Viewed in a historical context, a 4% home loan rate isn’t high.

With the right risk profile, right cash flow, and right property advice, the tail end of 2022 can be a good time to buy property.

Property Oracle: The Next Three Months

With the cash rate predicted to rise by 50 to 100 basis points before Christmas, housing affordability will likely decrease – at least a little.

Those same hikes will take home loan rates to 4.7–5.2%, keeping mortgages within reach of savvy investors.

When the RBA returns in February after the Christmas break, we’ll probably see further hikes designed to further decrease national inflation.

The banks, though, will be on the hunt for investors and home buyers to write loans for.

“My opinion is that the banks’ lending requirements won’t tighten a lot,” Mark says.

“The banks are hungry to lend. Volume is down, churn rate is enormous, and banks will be doing everything they can to hold onto their existing client base.”

Enhancing Your Borrowing Power