March 2007

Getting into property development, utilising equity to achieve income, and suburb with a stigma.

Our panel of experts answers property investment questions from API readers. For more Q&As, see this month’s API magazine.

Property development

B: l’ve recently taken a retrenchment from work in a non-related industry and am keen to learn about property development, however l’m not sure what courses l should take to get me up to speed within the industry, as l want to learn the building basics. Can you suggest any bodies or institutions that may help in this area? In addition, l’m not sure what restrictions l’m up against depending on the project l undertake. I’m looking at buying a rundown house in a good middle class area and renovating it into a four bedroom, two bathroom, two living area house and/or putting two to three units on a site. Is it possible to do what l’ve mentioned without becoming a registered builder (given that l’d be using registered builders) as l hear there are restrictions on how many one can do (if non-registered), eg. one per four-year period?

A: What you’re contemplating is really complex and daunting, even for very seasoned investors – practically, mentally and financially. Take your development plans slowly. I would strongly recommend you begin with a more straightforward cosmetic renovation and resale of an already structurally sound small house and improve it within the existing shell only. If that goes well, by all means undertake something slightly more challenging. Redevelopment mistakes can be financially crippling, especially if you already have substantial debts on other properties. Go slow, engage professional help and learn carefully along the way. In regard to your other questions, your first step is to do a bit of homework in your local area and identify some key peak bodies that are “au fait” with local planning laws. The main industry body for the trade you’re looking at is The Master Builders’ Association. Apart from the national body, each state has its own branch, so check with the one appropriate to your location. They should be able to inform you of any registration requirements. Tertiary trade or technical schools in your area will provide information on trade skills courses. As to any restrictions that may apply to your potential projects, you’ll need to carefully check your State Government planning rules or regulations as well as those that apply in your local government area. Both the State Government and appropriate local government will have planning departments that should be able to answer all your queries. Planning rules vary widely even within local government areas, so find out exactly what you can and can’t do before you start any projects. If you engage an architect and/or builder you don’t need to be registered as one yourself and as a beginner I would strongly recommend you do so. Monique Wakelin

Help

Q: I’m 47 and soon to be made redundant and my wife, 44, earns approx $30,000 per annum. We have a $560,000 investment loan and approximately $2,445,000 in (non-super) property and share assets (details follow). We’d like to utilise this equity to achieve an income for myself without selling any of the assets, given we’ve invested for the long term in quality locations/companies, as well as wishing to minimise capital gains tax. Your advice, taking a long-term sustainability perspective, would be greatly appreciated.

A: Assets:

• $180,000 in superannuation
• An old three-bedroom investment house in Noosa rented at $250 per week, value approx $1,100,000, purchased 1987 for $75,000 (joint names, security for loan)
• Three-bedroom investment house in Brisbane rented at $310 per week, value approximately $470,000, purchased 2006 for $440,000 (joint names, freehold)
• Shares (blue chip) value $330,000 including $190,000 capital gains (wife’s name, freehold)
• Land in Cardwell, North Queensland, value approximately $115,000, purchased 2004 for $56,000 (joint names, future retirement option, freehold)
• Current residence, three-bedroom house in Sawtell NSW, value approximately $430,000 (security for loan).

Liabilities:

• $300,000 investment loan interest-only fixed at 6.9 per cent for 5 years (matures 2010)
• $260,000 investment loan interest-only fixed at 6.7 per cent for 5 years (matures June 2007)
• Nil credit card or personal loan debts.  

My standout concern here is the Noosa property. With a value of $1.1 million, yet renting for only $250 per week, it’s returning just over 1 per cent. I would suggest you can do better than this in terms of rental return.
As I see it, you have two options:

1. Add value to the property, enabling you to increase the rental yield. Depending on the property’s condition and appeal to the rental market, this could mean undertaking cosmetic improvements or doing a more substantial renovation. By increasing the rental yield to 5 per cent, you’ll increase the income by around $40,000 per annum.
2. The second option is to sell the Noosa property. This may be less palatable in the short term, because the property has had significant capital growth and you would incur a substantial capital gains tax liability. However, it would give you the opportunity to generate much more income by putting the sale proceeds into a cash flow focused investment, such as a commercial property trust. Returns in these kinds of investment vehicles can be in excess of 8 per cent.

I suggest you talk to your accountant to get an accurate indication of your likely capital gains tax bill before making any decisions. You may also want to speak with your financial advisor about the ramifications of selling the Noosa property, in terms of your overall financial position. Mark Armstrong

Suburb with a stigma

Q: I’m looking at buying my first home in the west (far west of Melbourne i.e. Caroline Springs/Point Cook/Seabrook) because it’s the only area that I can afford, but I’m incredibly nervous about the stigma that it carries which obviously affects growth. Should I or should I not buy in a new suburb that has reasonably good and new amenities, slightly away from public transport? The bypass to the western ring road will be completed by 2009, there are three new schools around, the main cross section of the community has an education level not greater than TAFE level, but it’s a brand new township. I generally like the area but am concerned with its current connectivity and future growth prospects. What are your thoughts? 

A: New outer suburban areas can offer a great lifestyle for people who are looking for affordable housing and a family-friendly neighbourhood. However, I do understand your concerns. The long-term capital growth prospects for these areas are likely to be weaker than for areas closer to the CBD. There are two main reasons for this:

1. There’s an abundant supply of land, but most of the people looking to live there are homebuyers; there are very few investors or tenants. This means there’s generally more land available than people to live on it. If there is excess supply relative to demand, property values will stagnate or even fall.
   
   
2. The land-to-asset ratio (i.e. the value of the land relative to the overall value of the property) is likely to be quite low. Because the house is new, most of your property’s value will lie in the building component – the part that depreciates. This means your property may fall in value faster than it can grow.
   
   If you enjoy the lifestyle offered by the new estates, and you plan to stay for the long term to raise a family, poor capital growth potential may not concern you too much. However, if you’re looking to move closer to the CBD in the short to medium term (i.e. seven to ten years) the gap between the value of your outer suburban property and values in inner or middle suburban areas will grow ever wider, making it harder for you to enter your desired market when you eventually try to make the move. In this case, you may be better off getting a foothold in your desired market now, and rethinking the kind of property you want to buy. This could mean, for example, buying a unit instead of a house, or a two-bedroom house instead of one with three or more. Mark Armstrong

Have a question? If you have a question you’d like to ask our panel of experts, please send it to: editor@apimagazine.com.au Please keep questions to 150 words or less.

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