Property Investing For Dummies (For Dummies (Business & Personal Finance))

360 Pages·2023·5.306 MB·English

by  Nicola McDougall, Bruce Brammall

Property
Investing
3rd Australian Edition
by Nicola McDougall and Bruce Brammall
Property Investing For Dummies®, 3rd Australian Edition
Published by
John Wiley & Sons Australia, Ltd
Level 1, 155 Cremorne Street
Richmond, Vic 3121
www.dummies.com
Copyright © 2023 John Wiley & Sons Australia, Ltd
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ISBN: 978-1-394-17048-7
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Contents at a Glance
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Part 1: Understanding Real Estate as an Investment . . . . . . . 5
CHAPTER 1: Comparing Real Estate to Other Investments . . . . . . . . . . . . . . . . . . . . . . . 7
CHAPTER 2: Covering the Landscape of Common Real Estate Investments . . . . . . . 21
CHAPTER 3: Opportunities in Real Estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
CHAPTER 4: Building Your Team . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
Part 2: Financing: Raising Capital and Sourcing Loans . . . . . 67
CHAPTER 5: Sources of Finance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69
CHAPTER 6: Financing Your Property Purchases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83
CHAPTER 7: Shopping for and Securing the Best Mortgage Terms . . . . . . . . . . . . . . .99
CHAPTER 8: Property in Self-Managed Super Funds . . . . . . . . . . . . . . . . . . . . . . . . . . 115
CHAPTER 9: The Ongoing Costs of Real Estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 135
Part 3: Finding and Evaluating Properties . . . . . . . . . . . . . . . . . . . 149
CHAPTER 10: Location, Location, Value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 151
CHAPTER 11: Preparing to Bid or Make an Offer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 183
CHAPTER 12: Signing the Contract, Inspecting the Property and Settling . . . . . . . . . . 213
Part 4: Operating the Property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 231
CHAPTER 13: Property Management 101 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 233
CHAPTER 14: Protecting Your Investment: Insurance and Risk Management . . . . . . 253
CHAPTER 15: Tax Considerations and Exit Strategies . . . . . . . . . . . . . . . . . . . . . . . . . . . 267
CHAPTER 16: Building a Portfolio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 291
Part 5: The Part of Tens . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 307
CHAPTER 17: Ten Ways to Increase a Property’s Return . . . . . . . . . . . . . . . . . . . . . . . . 309
CHAPTER 18: Ten Steps to a Real Estate Fortune (Or a Great Second Income) . . . . . 317
Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 329

Table of Contents
INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
About This Book . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Foolish Assumptions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Icons Used in This Book . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Where to Go from Here . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
PART 1: UNDERSTANDING REAL ESTATE AS AN
INVESTMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
CHAPTER 1: Comparing Real Estate to Other Investments . . . . . . .7
Finding Your Motivation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Stacking Up Real Estate Against Other Investments . . . . . . . . . . . . . . . . 9
Returns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Liquidity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Income- and wealth-producing potential . . . . . . . . . . . . . . . . . . . . . .11
Capital requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Ability to add value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Tax advantages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Determining Whether Investing in Real Estate Is for You . . . . . . . . . . . 16
Do you have sufficient time? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Can you hire and fire? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Does real estate interest you? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Fitting Real Estate into Your Financial Plans . . . . . . . . . . . . . . . . . . . . . . 17
Ensure your best personal financial health . . . . . . . . . . . . . . . . . . . . 18
Protect your property and yourself with insurance . . . . . . . . . . . . . 18
Consider superannuation and property investment . . . . . . . . . . . . 19
Think about asset allocation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Being Mindful of Performance Statistics . . . . . . . . . . . . . . . . . . . . . . . . . 20
Covering the Landscape of Common
CHAPTER 2:
Real Estate Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .21
Investing in Residential Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Freestanding houses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Attached housing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Apartment blocks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Deciding among the options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Using Your Home as a Base for Investing . . . . . . . . . . . . . . . . . . . . . . . . 25
Why tax makes ‘home’ and ‘investment’ different . . . . . . . . . . . . . . 26
Buying a place of your own . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Table of Contents v
Converting your home to a rental . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Diversifying away from home . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Holiday homes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Considering Commercial Real Estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
Uncovering Undeveloped Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
Considering Rentvesting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
CHAPTER 3: Opportunities in Real Estate . . . . . . . . . . . . . . . . . . . . . . . . . . 3 . 5
Buying Property Strategies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
Private treaty sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
Public auctions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
Tenders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
Off-market . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
Flipping Out over Buying and Flipping . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
Flipping new and existing homes . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
Heeding the risks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
Property Development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
Understanding the process and the risks . . . . . . . . . . . . . . . . . . . . . 44
Vacant land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
The knock-down job . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
Redevelop or renovate? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
CHAPTER 4: Building Your Team . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
Establishing Your Team Early . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .50
Getting Good Legal Advice . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
Choosing your solicitor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
Solicitors versus conveyancers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
Lining Up a Lender or Mortgage Broker . . . . . . . . . . . . . . . . . . . . . . . . . 52
Reviewing roles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
Building relationships . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
Adding an Accountant . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .54
Inspecting with a Building Expert . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
Working with Real Estate Professionals to Buy and Sell Property . . . . 57
Understanding what agents do . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
On the lookout: Buyers’ agents and QPIAs . . . . . . . . . . . . . . . . . . . . 58
Commission? You bet . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60
Making the most of real estate professionals . . . . . . . . . . . . . . . . . . 61
Spruiker alert! . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62
Dealing with developers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63
Dealing with Property Managers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64
Keeping Relationships Professional . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65
vi Property Investing For Dummies
PART 2: FINANCING: RAISING CAPITAL AND
SOURCING LOANS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67
CHAPTER 5: Sources of Finance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 . 9
Calculating the Costs of Entry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69
Determining what you need to get started . . . . . . . . . . . . . . . . . . . . 70
Don’t forget stamp duty . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71
Overcoming deposit limitations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71
Rounding Up the Required Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72
Make saving a habit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73
Tap into other cash sources . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73
Primary Sources of Finance: Lenders Big and Small . . . . . . . . . . . . . . . 74
Banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74
Building societies and credit unions . . . . . . . . . . . . . . . . . . . . . . . . . . 75
Non-bank lenders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75
Non-conforming lenders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76
Borrowing Against Property Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77
What is equity? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77
Watch those bank valuations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79
No Home? No Worries! . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80
Advanced Funding Strategies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81
Leveraging existing real estate investments . . . . . . . . . . . . . . . . . . . 81
Partners and investors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81
Seller financing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82
Getting in the door with good credit . . . . . . . . . . . . . . . . . . . . . . . . . 82
CHAPTER 6: Financing Your Property Purchases . . . . . . . . . . . . . . . . . . 83
Taking a Look at Mortgages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83
Going with the flow: Variable-rate mortgages . . . . . . . . . . . . . . . . . .84
Honeymoon rates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86
Average annual percentage rates . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86
The security of fixed-rate mortgages . . . . . . . . . . . . . . . . . . . . . . . . . 87
Tax-effective interest-only loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88
Making a dent with principal and interest loans . . . . . . . . . . . . . . . . 90
Making Some Decisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91
Deciding between variable and fixed . . . . . . . . . . . . . . . . . . . . . . . . . 91
Deciding between interest-only and principal and interest . . . . . . 93
Deciding on a loan term . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93
Reviewing Other Common Lending Fees . . . . . . . . . . . . . . . . . . . . . . . . . 94
Mortgages That Should Make You Think Twice . . . . . . . . . . . . . . . . . . . 95
Interest-capitalising loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95
Recourse financing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95
Vendor’s Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 97
Table of Contents vii
Shopping for and Securing the Best
CHAPTER 7:
Mortgage Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99
Shopping for Mortgages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100
Putting your existing relationship to the test . . . . . . . . . . . . . . . . . 100
The rise of mortgage brokers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100
Keeping up with commissions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 101
Counting a broker’s contribution . . . . . . . . . . . . . . . . . . . . . . . . . . . 102
Relying on referrals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .102
Working with Economies of Scale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .103
Buying banking in bulk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 103
Taking on bigger and bigger debt . . . . . . . . . . . . . . . . . . . . . . . . . . .104
Sizing Up Banking Products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 104
Interest rates: Is cheaper always better? . . . . . . . . . . . . . . . . . . . . .105
Merging your home and investment finances . . . . . . . . . . . . . . . . 105
Linking an offset account . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 107
Paying ahead into a redraw account . . . . . . . . . . . . . . . . . . . . . . . . 107
Other useful products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .108
Considering a Professional Package . . . . . . . . . . . . . . . . . . . . . . . . . . . .108
Avoiding Some Big Hidden Nasties . . . . . . . . . . . . . . . . . . . . . . . . . . . . .109
Lenders’ mortgage insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 109
Exit fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .109
Attributing Rental Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 110
Solving Loan Predicaments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 111
Polishing your credit report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .111
Conquering insufficient income . . . . . . . . . . . . . . . . . . . . . . . . . . . . 112
Dealing with low property appraisals . . . . . . . . . . . . . . . . . . . . . . . . 113
CHAPTER 8: Property in Self-Managed Super Funds . . . . . . . . . . . . . 115
Superannuation’s Great Tax Advantages . . . . . . . . . . . . . . . . . . . . . . . .116
Super: A low-tax environment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 117
Super: A no-tax environment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 119
Comparing SMSFs with Other Super Funds . . . . . . . . . . . . . . . . . . . . . 120
Owning Your Business Premises Inside Your SMSF . . . . . . . . . . . . . . . 122
Borrowing to Invest in Property in SMSFs . . . . . . . . . . . . . . . . . . . . . . .124
Limited recourse borrowing arrangements . . . . . . . . . . . . . . . . . . 124
Using gearing to increase diversification and returns . . . . . . . . . . 125
Understanding Your Legal Requirements . . . . . . . . . . . . . . . . . . . . . . . 126
Trusting on a solid SMSF base . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 127
Starting with a new SMSF trust deed . . . . . . . . . . . . . . . . . . . . . . . . 127
Upgrading an existing SMSF . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 128
Borrowing through bare trusts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 128
LRBA loan agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 129
Working Out Who Can Lend to SMSFs . . . . . . . . . . . . . . . . . . . . . . . . . . 130
Regular lenders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 130
You become the lender . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 130
viii Property Investing For Dummies