Question Mark

If you have been holding out for a decent increase in your rental income, your window of opportunity may have arrived. Figures released by the Real Estate Institute of Australia today show that rental vacancy rates during the December 2005 quarter dropped or held steady in most major capital cities, compared with the previous quarter.

More significantly, vacancy rates in all major cities showed a substantial drop compared with December 2004 '” a sign that the recent oversupply of rental properties is beginning to correct itself; and that the time is ripe to review your asking rent.

	Sydney	Melbourne	Brisbane	Adelaide	Perth
Dec 05 qtr	2.6%	2.1%	2.1%	1.7%	1.6%
Sep 05 qtr	2.8%	2.2%	2.0%	1.8%	1.6%
Dec 04 qtr	2.8%	3.8%	2.7%	2.3%	2.7%

Source: REIV

In Sydney, vacancy rates fell by 0.2% compared with the September quarter. In Melbourne, rates dropped by 0.1% during the quarter (and almost halved compared with the December 2004 figure).

In Brisbane, the rate increased marginally, but was still substantially lower than the December 2004 figure. Adelaide vacancies fell by 0.1% during the last quarter; and 0.6% over the year. Even in Perth, where the quarterly figure showed no change, vacancies dropped by 1.1% over the 12-month period.

The primary reason for the drop in vacancy rates is the reluctance of investors to re-enter the market after two years of subdued activity.

When investors aren’t buying in large numbers, there are fewer rental properties to take up demand from new tenants entering the rental market. Unlike investor activity '” which is discretionary and fluctuates according to market prices, individual finances and overall confidence '” tenant activity is relatively constant because renting is a basic need for about a third of the population.

With the increasing shortage of supply, now is a good time to look at your current rental level and determine whether the market will tolerate a higher figure. If you need advice, talk to a property manager who knows your area.

FRENCH FORAY

We are attracted to property investment opportunities in provincial France. Naturally we are also looking for lifestyle benefits on a casual basis in the future, so the idea of a property that we can rent then lock up and leave appeals to us. We’re not too concerned about capital growth. Any advice? Any horror stories we should be aware of?

Although capital growth isn’t your primary goal, I’m sure you don’t want to pay more than the property is worth on the local market.

The key to buying a property at or below fair market value is local knowledge. First, get to know France’s laws regarding property ownership by foreigners. Knowing about any restrictions on the type or value of property you can buy will help focus your search.

Second, find a property professional in the area who knows about property values and about the community in general. For example:

• which areas and properties will provide the lifestyle you want during the times you’re in France, while also generating strong rental demand for the remainder of the year;
• which towns have the more stable local economies, without too much reliance on tourism or major seasonal fluctuations in population/rental income; and
• locations and buildings that may not be structurally sound. For example, if an area experiences substantial ground shifting, it can cause instability in a building’s foundations.

Second, get in touch with the French chapter of an organisation for Australian expatriates, who might be able to pass on some tips based on personal experience. More than 5000 Aussies live in France so it’s likely some have bought property there.

Try the French page of the Southern Gross Group’s website. Above all, resist the temptation to buy something because you’ve fallen in love with it, or because you’re tired of looking. A forced or ill-informed decision, combined with lack of local knowledge, could end in disaster.

You may want to consider renting a property in your desired location for a while instead of buying, to increase your knowledge of the area and decide whether it’s what you really want to commit to for the long term.

BREAKING A LEASE

Last year my wife and I sold our house in Fitzroy in Melbourne’s inner suburbs, as it was getting too small for our growing family. We decided to not rush in and purchase a new property and rent for a year until the right one came along.

Late last year we found the perfect home and were lucky enough to be successful at auction. We contacted our property manager to ask about breaking our lease. He said we were obliged to find a new tenant and keep paying rent until we did.

We have asked the property manager to help us find a tenant but he is not being very helpful. We will be paying him a letting fee so we think he should be doing more. What can we do? We feel we can’t approach another property manager for assistance because the owner has appointed him to manage the property.

You’re right; it is your responsibility to pay for any advertising and keep paying rent until a new tenant is found. You will not have to pay a whole new letting fee, but you will be required to pay a portion of the letting fee up to the time your lease was due to expire. For example, if you had a 12-month lease but break the lease after eight months and the letting fee is $300, you will pay $100 for the remaining four months.

By the same token, the property manager has an obligation to minimise your loss. That means they should be doing everything in their power to assist and advise you in getting a tenant as quickly as possible. They’re being paid a letting fee, so they need to work for it.

Unfortunately, a lot of owners are not aware that their property manager has an obligation to lease the property in the event of a lease break.

If you feel the agent has not worked to minimise your loss, you can take the agent to the Victorian Civil and Administrative Tribunal (click here). The tribunal has the power to rule as to what is fair and reasonable, taking into account all the issues.

CAPITAL GAINS

My question is about capital gains liability after the 50% concession (effectively $150,000) on the sale of a property. If in the same financial year, I purchase another investment property and prepay the interest of $114,000 for the following financial year, can I offset the $114,000 interest prepayment against $150,000 capital gain?

My understanding is that you can only offset a capital gain against a capital loss. However, I was recently told that a capital gain is separately added to your taxable income. For example, if your personal exertion income after deductions is $20,000 for the year and you subtract the $114,000 interest prepayment from your personal income you will show a loss of $94,000. This then effectively is offset against the $150,000 capital gain provided it occurs in the same financial year, leaving you with a tax liability of $56,000. Is this correct?

In principle, you are right. You are able to prepay interest and offset that interest payment against the capital gain. However, there are laws surrounding the prepayment of interest that may limit the amount of prepaid interest you can claim. Talk to your accountant to find out how much of your proposed interest prepayment is tax-deductible and therefore able to be offset against the capital gain.

Most investors are able to offset their interest expenses against their rental income. However, by prepaying your interest, you may incur a tax bill on the rental income from the new investment property. In this case, you may simply be postponing the inevitable. The taxman will find a way to get his share, sooner or later!

CREDIT RECORD

I have purchased an investment property with a friend and we need to borrow 95% of the property’s value. The bank has done a credit check and discovered that my friend has a credit default of $1752. My friend didn’t pay his credit card balance because he moved overseas and didn’t receive the bill in the mail. Even though he has now paid the debt, the bank says they will not lend more than 80 per cent of the property’s value. We don’t have sufficient funds for a 20% deposit. What can we do? Should we approach another lender?

Mortgage insurance is required for borrowings of more than 80% of the property’s value. Because many lenders use the same mortgage insurer, it’s unlikely that other lenders would approve your loan either.

However, you do have several other options. First, get your friend to speak to whoever put the default on their permanent credit record, and negotiate to have it taken off. If they agree to this, it should take about 72 hours.

If this fails, speak to your lender or broker again. When it comes down to it, a bank’s or mortgage insurer's policy is a guideline, not a hard and fast rule. A good lender will encourage their credit assessors to make individual judgement calls on applications with grey areas.

If this doesn’t work, approach a lender who specialises in loans for "non-conforming" borrowers, including people with impaired credit records. Be aware that interest rates and establishment fees for these loans can be significantly higher than for mainstream loans. Alternatively, and if you can afford it, consider taking out the loan in your name only.

Mark Armstrong is Director of Property Planning Australia www.propertyplanning.com.au, an integrated property advisory and mortgage sourcing service. He also writes for Australian Property Investor magazine www.apimagazine.com.au.

You can email any questions regarding property to Mark Armstrong right here, by clicking questionmark@eurekareport.com.au