Question Mark

Slowly but surely the signals are improving for property investors. Earlier this week statistics from the Reserve Bank revealed a powerful 4.7% jump in home lending approvals during May. The recovery in home lending approvals '” up 14% for the year '” may be linked to a wider change in the property market: the growing power of DIY super investors.

Australians have more than $800 billion in superannuation funds, yet just 3.8% of this is invested in direct unlisted property.

Since July 1 this year, employees under state awards have been able to choose their super fund, bringing them into line with other Australians for whom choice became possible a year earlier.

With the sharemarket losing some of its shine in recent months, savvy investors may begin moving some of their super from corporate or industry funds to self-managed super funds. This will provide greater flexibility to individualise their asset allocation within the super environment. They’ll be casting around for other investment vehicles and the property market is an obvious choice.

Unlike super, property provides the ability to leverage and purchase further assets. Many baby boomers and older generation-Xers have substantial equity in their family home. They want to borrow again to buy an investment property, but they’re not keen on putting their home at risk.

To spread their risk, these investors may choose to buy a property in partnership with their super fund.

Here is an example of how this strategy may work:

John and Jane have a home worth $600,000 with no debt and a self-managed super fund worth $500,000. They want to invest $400,000 in a residential investment property.

They decide to borrow $200,000 against the value of their home, and contribute $200,000 from their super fund.

To guarantee an income stream into their super fund, they set up a unit trust, which purchases the property. Half the units are owned by John and Jane and the other half is owned by the super fund.

This strategy not only spreads risk, but is tax-effective. The interest on the loan taken out in the John and Jane’s name will be claimed against their personal income. The income received from the units owned by the super fund will be taxed at 15%.

We’re yet to see a mass movement of money from super funds to direct property. I believe that once this happens, we’ll see more and more investors getting creative about building wealth in a tax-effective manner, by harnessing the combined advantages of super and property.

Maximising the benefits

My partner and I are planning to invest in a property, possibly in the Wollongong area. My partner is self-employed and already owns a property outright in Sydney. I have a modest deposit saved and this will be my first property purchase. Both of us earn about $75,000. I assume I would be eligible for the first home owner grant and stamp duty discount.

However, we are expecting our first child and I am due to go on maternity leave in September. If I buy the property in my name, will I have any problems getting a loan while on maternity leave?

I’d appreciate your opinion on the best steps given our situation '” de facto relationship, child on the way, first property owner and current home owner. We want to maximise the benefits the Government is offering.

Your question has two elements and I’ll answer them in turn.

First, you won’t be eligible for the first home owner grant or stamp duty discount. These benefits are only available for home buyers, but you’re buying an investment property.

Further, your partner already owns a property. Regardless of whether you’re in a de facto relationship or marriage, you’re entitled to a share of your partner’s assets. Even though you’re not on the title of your partner’s property, you’re both considered to “own” it. So even if you were purchasing a home to live in and not an investment property, you still wouldn’t be eligible for the first home owner grant.

Second, your ability to get a loan is determined by the “snapshot” you present when you lodge the application. If you were to apply for a home loan today, you’d have a better chance of being approved because you’re still earning an income.

If you don’t apply until you’re on maternity leave, you won’t be earning an income, so lenders aren’t likely to look on your application with such a friendly eye.

This means that if you purchase a property before you go on maternity leave, you have a much better chance of being approved for a loan.

Before taking this step, however, you must consider how you will meet the repayments once you go on maternity leave. What seems like an affordable repayment now may become a lot less achievable once you and your partner are living on his income alone.

The beach house

My wife and I bought an older-style three-bedroom home with great beach views in the south of Wollongong about six years ago with the intention of retiring there. However, we’ve now decided to stay put in Sydney.

We owe about $330,000 on the property and one agent thinks we might get about $600,000 if sell it. We are under no great pressure to sell.

What are your views on potential capital gains in this area over the next one to three years?

First, holiday homes are discretionary purchases; people tend to buy them when they’re feeling flush, and sell them when things get tougher. This means demand and capital growth in coastal areas can fluctuate significantly, along with the financial fortunes of purchasers.

Second, many people who own coastal holiday homes live in nearby major cities so capital growth patterns are generally influenced by market movements in the closest major capital city; in this case, Sydney.

Sydney has been going through a long correction phase since the last boom petered out in 2003.
I don’t see any big improvement in the overall Sydney outlook for at least 12 months. Therefore it’s unlikely that your coastal area will pick up significantly in the next couple of years.

In the longer term, the outlook is more positive. As more baby boomers approach retirement and slow down their pace of life, demand in coastal areas should start to pick up. Properties with coastal/beach views and ready access to cafes, golf courses and shopping strips will be in the strongest demand and should achieve significant capital growth over the longer term.

You say you’re under no pressure to sell; I suggest holding the property until the Sydney market has begun to move and the increased market confidence has trickled through to surrounding regional areas.

CGT and the family home

Our family home was built in 1980. We lived there until 1996, then moved out and rented it to tenants. Now we want to sell it. Will we have to pay any capital gains tax? I can’t get much help from the tax office guidelines.

You can rest easy. Regardless of the fact that you’ve rented out your property for a long time, no capital gains tax is payable for properties purchased before September 20, 1985.

Owning an investment property that is completely CGT exempt is a real bonus to your portfolio. I suggest holding the property for as long as possible, since any capital growth you achieve is tax-free. This will maximise the sale proceeds when you do eventually sell, giving you a bigger nest egg for further investment or lifestyle purposes.

The tax office spells out the status of properties like yours on its website.

Industrial land

Three years ago I bought commercial land in the northern suburbs of Melbourne. I had plans of building portable homes on this land and then delivering them to various sites. That idea fell through and now I am sitting on this land that I don’t know what to do with. I paid $300,000 and it is now worth about $350,000. Should I hold or sell?

It is very hard to give you an exact answer because I do not know the specific property. However, as a general rule, commercial land doesn’t achieve a great deal of capital growth because the demand comes from a small sector of the buying public.

This means the main reason to hold commercial property is to produce income. Sitting on a block of land that’s not producing any income seems to defeat the purpose.

If there’s little chance you will re-activate the portable home project or use the land for another purpose, you may be better off selling and redirecting the funds into an asset that will work more effectively.

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

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