Question Mark

A RENTAL ON SYDNEY'S FRINGE

Q: I have made my mind to sell but have not done anything about it yet. The property is a house in the Campbelltown area, southwest of Sydney valued around $280,000 and rented for $210 a week. I don’t owe any money on the property.

After expenses, my rental return is a paltry 2.8%. There’s not much prospect of a rent increase for another year or two. Capital gain in this area is also very limited. I’m 56 years old, so waiting for another price boom is not particularly practical. Would you agree with my decision to sell?

I certainly do agree with your decision. Like many other areas on Sydney’s outer suburban fringe, Campbelltown and the surrounding district has no shortage of land available for development. In addition, owners will put existing properties up for sale '” meaning there will be more properties available for sale than people wanting to buy them.

Regarding capital growth prospects, your area is unlikely to see significant growth over the short to medium term because supply outweighs demand.

Regarding rental returns, the Campbelltown district is predominantly a homebuyer area with limited demand from tenants. This will keep rents low for the foreseeable future.

At the age of 56, waiting for the market to move may limit the amount of money you have to retire on. I would suggest there are better and more tax effective investment options, such as selling your investment property and putting the proceeds into superannuation.

TRAVELLING NORTH

Q: Following the pessimistic forecasts from John Symond of Aussie Home Loans in regards to the Sydney market, is it realistic to expect the southern Queensland market to hold up, or at least maintain its past appreciation rate? I will soon be investing in this area.

Interstate migration is the key factor underpinning the recent growth spurt in southern Queensland.

By 2000-01, property prices had risen to levels that were unsustainable for many homebuyers in Sydney and to a lesser extent, Melbourne. Keen to enter the market but unable to shoulder large mortgages, homebuyers began moving to southern Queensland in ever-growing numbers. The swelling population increased demand for housing and pushed up prices.

By 2003-04, Sydney and Melbourne prices began to moderate as the market entered a correction phase. Migration into southern Queensland began to slow; demand for property in the area started to abate, and so did price growth.

While the overall trend is towards moderating prices in southern Queensland, some areas will fare better than others.

The newer suburbs of Brisbane and the Gold Coast, which have seen particularly strong population growth over the past five years and subsequently enjoyed a property development boom, are likely to experience a softening in prices for the next two to three years.

Areas within 10 kilometresm of Brisbane’s CBD, which don’t rely on incoming migration to fuel housing demand, won’t be as affected by the overall softening, and may be a better bet for continued capital growth.

A MATTER OF TIMING

Q: My husband and I are in our early 50s and the kids are finally off our hands. We are looking to buy a new home in Melbourne’s inner suburbs for about $600,000. We have an elderly parent living with us, so we want to minimise disruption by buying the new home first, then selling the old one. I know this is different from the way most people do things. I’d really appreciate your thoughts.

Selling one home and buying another is one of the most stressful times in anyone’s life. Trust me, I know '” I’ve done it!

Ideally, you should try to get both properties to settle on the same day. This will minimise the possibility of having to move twice, and/or organise expensive bridging financing.

There are three ways to achieve this:

1. Prepare your current home for sale so it’s ready to go on the market as soon as you’ve bought the new one. This means selecting a selling agent, negotiating their commission and marketing schedule, and doing any repairs/minor renovations/gardening needed to bring the property up to scratch.

2.Negotiate a long settlement on the property you’re buying. Don’t succumb to the selling agent when they pressure you for a shorter timefame. Settlements of up to six months are not unusual. You can always reduce the settlement timeframe by mutual agreement with the vendor if you sell your current home sooner than expected.

3. Negotiate a short settlement on the property you’re selling. Use the settlement period as a point of negotiation. For example, you might decide to accept a couple of thousand dollars less for the property if the buyer agrees to a 30 or 45 day settlement.

INVESTMENT RISKS

Q: I have a home worth $400,000, with $180,000 owing. I’d really like to buy an investment property, but I don’t have a pile of cash sitting in the bank account. I know people who’ve borrowed against their home to buy an investment property, but this seems like a pretty risky strategy. I’d be worried about losing the house.

Any borrowing strategy involves some degree of risk. Yes, there is a risk of losing your home if you borrow against it, but this is very small and would only happen in dire circumstances.

From your concerns about potential risk, I assume your investment property will be negatively geared (that is, you’ll receive less in rental income than you’ll pay in interest and holding costs, and will make up the shortfall from your own pocket).

The key thing you can do to minimise risk is to borrow only what you can afford to repay. This will keep your repayments affordable in the (currently unlikely) event that interest rates increase substantially.

To work out what you can afford, determine:

1. Your likely rental income, building in a buffer of 20–25% per annum for times when the property is not tenanted.
2. How much of your own money you can put towards the loan repayments.
3. The likely repayment amount, building in a 1–3% buffer for potential interest rate rises.
4. Potential holding costs, such as body corporate fees, insurances, council rates, repairs and maintenance.

It is worth remembering that if the property is negatively geared you can claim back a percentage of the loss you made on the property as a tax refund at the end of the financial year.

Taking out the relevant insurances, such as income protection and landlord protection, will further reduce your risk of defaulting on repayments in the event of injury, long-term illness or problems with tenants.

If, in the unlikely event that you can’t meet your repayments, the lender is far more likely to try and sell the investment property than your family home to try to recoup the money.