Property prices are falling and banks are tightening up on lending in the wake of the banking royal commission.
By Leon Gettler
It may be frustrating for the property investor with a longer time horizon who can spot a great property investment opportunity, but experts say funding is available for those prepared to put in some extra effort. Here are five tips for property investors wanting to borrow.
Ensure your documents prove your case
Property investors can expect tighter scrutiny of all aspects of their loan proposals in the current lending environment.
“In the past you would find there probably was less documentation required, they were probably more likely to take things on face value whereas now they going line-by-line through all aspects of your finances and balance sheet,” says Angeline Mann, director at property advisor Herron Todd White.
Now there is far more in-depth evaluation of your numbers as lenders assess capacity to pay.
Show you have done your research
“You also need to be aware of the many moving parts that make up current market dynamics”, says Mann, referring to the challenging combination of over-supply, high vacancy rates, and falling property prices in capital cities.
Good investment opportunities present to those willing to put in the required research legwork. It also pays, she says, to remain open to venturing out of your local market.
“Most people are familiar with how the local market is performing, and don’t consider the potential that lies outside. With a little guidance from professionals, it is possible to broaden your horizons – and then take a good look at what is driving those markets, and which of those factors could change in the future.”
She says secondary markets in smaller and regional cities offer opportunities, but investors need to be well-informed.
“There are some good opportunities, but it takes a good mountain of research and making sure that you know what that particular market is doing,” she says.
Mann recommends researching current rental rates and sale prices, and how long certain properties have remained on the market. She also believes it is better to do this research over a three-month period rather than over six months, considering how quickly the market can change.
Research your “customers”
Can you convince a lender that you are looking at an investment that will attract renters?
Jayne Robbins CPA, principal buyer and owner of theinformedbuyer.com.au says it is important to assess the market in the area, particularly the prospective tenants. If the investor is looking at a family home, they must assess nearby schools. If they want professional people as tenants, they need to look at commute times, infrastructure and public transport.
“Just like running a business, you should know who your ideal customer is before you open your doors,” Robbins says.
“You want long term tenants because there will be less wear and tear on the property because people won’t be moving things in and out all the time.”
Know your property investment strategy
Mann says that with the market changing, investors need to look at modifying their investment goals.
“There are two ways of looking at it,” she says. “Most people are looking for short term or potentially long-term capital gain and others are looking for the rental return as an investment, so you have to weigh up what phase your investment is in and then assess if that’s still suitable to where you want to go with your portfolio.”
Collecting sales and rentals information will allow investors to spot opportunities.
Is strata still attractive?
Robbins says investors buying strata title property should look carefully at body corporate fees and drill into those numbers.
“You have to understand what those numbers are made up of, where they are in the cycle, what are they collecting from each of their lot owners, and how well the body corporate is being run because all that can impact your investment.”
She notes that some investors “are really put off” by body corporate fees but says on the flipside, a stand-alone property comes with maintenance costs.
Property investors may feel they have “dodged a bullet” following the federal election result, which could have led to changes in negative gearing and capital gains tax. Many, however, are likely to face increased demands for documentation when applying for a property investment loan, and a longer wait for approval.
Being able to show a lender the numbers to back up your case and that you have realistic expectations is more likely to end in a positive response.
5 tax tips when renovating property