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Off-the-plan property has been a buzz word for quite a while with many analysts arguing both for and against the strategy (see my blog post Building Financial Success: A Journey into Property Development for my own personal opinion). Many recommend it while others feel that the strategy never works out. There are pros and cons to any kind of investment and so is the case with off the plan property. Buying off the plan can be a really good strategy in some circumstances while in other situations you may better choosing something else.

The Pros

One of the biggest benefits of buying off the plan property is that you get to own a newly built property, and it might be at a very competitive price. Developers sell property off the plan to meet the pre sales requirement for their loan. Developers at this stage usually offer very good discounts to meet the pre-sale requirements of the lending entity. You can also enjoy the benefit of a long settlement period and allowing you time to arrange your finances or sell your property. Off-the-plan property also gives you the freedom of customization. Since the property is still under construction, the developer will often allow you to make certain changes to the plan to suit your taste.

The Cons

Buying any property by simply looking at a plan on a piece of paper or a model involves a significant amount of risk. You may not be able to fully comprehend the plan and as a result, the outcome might not meet your expectations. There is also a financial premium often charged for new property as there is a wider market for new properties compared to used or old properties.

Other risks are that there may be delays in the project or the developer may go bankrupt amidst the project or warranty period which again can be a very painful situation.

But the biggest reason not to buy off-the-plan is the opportunity loss to build financial success  – why not build or develop yourself, or go in with others into a syndicate, and access the builders profit? Ask us how …. grantmuddle@malyshka.com.au

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Cash Flow vs Capital Growth is arguably the most debated topic whe it comes to investing in property – while many are staunch followers of cash flow, others are firm devotees of capital growth. Both strategies offer certain distinguished benefits but the real question that many ponder is – can you have both at the same time? A close look at both the strategies might just give us an answer.

Cash Flow

The advocates of cash flow strategy suggest that property investments should be made only when the property in question has the ability to generate high returns in the form of rental income and it should be a positive cash flow property. In layman’s terms the property should generate enough revenue (rent) to pay your expenditure (mortgage).

Capital Growth

The advocates of capital growth argue that property investments should be made with capital growth in mind. A property whose value increases significantly over a period of time is the best type of property to invest in. These properties usually have lower returns in the form of rent but have a higher capital growth.

Which one is better?

The answer to this question is that it could be either of them. It depends on your priorities. If your investment is aimed at wealth creation, capital growth is a better strategy. If you simply wish to obtain a surplus cash amount every week, cash flow is better. Capital growth is a wonderful wealth creation strategy that can help you make major makeovers to your lifestyle.

How about a little bit of both?

You can often achieve both with just a few minor tweaks in the property itself. One of the factors that might help is the geographical location. Geographical location can also help you convert a cash flow property into a high growth property. Once you have invested in a capital growth property, you can easily reap the benefits of cash flow along with capital growth by conducting minor renovations or developmental works on your property. A renovation or a development will provide you higher rental returns while giving you depreciation allowances which convert the property for high growth.

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Building Financial Success: A Journey into Property Development

With my Superannuation losing value fast, I decided I needed to do something to take my financial future into my own hands.

For a long time my father kept telling me: “Forget the stock-market Grant. Live in your superannuation fund, bricks and mortar is the way to go. Buy at the right time and right place and right price, and you can retire a wealthy man. Property is one of the smartest ways to invest your money”.

Having a quick glance at the rich list in Australia and it was clear the majority of their wealth was created in property.

“BRW Rich 200 Members have often turned to the property sector – and become substantially richer.” ~ Business Review Weekly 31 July 2008 

Let’s be honest, we all want to be wealthy for a variety of reasons: Family, Lifestyle, philanthropic – me …. I just want to be able to give my family everything I can ….

So I set myself a personal mission statement of Building Financial Success and decided that my dad must be right (there you go dad, it is written down in black and white .. I acknowledge you were right at least once)… and decided I would achieve this mission via Real Estate.

Deciding that was easy … but what next?

What did dad say?

• Buy at the right time;
• Right place; and
• Right price

The first two seemed easy enough, with enough research {and I worked out how to do that too} you can often (not always) find the right time and the right place to buy, but the right price was a challenge to me.

How do I get to purchase at the right price … and right price for me was below market value … at least 15% below .. I liked the buy and hold method so often used, but if I could always buy below market value I would be able to grow my wealth faster … I want to be able to enjoy the wealth, enjoy my families enjoyment of wealth.. not be an old man and never get see the fruits of my labour.

Whilst there are some unfortunate people in some unfortunate situations, but not many people are silly enough to sell below what the property is worth, and even fewer who will sell at a 15% discount to value.

And why would I want a second hand property as an investment? I knew enough to understand buying investment properties brand new was a sound real estate investment strategy as essentially maximising on my depreciation benefits while minimising on my out-of-pocket expenses, given that buying brand new investment properties means generally lower maintenance costs.

So I needed brand new property, in the right place, at the right time at the right price (which I had already decided was at least 15% below value).

Further research showed me that what is not generally known is that the astute property investors on the BRW Rich 200 list are consistently generating safe and higher than average returns not by paying retail prices like most, but by accumulating properties at wholesale via property development.

By acquiring properties via property developments I would be able to grow wealth safely as well as achieve a better return on investment (ROI) enabling me to reach my financial goals a lot faster, allow me to Build Financial Success.

Below is an illustration of the cost savings of acquiring property as a developer at cost price, as opposed to acquiring property as an investor at retail price. For example these are the figures for 1 townhouse in Duplex project in Toowoomba.

Developer           Investor

Market value                                           $405,000            $405,000

Less development profit*                      $87,032           $0

Purchase price                                         $317,968           $405,000

Plus stamp duty                                       $0                          $12,600

Plus Legals (Purchase)                           $0                         $3,500

Total cost of property                            $317,968           $421,100

Net equity                                                   $87,032               ($16,100)

* These numbers are based on a project showing a yield of 27.37% on costs.

As the developer I would have acquired my own investment property $103,000 cheaper than a regular retail investor. A basic duplex – two townhouse – project would save me $206,000 and give me at least $174,000 in equity!

There was my answer … I had to get into property development FAST.

Embarking on a journey to become a residential property developer I again came to the stumbling block of how to start, what is the first step?

More importantly, what are all the steps? What are the steps of completing a residential development from beginning to end.

After spending many hours researching via the internet, reading, talking with builders, developers, financiers and of course my dad; I came up with the following 10 Phases of a Residential Development:

1.      Identify Site

2.      Initial Analysis – Feasibility & Due Diligence

3.      Final Analysis – Complete Feasibility and Due Diligence

4.      Negotiate & Acquire Property (Subject to finance)

5.      Obtain Finance

6.      Development Planning & Design

7.      Council Approval

8.      Pre-Marketing

9.      Construction

10. Sales & Marketing

OK, in all honesty, this list was not my first list, in fact I think my list was as simple as:

1. Buy a Site,
2. Build it,
3. Sell it,
4. Make a big profit.

But before I spent any money I expanded it and refined it to the 10 points above.

Now having used these 10 steps to completed various projects I am confident they are truly my[1] blue print to Building Financial Success.

I am in no way saying that residential developments are easy, in fact they are not, but you can be successful if you’re prepared to put in the hard work and learn before you get started …. I learned a lot before I started, but I have learned so much more since .. unfortunately some lessons I learned the hard way.

If you’ve got money to invest, are asset rich and time poor, or your superannuation fund (SMSF) has been underperforming, then residential property development is a viable strategy for you too – contact Malyshka today to find out how we can help you acquire your first property at developer cost

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Property investment has recently become one of the favourite options used by many Australians as a part of their wealth creation strategies in their SMSFs (Self-Managed Super Funds). This may well be because of the massive fluctuations in the unstable global stock and FOREX markets. One of the most effective ways to boost the value of your retirement savings is to purchase a residential property inside your SMSF. This provides several tax benefits and a good return on investment and potential capital growth.

Why should you add a residential investment property to your SMSF?

Effective Tax Benefits

Holding a residential property investment in your SMSF is more tax effective compared to owning the property personally. The comparably favourable tax policy sround capital gains and rental income of a SMSF is one of the factors that have made holding residential property in your SMSF as a favourable option.

The maximum tax rate an SMSF can pay on a rental income is about 15% and it drops to 0% if the SMSF is in the pension phase. The capital gains, if the property is held in the SMSF for more than a year, can be as low as 10% to 0% depending on the phase of the SMSF. Considering all the parameters, holding a property in your SMSF can save you as much as 46% in tax.

A Strong and Stable Market

The residential property market is one of the strongest markets inAustralia. In Australia residential property values have grown at an average rate of 9% every year since March 2002. Several other factors such as the demand for housing and low rental vacancy rates are indicators of a stable residential property market in the country. Also, property investment has a long term attribute that perfectly suits the nature of super funds unlike the shaky and volatile shares

Balancing Your Portfolio

The residential property market is not as volatile as the stock market. The impact of economic factors on the residential property market is very different compared to the the impact on the stock market. The residential property market does not fluctuate as much as equities. This makes it a safer haven for investors and helps them balance their portfolios.

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Negative Gearing

Negative gearing is a strategy where an investor buys a property in such a manner that the property costs are higher than the property income. That is, the yearly interest payable on the loan you have taken out to purchase the property and other related expenses involved in property maintenance exceeds the rental income generated by the property each year. With this, you experience a loss of cash but the tax system absorbs the effects of this loss, and ultimately the tax effects reduce your loss. So basically, your rental income and the tax man pay for your investment property!

Tax Benefits of Negative Gearing

The Australian Taxation Office (ATO) allows investors to offset losses incurred from higher property costs to property income against the income from any other source. This might seem very kind of the ATO but you must consider several other factors before thinking of utilising this strategy. When using negative gearing you must always try to balance your repayments. If you fail to plan this aspect effectively, you may end up losing much more than you initially intended.

Earn and Save Taxes at Once?

While many might try to sell you a negatively geared property based on the above statement, you must always remember that it is not possible to make money and save taxes at the same time. The losses incurred in a negative gearing strategy are real and you will need to physically overcome your tax or chash-flow shortfalls. You may have unrealised capital gains that are not taxable as long as you don’t sell the property. But the problem with an unrealised profit is that you cannot use it easily. Accessing your unrealised profit can be a painful and expensive task.

Negative gearing is an excellent wealth creation strategy but it is designed in a way to incur losses. This means you need to continue to work in order to balance the losses. The strategy does not provide enough financial freedom unless you have high income from other sources and get high capital growth. It definitely helps you gain wealth but if you are the sort of person who seeks an early retirement, it is not an ideal strategy for you.

By partnering with Malyshka you will be able to buy property at near developer cost, have cash flow positive property, instant equity and in areas with potential high capital growth

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Residential property development can be very lucrative. In the current poor global economic climate and the constant highs and lows of the stock market, property development is considered by many to be  a sound method of building financial success. The number of people investing in property development has increased considerably in recent times, especially since the government has allowed the inclusion of property into SMSF’s. Also with state governments increasing the cash grants for new homeowners, this growing trend, at least in the short term, is in my opinion here to stay.

Whilst property development is lucrative, many first time developers commit “blunders”. Most of these “blunders” are because of the investors’ inability to fully understand the tax laws as set by the ATO (Australian Taxation Office). Residential property is generally exempt from taxes. However, the nature of the development and intended use of the property after its development affects the property’s tax position. Below are some of the common tax pitfalls to avoid when undertaking a property development.

Overview of the ATO Policy

Residential property is commonly exempt from taxes. But if you undertake a developmental project on the property such as a renovation or modification such that it generates profit, the property profits may become taxable. For example, the property is a taxable asset if it is intended for the purpose of running a business. In this case, it may be subjected to income tax, GST (Goods and Services Tax) and also capital gains tax.

Tax Policy for Your Home

The home that you live in is usually not taxable. But if you rent out a portion of the dwelling or use it for any other commercial, it might be taxable. The same applies to inherited dwellings. Any sale of residential property is also subjected to capital gains tax, unless it is solely your principal place of residence.

Tax Policy for Residential Land

Vacant land is generally considered as a capital asset and is subjected to capital gains tax on sale. If you purchase the land for business purposes such as for resale, such land is considered as trading stock and the revenue generated is considered as ordinary income, which is subject to GST. The same rule applies to the subdivision of land.

Malyshka Pty Ltd is not a financial advisor, and nothing contained in this post constitutes financial advice. Everyone is advise to gain professional and independent advice before undertaking any investment of any kind.

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Property Investment and SMSF’s (self-managed super funds) requires a thorough understanding of the governing rules and laws. Failure to comply with property investment and SMSF’ laws can have serious repercussions to your wealth creation strategies. If you’re able to understand to and can adhere to the laws and complicated regulations, including a property as an SMSF asset can be very beneficial to your wealth creation strategy. Here are a few reasons why it might be beneficial to invest in property through your super.

High Leverage

A property investment and SMSF combination offers the opportunity of a high degree of leverage compared to any other form of investments. As a result you can potentially get very high return on your investment in %% terms.

Safety and Stability

Property prices in Australia are not subject to frequent fluctuations when compared to the stock markets. Most banks consider property as a low risk investment and offer to lend a vast majority of the asset value (leverage). Property bought at the right time, in the right place and the right price tends to increase over a period of time more often than decrease.

No Margin Calls

As the Australian property market rarely wildly fluctuates (unless you over paid for property to start with), banks rarely require property to be re-valued. A consequence of this is that investment properties are rarely subject to any form of margin calls; unlike Option Contracts or CFD’s.

Long-Term Market

As SMSFs are, by name “self-managed”, there is a wide scope for changing the allocation of funds. An investment property, is not a liquid asset does not allow for fast and emotive or reactive changing of fund allocation – it is harder for you to get sucked into the latest investment fad. The long-term nature of the property market is more suitable to those who are wary of the frequent highs and lows of the stock market and like a consistent and proven performing asset class.

Higher Control

For individual investors it is probably impossible to influence the value of shares in your share portfolio – really what can you do to influence the share price of BHP or Westpac bank for example? However, when it comes to property, you can increase its value by developing the land, undertaking a renovation etc. This also applies to any property held under SMSF. But you must take care to comply with all SMSF rules as renovations and improvements are strictly regulated.

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Residential property development has potential high returns, and risks can be managed to limit detrimental outcomes (as an extreme: bankruptcy) – competent and complete feasibility, use of professionals to forecast costs and times etc. can limit the consequence of things you cannot manage like increased interest rates.

Even though there are numerous risks involved in residential property development, the rewards you stand to gain are much higher – and this is why one becomes a property developer

Cash Flow

A continuous cash flow can be generated from the sale of dwellings, or alternatively a developer can hold the properties for further capital growth and in the waiting time receive an income from rental. As a developer, since any loan will be at cost of the project and not value, your rental should more than cover any interest – hence they should actually produce an net income for you.

Tax Benefits

In addition to the depreciation, a number of other expenditures involving property development can also be deducted as expenses. It is often possible to deduct the development expenses, property rates & taxes and the any payable interest as an expense,  ultimately reducing taxable income.

Build Equity

Apart from the Manufactured Equity you make undertaking a development project, you can also keep the properties you develop as long term investments. The value of a property increases essentially based on demand, and in Australia property typically doubles every 7-10 years (depending where in the property cycle you have procured the property). You will be able to use your equity as leverage for bigger projects – if that is your risk appetite.

Leverage

Almost all property developments are built with funds borrowed from a bank or other financial institution. This process is commonly known as leveraging. You can use either your project or equity to gain this leverage and develop the property.

Undertaking property development really can help you build financial success.

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The first time you perform this study, the numbers involved are usually general and ‘ball-park’, but as you complete more and more of them you get to know the real numbes and they become more and more precise. Property development feasibility studies analyze the strengths and weaknesses of a development opportunity. Threats in the environment, like economic instability, can also be discovered with the help of a “Feaso”.

Property development feasibility studies are extremely useful when you want a general idea of the labor, material and time needed for the project to be completed. You can then rationalize as to whether the project will meet your needs.

Lastly, the probability of success of a project is demonstrated by a feasibility study. This way you will know if the property development will be rewarding in terms of finances to you or your organization.

Property development feasibility studies are especially helpful because they force you to pause and think about all aspects of the project. It helps get insights into things that are often overlooked.

The five main areas that are taken into consideration while completing a comprehensive feasibility study include:

1. Technical

The technical aspect details the material, resources, transport and labor involved.

2. Legal

The legal aspect considers all the legal requirements and if they are viable in terms of the company.

3. Scheduling

The scheduling outlines whether deadlines can be met without the works quality being sacrificed.

4. Economic

The economic aspect studies the value of the project in potential terms. The main point here being, the advantages of the project should outweigh the   cost.

5. Operational

Finally, the operational section analyses the organizational structure and systems of the company that is constructing or developing the property.

After reviewing and analysing all of the above, it is onlythis point that an informed  conclusion can be reached about whether or not the project under consideration should be completed.

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