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Raj Nathoo - Good Life Finance
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The secret way to save a Deposit - without sacrificing your lifestyle.

One of the biggest challenges for many first home buyers is finding a way to save enough for a deposit.

For those of us who couldn't wait to leave home and find some freedom - moving back in with parents is not always an appealing option. And if you're still in your twenties you might not feel ready to sacrifice your social life, and commit to a few years of watching movies on the couch.

Well, it might surprise you to learn that there's a secret way to save that deposit, live comfortably and still enjoy the odd dinner at a restaurant.

It doesn't involve moonlighting, or donating your organs on the black market. And it might even allow you to travel a bit, or enjoy a little luxury while you watch your bank balance grow.

So what's this big secret?

Well, let me ask you a question first. How much do you spend per year on your living expenses right now? Not food, but costs associated with renting your place of residence. The figure should include rent, utilities, internet connection and any maintenance that you're responsible to pay for.

For most couples, this figure would easily add up to about $25,000 per year.

How quickly could you save a deposit if you didn't have to pay anything towards your household expenses? Pretty fast - I would imagine. That's the benefit of house-sitting.

Offering your services as a house-sitter allows you to live comfortably while saving money at the same time. Let's face it - if you're looking for a house-sitter, chances are that your house is pretty nice to start with.

You don't need to charge a fee for this service, because you're saving tens of thousands just by living in someone's home and not paying rent and household bills.

You could experience different areas before you commit to buy in a particular suburb or town. This could give you an excellent opportunity to really research your purchase before you jump in head-first with a 30 year mortgage.

Depending on your work situation, you might even be able to do some travelling, and see a bit of the world while you continue to save.

If you're interested in doing some house-sitting while you save your deposit, there are a couple of websites that you can browse for opportunities:

www.mindahome.com.au

www.aussiehousesitters.com.au

www.houseminders.com.au

This concept isn't for everyone, and it might not suit those who already have a lot of nice furniture. But if you don't mind moving around a bit, and perhaps walking a dog or feeding a cat - this could be a great opportunity to save your deposit in no time at all.
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BUYER BEWARE THE BARGAINS

Limited cash flow and equity mean many first-time property investors feel the need to chase down a bargain to enter the market. But, like most things in life, you usually get what you pay for, which — in the case of property — can mean unrealised returns or even losses.

While there’s nothing wrong with paying less in the hope of making more, investors need to understand when a cheap property is truly a bargain and when they could be selling (or rather buying) themselves short.

Here’s our guide to help investors actually get what they bargain for.


Always ask “why”:

There’s always a reason a property is selling cheap. Your job is to find out why.

Some reasons are obvious — the property is on a main road or backs onto a railway line — but others may be less overt. There could be termite damage, rising damp or shifting foundations, which perhaps only a property inspection will reveal. While not irreparable, these can be big-ticket fixes and probably beyond your reach if you have limited funds.

Other factors may be even more concealed. For example, a very small property with poorly placed sewer pipes that prevent extensions, a new flight path planned for overhead or a property in a high-risk flood zone. These are variables you can’t control and should probably be avoided.

The best way to avoid being sold a lemon is to do your research, not just on the property for sale but on others in the vicinity. What’s the average price for similar properties in the same suburb? And what do they have that yours doesn’t, or vice versa (as in the case of aircraft noise).

That’s not to say all cheap properties have sinister secrets. Some are under-priced because the owners need a quick sale or the property is part of a deceased estate. Keep in mind, though, these sorts of genuine bargains tend to get snapped up quick, so have your suburb research on hand to be in a position to pounce.


What can and can’t be fixed:

Even in the property market there are lemons that can be turned into lemonade. It’s a matter of knowing which lemons are worth squeezing, which means accepting what can and can’t be fixed.

What you can fix:

- Minor noise (with insulation and double glazing).
- Interior design.
- Configuration of rooms (turning a study into a bedroom or vice versa).
- Storage.
- Natural lighting in a house (add a skylight, windows or glass doors).
- Under-cover parking for a house (add a car port).
- Landscaping.

What you can’t fix:

Location.
- Land zoning and covenants (restrictions on height, building type etc).
- Land size.
- Traffic.
- Infrastructure that imposes on your property (e.g. power poles).
- Flight paths.
- Aspect (which way the property faces).
- Natural lighting in a unit (you won’t be allowed to add windows).
- Unit block exterior (although you can try and influence the body corporate).

Just because a negative, such as traffic, is beyond your control, the property may still be worth pursuing at the right price. You just need to accept it may be harder to rent and harder to sell, and will probably take longer than desired to increase in value.

One of the biggest mistakes investors make when they purchase cheap properties with “unfixables” is to over-capitalise on renovations (see our story in this edition on this very subject).

There can be a temptation to compensate on what can’t be fixed by over-investing in what can. If you decide to invest in a bargain that has some obvious drawbacks, do your homework on which renovations will give you the best return on investment.


Short-term pain, long-term gain:

As with all investments, you need to weigh up your personal finance goals and individual circumstances before settling on a property. For many investors, a bargain buy (even with some of the unfixables) is going to be their best opportunity to gain a foothold in the market.

It’s worth considering, though, whether settling for something cheaper is the best strategy in the longer term.

A slightly more expensive property in a quality suburb with higher growth potential could be worth the extra stretch up front if the capital gain over time far outstrips a bargain buy elsewhere.

Buyers should also be wary of towns or suburbs billed as the “next big thing”. Where there’s a boom, there can also be a bust. Towns built on the back of mining are key examples of property markets that can lure investors with promises of high rental returns. But if the mine dries up or goes belly up due to external factors, you could be left with a property that is worth much less than what you paid with few prospects of tenants.

The key to taking a longer term view is patience, and ensuring you are in a financial position to stick to your plan, especially if it means holding onto a property for 10 or more years to realise its growth potential.


Get expert advice:

Your broker can help you assess your individual circumstances to determine what you can afford. Everyone’s circumstances are unique so it’s important your first investment takes into account your earnings now and into the future, plus any significant lifestyle changes that might affect your ability to service a loan.

Are you planning to start a family or travel? Do you have kids in private education?

It’s important to weigh up all of these factors when considering your financial future.
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Don't let this avoidable home buying disaster happen to you:

We all get a little excited when we finally find 'the one'. After months of dragging yourself around to open houses, finally it looks like you might be in with a chance, on a property that you really like.

Of course, you have probably been instructed by your mortgage broker to add a condition in your offer that makes it 'subject to finance'. This protects you just in case there are problems getting your loan over the line, so that you don't lose your deposit.

But one thing that a surprising number of borrowers fail to do is arrange a building and pest inspection report. It might seem like a waste of time - you've probably heard from friends that they paid for a report and nothing came of it. That's your ideal scenario. What you don't want is what happened to Matt and Sarah.

Matt and Sarah had been trying for over a year to purchase their first home. They had enough saved to cover their bases. Finance was pre-approved, and they were making good offers with no luck. Finally they found a great potential home, and they decided to give it a go.

The agent advised the couple that there were a few other offers on the table, so they would need to put in a strong 'unconditional' offer to have a chance of success. Unconditional meant no 'subject to finance' clause, and no 'subject to building and pest inspection' condition. The decision was a tough one - do what the agent was suggesting, or probably go back to the drawing board again.

Matt and Sarah decided to go for it - they had their finance pre-approved anyway, and the house seemed fine - Matt had already looked under the porch and couldn't see any sign of trouble. They were thrilled when they received a call back from the agent almost immediately asking them to come and sign up their offer.

Although they hadn't protected themselves in case of problems with obtaining finance, everything went smoothly with the settlement and before long the couple were living in their new home together.

After a couple of months in the home, Matt decided it was time to repaint the exterior. They didn't have a lot of money left over but it was only going to be a few hundred dollars for all of the paint and equipment.

That was until he discovered the wood damage around all of the windows and doors. Then he found it underneath the floorboards as well. He came to the horrible realisation that they had bought a house with a termite infestation.

Termite damage can cost an absolute fortune to fix, depending on the extent of the damage and the location of the termites. In this case, Matt and Sarah still have not been able to afford the necessary repairs and they are considering selling their home. It's not uncommon for this sort of repair work to run into the tens of thousands - if not more.

All of this trouble can be avoided, if you arrange a building and pest inspection report. If the vendor refuses this inspection - you have to ask yourself what they are trying to hide.
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Avoid trouble when the bubble bursts - 5 ways to spot a housing bubble.

Purchasing a property is a major financial commitment, and hopefully a great investment that will serve you well. Unfortunately though, many purchasers don't recognise the warning signs, and make this great leap in the middle of a 'bubble' - when housing prices are suddenly inflated.

What happens next can be a devastating blow - the bubble bursts and your property is now worth less than what you paid for it.

Don't let this happen to you - look out for these 5 ways to spot a housing bubble...



Housing prices have increased rapidly

If prices in your area have climbed by 20% in the past few months, there might be other factors at play. Beware of sudden increases to property values, and try to find out who is paying more. In the past, Government incentives such as enormous 'first home buyer' grants have caused property values to rise with speed. When the schemes come to an end, the market will adjust itself accordingly, and many new purchasers can be caught unaware.



Affordability Figures are low

If housing affordability figures indicate that median house prices have become unaffordable for the average Australian, chances are that they will settle back down again at some stage.



Interest Rates threatened to increase

When interest rates are low, property sales figures are often very strong. Unfortunately once interest rates begin to rise again, property prices and selling rates will drop accordingly.



Relaxed lending criteria

Lenders tend to adopt stricter lending criteria during tough economic times. During the Global Financial crisis, many lenders required a 20% deposit on all new loans. When loans are being awarded freely, and lenders are advertising 95% finance or more, there is often trouble on the way.



Delinquencies

The United States was heavily impacted by the GFC, and the first sign of trouble was a higher rate of delinquencies. Freely available loans and very long mortgages contributed to a situation where finance was given to many purchasers who could not afford to service their loan.

Look out for a high rate of delinquencies which could signal that the bubble is almost ready to burst.
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If you have a successful businessand profitable and can't understand why your bank won't support you, click here to find the answer, and the solution. http://www.mortgageaustralia.com.au/email/files/thebalancingact.pdf
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For the more adventurous - here is a guide to investing in Commercial Property.

When mum and dad investors consider property, most look no further than the residential market.

While homes and apartments may be seen as simpler and safer options, many investors are prepared to defy tradition and set their sights on the commercial sector.

Commercial property differs to residential, but with the right understanding of the key drivers, it need not be more complex.



How does commercial property differ to residential?

Firstly, commercial property attracts GST on the purchase price and the rent received, unlike residential real estate, which remains GST-free on both fronts.

An exception to this may be where the property is acquired with an existing lease in place. In this case, the vendor may be able to treat the sale as a 'GST exempt sale of a going concern' (refer www.ato.gov.au).

Commercial properties also usually attract higher yields - seven to eight per cent on average, compared to half that for the residential market. But the higher returns are often offset by the bigger risk of longer vacancy periods, which is why choice of property is paramount.

On the up side, commercial tenants tend to take much longer leases than domestic renters, providing a stable financial footing for your investment.

Another distinction is who pays for property upgrades. In the residential sector, owners foot the bill for maintenance, repairs and improvements, while tenants usually cover the cost of refurbishments to suit their particular enterprise.



The right property

With retail outlets, offices and industrial estates all sitting at the heart of our economy, it can be hard to decide which type of commercial property to invest in.

Many first-time commercial investors are business owners looking to end the rent cycle and acquire an asset at the same time. If you don't own your own business, a good starting point is to consider the same principles that apply to residential investment.

Look for properties in growth sectors in areas with low vacancy rates. A drive around any light industrial estate, CBD or retail strip will quickly reveal the 'for rent' signs and give you a pulse check on local supply and demand.

You should also consider local infrastructure, such as transport, and even commercial entities that may be a drawcard for others. In the retail sector, a big brand name with a long-term lease (called an anchor tenant) can be the attraction for smaller operators looking to cash in on the high foot traffic the big name will generate.

Commercial tenants also look for properties with high visibility, easy access and plenty of parking, especially if there is no public transport nearby.

If looking at a light industrial property or office complex in a commercial estate, check it is not in a flood zone. Some commercial complexes are built in low-lying areas at risk of riverine or flash-flooding. Flood cover is not always offered on commercial properties and can be costly when available, so assess the risk thoroughly before you invest.

Commercial property agents will happily help you with the property hunt. Keep in mind their job is to sell, so make sure you do your own homework on values, vacancy rates, average rents and potential tenants for any property put forward.

Another helpful starting point is your mortgage broker. They can help you work out your budget based on your existing loans and financial arrangements and find a loan product suitable for your circumstances.



The right tenants

Attracting the right tenants is the key to successful commercial investment. Concerned by the potential for long vacancy periods, commercial property investors often snap up the first tenant who comes along.

Take time to research whether the applicant is in a viable sector with strong demand or a waning one. While you can lock any tenant into a three-year lease, an insolvent business will not be able to pay the rent, no matter how many demands you place on it.

On the other hand, a flourishing business with a strong track record may request a longer term lease in some cases up to 10 years. You may even be able to request a bank guarantee for the term of the lease.



The information contained in this article does not constitute either financial or taxation advice. We recommend you speak with your financial advisor, and as taxation legislation is complex, you should consult a tax advisor or contact the ATO for further details and expert advice in relation to your personal circumstances.
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Did you know that your skill and experience in managing a tight budget could make you a better property investor than some big spending high income earners?

We often meet people who are hooked on the good life: living in expensive suburbs, fancy cars, frequent dining out and overseas holidays. You’d be surprised however, at how many don’t have adequate savings for retirement or redundancy, let alone a solid investment plan.

For more details, click here to read my "You may already have what it takes to be a good property investor" article. http://www.mortgageaustralia.com.au/email/files/whatittakestobeagoodpropertyinvestor.pdf
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The truth about your Credit File.

When the National Consumer Credit Protection Act came into effect in 2010, it was designed to help regulate lenders and prevent consumers from getting out their of depth with debt.

One of the spin-offs has been increased scrutiny on would-be borrowers.

Lenders now look to an individual's credit file to help determine if they are a good or bad risk.

Yes, that's right - a credit file. It sounds very FBI and, in some ways, it is. Your credit file includes your personal information, including your full name, date of birth, driver's licence number, gender, addresses and employer information.

It also records any credit applications you have made in the past five years, such as home loans or store financing of household goods, plus any bills you have defaulted on and any financial matters on public record, including any bankruptcies or directorships.

Home lenders will look at your credit file to verify your reliability. Being aware of what's on your file and how you can keep it clean, will go a long way to helping you secure a home loan.



Previous credit applications

A previously declined credit application can leave an unwanted stain on your credit file. If you are declined a credit card or a loan, find out why and take steps to rectify the situation before applying for new loans or credit.

While your positive actions may not erase the blemish, you can at least demonstrate responsibility with the new lender, which may convince them to give extra weight to other criteria, such as income and a strong employment record.



Payment defaults

Don't think that unpaid phone bill from your previous rental matters much? Think again. A payment default is an account of $100 or more that is 60 days or more overdue.

Payment defaults can only be included on your credit file if the credit provider has tried to recover some or all of the overdue amount. This means they must have sent a notice in writing to your last known address and requested payment.

Payment defaults stay on your credit file for five years, even after you pay the overdue amount.

If you don't pay a bill but can't be contacted, you may be declared a clearout. Before you can be listed as a clearout, the credit provider must make reasonable efforts to contact you, either in person (including over the phone) or in writing to your last known address.

If you can't be contacted, the credit provider can immediately list the debt on your file as overdue, even if it hasn't been overdue for 60 days or more. Clearouts remain on file for seven years from the date they are listed, even when you have paid the overdue amount.

Avoid unpaid bills blighting your credit file by:

- Paying on time or at least when overdue notices are sent.
- Providing a change of address to all creditors/billers if you move.
- Leaving someone to manage your bills if you need to be away for a month or more.


Hardships

They say it's often better to seek forgiveness than permission, but most lenders are happy to discuss what can be done to help if you hit hard times. Far better to fess up to a creditor or lender if you can't make one or two payments than have them whack a black mark on your credit file due to lack of contact.



Talk to your Mortgage Broker

Borrowing via a Mortgage Broker is one of the best ways to navigate the credit crunch. A broker will have a good understanding of what financial attributes various lenders are looking for in their borrowers.

For example, a lender may give kudos to long service in a job and a solid savings record, which may help offset an unpaid bill from three years ago that appears on your credit file.

Your broker can also advocate and negotiate on your behalf. Just remember, it pays to be honest. If you have a mark against you, be up front so your broker can consider the best lender and loan for your situation.
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How to buy with a friend - without killing the friendship or your credit rating

Have you ever heard the expression, 'no friends in business'?

It's an oldie but a goodie.

This is the attitude you should bring when considering buying property with a friend.

Many good friendships have gone under the bus, and lots of people have taken a bullet to their credit rating by not giving this decision adequate thought.

So what are the risks involved with co-ownership, especially when you purchase with a friend?



What if one owner wants to sell?

One of the biggest problems with co-ownership is when one owner decides they want to sell the property, but the other owners don't agree.

This often ends up in court, and the process can be costly and upsetting for everyone. And needless to say - the friendship probably won't survive.



Buying could be harder in the future.

It might seem like the dream scenario to invest now with your best friend.

But if you decide in a few years to purchase a home to live in, the lender will assess your financial commitments based on the whole loan for the first property, not just the portion that you agreed to cover.

This could make it very difficult for you to get another loan.



You could be left holding the baby.

If something happens and your friend is unable to make their repayments, you could be left in the difficult situation of repaying the entire loan by yourself.

Coupled with your other living expenses, you might not be in a position to cover the whole amount yourself.



But there are some ways that you can reduce the risk, if you are keen to purchase property with a friend:

1) Put a legal will in place. It's important to make arrangements for what will happen to your assets if you pass away or become incapacitated.

2) Draw up a co-ownership agreement. If you can think about any issues that might possibly come up in the future, and have an agreement in place to solve them, you're less likely to wind up in court trying to work things out.

3) Choose the right structure - tenants in common, or joint tenants. Tenants in common can own a different portion of the property, and they need to specify in their will who will inherit their portion if they die. Joint tenants jointly and equally own the property, and if one person dies, their share automatically goes to the other(s) regardless of the instructions in their will.

4) Choose the right person. It's important to discuss your financial goals and values before you enter into this sort of arrangement. You need to feel comfortable knowing that your friend will be financially secure enough to keep up their end of the bargain - otherwise you might be left trying to cover the repayments alone.

It's important to think about your own relationships as well, if your partner is keen for you to buy a house together next year, you might want to think about how this first investment might impact your borrowing power.
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Revealed - the secrets to buying property with confidence.

Getting the right property at the right price isn't good luck. Its all about being prepared and taking the right steps at the right time.

Read this article - "Buying with Confidence" - for a number of quick tips to playing the home buying game on your terms. http://www.mortgageaustralia.com.au/email/files/buyingpropertywithconfidence.pdf
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