Investing in property can be a fantastic means of strengthening the bottom line and generating wealth.
But proper research and financial savviness is required to ensure the investment pays off.
While property sales prices have increased strongly over the past five years, rental yields have failed to keep pace.
According to Core Logic, returns on houses in Torquay for example, have decreased from 3.83 per cent to 3.5 per cent, and units have fallen from 4.7 per cent to 3.8 per cent.
It’s still marginally higher than Melbourne returns, but it has driven investors and would-be investors to consider shorter term rental options, where care needs to be taken.
Fairfax’s Domain.com.au reports that on average, investors advertising on AirBnB receive about 50 per cent of the advertised price after cleaning, maintenance costs and tax.
Location is of course important.
When chasing returns on short term rentals, proximity to the beach and shops will yield a far greater result. As will uniqueness. There are well over 300 properties listed on Stayz and Airbnb, so the property needs to stand out to attract a premium rental yield.
Lanie Conquest from Surfcoast Life & Lending says that when it comes to the finance arrangements, the bank will only consider a standard rental return in its numbers, despite any dreams of Airbnb success.
“When it comes to refinancing, only income declared in the tax return over successive periods will count in the majority of cases, unless an alternative is sought where higher interest rates may apply.
“I get a lot of questions about interest-only lending and borrowing in an SMSF.
“Interest-only loans are now typically only available on five-year terms, although there are a few providers of 10-year facilities.
“The biggest trick to be aware of is that in today’s environment, the bank will assess the loan on the current ability to repay full principal and interest, accounting for the fact that in five years, that is what they require to kick in.
“Most mortgage stress out there today is where investors have assumed interest-only terms will roll over. And the banks are simply not doing that right now.”
Lanie says the options are to ensure that the property is positively geared, which means that the returns are higher than the interest repayments, or ensure there is enough surplus income to service a full P&I loan.
On the topic of SMSF lending, the main consideration is that it is always more expensive to run an investment property inside super than outside.
And, of course, it can’t be used by the owners (as a development opportunity or holiday house, for example).
“That doesn’t mean it doesn’t work – it does. If there’s a sufficient balance to use some as a deposit (don’t expect to use it all!) and adequate cashflow in the fund to repay principal and interest, then it’s still definitely worthy of consideration.”
For more advanced tips and advice, contact Lanie Conquest at Surfcoast Life & Lending.
With more than 25 years’ banking and financial services experience, she helps local families and businesses make smart financing decisions. Phone 0418 938 646, email lanie@surfcoastlending.com.au, and head to surfcoastlifeandlending .com.au.