Property: What, How and Why?
Loan Central Hub is proud to announce the start of our new finance series. In each blog, we cover finance concepts, specifically:
What the finance concept is and relates to
How it is applied in reality and finance
Why it operates and exists in a certain way
To kick things of, we will be covering Property as a long term investment asset, how people leverage property and why they do so.
Property is one of the most significant investments individuals can make, offering a variety of benefits and opportunities for financial growth. As a tangible asset, property holds intrinsic value which generally increases overtime, making it a popular choice for long-term investment. The main reason why people buy property are:
Future equity growth/capital gains, which can be used for future leverage in lieu of cash reserves for many different types of loans in the commercial and residential segments, such as line of credits and business acquisition loans.
Recurring Cashflow from rental investment properties which may assist with future borrowing capacity and general personal cashflow
Tax Purposes: Properties, are ‘geared’, either positively, neutrally or negatively, referring to the overall financial position of the property when comparing income vs expenses.
‘Lower’ Risk investment in comparison to other investment options such as bonds or shares, however, with a higher barrier to entry in comparison to other investment options.
The 2 Main Perspectives a buyer generally has when purchasing property
For property purchasers, there are generally 2 perspectives that are adopted when locating a property. Depending on the area being purchased etc., first home buyers will generally focus on 1 of the 2:
Personal Purchase: This perspective is based solely on the personal preferences of the buyer and are usually for owner occupied purchases. As this is based on the buyer, the criteria is a case by case basis ranging from location to current community/family, work etc.
Investment Purchase: This perspective removes the emotional perspective that a personal purchase has. The focus is solely on the return on investment & future capital growth. Considerations when looking at property from an investment perspective are generally future infrastructure, access to amenities, the property being purchased (i.e. apartment vs. house and land) etc.
The Pros and Cons of Residential Properties
Residential property generally falls under one of the below:
Home and Land: This is a free standing house with land, and generally provides both cash flow and future property equity. However, the barrier of entry is notably higher than an apartment. Off the Plan Home and Land Packages also fall under this category, although not vacant land standalone without set deadlines for construction (commercial land bank loans)
Townhouses/Villas: This refers to multiple houses with shared walls on 1 title. This property provides both cashflow and future property equity at generally a lower rate than a house and land, but with a lower barrier of entry. Overall, this is the ‘middle’ option between a free standing house with land and an apartment. Additional costs/cons also kick in to consider such as Strata Expenses and getting Strata approval for renovation works etc.
Apartments: This is a small dwelling in a multi dwelling complex, generally in a metro or high density area. While the lowest barrier to entry when comparing the other 2 options. these properties are generally the best from a cashflow perspective. However, they also come with a few cons such as:
These properties are generally categorised as ‘High Density’ which results in most lenders offering less money.
Minimal/No equity growth. This is due to the ‘High Density’ nature of these properties. Generally, there are multiple properties within the same complex on sale which affect the values of the properties, and depending on the area, there can be multiple complexes which further affect the value of the property. An example of this is Melbourne CBD, where the average unit price has not increased due to multiple apartment complexes being constructed in close proximity over the last 10 years.
Strata Expenses, costs and process for approval with renovation works etc.
When is the right time to buy property?
Due to the long term investment nature of property, the ‘right’ time to buy a property is generally when it is affordable for you to do so. There are numerous First Home Grants available for first home buyers purchasing residential property to live in. The main grants are as follows:
First Home Owner Grant: This grant provides you with additional cash (generally $10,000). The purpose of the grant is to assist first home buyers with purchasing furniture etc. when moving into their new home and does not get factored into your deposit contribution to the loan. It can be used as part of your ‘Fund to Complete’ (i.e. loan fees and stamp duty costs etc.). This grant is generally lodged in tandem with the loan application by the broker.
First Home Buyer Assistance Scheme: This grant waives stamp duty expenses up to a limit. In practice, the conveyance/solicitor usually assists with the lodgement of this grant.
First Home Guarantee: This grant used to be known as the First Home Low Deposit Scheme and operates differently to the rest. Eligible clients who get this grant approved can get a loan up to 95% of the value of a property without the requirement of paying Lenders Mortgage Insurance. It is important to note:
This grant has limited spots which get released in half yearly tranches.
There are more strict requirements with this grant. Individual applicants cannot earn more than $125,000 and joint applicants cannot earn more than $200,000 as confirmed in the most recent Notice of Assessment.
All funds held by the client must be used in the loan, with $15,000 maximum to be kept in reserve after settlement. This grant is to assist first home buyers with low deposits to purchase their first property, and not for buyers wishing to use less of their own funds for the purchase.
Buyers should also familiarise themselves with the finance process. The key steps involved are:
Financial Preparation: Assess your financial situation, including your savings, credit score, and ability to secure a mortgage. It's essential to have a clear budget and understand the costs involved in buying property, such as the down payment, closing costs, and ongoing expenses.
Research: Conduct thorough research on the property market, focusing on areas with good growth potential. Consider factors like location, amenities, transport links, and future development plans.
Pre-Approval: Obtain mortgage pre-approval from a lender to understand how much you can borrow. This step can make you a more attractive buyer to sellers.
Property Search: Begin searching for properties that fit your criteria. Work with a real estate agent to identify suitable options and arrange viewings.
Making an Offer: Once you find a property you like, make an offer. This involves negotiating the price and terms of the sale with the seller.
Due Diligence: Conduct necessary inspections and valuations to ensure the property is in good condition and worth the investment.
Finalizing the Purchase: Work with a solicitor or conveyancer to handle the legal aspects of the transaction, including reviewing the contract and completing the paperwork.
Settlement: Complete the purchase by paying the agreed price and any associated costs. Once settlement is complete, you officially become the property owner.
The key parties in purchasing property
There are several key parties involved in the property purchase process. These include:
Accountants: The role of the accountant is to advise on tax strategies etc. This can involve advice on the borrower/entity type for tax purposes. Additionally, Accountants play a key role in low document non-bank lending through verifying business income in lieu of financial statements and tax returns.
Conveyancers: The role of the conveyancer is to represent & negotiate on your behalf for any legal/contract requirements. The main things that they handle are:
Negotiations on the terms of the Contract of Sale, including key dates such as settlement and finance clause date, along with deposit exchange amounts etc.
Handling of the loan process post unconditional approval. The conveyancers arrange the settlement process via PEXA/paper settlements, communicating with all parties to ensure that when settlement occurs, all caveats are lifted and all utility expenses have been calculated in line with settlement date etc.
Brokers: The role of the broker is to provide you with the best loan option that you qualify for in line with your financial requirements, needs and objectives.
Real Estate Agents: The role of the real estate agent is to assist you with sourcing suitable properties in line with your requirements as well as to assist with early negotiations/discussions with the seller prior to the solicitors contacting each other. They can also assist you with getting a better understanding of the property market and the insight of the vendors to see if this aligns with your property purchase requirements.
Conclusion
Property is a versatile and valuable asset that offers numerous benefits for investors. As a long-term investment, it provides opportunities for capital growth and rental income. It can also be leveraged to secure future debt, enhancing your investment potential. Additionally, strategies like negative gearing can offer tax advantages, making property investment even more attractive. For first-time buyers, understanding these aspects and the process of purchasing property is essential to making informed and confident decisions. At Loan Central Hub, we are experts in the finance process and property investment, and can assist you with navigating through finance with confidence.
