Listener questions – Property with a dark history: to buy or not to buy? What kind of asset mix is best for boosting serviceability & why this may not be the first question to answer. And more! (Ep.168)

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In this week’s episode, Dave, Cate and Pete take you through:

1. To buy or not to buy? Properties with a history of murder
I’ve recently came across with a property which has history of murder. 2017. As I keep hearing property is about numbers. And the numbers are good as less buyers want it. My question is would you buy this kind of property where they have “dark history” which will eventually fade in the long run? Any Thoughts on this?
2. What kind of asset mix is best for boosting serviceability & why this may not be the first question to answer
Love the podcast! Thank you for taking the time out of your busy lives and putting the show together. My question is related to financing property acquisition. Capital growth is the holy grail for property investing but it is only one side of the equation. Serviceability is the other. If you can’t service your debt, all the equity from capital growth is inaccessible. What kind of residential property asset mix should an PAYG investor consider in their property planning to boost serviceability to continue their investment journey? Does a happy intersection of capital growth and rental yield exist?
3. How will the changes to QLD land tax impact investors?
What do you think will be the effect of the new changes to Qld land tax. Effectively, you will now be penalised on your Qld land tax if you own properties outside Qld. My own calculation due to my extensive holdings in all states is that this has a horrendous impact on large investors. I now will consider selling some Qld properties. I believe it will have flow on effects, where there will be less investors in Queensland, and rents will rise even more dramatically again (lower vacancy rates). how long do you think it will take for this impact to flow through and the Queensland government will be forced to look at this? The unintended consequences, I believe will be severe.
4. Got a scenario or question for the trio? Fill out our online form here
1. To buy or not to buy? Properties with a history of murder
I’ve recently came across with a property which has history of murder. 2017. As I keep hearing property is about numbers. And the numbers are good as less buyers want it. My question is would you buy this kind of property where they have “dark history” which will eventually fade in the long run? Any Thoughts on this?
  • Lots of owner occupiers that won’t do this. It’s a perception issue. When it comes to buying an investment, it’s about the numbers, what do you do? Will you get a tenant in there? 
  • If the vacancy rates are tight, you’ll find a tenant.  
  • When it comes to a murder, there have been a few situations where it was a murder or a suicide, people do get freaked out about it.  
  • It is a case of each to their own.  
  • My main point here is being well equipped with the knowledge of what has happened and what a local property manager may say.  
  • Really serious drug dealing? People banging on the door at 2am because they’re not aware that the drug dealer has moved on, that is not ideal.  
  • How documented was the issue, was it featured in papers? 
  • But if it’s something that wasn’t well publicised, then memories do fade and you can give a house a new makeover as well.  
  • I usually pride myself of being very pragmatic, personally I would steer clear from living in it. I can understand from an investment property why someone would purchase. But if it ticks a lot of boxes, I still probably wouldn’t.  
  • Look at the longevity of the previous owner, it’s a 1%, it gives an insight into how much someone has loved living in the property or location. Or they tend to hold on to it longer if it worked and didn’t provide headaches. We look at floor plan, natural light, properties have a vibe, it either enhances connectivity of the inhabitants or joy in living there. You still need to make sure – even if it is a bargain, is it still a good asset? 
  • Period appeal and scarcity value, bought in West Hobart, old pub dating back to 1841 – it has had some serious brawls and murders. Anyone who has bought a converted church, how many funerals have been in the dining room? 
  • Agents having to relay what they know about it, they have a duty of care to tell you about it. Now we have material facts disclosure. You don’t want someone to buy the property and then later the neighbours tell you what’s happened.  
  • You need to make sure it still ticks the boxes as a quality investment. And if you are willing and open to buy something that’s had something like that occur in it, hopefully the stigma washes away over time.  
2. What kind of asset mix is best for boosting serviceability & why this may not be the first question to answer
Love the podcast! Thank you for taking the time out of your busy lives and putting the show together. My question is related to financing property acquisition. Capital growth is the holy grail for property investing but it is only one side of the equation. Serviceability is the other. If you can’t service your debt, all the equity from capital growth is inaccessible. What kind of residential property asset mix should an PAYG investor consider in their property planning to boost serviceability to continue their investment journey? Does a happy intersection of capital growth and rental yield exist?

From my experience, and this became very apparent to me when I started mortgage broking as a 24 year old, your income is the critical differentiation to your borrowing capacity and wealth creation, closely followed by your money management and investment strategy.

The question goes towards your asset accumulation strategy really.

  • How many properties do you want to purchase?
  • What income do you want in retirement?
  • What is your borrowing capacity today?
  • Have you already got the loan term home or do we need to plan for it?
  • What is your income today?
  • Do you have your life partner?
  • Have you started or finished having kids?
  • From my experience since 1999 in running a business that mortgage broking, property planning, financial planning and buyers advocacy focusing on rental income to help borrowing capacity makes very little difference to borrowing capacity.
  • Growing your income is the difference maker whilst keeping your living expenses under control.

Here are the reasons why –

  • Most banks only assess your rental income at 75% of its actual income.
  • They then assume the interest cost on the debt is 3% higher as of nov 21.
  • Most properties are negatively geared, if they are positively geared it might only be by $5k, $10k pa in the vast majority of case.

Whereas actual incomes is –

  • The base salary is 100% which is the main portion for most people. take except for some variable income at times.
  • Some variable income can be considered at 100%.
  • Importantly when we take off our living expenses including repayments on non-income producing home or holiday houses, we are usually still left with $10’s or even $100,000’s of thousands of dollars to go towards borrowing capacity.

Capital growth V rental income growth

  • You need equity and rental income growth to borrow more.
  • We know as per the stats shared recently by Pete and that capital growth has far outperformed rental income growth over the last 10 years or so, but this is starting to level out. But if you look at it for most people you can use 80% of your capital growth without any further shading WHEREAS the rental income is shaded by 75% and the interest cost plua 2.5% to 3% also effectively shades the borrowing capacity.

The best bet as you get stretched is to work with a Strategic Mortgage Broker who understands the full market and who can if needed, find second tier non-bank lenders who will allow you to asset the rental at above 75% or the interest rates at the actual rates.

This is where the Property Planning platform is so powerful. We can actually plugin your property based retirement goals, current situation, and map out up to 4 different pathways to see how you can achieve your goals, which pathways might work and which one may not. The contrast between less property at higher value V’s more at lower value.

For most people I would say that focusing on what is affordable for you ensuring that you have your desired level of surplus cash flow and available funds buffer after settlement, and then purchasing the best quality asset you can for that price range is the best approach generally.

3. How will the changes to QLD land tax impact investors?
What do you think will be the effect of the new changes to Qld land tax. Effectively, you will now be penalised on your Qld land tax if you own properties outside Qld. My own calculation due to my extensive holdings in all states is that this has a horrendous impact on large investors. I now will consider selling some Qld properties. I believe it will have flow on effects, where there will be less investors in Queensland, and rents will rise even more dramatically again (lower vacancy rates). how long do you think it will take for this impact to flow through and the Queensland government will be forced to look at this? The unintended consequences, I believe will be severe.

How the system works currently

  1. Land tax is assessed on the value of all non-exempt landholding in Queensland (and not elsewhere) at midnight on 30 June each year.
  2. Differing thresholds and rates apply depending on whether a taxpayer is an individual, corporation, trustee or absentee.
  3. Types of land that are exempt from the calculation include land used as farming (in certain circumstances) and an individual’s principal place of residence.
  4. The Revenue Amendment Act which changes the laws around stamp duty does not change these thresholds or exemptions.

Changes

Apply for the land tax year commencing 1 July 2023 (i.e. for land tax assessed on land values as at midnight on 30 June 2023).

Legislation:

  1. the Queensland Revenue Office (QRO) will use the total value of a taxpayer’s ‘Australian Land’ in calculating land tax. This will include the value of both ‘Taxable Land’ and ‘Relevant Interstate Land’
  2. the total value of ‘Australian Land’ calculated will then be used to determine the rate of land tax that will be applied to the ‘Queensland Proportion’ of landholdings.

Translated into practice, this means that taxpayers will still be taxed only on the value of their Queensland landholdings, but in determining the ‘rate’ of land tax that they pay, the total statutory value of their ‘Australian Land’ will be used.

This will push Queensland landowners into a higher land tax bracket.

The new rule works like this:

  1. first calculate the total value of Australian land owned by the taxpayer
  2. then calculate the land tax on that as if all of that land is in Queensland
  3. then, apportion to the total land tax amount to the Queensland land by relative value.

Gold Nuggets

David Johnston – The Property Planner’s Golden nugget:you don’t want to make the decision based on something as binary as cash flow or capital growth. It really should fit into your longer-term property plan and current stage of life, have you started a family, what are your goals for retirement, what would you like your financial position to be after you purchased the property? Get clear on purchase price and then you determine the right property. 

Cate Bakos – The Property Buyer’s Golden nugget: about QLD issue, any listeners who have QLD holdings do need to educate themselves. Jump onto the QLD SRO website, google for news and petitions, so if you’re worried about it, skill yourself up and find your voice. 

Market Updates

1. A warning to investors intending a demolition
For those investors who are looking at run-down properties with plans for a future development, it is important to consider the minimum standard of living legislation. If you purposefully purchase a home that needs a lot of work to make it liveable for tenants, you may be over capitalising when the long-term intention is to put a bull-dozer through it.
2. Smoke signals from China
Unlike the rest of the world, China has just reduced interest rates to try and stimulate the economy. This is due to some prevalent risks building in the Chinese economy, such as developers going under, Chinese citizens who have refused to pay mortgages because their property has not yet been built and further covid lockdowns. This will have a big impact on Australia and the rest of the world economy. To top it off, China is heading towards their next election… watch this space.

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