Property Investing For Dummies - Australia, 2nd Australian Edition - Bruce Brammall - ebook

Property Investing For Dummies - Australia, 2nd Australian Edition ebook

Bruce Brammall

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Opis

Learn to: * Make real estate a part of your long-term investmentstrategy * Pick the right properties for profit * Spot the best deals on financing * Understand the new rules for purchasing properties usingSMSFs Become a successful property investor with this user-friendlyguide Are you thinking about real estate as a long-term wealthopportunity? Whether you're interested in a house, apartment,vacant land or commercial property, the second Australian editionof Property Investing For Dummies explains what you need toknow to ensure you invest wisely. Discover how to build a winningproperty portfolio with practical advice on everything fromchoosing the right property at the right price to financing yourgoals with SMSFs, and much more. * Decide which type of property is right for you -- choosean investment option that fits in with your financial plans * Assemble a reliable support network -- research and enlistthe help of lenders, buyers' advocates, advisers and otherexperts * Explore your finance options -- learn about mortgageterms, lending fees and holding property in a self-managed superfund * Evaluate properties worth pursuing -- find the rightlocation, identify value and prepare to bid or make an offer * Protect your investment -- discover what it's like to be alandlord, learn how to insure your property and manage risk * Build a solid portfolio -- uncover the secrets to growingequity, diversifying and building an income stream Open the book and find: * How to invest in residential and commercial properties * Information on using a buyers' advocate * Advice on shopping for a mortgage * Tips for owning property with SMSFs * Steps for signing contracts and leases * Help with keeping on top of your paperwork * Secrets for growing your profits

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Property Investing For Dummies®, 2nd Australian Edition

Visit www.dummies.com/cheatsheet/propertyinvestingau to view this book's cheat sheet.

Table of Contents

Introduction
How This Book Is Different
Foolish Assumptions
How This Book Is Organised
Part I: Understanding Real Estate as an Investment
Part II: Financing: Raising Capital and Sourcing Loans
Part III: Finding and Evaluating Properties
Part IV: Operating the Property
Part V: The Part of Tens
Appendix
Icons Used in This Book
Where to Go from Here
Part I: Understanding Real Estate as an Investment
Chapter 1: Stacking Up Real Estate Against Other Investments
Getting Yourself Motivated
Comparing Real Estate with Other Investments
Returns
Risk
Liquidity
Income- and wealth-producing potential
Capital requirements
Diversification value
Ability to add value
Tax advantages
Determining Whether Investing in Real Estate Is for You
Do you have sufficient time?
Can you deal with problems?
Can you hire and fire?
Does real estate interest you?
Fitting Real Estate into Your Financial Plans
Ensure your best personal financial health
Protect your property and yourself with insurance
Consider superannuation and property investment
Think about asset allocation
A Warning on Statistics
Chapter 2: Covering the Landscape of Common Real Estate Investments
Investing in Residential Properties
Freestanding houses
Attached housing
Apartment blocks
Deciding among the options
Using Your Home as a Base for Investing
Why tax makes ‘home’ and ‘investment’ different
Buying a place of your own
Converting your home to a rental
Diversifying away from home
Serial home selling
Holiday homes
Considering Commercial Real Estate
Uncovering Undeveloped Land
Researching Property Trusts
Distinguishing between listed and unlisted property trusts
Performing by the numbers
Chapter 3: Opportunities in Real Estate
Private and Public Purchases
Private treaty sales
Public auctions
Tenders
Unusual purchase options
Flipping Out over Buying and Flipping
Flipping new and existing homes
Heeding the risks
Property Development
Understanding the process and the risks
Vacant land
The knock-down job
Redevelop or renovate?
Property Syndicates
Property Crash?
Why the US property market slumped
Could it happen here?
Chapter 4: Building Your Team
Establishing Your Team Early
Getting Good Legal Advice
Solicitors versus conveyancers
DIY conveyancing
Lining Up a Lender or Mortgage Broker
Reviewing roles
Building relationships
Adding an Accountant
Inspecting with a Building Expert
Working with Real Estate Professionals to Buy and Sell Property
Understanding what agents do
On the lookout: Buyers’ advocates
Commission? You bet
Making the most of real estate professionals
Spruiker alert!
Dealing with developers
Dealing with Leasing Agents
Putting Your Investment to Work
Finding a financial adviser
Considering a valuer
Keeping Relationships Professional
Part II: Financing: Raising Capital and Sourcing Loans
Chapter 5: Sources of Capital
Calculating the Costs of Entry
Determining what you need to get started
Don’t forget stamp duty
Overcoming deposit limitations
A low-entry-cost option
Rounding Up the Required Cash
Make saving a habit
Tap into other cash sources
Primary Sources of Finance: Lenders Big and Small
Banks
Building societies and credit unions
Non-bank lenders
Non-conforming lenders
Borrowing Against Home Equity
What is equity?
The 110 per cent loan — borrowing the lot and then some
Watch those bank valuations
No Home? No Worries!
Advanced Funding Strategies
Leveraging existing real estate investments
Partners and investors
Seller financing
Chapter 6: Financing Your Property Purchases
Taking a Look at Mortgages
Going with the flow: Variable-rate mortgages
Honeymoon rates
Annualised average percentage rates
The security of fixed-rate mortgages
Tax-effective interest-only loans
Making a dent with principal and interest loans
Making Some Decisions
Deciding between variable and fixed
Deciding between interest-only and principal and interest
Deciding on a loan term
Reviewing Other Common Lending Fees
Mortgages That Should Make You Think Twice
Interest-capitalising loans
Recourse financing
Vendor’s Terms
Chapter 7: Shopping for and Securing the Best Mortgage Terms
Shopping for Mortgages
Putting your existing relationship to the test
Mulling over mortgage brokers
Looking for loans on the internet
Relying on referrals
Economies of Scale
Buying banking in bulk
Taking on bigger and bigger debt
Sizing Up Banking Products
Interest rates: Is cheaper always better?
Merging your home and investment finances
Linking an offset account
Paying ahead into a redraw account
Other useful products
Considering a Professional Package
Avoiding Some Big Hidden Nasties
Lenders’ mortgage insurance
Exit fees
Attributing Rental Income
Solving Loan Predicaments
Polishing your credit report
Conquering insufficient income
Dealing with low property appraisals
Chapter 8: Property in Self-Managed Super Funds
Superannuation’s Great Tax Advantages
Super: A low-tax environment
Super: A no-tax environment
Comparing SMSFs with Other Super Funds
Owning Your Business Premises Inside Your SMSF
Borrowing to Invest in Property in SMSFs
Limited recourse borrowing arrangements
Using gearing to increase diversification and returns
Understanding Your Legal Requirements
Trusting on a solid SMSF base
Starting with a new SMSF trust deed
Upgrading an existing SMSF
Borrowing through bare trusts
LRBA loan agreements
Working Out Who Can Lend to SMSFs
Regular lenders
You become the lender
Delving into Specific Tax Implications
Negative gearing in super
Eliminating contribution taxes using negative gearing
How SMSFs pay low, or no, CGT on property
A Warning on SMSFs: It’s Complicated!
Chapter 9: The Ongoing Costs of Real Estate
Budgeting for the Inevitable
Mortgage interest — month in, month out
Financing unpredictable maintenance issues
Body corporate fees
Ongoing Property Taxes
Council rates
Land tax
Other Costs to Be Aware Of
Utility charges
Agents’ fees
Property improvements
Insurance
Gardens
Part III: Finding and Evaluating Properties
Chapter 10: Location, Location, Value
Deciding Where to Invest
Evaluating a Region: The Big Picture
Population growth
Job growth and income levels
Investigating Your Intended Real Estate Market
Australia’s major property markets
Supply and demand
Path of progress
Considering barriers to entry
The impact of governments on real estate
On the Block: Metropolitan Properties
Inner city
Suburban
The ripple effect
Seek and You Shall Find: The Sea, Ski or Tree Change
Holiday homes — a general warning
Heading for the coast
Regional and rural hideaways
Short- and long-term rentals
Comparing Communities Come Investment Time
Employment opportunities
Schools
Public transport
Amenities
Crime rates
Pride of ownership
Role play: What attracts you to the property?
Property knowledge sheets
Mastering Sellers’ Markets and Buyers’ Markets
Real estate cycles
Timing real estate markets
Understanding Value
Understanding the principles of valuation
Hiring a valuer
Evaluating existing leases
Making capital improvements
Chapter 11: Preparing to Bid or Make an Offer
Valuation: How Much Should I Pay?
Market data (sales-comparison) approach
Cost approach
Calculating a yield-based return
Finding properties where you can add value
Negotiating Basics
Selecting negotiating styles
Building your knowledge base
Assembling attractive and realistic offers
Making Your Offer
Understanding the basics of contracts
Completing the contract of sale
Determining How to Hold Title
Sole ownership
Joint tenancy
Tenants in common
Self-managed super funds
Partnerships and companies
Trusts
Chapter 12: Signing the Contract, Inspecting the Property and Settling
Offer Accepted!
Setting a settlement date
Hi ho, off to the lawyers you go
Conveyancers’ duties
Removing conditions
Conducting Formal Due Diligence
Reviewing the books and records
Inspecting the property
Using the Settlement Period Wisely
Taking control at settlement
Insuring the property
Preparing for tenants
Balancing at settlement
Taking ownership
Part IV: Operating the Property
Chapter 13: Landlording 101
Managing Yourself or Hiring Help?
Ignorance is no excuse
Assessing your skills as a property manager
Hiring professional management
DIY property management
Renting Vacant Properties
Establishing tenant-selection criteria
Determining lease length
Setting the rent
Adding value through renovations and upgrades
Advertising for tenants
Taking and verifying applications
Signing Leases and Collecting Money
Reviewing and signing documents
Collecting the money
Inspecting the property with your tenant
Working with Existing Tenants
Meeting tenants and inspecting the property
Entering into a new rental agreement
Increasing rents
Avoiding Discrimination Complaints
Being fair to families and children
Dealing with tenants with disabilities
Dealing with tenants and pets
Chapter 14: Protecting Your Investment: Insurance and Risk Management
Developing a Risk-Management Plan
Getting the Property Insurance You Need
Understanding insurance options
Determining the right excess
Selecting potential insurers
Talking with tenants about contents insurance
Dealing with claims
Insuring Your Biggest Asset: You
Life (death) insurance
Total and permanent disability insurance
Trauma insurance
Income-protection insurance
Chapter 15: Record Keeping and Accounting
Organising Your Records
Maintaining property records
Filing made easy
Accounting for Your Rental Activities
Documenting income and expenses
Creating a budget and managing your cash flow
Doing your accounting manually
Using software
Chapter 16: Tax Considerations and Exit Strategies
Understanding the Tax Angles
Minimising taxes
Depreciation as de facto income
The Biggest Expense of All — Interest
Gearing Strategies and Tax
Negative gearing
Positive gearing
Neutral gearing
Capital Gains Tax
Pre-CGT assets
Post-CGT assets
The home exemption
Turning Your Home into an Investment Property
Tax-deductibility
Home CGT liabilities
Holiday homes
Exit Strategies
Outright sale
Calculating gain or loss and tax liability on sale
Gifts and bequests
Chapter 17: Building a Portfolio
Using Property’s Power Tools
Compounding returns
Powering with leverage
Combining compound returns and leverage
Buying Your Second Investment Property
Buying the Third, Fourth, Fifth and Beyond
Property three
Property six
Growing Equity
Getting comfortable with big debt
Servicing a ‘menagerie of mortgages’
Keeping an eye on leverage
Funding Several Properties
Understanding Good Debt versus Bad Debt
Diversifying Your Portfolio
Across a city or state
Across Australia
Building an income stream
Part V: The Part of Tens
Chapter 18: Ten Ways to Increase a Property’s Return
Raising Rents
Reducing Turnover
Subdividing and Developing
Keeping Your Banker on Her Toes
Maintaining and Renovating
Cutting Back on Operating Expenses
Taking Advantage of Tax Benefits
Being Prepared to Move On
Adding Value through Change in Use
Improving Management
Chapter 19: Ten Steps to a Real Estate Fortune (Or a Great Second Income)
Building a Portfolio through the Power of Compounding
Moving Debt from ‘Bad’ to ‘Good’
Valuing Your Time
Building Up Savings and Cleaning Up Credit
Renting Out Your Holiday Home
Buying Property in the Path of Progress
Buying the Right Property at the Best Price Possible
Renovating Property Right
Keeping Abreast of Market Rents
Increasing Income and Value through Superior Management
Appendix: Sample Property Condition Report
Cheat Sheet

Introduction

Welcome to Property Investing For Dummies, 2nd Australian Edition! We’re delighted to be your tour guides. Throughout this book, we emphasise three fundamental cornerstones that we believe to be true:

Property is one of the three time-tested ways for people of varied economic means to build wealth (the others are shares and small business). Over the long term, you should be able to make an annual return of around 7 to 9 per cent per year investing in real estate.

Investing in real estate isn’t rocket science but does require doing your homework. If you’re sloppy with your legwork, you’re more likely to end up with inferior properties or to overpay for a property. Our book clearly explains how to buy the best properties at a fair (even below-market!) price. (Although we cover all types of properties, our book concentrates on residential investment opportunities, which are more accessible and appropriate for non-experts.)

Although you should make money over the long term investing in good real estate properties, you can lose money, especially in the short term. Don’t unrealistically expect real estate values to increase every year. When you invest in real estate for the long term, which is what we advocate and practise ourselves, the occasional price declines should be merely bumps on an otherwise fruitful journey.

How This Book Is Different

If you expect us (in property spruiker fashion) to tell you how to become an overnight multi-millionaire, this is definitely not the book for you. And please allow us to save you money, disappointment and heartache by telling you that such shysters are only enriching themselves through their grossly overpriced CDs and seminars, or are likely urging you into their property developments with funding from their related-party loans.

Property Investing For Dummies, 2nd Australian Edition, covers tried and proven real estate investing strategies that real people, just like you, use to build wealth. Specifically, this book explains how to invest in houses, units, apartments, small apartment blocks, commercial properties (including office, industrial and retail) and raw (undeveloped) land. We also cover ‘indirect’ real estate investments such as real estate investment trusts (REITs) that you can purchase through the Australian Securities Exchange or a real estate managed fund.

Unlike so many real estate book authors, we don’t have an alternative agenda in writing this book. Many real estate investing books are little more than promotional materials for high-priced seminars or developments the author is selling. The objective of our book is to give you the best crash course in property investing, so that, if you choose to make investments in properties, you may do so wisely and confidently.

Foolish Assumptions

Whenever authors sit down to write books, they have particular audiences in mind. Because of this, they must make some assumptions about who the reader is and what that reader is looking for. Here are a few assumptions we’ve made about you:

You’re looking for a way to invest in real estate but don’t know what types of properties and strategies are best. (We’ll show you.)

You’re considering buying an investment property, be it a house, a unit, an apartment or flat, a small apartment or unit complex or an office building, but your real estate experience is largely limited to renting an apartment or owning your own home.

You may have a small amount of money already invested in real estate, but you’re ready to go after more or bigger properties.

You’re looking for a way to diversify your investment portfolio.

If any of these descriptions hits home for you, you’ve come to the right place.

How This Book Is Organised

We’ve organised Property Investing For Dummies, 2nd Australian Edition, into five parts. Here’s what you can find in each.

Part I: Understanding Real Estate as an Investment

In this part, we explain how property compares with other investments, how to determine whether you’ve got what it takes to succeed as a real estate investor and how much money you’ll need to invest in various types of real estate. We cover why your home isn’t really an investment property and why a holiday home can be both home and investment property. We discuss the range of real estate investments available to you — such as residential and commercial properties — and the various ways of buying property in Australia. Finally, you inevitably need to work with professionals, so we also detail how to hire top agents, accountants and other real estate pros.

Part II: Financing: Raising Capital and Sourcing Loans

You can’t play if you can’t pay. This part details how and where to come up with the dough you need to buy property. We explain the common loans available and some not-so-common ways to finance property investment. We share all of our favourite strategies for finding and negotiating the best deals when you need a mortgage. We also look at the new legal area of gearing (using borrowed funds) to buy property inside a self-managed super fund. Finally, we take a look at the ongoing costs of real estate and what you need to consider to cover those expenses.

Part III: Finding and Evaluating Properties

This part is simply about the rules of buying real estate right. We tell you how to determine where and what to buy, and how to value and evaluate investment properties. Here you find out how to choose the best locations and how to project a property’s cash flow. Finally, we take you through the negotiation process, bidding, inspections and settling on your purchase.

Part IV: Operating the Property

After you own a property, you have lots of opportunities to improve its value through managing it well. For starters, this important part covers the basics of being a landlord, and how to find and keep the best tenants and sign solid lease contracts. What you’re looking to buy is an expensive asset and you need to know how to properly insure both the property and yourself. We also reveal many proven methods for boosting a property’s return and value. We won’t let tax headaches get you down as we walk you through how to account for the annual cash flow on your property and the tax advantages of depreciation. We also share strategies for deciding when and how to sell, including the impacts of capital gains tax. Last but not least, we provide some tips on building a property portfolio, as you look at purchasing your third (fourth, fifth, sixth . . .) real estate investment.

Part V: The Part of Tens

This part contains other important chapters that didn’t fit neatly into the rest of this book. Topics we cover in this section include ten ways to increase a property’s return and ten steps to a real estate fortune.

Appendix

This book is comprehensive, but it isn’t a book of forms. We don’t recommend that novice real estate investors perform their own property management — they should hire professional agents to do this. However, we do include a fairly typical inspection report that you may find useful for checking the status of your properties. For sales and rental contracts, we recommend that you contact local real estate professionals for the forms that are specifically drafted for your state.

Icons Used in This Book

Throughout this book, you can find friendly and useful icons to enhance your reading pleasure and to note specific types of information. Here’s what each icon means:

This alerts you to those who may have conflicts of interest or offer biased advice, as well as other concerns that could really cost you big bucks.

This icon flags concepts and facts that we want to ensure you remember as you make your real estate investments.

Included with this icon are complex examples and interesting technical stuff that you may want to read to become even more familiar with the topic.

This icon points out something that can save you time, headaches, money or all of the above!

Here we’re trying to direct you away from blunders and errors that others have made when investing in property.

Suddenly investing in real estate is much easier with research tools a mouse click away. This icon highlights the most useful sites.

Where to Go from Here

If you have the time and desire, we encourage you to read this book in its entirety. It provides you with a detailed picture of how to maximise your returns while minimising your risks in the property market. But you may also choose to read selected portions. That’s one of the great things (among many) about For Dummies books. You can readily pick and choose the information you read based on your individual needs.

Part I

Understanding Real Estate as an Investment

Glenn Lumsden

‘. . . and if the real estate market ever nosedives, you can always just live off the gingerbread.’

In this part . . .

Real estate is just one of many available investment options, so, in this part, we compare real estate investing with alternatives you may consider and look at how to fit real estate into your overall financial plans. Property investment is a world of different opportunities that require extensive analysis. We talk you through the different types of properties you can buy and the different methods of buying them, and touch on other property strategies — such as buying and flipping, and property development. We finish off with how to assemble a team of competent professionals to help ensure your long-term property investment dreams can be realised.

Chapter 2

Covering the Landscape of Common Real Estate Investments

In This Chapter

Looking at residential properties

Broadening your investments away from home

Getting to know commercial real estate

Examining undeveloped land

Comprehending property trusts

If you lack substantial experience investing in real estate, you should avoid more esoteric and complicated properties and strategies. In this chapter, we discuss the more accessible and easy-to-master property options, from residential to commercial properties and vacant land. In addition to discussing the pros and cons of each, we provide insights as to which may be the most appropriate and profitable for you.

Investing in Residential Properties

Residential property can be an attractive real estate investment for many people. Residential housing is easier to understand, purchase and manage than most other types of property, such as office, industrial and retail property. If you’re a homeowner, you already have some level of experience locating, purchasing and maintaining residential property.

If you’ve been in the market for a home yourself, you know that, in addition to freestanding (detached) houses, you can choose from numerous types of attached or multi-dwelling properties, including units, apartments and townhouses. In the following sections, we provide an overview of why some of these may make an attractive investment for you.

Freestanding houses

As an investment, freestanding houses usually perform better in the long run than attached housing, units or apartments. In a good real estate market, most housing appreciates, but traditional detached homes tend to outperform other housing types for the following reasons:

Freestanding houses tend to attract more potential buyers — most people, when they can afford it, prefer detached dwellings, particularly for the increased privacy (and space).

Attached housing, or units and townhouses, are less expensive and easier to build — and to overbuild. Because of this potential for surplus properties on the market, such property tends to appreciate more moderately in price.

Land value is the major driver of property prices. The higher the land content, the more likely the capital growth. And a freestanding house, in the vast majority of cases, has a higher proportion of land content than attached housing.