Ground rules for smarter moves

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For the growing number of Indians buying into Australian properties, here are some ways to ensure a solid foundation for your investment

Within the decade, Indians will be among the largest residential property investors in Australia. Wealthy Indians from overseas do buy lot of properties in Australia as this country has been a safe haven for wealthy Indians. At the moment, as the dollar weakness there will be more activity in Australian real estate from Indian Investors.

Here are some of the common questions India property investors ask me.

Can you explain fixed interest rates.

Well, the answer is that in Australia, you are not able to fix interest rates for more than 10 years. While in other parts of the world you can fix the interest rate from 10 to 30 years, in Australia, at the moment fixed rates are almost close to variable rates. Once you want fix more than 3 years, the difference can be 4% higher than the variable.

Variable rates will be low for a quite a while. Greece has been dragging Europe and it is experiencing a negative Interest rate scenario. Unemployment in Australia is above 6%. If you don’t consider part-time jobs, unemployment will be close to 10%. We are not going to see any mining boom scenario in the coming years. The low dollar might help exporting, and Australia being one of the commodities exporting countries, our Reserve banks will try to keep the interest rates low.

At this stage, I would recommend that you do not fix Interest rates. In 2011, Australia has abolished exit fees on all the variable loans. Exit fees only apply to fixed interest rate loans. Banks benefit from you having a fixed rate. Mortgage brokers like you to be on fixed rate, as they get better commission and trailing commission per month being guaranteed. In the long run, you are better off with variable interest rates.

 

How can a small investor buy land in established areas and sub divide and profit from the same?

Developing in established areas can be very lucrative. Before entering the career of developer, be aware that 9 out of 10 developers go bankrupt. Highest bankruptcies rates in Australia but If you are successful, you have a wonderful career ahead.

Before buying a development site, you will need to have thorough knowledge of the council laws specifically the sub-division. If you are planning a sub-division and planning to develop, I would say, you will need to hire a project manager. You may be paying a premium fee for their services, however in the long run their services will pay you more in returns before the project is completed.

As for when you should employ a project manager, I would say even before you start looking for a site. Employ one who has thorough knowledge of the local council laws and can walk with you through selecting a development site.

If your builder is your project manager, you are in for a wild ride in this game.

What are the approvals needed?

Make sure you get your pre-approval for your development site. Go to a broker who has experience in construction loans. They are specialists in it. Development site is where an old house still in rentable condition but can be subdivided to put up few more units. You will first need to do a feasibility study on the property.

Once you have selected the site, request the project manager to apply for a Development Approval (DA) from the council. It’s a 19-step process to get the final product and can take almost 2 years.

Property development is an extremely creative process, therefore property developers must be creators by nature. As a developer, your role is to take a project from the conception of an idea, right through all the stages of design and approval, financing, construction and marketing and eventually the leasing or sale of the project.

Successful property developers are a bit like movie producers.

In order to complete a successful project you will need to assemble a highly skilled group of people to work with, and it is your responsibility to oversee the entire process with them – to be the producer of the project.

Property development is all about creating your own equity.

Depending on a project’s complexity, it is likely that some or all of the following team members might be required — real estate agents, lawyers, town planners and urban designers, property market researchers, engineers (civil, structural, traffic, acoustic, environmental specialists), architects, landscape architects, interior designers, financiers, building contractors, project marketing specialists, and development, project and construction managers.

The biggest mistakes you can make are not having a strategy in place, overpaying for the site, poor due diligence, poor feasibility research, bad tax structure, and over confidence.

 

How do you consolidate loans if you have multiple properties?

We don’t recommend taking all your loans with one bank. Never cross- collateralize all your properties. If one property goes south in price, banks can call in loans on all of them or sell better assets to recover their losses, or restrict lending and put a stop on investment.

If you have a good relationship with bank and want to use same bank for multiple properties, you can have them as standalone loans without cross collateralization.

Self-employed or PAYG people need to make sure you have a good serviceability for your loans, so the bank will offer you a better deal. Banks ask for two years tax returns. The trick before consolidating a loan with good interest rate to make sure you have two years worth of tax returns.

 

Is it better to manage your own property or rely on agents?

Being a DIY landlord means dealing with difficult issues — such as making rent demands, evicting tenants and claiming bond monies. Unfortunately, they are a fact of life when dealing with rental properties. As a DIY landlord, you need to ensure that you are going to be able to do these things without getting emotionally involved in the situation.

To manage your own properties, you should have the following skills or else you better off with the agents — Legal and legislation, rent collection, leasing your property, inspections, rental appraisal and increase, availability and time, technology for tax and record keeping.

If the main objective is saving costs, negotiate a better price structure with the agents. All the management fees are negotiable. The more properties you have, the less the agent fees.

 

Can Indians from India invest in property in Australia?

Yes, they can buy properties as locals. FIRB (Foreign Investment Review Board) allows Indians to buy properties with some conditions — There are no restrictions on the number of vacant land, new properties, or established dwellings for redevelopment; approval is required for a specific property you wish to purchase; established properties may not be purchased as investment properties; temporary residents may acquire one established (or second hand) dwelling which must be used as their residence in Australia.

 

If Indians buy property can they rent it out?

Established (or second-hand) dwellings bought by temporary residents cannot be rented. However, new dwellings and dwellings built on vacant land can be rented. A dwelling purchased for redevelopment cannot be rented out prior to the redevelopment commencing.

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