Renovation due diligence
Cosmetic reno; getting in and change the look and feel
Advance reno: change structure
Add value for as little money as we can
Buy100k + 30k reno, revalue @160k, and borrow against the new value to get new capital for the next project
End sale value: the biggest mistake is overestimate the end sales value
The selling agent of the property you are buying should have an idea what the end price is, then go and look as many house as you can to confirm the end price.
Go to another angent, pretend to buy the end property in the area, then you get truer picture, as agents talk differently to seller and buyers. If it’s a small town, get yoru friend to do it.
Dean doesn’t factor in any decline and growth in projecting end price. However he is conservative in budgeting the end price.
It’s difficult to find reno proj with profit in it. Need to be very careful.
Because there is a trend of people doing reno, people are starting to pay premium for unrenovated houses. Therefore you need to be able to negotiate better deals to ensure there is a profit in the end. Though now there are people who are willing to drop the selling price a bit.
Some reno proj are better than others. A perfect reno project is somthing not too old in a decent area.
Something quite old with structure prob that needs new stumps or have invisible prob such as wiring is no good.
Look for where you can add a room w/o extension.
Emotional area of property cause greatest value appreciation. Kitchen and bathroom are major areas where you can spend money. The danger in reno is ppl spending too much inside and little outside. You need to get ppl inside first. Dean only buys units if they are a block so he can change the outside.
Get building inspection to find things that you can’t see.
Restumping, rewiring, reproofing does not add value. Be diligent ,detailed and thorough in the costing . Make decisions about what you need to change before you buy.
Q:How to separate the ones will truly add value from those just “nice to haves’?
A: It comes down t research. Before you buy, decide who is your market and target that what is needed. Keep in mind what’s selling fast. Look for the style of the house in the area that’s selling fast and look for something that’s similar. Ask REA what price range sells best.
Q:What are the ways of cutting down unnecessary reno cost?
A: If you know the target market well and look at other properties then you know what’s needed. Determine what you need to do to fit that target market. For every dollar you spend, you need to get a greater value back. You don’t have to replace the whole kitchen and bathroom.
Some reno work requires permit. Cosmetic reno does not need permit. Structural change such as stump, roof, and walls generally need permit. Painting, change tiles and carpet does not need permit. Rules and regulations are different in every area. Best to check with local building surveyor.
Unexpected holding costs are the biggest blow to reno prj. Early access is an advantage. Minimise the down time in the project. As soon as one tradesman finish, get the next one in . Plan the time for the trades people.
Some times it is hard to get to finance reno prj. Renos are cash intensive. If you can get a permit for a structural, then you can get a loan from the bank. As soon as you finish reno, trying to get the value.
It’s important to know how it hinges together. It’s good to do it first time yourself to understand how every job hang together.
For people who plan to do multiple projects at once you need a system to manage it.
Q: How to estimate material cost?
A: Go to bunnings;
Q: How to estimate labor cost?
A: For most trades like tile carpet, painting tile you should be able to get accurate quote. Plumbing labor is hard to estimate. It comes down to the complexity of the prj. Get a plumber through the property and let him know what needs to be done. He should be able to give you an idea how much it costs. Then add 10 to 20% for unexpected things. You can use your home as a test case to get an idea what everything costs.
Dean budgets Cosmetic reno on 10% initially. Later he based it on the profit that can be achieved.
Q: How do you separate emotion from the numbers in reno.
A: Make sure to meet the requirement of the target market.
Factor in a handy-man’s time for bits and pieces. Get a quote from a handy man re hourly rate
Current market:
Mixed messages out there. We are at a point of change. Uncertainty needs to be factored in when you buy.
Do your due diligence and be prepared to walk away if the numbers don’t stack up. Know your market, know your target market.
Friday, July 25, 2008
Wednesday, July 23, 2008
Property sub-division and capital gains tax
Source: Wealth Creator Magazine January/February
Subdividing land – will you have to pay capital gains tax?
If you own a block of land and are thinking of subdividing it into two or more separate blocks, remember this can affect the amount of capital gains tax (CGT) you pay when you dispose of the subdivided blocks.
The process of subdivision will not result in any capital gains tax liability as long as you continue to own the subdivided blocks. However, you may make a capital gain or capital loss when you sell or give away any of the blocks.
You also divide the costs incurred in acquiring and subdividing the land across the subdivided blocks on a reasonable basis.
You may know that your home is usually exempt from capital gains tax due to the main residence exemption. If you subdivide land surrounding or adjacent to your home, it does not qualify for the exemption if you sell it separately from the home.
Example
Kim bought a house on a 0.2 hectare (or 2,000 square metre) block of land in June 2003 for $350,000. The house was valued at $120,000 and the land at $230,000. When purchasing the property, Kim incurred $12,000 in stamp duty and legal fees. Since the purchase, Kim lived in the house as her main residence.
Kim found the block was too big for her to maintain. In January 2005, she subdivided the land into two blocks. She incurred $10,000 in survey, legal and subdivision application fees and $1,000 to connect water and drainage to the rear block. In March 2005, she sold the rear block for $150,000.
As Kim sold the rear block of land separately, the main residence exemption does not apply to that land. She contacted several local real estate agents who advised her that the values of the front and rear blocks were the same. Therefore, Kim apportioned the original cost of the land ($230,000) equally between the two blocks ($115,000 each). Kim incurred $3,000 legal fees on the sale.
Kim works out her capital gain by adding together costs she incurred that form the cost base of the rear block, and taking this amount away from the sale price, as follows:
Cost of the land $115,000
50% of $12,000 stamp duty and legal fees on purchase $6,000
50% of the $10,000 cost of survey, legal and subdivision application fees $5,000
Cost of connecting water and drainage $1,000
Legal fees on sale $3,000
Total cost base $130,000
The capital gain on the sale of the rear block is calculated as follows:
Sale Price $150,000
Less
Cost base $130,000
Capital gain $20,000
As Kim owned the land for more than 12 months, she can reduce her $20,000 capital gain by 50%, after deducting any capital losses she made from other assets.
When Kim sells her home, being on the front block, she will get the full main residence exemption for it if she uses it solely as her main residence during all of her period she owns it.
Special rules
If the block you are subdividing was purchased or given to you before 20 September 1985, capital gains tax does not generally apply. However, if after that date, you had a building (such as a house) constructed on the land or made major renovations to the property, they may be subject to capital gains tax when sold.
You may make a profit from the subdivision and sale of land which occurred in the ordinary course of your business or which involved a commercial transaction or business operation entered into with the purpose of making a profit. In this case, the profit is ordinary income. If you need advice about this, you should seek help from a registered tax agent.
More info:
The Tax Office has publications and tools available to help you. The new capital gains property exemption tool is available on the Tax Office?s website http://www.ato.gov.au/ and helps you work out what proportion of any capital gain or loss is subject to CGT when you dispose of the property. If you have any questions relating to your circumstances, you can call the Tax Office on 13 28 61.
More information The Tax Office booklet You and your shares (Nat 2632-6.2004) is available at http://www.ato.gov.au/ or, for a paper copy, call 1300 720 092.
Subdividing land – will you have to pay capital gains tax?
If you own a block of land and are thinking of subdividing it into two or more separate blocks, remember this can affect the amount of capital gains tax (CGT) you pay when you dispose of the subdivided blocks.
The process of subdivision will not result in any capital gains tax liability as long as you continue to own the subdivided blocks. However, you may make a capital gain or capital loss when you sell or give away any of the blocks.
You also divide the costs incurred in acquiring and subdividing the land across the subdivided blocks on a reasonable basis.
You may know that your home is usually exempt from capital gains tax due to the main residence exemption. If you subdivide land surrounding or adjacent to your home, it does not qualify for the exemption if you sell it separately from the home.
Example
Kim bought a house on a 0.2 hectare (or 2,000 square metre) block of land in June 2003 for $350,000. The house was valued at $120,000 and the land at $230,000. When purchasing the property, Kim incurred $12,000 in stamp duty and legal fees. Since the purchase, Kim lived in the house as her main residence.
Kim found the block was too big for her to maintain. In January 2005, she subdivided the land into two blocks. She incurred $10,000 in survey, legal and subdivision application fees and $1,000 to connect water and drainage to the rear block. In March 2005, she sold the rear block for $150,000.
As Kim sold the rear block of land separately, the main residence exemption does not apply to that land. She contacted several local real estate agents who advised her that the values of the front and rear blocks were the same. Therefore, Kim apportioned the original cost of the land ($230,000) equally between the two blocks ($115,000 each). Kim incurred $3,000 legal fees on the sale.
Kim works out her capital gain by adding together costs she incurred that form the cost base of the rear block, and taking this amount away from the sale price, as follows:
Cost of the land $115,000
50% of $12,000 stamp duty and legal fees on purchase $6,000
50% of the $10,000 cost of survey, legal and subdivision application fees $5,000
Cost of connecting water and drainage $1,000
Legal fees on sale $3,000
Total cost base $130,000
The capital gain on the sale of the rear block is calculated as follows:
Sale Price $150,000
Less
Cost base $130,000
Capital gain $20,000
As Kim owned the land for more than 12 months, she can reduce her $20,000 capital gain by 50%, after deducting any capital losses she made from other assets.
When Kim sells her home, being on the front block, she will get the full main residence exemption for it if she uses it solely as her main residence during all of her period she owns it.
Special rules
If the block you are subdividing was purchased or given to you before 20 September 1985, capital gains tax does not generally apply. However, if after that date, you had a building (such as a house) constructed on the land or made major renovations to the property, they may be subject to capital gains tax when sold.
You may make a profit from the subdivision and sale of land which occurred in the ordinary course of your business or which involved a commercial transaction or business operation entered into with the purpose of making a profit. In this case, the profit is ordinary income. If you need advice about this, you should seek help from a registered tax agent.
More info:
The Tax Office has publications and tools available to help you. The new capital gains property exemption tool is available on the Tax Office?s website http://www.ato.gov.au/ and helps you work out what proportion of any capital gain or loss is subject to CGT when you dispose of the property. If you have any questions relating to your circumstances, you can call the Tax Office on 13 28 61.
More information The Tax Office booklet You and your shares (Nat 2632-6.2004) is available at http://www.ato.gov.au/ or, for a paper copy, call 1300 720 092.
Friday, July 11, 2008
Victoria planning schemes
Victoria
http://www.dse.vic.gov.au/planningschemes
Maroondah
http://www.maroondah.vic.gov.au/MaroondahPlanningScheme.aspx
http://www.maroondah.vic.gov.au/SubdividingLand.aspx
http://www.dse.vic.gov.au/planningschemes/maroondah/home.html
Process:
When find the land, ring the council to check the zoning to see if it can be subdivided
overlay(special planning controls for a local area) requirement: The minimum lot size for subdivision is 864sqm
Firstly get the block surveyed then lodge the application
The council will then refer the plans to various service authority which include Yarra Valley Water, Melbourne Water, Gas and Electricity suppliers, Telstra, VicRoads and CFA, and they will make comments to the council
If all ok, council will then issue statement of compliance for obtaining separate title
From the surveyor lodge the application to issuance of statement of compliance can take up to 6 months.
Application can be lodged before settlement after signing the contract.
http://www.dse.vic.gov.au/planningschemes
Maroondah
http://www.maroondah.vic.gov.au/MaroondahPlanningScheme.aspx
http://www.maroondah.vic.gov.au/SubdividingLand.aspx
http://www.dse.vic.gov.au/planningschemes/maroondah/home.html
Process:
When find the land, ring the council to check the zoning to see if it can be subdivided
overlay(special planning controls for a local area) requirement: The minimum lot size for subdivision is 864sqm
Firstly get the block surveyed then lodge the application
The council will then refer the plans to various service authority which include Yarra Valley Water, Melbourne Water, Gas and Electricity suppliers, Telstra, VicRoads and CFA, and they will make comments to the council
If all ok, council will then issue statement of compliance for obtaining separate title
From the surveyor lodge the application to issuance of statement of compliance can take up to 6 months.
Application can be lodged before settlement after signing the contract.
Thursday, July 10, 2008
The Tax Office is taking a tougher stance in a bid to keep self-managed funds in line.
Max Newnham July 4, 2008 - 10:55AM
http://smallbusiness.smh.com.au/growing/tax/now-you-can-dob-yourself-in-912280922.html
The Tax Office this week issued its long-awaited report on contraventions in self-managed super funds. The report lists the errors made by the trustees of SMSFs that must be reported by auditors of super funds.
Previously, auditors could use their professional judgement on whether they advised the ATO of infringements of the super regulations.
The contravention report is an indication of the tougher stance the ATO will take in performing its role as the regulator of SMSFs, and should be a warning to trustees to fully discharge their duties.
Auditors are now required to report all breaches of regulations in the first year of operation of SMSFs. The accounting and audit cost of SMSFs will rise with this requirement.
The ATO has said this step has been taken to gain a better understanding of how trustees are discharging their duties. They will use this information to better target educational and enforcement activities for SMSFs.
The contravention report is set out in a series of seven questions that, when answered in the affirmative, require the breach of the regulations to be reported. The questions are:Did the fund fail to meet the definition of a SMSF?
As at the end of the financial year, is the SMSF less than 5 months old?
Has the trustees previously received advice of a contravention that they breached again?
Is there an identified contravention from a previous year that has not been rectified at the time the audit is being conducted?
Did the trustees fail to meet a statutory time period by more than 14 days?
Was the total value of all contraventions greater than 5% of the total value of the fund's assets?
Was the total value of all contraventions greater than $30,000?
A super fund meets the definition of an SMSF if it has no more than four members, all members are trustees or directors of a trustee company, no member is an employee of another member unless they are a relative, and trustees are not paid for performing their duties as trustees.
The instruction guide issued to auditors on how to complete the contravention report lists 20 reportable regulations and sections of the act.
The breaches of the super rules most likely to be reported will be failing to segregate super assets from personal assets; buying assets from members; incorrect payment of benefits to members; and failing to provide documents to an auditor within 14 days.
This last regulation is the one that many trustees breach because of the low priority placed on providing documentation to auditors on time.
The inclusion of value limits on breaches of the regulations is a welcome refinement of the contraventions reporting requirements.
Without the $30,000 total value limit, and the 5% of total asset value limit, every simple administration error would have been required to be reported.
The combination of the audit contravention reporting requirements, and the declaration that must be signed by all new trustees of super funds stating that they understand their responsibilities and duties, should result in a greater level of compliance by trustees of SMSFs.
In the past, the ATO has preferred to have mistakes fixed, rather than classing the fund as a non-complying fund. When this occurs, 46.5% of the super fund's assets are taken as a penalty.
If the contravention reports provide evidence of trustees wilfully breaching the regulations, this penalty ay be imposed more regularly.
Questions can be emailed to max@taxbiz.com.au.
Tax for Small Business, A Survival Guide by Max Newnham, is now available in book stores.
http://smallbusiness.smh.com.au/growing/tax/now-you-can-dob-yourself-in-912280922.html
The Tax Office this week issued its long-awaited report on contraventions in self-managed super funds. The report lists the errors made by the trustees of SMSFs that must be reported by auditors of super funds.
Previously, auditors could use their professional judgement on whether they advised the ATO of infringements of the super regulations.
The contravention report is an indication of the tougher stance the ATO will take in performing its role as the regulator of SMSFs, and should be a warning to trustees to fully discharge their duties.
Auditors are now required to report all breaches of regulations in the first year of operation of SMSFs. The accounting and audit cost of SMSFs will rise with this requirement.
The ATO has said this step has been taken to gain a better understanding of how trustees are discharging their duties. They will use this information to better target educational and enforcement activities for SMSFs.
The contravention report is set out in a series of seven questions that, when answered in the affirmative, require the breach of the regulations to be reported. The questions are:Did the fund fail to meet the definition of a SMSF?
As at the end of the financial year, is the SMSF less than 5 months old?
Has the trustees previously received advice of a contravention that they breached again?
Is there an identified contravention from a previous year that has not been rectified at the time the audit is being conducted?
Did the trustees fail to meet a statutory time period by more than 14 days?
Was the total value of all contraventions greater than 5% of the total value of the fund's assets?
Was the total value of all contraventions greater than $30,000?
A super fund meets the definition of an SMSF if it has no more than four members, all members are trustees or directors of a trustee company, no member is an employee of another member unless they are a relative, and trustees are not paid for performing their duties as trustees.
The instruction guide issued to auditors on how to complete the contravention report lists 20 reportable regulations and sections of the act.
The breaches of the super rules most likely to be reported will be failing to segregate super assets from personal assets; buying assets from members; incorrect payment of benefits to members; and failing to provide documents to an auditor within 14 days.
This last regulation is the one that many trustees breach because of the low priority placed on providing documentation to auditors on time.
The inclusion of value limits on breaches of the regulations is a welcome refinement of the contraventions reporting requirements.
Without the $30,000 total value limit, and the 5% of total asset value limit, every simple administration error would have been required to be reported.
The combination of the audit contravention reporting requirements, and the declaration that must be signed by all new trustees of super funds stating that they understand their responsibilities and duties, should result in a greater level of compliance by trustees of SMSFs.
In the past, the ATO has preferred to have mistakes fixed, rather than classing the fund as a non-complying fund. When this occurs, 46.5% of the super fund's assets are taken as a penalty.
If the contravention reports provide evidence of trustees wilfully breaching the regulations, this penalty ay be imposed more regularly.
Questions can be emailed to max@taxbiz.com.au.
Tax for Small Business, A Survival Guide by Max Newnham, is now available in book stores.
Tuesday, July 8, 2008
Active Property Network monthly meeting notes
8-Jul-08
Investor vs Trader
Investor:
Investor vs Trader
Investor:
* 12 months CGT exemption applies on contract date. NOT settlement date
*Capital gain cannot offset other form of income
*PPOR exemption
*Capital Gain = Sale price
- selling cost
- Purchase price & purchasing cost
- Initial Repairs and other capital expenses
+ Capital allowances & building write off claimed
Property Trader-
*Tax applies on settlement date
*Property viewed as trading stock; It can be valued at cost or at market value
*Costs directly related to property get added to stock value
*Holding costs such as interest rate, rates can be claimed as deduction in the year incurred
*No PPoR exemption if deemed a trader
Change of intention is a trigger for events. ATO uses the intention on the loan document
When claiming property expenses as home office expenses, generally
< 25% claim – home office
> 25% claim – place of business
Discretionary Trust
Only need to name one primary beneficiary. Income can still be distributed to other family member.
Don’t name the whole family as banks sometimes require every beneficiary as guarantor
It does not matter whether the trustee is company or individual. Ideally the person named as director should be different person from the trustee.
To get 30% tax rate, the company needs to be named as beneficiary. When a company is named as beneficiary, it’s called a bucket company
GST
GST registration is required for entities trading as an enterprise, or where the turnover (excluding capital asset sales or input tax sales) > 75k
GST applies to
*Commercial properties
*Land
*“New” residential properties – If you build a property, then rent it out for 5 years before you sell, then it’s no longer a “new” property. GST charge is therfore not required in this case. However, you do have pay back GST claimed when you built it. It’s called an “adjustment”.
*“Substantially renovated” residential properties – to be “Substantially renovated”, every room in the property needs to be renovated
You cannot claim GST on expenses related to non GST taxable income.
Marginal Scheme
Marginal scheme applies if
* You bought a property from someone not registered for GST
* You bought a property from someone who applied marginal scheme
To apply marginal scheme, both parties must agree to it.
Just because you are not registered fro GST, it does not mean you don’t have to pay for GST.
GST on Marginal scheme = (Sale Price – Purchase price)/11
Ignore the purchase costs
e.g.,
Purchase Price 250k, no GST included
Stamp duty 12k, no GST included
Building cost 330k, 30k GST claimed
Sale Price 720k
In this case, GST payable on sale under marginal scheme is (720-250)/11 = 42.73k
If not under Marginal scheme, GST Payable would be 720/11 = 65.45k
Finance
What banks look at:
*Repayment capacity
*Employment history: same industry (usually 2yrs)
*ABN: usually 2 YEARS
*Credit history: any arrear or default, reasons
*Deposit: Savings/FHO grants
*Residential history: usually 2 years in the same address
*Property Type: Standard residential, warehouse conversion, vacant lands are commonly accepted; Rural residence may affect maximum LVR
To be a successful investor, you need to work on lasting relationship.
Every time an agent rings, it’s an opportunity to find out about the market. Ask “Can you give me past sales?”
Tell them “Thanks for ringing me. It’s great talking to you!”
Treat them like human beings, and they will treat you the same.
Accountability Buddy
Be in contact once a week, tell you accountability buddy
*What you have done
*What you haven’t done
*What I found easy
*What I found difficult
Friday, July 4, 2008
Due Diligence - Webinar 4 Jul 08
Current Market:
Australia experiencing housing shortage
New dwelling approval falls by 6.25%
Population growing at fastest rate at 18years
Affordability and gloom is keeping the prices down
ANZ predicts price and rent explosion
Affordability Fear is driving the market at the moment. Price will not rise untill
1. Government intervention to free up money to buy,e.g access to super, government provide low cost housing
2. Interest rate fall; banks collectively feel int unlikely to all unless US mkt change and inflation in control. it takes 2 years for the situation to change
3. Income increase
Mortgage recession declared. New morgages experienced 2nd consecutive fall.
There will be a boom, but when? Short-term it’s going to fall. Better to get in when the market has just got off the bottom and miss a little bit of the initial rise.
The trend is not going to change rapidly. At the moment it is volatile.
Now:
invest in areas where there is a shortage; focus on shortage of supply relative to specific demand
Work hard on balance sheet so we are ready when the market changes
Be very careful about speculating in current market
What is the hot topic among graduates? JV
JV with friends and family members need legal document to protect all in case of something goes wrong
There is more at stake than money when JV with family.
Open discussion and decision made for if something goes wrong
What the expectations are for every member of the joint venture
What if extra funds are required as the project progresses?
Don’t rely on someone else in the group doing due diligence. Do your own DD on the deal and the people in the JV
Focus no exit strategy on worst case.
Due Diligence:
Due Diligence is to make sure you know as much as you can
It’s what you don’t know costs you money in real estate. Once you know it, you can take measures to mitigate it.
It’s the things that are left to chance sink the project.
The more things left to chance, the more chance things will go wrong.
Key areas of homework
numbers: real estate is a medium for making money; the numbers have to stack up
the physical property: most people who sell hide the flaws; It’s your job to find them
tenant
offer
finance and legal
When doing due diligence, make use of the templates on the website.
2. When doing numbers, take into account
· realistic time required for sale
· Time frames and holding costs
Get a definitive time frame, deadline provided in a document
2 Physical property:
a. land size ; boundaries are different; measure yourself
b. turn on the over, lights, tap, heating; see if the water is dirty ( the pipe could be corroded)
c. Cracking bricks, weather board
d. Evidence of termite, woodwork damage; look for odd new carpet
e. Talk to neighbour. What is the neighbourhood like and how is it going? (don’t ask the neighbour directly about the owner as people are protiective of their neighbours)
f. changes in the building without permit
a. Any extension, pergola, carport, ask for building permit. Section 32 in Victoria should provide info for permit; question anything added; ring the council see if they have a record
g. Age of the building.
a. old copper piping for plumbing are expensive
b. fire aid between apartments is a problem when subdividing
h. Roads: Don’t take what REA tells about roads going to be built. Check it out yourself.
3. Get a copy of the title for the property. It tells you the dimension, the boundary, and easement, covenant, caveats.
Easement is what you own but you don’t have authority over, sewer line, water line, power, gas, overhead easement say power line over the block
Covenant: an undertaking put in place to restrict the use of the property. It might restrict what you do with
Caveat: indicate there is debt or other interest on the property. Ask the agent to provide detail to ensure it’s not something to prevent you from taking possession
4. Existing lease: find out whether there was a bond taken, the rent payment history and whether rent was artificially inflated. Get a rent valuation by phoning a rental manager.
Investigate the rental management fee; It varies from area to area. In the country it could be a lot dearer.
Find out about vacancy rate in the area
5.body corp.: special levy, body corp. fee; order for maintenance (order by council for external maintenance)
6.finance options, exit fee, LMI, etc
Pre-purchase inquiries sound a lot. Do it very thoroughly once as exercise.
Australia experiencing housing shortage
New dwelling approval falls by 6.25%
Population growing at fastest rate at 18years
Affordability and gloom is keeping the prices down
ANZ predicts price and rent explosion
Affordability Fear is driving the market at the moment. Price will not rise untill
1. Government intervention to free up money to buy,e.g access to super, government provide low cost housing
2. Interest rate fall; banks collectively feel int unlikely to all unless US mkt change and inflation in control. it takes 2 years for the situation to change
3. Income increase
Mortgage recession declared. New morgages experienced 2nd consecutive fall.
There will be a boom, but when? Short-term it’s going to fall. Better to get in when the market has just got off the bottom and miss a little bit of the initial rise.
The trend is not going to change rapidly. At the moment it is volatile.
Now:
invest in areas where there is a shortage; focus on shortage of supply relative to specific demand
Work hard on balance sheet so we are ready when the market changes
Be very careful about speculating in current market
What is the hot topic among graduates? JV
JV with friends and family members need legal document to protect all in case of something goes wrong
There is more at stake than money when JV with family.
Open discussion and decision made for if something goes wrong
What the expectations are for every member of the joint venture
What if extra funds are required as the project progresses?
Don’t rely on someone else in the group doing due diligence. Do your own DD on the deal and the people in the JV
Focus no exit strategy on worst case.
Due Diligence:
Due Diligence is to make sure you know as much as you can
It’s what you don’t know costs you money in real estate. Once you know it, you can take measures to mitigate it.
It’s the things that are left to chance sink the project.
The more things left to chance, the more chance things will go wrong.
Key areas of homework
numbers: real estate is a medium for making money; the numbers have to stack up
the physical property: most people who sell hide the flaws; It’s your job to find them
tenant
offer
finance and legal
When doing due diligence, make use of the templates on the website.
2. When doing numbers, take into account
· realistic time required for sale
· Time frames and holding costs
Get a definitive time frame, deadline provided in a document
2 Physical property:
a. land size ; boundaries are different; measure yourself
b. turn on the over, lights, tap, heating; see if the water is dirty ( the pipe could be corroded)
c. Cracking bricks, weather board
d. Evidence of termite, woodwork damage; look for odd new carpet
e. Talk to neighbour. What is the neighbourhood like and how is it going? (don’t ask the neighbour directly about the owner as people are protiective of their neighbours)
f. changes in the building without permit
a. Any extension, pergola, carport, ask for building permit. Section 32 in Victoria should provide info for permit; question anything added; ring the council see if they have a record
g. Age of the building.
a. old copper piping for plumbing are expensive
b. fire aid between apartments is a problem when subdividing
h. Roads: Don’t take what REA tells about roads going to be built. Check it out yourself.
3. Get a copy of the title for the property. It tells you the dimension, the boundary, and easement, covenant, caveats.
Easement is what you own but you don’t have authority over, sewer line, water line, power, gas, overhead easement say power line over the block
Covenant: an undertaking put in place to restrict the use of the property. It might restrict what you do with
Caveat: indicate there is debt or other interest on the property. Ask the agent to provide detail to ensure it’s not something to prevent you from taking possession
4. Existing lease: find out whether there was a bond taken, the rent payment history and whether rent was artificially inflated. Get a rent valuation by phoning a rental manager.
Investigate the rental management fee; It varies from area to area. In the country it could be a lot dearer.
Find out about vacancy rate in the area
5.body corp.: special levy, body corp. fee; order for maintenance (order by council for external maintenance)
6.finance options, exit fee, LMI, etc
Pre-purchase inquiries sound a lot. Do it very thoroughly once as exercise.
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