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Read the transcript below:
In a conversation with Real Estate Talk’s Kevin Turner, Sam answered listeners’ questions about investing in property:
Investing in Blacktown, Sydney:
Turner: What’s the best option for him [a listener] – a unit or a house in the price range of $300,000 to $350,000 in Blacktown, Sydney? Is it a good property investment?
Sam: Oh, absolutely. I think Blacktown – the Local Government Area – is certainly on the precipice of a tipping point at the moment. There’s so much activity happening in that area. It’s got all the great key drivers, that mean the marketplace is going to perform in the short, medium and long term.
In fact, employment is improving in the area and there are massive companies relocating to that LGA. You’re even seeing such enterprises as new AFL football teams emerging to support the huge population growth in that area.
It’s one of the fastest growing population LGAs in Australia today so there’s so many reasons to purchase in Blacktown. The yields are phenomenal. You can pull together a property in a capital city sitting around at a 6.5% return.
Now bear in mind, Blacktown – I think the tipping point might have been the road system that’s really been connected to the CBD. On a good day you can get to town within 25 minutes and that’s just unheard of!
Blacktown is experiencing gentrification, meaning the local community is starting to invest in that area, they’re putting their own dollars and cents into making the place much better. There’s newer precincts opening up.
A house or a unit, I don’t think you can go too far wrong on either camp. Obviously a house is going to have more land – a component which I think in the end will probably serve you well. If you’re going to find a house maybe look at the granny flat legislation – choose something that’s going to conform to that because you just might be able to add value later by putting a granny flat in the back yard.
Turner: Is that a big thing in New South Wales? It really hasn’t taken off in any other market in Australia – is it just some legislation in New South Wales that favors it?
Sam: It conforms under the State Planning Act, so it comes under the affordable housing scheme so you can actually sort of override the council area to get the approval so it’s a complying development in New South Wales.
Look. It won’t be around forever and I think the important thing to remember is that state governments implement ideas and they take away ideas quite often as well. I think we’ll see granny flat legislation around for the next 4 or 5 years and then of course they’ll probably remove it once they’ve met a quota of how many granny flats are around the city and the state. Of course that’s going to mean that a house with a granny flat may just be worth a little bit more because it is complying to the scheme.
Turner: That return you mentioned earlier – 6.5% – is that just a single dwelling, and can I assume that if I get a property which can have a granny flat that 6% is actually going to go up?
Sam: Yes, absolutely. So I think with a starting yield in the LGA of Blacktown – you know either a unit or a house – the yields are really good. You’re purchasing it off the bat – you’re getting around 6, 6.5%.
Now if you’re choosing a property where you can add some value to that, let’s say with a granny flat, you’re going to have a positive cash flow property in Sydney that’s going to be returning around 9% or 10%. Hey who doesn’t like those numbers?
Investing in NRAS
Turner: Is it wise to invest in NRAS properties for positive cash flow? Is there still some potential for capital growth in these properties – what are the considerations to be mindful of when investing in NRAS property?
Sam: NRAS – the scheme obviously put together to create affordable housing. Look, I’ve got some mixed opinions on them. I think if you can find a great marketplace where the area is going to do well anyway, NRAS could be a good option, but for the most part, I actually think it is luring investors into areas which they wouldn’t otherwise invest in based on the idea of tax incentives.
You don’t buy properties based on tax incentives, you buy a property to make a profit. One of the key problems that I encounter with NRAS is it is very hard to fund and quite often many major banks actually don’t support the NRAS scheme.
Now, for example, off the top of my head, the National Australia Bank and the Commonwealth Bank of Australia don’t actually lend money on properties under the NRAS scheme, so that you’re diminished immediately. From the get-go you have diminished lending ability.
Now think about selling that property if you own it. Of course the next person’s going to have the same struggle. There’s only a certain few lenders in the market that actually support the concept of NRAS.
Taking that a step further, let’s say you wanted to buy on a 90% LVR, so you only wanted to put 10% of your equity into a property with NRAS. Only one mortgage insurer in Australia supports NRAS, so immediately you’ve created a situation where again the property’s not very liquid – you can’t sell it – it doesn’t appeal to the mainstream funding community out there at large.
The other problem with NRAS – quite often valuers will actually not support the value of the property. They’ll use the NRAS scheme as a way of actually reducing the price of their interpretation of the value of the property, so it becomes very messy. I think high density developments are a real no-go zone. I think you’ll find that most are very hard to fund at the point of purchase.
Houses with NRAS – I think if they’re in the right area they’re a lot easier. The funders do prefer them – you do open yourself up to more funders in the marketplace.
Turner: Is that because of the land component?
Sam: They just look at it as quite often a less risky kind of asset. If you can imagine a whole building with NRAS under the affordable housing scheme – I think the banks are sort of looking at that and going hang on a minute, for them to actually re-sell that property if the purchaser absconded from paying their loan – they gauge the risk of it, and so for them, a lot of the banks just won’t lend on it and won’t support it for that reason.
The philosophy behind it is great – who wouldn’t want all of those great tax deductions and incentives to purchase the property, but the real problem with it is actually the system itself. It hasn’t actually created a smooth way of purchasing.
I think a lot of people need to understand that perhaps they are working with a group or property company that ‘s talking up NRAS. Just be careful you’re not cross-securitizing your house with the NRAS.
Essentially when it comes to lending, banks are more likely to lend you the money if they can actually put your own home and cross securitise that, create a security out of that with the property that you’re proposing to buy through NRAS.
What might happen is that the bank will have a policy around an NRAS property that they’ll led out 70% of the property’s value, but they immediately have that extra 30% coming out of your own property and so what it actually means is that you may not realise that you’re giving a lot of your equity away in your own principal place of residence and that’s not a smart thing to do.
You don’t want to cross your investments with your PPOR – you want to keep your own home separate.
So just be careful. You want a standalone loan with NRAS properties and of course they’re kind of a little bit more difficult to get over the line. You’ve just got to go through the process, and anyone going into an NRAS deal, just go into it with an open mind that you’re going to have to work through valuation issues, funding issues and other issues to get the result.
The main consideration is what consortium is the manager of the NRAS, and if they’re bank approved consortium so one question you need to ask is – if you’re an investor looking at an NRAS scheme – what consortium manages the property and then you’ve got to speak to your broker, your home loan broker and say well XYZ Consortium manages the property, what lenders are they panelled for?
There’s a lot of areas that can go wrong to get the property over the line. Remember – if it’s hard for you to buy, image [what could happen] when you’re trying to sell.
To find out more about these and many more topics, grab a friend or family member and come along to our next complimentary Property Investor Night. At our fun filled events you’ll learn how to significantly reduce your tax, pay off your home more quickly than you may have believed possible, where the property hotspots are and much, much more. Hope to see you soon!