Pre-Purchase Reports puts Buyers in Drivers Seat
…. information on a building worth thousands in negotiation.
6 April 2005

Rising interest rates and continued high prices for housing has been the catalyst for many more home buyers choosing to undertake pre-purchase housing inspections as part of their negotiation process, Archicentre, the building advisory service of the Royal Australian Institute of Architects said today.
State Manager of Archicentre Queensland, Mr Ron Tanton said: "Having a professional property report which details the faults in a home, the cost of repairs and the potential for renovation is a powerful negotiation weapon and can be used by home buyers having the price reduced on properties to cover repair costs."
"With interest rates on the rise and the cost of trades persons and materials blowing out, the margin for sloppy due diligence on property purchases is diminishing rapidly."
The Archicentre Pre-Purchase report covers over 300 points on any home with architects carrying out inspections in the hard to see areas such as under floor and roof areas where often the most expensive repair costs for foundations, termites, plumbing, roofing repairs and wiring lurk for an unsuspecting buyer.
"A quick make over of a property may see new tiles in the bathroom and kitchen, but a look behind the scenes often reveals rotten timbers, sub-standard plumbing and wiring which can run into thousands of dollars to replace or repair, and in many cases requires the make over to be pulled out and re-done correctly," Mr Tanton said.
"Illegal building is a major investment hazard as people could lose thousands of dollars buying poorly renovated buildings or end up with serious legal settlement costs."
Archicentre national statistics for pre-purchase home inspections show that illegal building is rife in Australia with almost 24% of homes inspected revealing some form of illegal activity.

National Statistics on Illegal Building from Archicentre pre-purchase home inspections:

Mr Tanton said that pre-purchase reports are extremely prudent in the inner city areas of capital cities where housing stock is older with historic building practices and usually the property has inherited the traditional problems of dampness, cracking, termites, poor drainage or illegal building over the longer period of time.
"It is also the type of property which can attract substantial prices because of its location and proximity to the city," he said.
Mr Tanton said that many home buyers carrying out pre-purchase inspections are submitting the results with cost estimations as part of the offer for properties and others are making offers subject to a satisfactory building report placing the buyer in the drivers' seat.

www.archicentre.com.au

Media Enquiries:
Ron Tanton State Manager Archicentre Queensland (07) 3846 4957 Mobile: 0421 598 233
Ron Smith Corporate Media Communications (03) 9818 5700

What is your insurance worth?
What you need ⁄ What to look out for

Australians often spend all their time worrying about securing the best mortgage when buying their first home but don't pay too much attention to what insurance they really need. Louise Goldsbury investigates.

When purchasing property and seeking out the best deal on a mortgage, many buyers overlook insurance. But insurance – whether it's home and contents, life or disability and unemployment cover – is an essential part of buying and keeping your home.

Lisa Montgomery, National Manager of Consumer Advocacy at Resi Mortgage Corporation, cannot emphasise enough the need to be adequately insured. Having worked in the industry for 22 years, however, she understands it can be difficult to add insurance to the long 1st of responsibilities faced when purchasing property.

“People are so bombarded with information when they are getting their mortgage that when the time comes to consider insurance for the house and for themselves; it gets to the point of overload. Because you don't need to provide an immediate response to these things, you tend to let them go. But house and contents insurance, life, disability and unemployment insurance are just as important as any other facet of getting your loan,” Montgomery says.

According to Montgomery, the other problem is that people are often unsure about the amount for which they should insure their property. It's quite common for purchasers of new property to insure for the amount of the purchase price, which obviously includes the land value, but this is not an accurate method. The best indication of the value of the improvements to your land will be found on your property valuation (usually obtained when you apply for a loan). The valuer almost always gives an indication of insurance value and your lender can provide you with this figure.
“In most cases, your solicitor will also require a copy of your building insurance policy or 'certificate of currency' from the insurer at time of settlement. This will need to be correctly endorsed with your lender's details.

This requirement is extremely important, particularly in the event that you have a total loss and your property is destroyed – it gives peace of mind to not only you, but to your lender.”

A common mistake is choosing insurance according to the price, rather than the features and benefits. “It's important to read the fine print on your policy, as not all companies are the same,” says Montgomery. You could be paying top dollar every year and get a nasty surprise when you come to make a claim. For example, during the aftermath of the Newcastle earthquake in the late 80s, a high percentage of people were substantially underinsured. Many of the homes around the epicentre were damaged beyond repair and many owners had not insured their properties enough to cover demolition and rebuilding, leaving them in a difficult position. Often we prepare for minor setbacks, such as broken windows or storm damage; rarely do we consider the chance of a total loss.”

Contents insurance is also important, but too often dismissed. Most contents policies will provide replacement of possessions in the event of a claim, but it is important to check if there are limits placed on certain items, such as mobile phones, cameras and other expensive gadgets. It depends on the level of insurance cover of each policy as to whether these items are covered if stolen or destroyed outside the home. Of course, this type of “blue ribbon” coverage may come at a premium.

Other types of insurance that are even more commonly overlooked include life, disability and unemployment cover. When taking out a mortgage there are many costs that mount up, so when it comes to making a choice about protecting our family, or ourselves, we often consider it unnecessary and or expensive. But with the average mortgage increasing substantially over the last few years, this type of insurance is as important as any other aspect of the loan process. It is advisable for all new home owners to re-assess their personal insurance cover to ensure peace of mind should any unforeseen event occur. As Montgomery has observed, single people without dependants do not usually consider life cover because they are not overly concerned with what happens if they pass away. But, she warns, it they become unemployed or disabled, servicing their debt could become a serious issue.

Montgomery advises people to research several policies from different companies to ensure they get the most appropriate insurance for their needs and for the best, but not necessarily cheapest, price. “When considering the cost of mortgage protection cover, life insurance is often the least expensive, mainly because there's more chance of you becoming unemployed or disabled. But your cover shouldn't be chosen on price. Choose a cover that will complement your existing situation, as well as other benefits you may be entitled to under your current superannuation policy. Don't pay good money for something that won't be beneficial in the long run – do your research.

For couples, especially those with children, Montgomery strongly advocates mortgage protection cover and external life cover. 'If you have an existing life policy, it may cover paying back the mortgage, but not the ongoing financial support needed by your family, so covering the mortgage and your family's future lifestyle is important.”

Keep in mind that not all lenders provide mortgage protection cover for borrowers, in which case you should do your homework and buy independent cover from an accredited consultant. Salary continuance is one example of cover that has gained in popularity over the past decade. As Montgomery explains, “This type of cover usually pays the individual a percentage of their salary if they become sick or disabled. The cost varies depending on the conditions you choose for your policy. There are several levels of cover and it's not uncommon for some larger employers to organise a bulk deal for staff to lower the cost.”

Source: Your Mortgage Magazine – February 2005

Risk management for landlords

You've bought your investment property and now you think it is time to sit back, relax and let the tenants pay it off. Wrong! You need to be diligent to ensure your investment is being paid off every month, but also that it's being looked after. Tern Scheer explains.

Avoiding the traps
Buying a rental property remains a popular investment option and is an ideal way to diversify your portfolio, offset tax and generate an additional income stream. However, as with any investment, it also carries risk.

It's a common perception among landlords that provided you select the right tenant, your investment will be as safe as houses. Research by Tern Scheer Insurance Brokers, however, shows that for 42 per cent of insurance claims paid to landlords for loss of rent, the tenant did not qualify for a refund of any portion of their bond. This means that in almost half of all instances, the expenses incurred by landlords exceeded the bond that their tenants had paid.

It's a business transaction
Too many investors get caught up in the excitement of purchasing a home and make decisions based on an emotional attachment to the property rather than its capacity to generate income.
First and foremost you need to recognise that buying a rental property is a business transaction and any decisions you make about the investment should be considered from this perspective. This means doing your homework on the property – an essential part of any investment decision – to ensure that you go in with your eyes open.

Consider location
Many people think that a larger home will generate higher rental income, but 25 per cent of people now live on their own, which means a three-bedroom home may not attract the most lucrative returns.

In many cases, a one or two bedroom unit in a good location could yield better financial results. Buying a smaller home in a suburb closer to the CBD may require a larger initial outlay, but is likely to generate greater long- term benefit.

The well-known adage “location, location, location” is still an essential home-buying mantra and should be a key consideration when investing in property. Consider the home's proximity to public transport, schools, amenities and shopping centres and find out how long it takes to drive or commute to the CBD. It may also be worthwhile investigating school zoning and the availability of childcare facilities.

Research occupancy rates and rental demand in the area where you want to buy. This will affect the value of your investment and give you an idea of the tenants you might attract.

Do your homework
It can be dangerous for investors to enter into a contract without checking previous rental records if the property has been rented in the past. A common assumption is that because the home has been rented previously there will be no problems, but this is not always the case. It is essential to access information about the payment history of the existing tenant as this will highlight any arrears that need to be addressed and whether there has been any previous damage to the home.

In addition, it is important to check the title of the property and who is registered on it before signing a contract. The type of title will affect the level of insurance you will need to purchase and your rights and responsibilities if you decide to sell the property. This is particularly important if the home is part of a group of properties such as an apartment or unit, because it may come under a community or strata title.

Market fluctuations
Be aware that the rental market fluctuates throughout the year, peaking between November and February and dropping in June.
A trap some investors fall into is having the property's potential rental earnings appraised during peak periods, only to find that settlement falls later in the year when prices are lower. For example, if you have your property appraised in February when demand for rental homes is high and the settlement date falls closer to June, you may not be able to achieve the rental income you anticipated.

When applying for finance to purchase your property, you will need to provide your lending institution with a statement of estimated rental income based on an appraisal conducted by a qualified property manager.

Appoint a property manager
It can be a challenge to find the time to service maintenance requirements, address potential liabilities, select appropriate tenants and conduct regular property inspections.

However, if you don't, you maybe neglecting your essential duty of care responsibilities, leaving yourself wide open to the risk of liability suits.

One way to minimise these risks is to appoint a property manager. A property manager will act as the point of contact between you (the landlord) and the tenant. They will be responsible for all of the day-to day dealings involving your property in return for a commission of rental income. The property manager takes responsibility for alerting you to any maintenance requirements and tenant issues, and conducts regular property inspections.

Qualified property managers have access to a nation-wide tenant default database, which can be a useful screening tool in alerting you of any unsuitable applicants.

Choose the right insurance
Insurance is an expense that some landlords try to avoid in order to reduce costs. If you purchase a cheaper policy that does not provide adequate cover, inadvertently choose the wrong type of policy, or don't have any insurance at all, you can expose yourself to the risk of legal liability suits. Part of your legal duty of care as a landlord is purchasing adequate insurance, particularly for a strata title property. Legal liability suits brought by tenants against landlords have increased by 300 per cent over the past two years. These usually relate to a tenant or their guest injuring themselves on the property. Legal liability claims, loss of rental income and damage to rental properties (either malicious or accidental) are all risks that you can insure against. Insurance is vital to guarantee regular rental payments, regardless of what happens to the property.

While in many instances you can use the services of a real estate agent or property manager to oversee the selection of a tenant, it is your responsibility as the landlord to ensure you have a suitable insurance policy in place. Even the most fastidious tenant is able to damage a property – whether accidental or otherwise – which can prove extremely costly, both in repairs and through the loss of rental income.

By seeking a specialised form of insurance cover, you can protect yourself from the risks associated with owning a rental property. This is particularly important in light of research from Tern Scheer Insurance Brokers, which shows that up to one in six investment properties in some areas will suffer either damage by tenants or loss of rental income.

When choosing an insurance policy, you should give careful consideration to ensure it contains clauses specific to your needs. The most common risks for a landlord are malicious damage by a tenant, theft, accidental damage, legal liability and loss of rental income. In line with this, you should choose an insurance policy that has been specifically designed to address these needs.

Therefore, you need an insurance policy that considers the risks specific to renting a property. This will provide financial peace of mind and safeguard your investment, ensuring you continue to receive a steady flow of rental income.

Source: Your Mortgage Magazine – February 2005

Property investments and tax
If you own or are thinking of buying investment property there are some tax implications you need to know about.

The ATO has prepared this list for API.

AUSTRALIAN BUSINESS NUMBER (ABN) AND WITHHOLDING TAX
You don't need an ABN if you own a residential property but, if you buy any goods or services for the property and you can't see an ABN on the invoice, you must withhold 48.5 per cent of the payment for tax if it's over $50.

So, for example, if a plumber invoices you $250 for repairs to the property and there is no ABN on the invoice, you pay the plumber $129 and send $121 to the Tax Office.

You should get an ABN if you own a commercial property. If you can't quote an ABN then a business renting the property has to withhold 48.5 per cent of the rent.

GST
Generally QST only affects commercial properties. If you're registered for GST, you will include GST in the rent you charge and are entitled to claim GST credits for any rental expenses you have paid.

Assuming your only enterprise is the commercial property, you will need to be registered for GST if your gross rent, excluding GST, is more than $50,000 in a year. If your rent is less than $50,000 you can voluntarily register for CST.

If you're registered for GST and you buy something for the commercial property, you will need to have a tax invoice to be able to claim the GST credits. Similarly, you will need to give your business tenant a tax invoice so that they can claim the GST in the rent.

If you rent to an associate who is registered for GST and the rent is wholly business, the rent will include GST and you will be able to claim GST credits. However, if your associate is not registered for GST or the rent is partly for private purposes, then the GST is based on the market value. If, for example, you rent office space to your son who is not registered for GST and he pays $110 per week while the market value rent is $220 per week, you will account for $20 GST and be entitled to claim any GST credits.

INCOME AND EXPENSES
As well as rent, income from a rental property includes: bond money if you become entitled to keep it; some insurance payouts, such as compensation for lost rent; and profit generated from the use of the rental property.

Expenses include the costs of maintaining the property as well as body corporate fees and charges. The amount you can claim may be limited if you let the property, or part of the property at less than normal commercial rates. If, for example, you allow a family member to use it for free then you won't be able to claim any deductions for the time they use it.

You can't claim levies if they are paid to a special purpose fund to pay for particular capital expenditure. Nor can you claim special contributions for major capital expenses to be paid out of the general- purpose sinking fund. You may, however, be able to claim a capital works deduction for the cost of capital improvements or capital repairs once the cost has been charged to the appropriate fund.

Capital works deductions can be claimed over a number of years and relate to certain kinds of construction expenditure and the amount you can claim depends on the type of construction and the date construction commenced.

Other expenses that can be claimed over a number of years include borrowing expenses and amounts for decline in value of depreciating assets.

When you own the property with someone else, rental income and expenses must be attributed to each co according to their legal interest in the property, regardless of any agreement to the contrary.

CAPITAL GAINS
Some expenses you can't claim as deductions, such as the costs of buying or selling the property, may form part of the cost base of the property for capital gains tax purposes.

Depending on when you bought your rental property, capital gains tax may apply when you sell it. If the property is co owned, each co-owner may have a capital gains tax liability according to their legal interest in the property.

KEEPING RECORDS
You need to keep records of both income and expenses relating to your rental property.

For capital gains tax purposes, you must start keeping records if you purchase or inherit property, receive property as part of a divorce settlement or as a gift, or make improvements to property.

Records relating to your ownership and all the costs of acquiring and disposing of property must be kept for five years from the date you dispose of it.

Records must set out in English the date you acquired the asset, the date you disposed of the asset and anything received in exchange, the parties involved and any amount that would form part of the cost base of the asset.

MORE INFORMATION
The Tax Office has a number of publications that can help you, including Rental Properties 2003-04 and the Guide to Capital Gains Tax which are available at www.ato.gov.au or by calling the Tax Office on1300720092.

© Australian Property Investor magazine – www.apimagazine.com.au. Reprinted with permission.

Housing slow until next year – www.quartile.com.au 08.04.05
The slower pace in the housing sector is set to continue until mid next year, when underlying demand and increased immigration will again give the industry a boost, according to the HIA National Outlook for the March quarter 2005.

Releasing the publication this week, HIA's Senior Economist, Mr. Harley Dale, said that while there was no housing crash looming, the industry was in for a weaker couple of years.

“All indications continue to point to a relatively moderate correction for the housing industry, despite another interest rate rise which certainly wasn't helpful or necessary for the industry,” Mr. Dale said, adding that anecdotal reports from Australia's volume home builders show that there was never any chance of the housing sector gaining a second wind.

“In March we saw an interest rate rise, a weak update on the economy that was overplayed, and higher oil prices feeding through to the pump. These factors conspired to send confidence nose-diving in March and will remove a further chunk of buyer urgency from the housing market,” Mr. Dale said.

“Nevertheless the fundamentals of this economy remain sound…after surging by nearly 50 per cent in three years we expect to see the number of housing starts fall by 12 per cent in 2004⁄05 and by a further 4 per cent in 2005⁄06, to a level of around 145,600,” Mr. Dale added.

However, this moderate and manageable correction to new housing construction, together with strong underlying demand and high overseas migration, indicates that housing starts will begin growing again from 2006, increasing to a level of over 162,000 by 2007⁄08, according to Mr. Dale.

Renovation activity looks to have peaked and is forecast to fall by around 6 per cent over 2004⁄05 – 2006⁄07.

"An easing of around 6 per cent in renovations activity over the next couple of years still leaves you with a very healthy level of activity of over $20 billion," Mr. Dale said, adding that renovations now make up over 40 per cent of the total housing activity – a figure that is likely to increase in the near future.

The data compiled for the HIA National Outlook is sourced each quarter from the Australian Bureau of Statistics, the Department of Employment and Workplace Relations, and HIA's own datasets on home sales, affordability, and trade prices and availability.

PLAN AUSTRALIA CODE OF ETHICS Last Updated: 30-01-2003
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PROFESSIONAL LENDERS ASSOCIATION NETWORK OF AUSTRALIA PTY LTD
CODE OF ETHICS
We the Members of the Professional Lenders Association Network of Australia Pty Ltd (‘PLAN Australia’) set out this Code of Ethics outlining the minimum ethical standards to be maintained. By adhering to the Code of Ethics we believe that we will:
• Safeguard the reputation and standing of PLAN Australia and its Members;
• Provide Consumers with a high level of confidence and trust in the mortgage broking industry, and thereby;
• Raise the profile and business of all Australian mortgage brokers.
 To act with Honesty and Integrity at all times
This will extend to representations made in advertising, commissions received, all communications, advice provided and customer applications. This will ensure that the best interests of both the customer and financial institution are always upheld.
 To comply with all Laws and Regulations relating to the Mortgage Industry
To maintain a current understanding of and adherence to all laws and regulations as they pertain to the finance industry.
 Conflicts of Interest
In each professional assignment undertaken, a Member must both be and be seen to be free of any interest which is incompatible with the best interests of the customer. This will extend to both product advice and commissions received. Substantiation of any recommendation will be freely provided to the customer.
 To maintain Confidentiality in all dealings
Through adherence to the above, professional conduct will be maintained at all times.

Professional Lenders Association Network of Australia Pty Ltd (ACN 086 490 833) trading as PLAN Australia
488 Bourke Street Melbourne 3000 Ph (03) 8622 2222 Fax 1300 78 78 15