Hello,

Welcome to the Investment House property newsletter for February 2008.

Subscribers to this newsletter have told us that they enjoy real-life case studies from fellow investors, so we have another one for you this month. We also report on the Brisbane property outlook and explain a "simple" investor finance strategy that we know many investors aren't using!

In this edition:

• Real Investor Case Study: James and Ping Share Winning Strategy with Family
• Market Snapshot: Brisbane property in 2007
• Finance Strategy: How Selling an Investment Property can Pay Your Home Loan Out
• Investment House Team Training

If you have any questions regarding the strategies and ideas in this newsletter, please feel free to call our team on (+61 7) 3369 0111 or contact us online.

I also wanted to let you know that the "Buy land and build" strategy that I outlined in our last newsletter is still working like gangbusters. For many clients, this is the most viable strategy for gaining a foothold in the current market.

Enjoy the newsletter!

Best regards,

Colin Ferguson
Managing Director
Investment House

P.S. If you know friends or colleagues who would enjoy this newsletter too, please spread the word by forwarding it on to them. If you've received this newsletter and you'd like to subscribe to future editions, you can do so here.

Real Investor Case Study: James and Ping Share
Winning Strategy with Family

When James and Ping first heard about Investment House, they were visiting the Property Expo in Melbourne a few years ago.

“We heard a short presentation about a Brisbane based company using developer techniques to generate a profit when you buy property” explains James.  “They talked about buying a large house site and then ‘sliding’ the existing house to one side of the block to make way for a new house on the site – and making a handsome profit in the process.  It sounded fascinating - we’re always keen to make a profit!”.

Living in Melbourne, where most homes are of brick and tile construction, the idea of picking up a house and moving it around seemed a little bizarre. But it made more sense when it was explained they were dealing with a lightweight “tin and timber” Queenslander-style home.

Although James and Ping had invested in property previously, they had tended toward existing properties.  So there was certainly a little trepidation when it came to launching into a property development some 2,000 km away in Brisbane.  They were to undertake it remote control as an “armchair developer” – and a long distance one at that.

“We flew to Brisbane and looked at a number of possible sites that the Investment House people presented”, says Ping, “and we went with the Beck St option because it ran through from one street to another, and that meant we wouldn’t have to move the old house at all”. 

Beck St is in the Brisbane inner ring suburb of Paddington, just 2.5km from the GPO.  The site had the advantage of two street frontages, but came with a disadvantage in that it required a full sub-division.  That requirement makes the project impact assessable, and impact-assessable sites cost more to get town planning approvals and take longer to develop than “code assessable” sites.  But the feasibility analysis stacked up and James and Ping liked the proximity to the city heart.

“We bought the Beck St site for high four humdreds” says James.  “At the time we thought it was maybe a little high, but in hindsight it was cheap” he added. 

The old house couldn’t be demolished because of the Brisbane City Council rules about preserving character homes.  And their game plan dictated it should be sold.  So they decided to put the old house on the market straight away while the subdivision approvals were obtained. 

The “selling” job was given to Maureen Weal.  Maureen is part of the selling team at Investment House’s internal real estate service division, In-House Real Estate. 

“Maureen was very professional” says Ping.  “She jumped into the task and very quickly found us a good buyer.  And the price was significantly higher than the feasibility analysis required, so we were very happy”. 

The contract was cleverly negotiated, enabling the buyer to move in almost immediately and pay rent to James and Ping until the subdivision was completed and settlement could be effected.  It was a win / win situation.

While the Development Application was being processed for Beck St, James and Ping (in conjunction with some other family members) launched into another project. 

“We’d talked about our Beck Street project with my family, and they wanted to do something too – so we put our heads together and had Investment House secure a site at Khartoum St, Gordon Park” explains Ping.

“The Khartoum St site was a great find” says James.  “It was already two existing lots with a house that we were allowed to demolish. And it was code assessable so it would be quicker than Beck St”.

The Investment House team offered some suggestions at the contract stage which would mean each family could settle on a single block of land (despite the existing house infringing the titles).  This, coupled with some delicate negotiations to pull it together, would mean substantial savings in stamp duty.  And it all came together beautifully.

From there, the plan was to demolish the existing house and build two new five bedroom double car garage contempory homes.  And then rent them out for the medium term in search of future capital gains. 

Sounds simple, but there were a couple of snags along the way. 

The Development Approval took longer than was forecast in the feasibility analysis, and that meant the cost of construction was a little more than was initially budgeted.

“It’s a shame when costs blow out, but even with that, we’ve still made a very handsome profit” says James. “And as it’s turned out, the Khartoum St development has actually finished ahead of Beck Street” he adds.

“Both new houses are finished and they were tenanted very quickly.  The Investment House Property Management team did a great job there. They actually had tenants moving into one house just as the builders were moving out.  They were literally passing one another on the driveway!” adds Ping with a smile.

Now, James and Ping are watching the new house at Beck Street coming together.  All things being equal, it should be finished by mid April.

Where to from there?

“We’ll probably let the dust settle on these two, and then maybe see what else is out there for us” says James, glancing at Ping.

Market Snapshot: Brisbane 2007

The Australian Bureau of Statistics recently published it’s year-end figures for 2007. 

Investors with property in Brisbane have reason to be smiling (all the way to the bank).  According to the ABS, Brisbane houses increased in value over the year by an astonishing 21.6%. 

Most Investment House clients own properties in quality inner ring suburbs, up to about 10km from the GPO.  An average value would be in the order of $700,000 – and if you calculate 21.6% of $700,000 you get a neat $151,200.

If you have more than one property – you can do the math yourself!

The ABS release also reported capital growth of 5.4% for the quarter ending December – which extrapolates out to 21.6%pa.  While this would suggest the market is maintaining its momentum, there is some anecdotal evidence the market may have softened with the advent of the New Year.

How Selling an Investment Property can Pay Your Home Loan Out

With the spectacular capital gains over the last year, some owners are now in a position to sell part of their investment portfolio and pay out their home loan.

Most Investment House clients figured the key difference between “good debt” and “bad debt” a long time ago.  And they clearly understand the importance of getting rid of any “non performing loans” – that’s any debt which is non-tax deductible (like your home loan).

One very effective strategy used by a number of our clients is that of selling off one of their investment properties and paying out their home loan.

It’s simple, and there’s a clever twist that is not widely understood.

Providing you have one investment property left in your portfolio after the sale, you can use the entire sale proceeds to payout (or reduce) your home loan.  Even if it means you subsequently don’t have enough to clear the investment loan you took out for the property you’ve now sold. 

It sounds a little confusing, but here’s an example:

Say you took out a loan when you bought your own family home and you still owe $250,000 today.  You know the interest on this $250,000 is non tax deductible (and, being an astute investor, you’d like to have all your debts tax deductible).  And you’re also mindful that the monthly payments could be put to a better use!

You also have two investment properties – each worth $700,000 totalling $1.4M and each with a mortgage of $500,000 giving a combined debt of $1M.

You sell one of your properties for $700,000 and immediately pay out your $250,000 home loan with the proceeds.

That leaves you with $450,000 to put toward your investment loans (we’ve ignored selling costs and Capital Gains Tax at this stage just to keep it simple).
Here’s your new position:

1. Family Home Loan – paid out!
2. Remaining Investment Property - worth $700,000 with a fully tax deductible loan against it of $550,000.
3. Monthly home loan payments now available for further investment.

From here, you are in a good position to march back into the investment arena and purchase two more investment properties with your new found cash flow.

Presto!!!

Of course, selling costs and provision for Capital Gains Tax will make a dent in the numbers in the illustration.  But it’s the concept and strategy that counts.  Have your accountant or financial advisor help crunch the numbers if you’re in any doubt.  The larger your home loan, the more value this strategy will deliver.

If you’d like to explore the possibility of selling a Brisbane property, talk to Maureen in our Real Estate Services division on (07)  3369 0111.  Maureen heads up our sales force with her “no fuss - get the job done” approach to selling.   And her approach seems to work – she was recently commended for negotiating a “new suburb high” sale price for one of her clients in December.

If you’d like a refreshing change from the super-hype of most real estate sales people, then speak to Maureen.

Report From Investment House Team Training

Twice each year the entire Investment House Team downs tools and embarks on a “Getaway Retreat”.

It’s a team building and business planning exercise, and this latest excursion in February 2008 was no exception. The crew headed north to the holiday destination of Coolum on the Sunshine Coast – but it was no holiday. They were confronted with a raft building and dam crossing challenge followed by a 300m long flying fox from a raised launch platform on one hill to a grassy landing on another.

As you might imagine, there were some serious design questions over the rafts and there was much shrieking when it came to the flying fox – but all enjoyed the challenge.

Congratulations go to Jeff Small for taking out the “Investment House Extra Mile Award”. This award is given in recognition of the team member who has most contributed “above and beyond the call of duty” in the preceding six months. Jeff has put an enormous effort into bringing our first industrial shed project together, particularly given he was coming from a standing start.

Congratulations Jeff!