If you are thinking of purchasing a “fixer upper” to rent out in Darwin, well, now is the time to do so given that the markets are low … but for how long? There is opportunity to grab a good deal, do a bit of renovating and offer the property to the rental market. However, before you dive in, you should take a moment to pause, reflect and take into consideration the following:
Do your research
Before purchasing an investment property, get to know your market. It is wise to check the following:
Rental returns for properties of the same type, size and location
The types of tenants that are likely to rent in that particular area
The surrounding suburbs to see if the property is in an area which has a lot of renters or a lot of owners (Note: owners are usually the ones who look after their gardens!)
Is there infrastructure close by like shopping centres and hospitals which may induce local employment?
Competition – is the property in an area that already has an oversupply of rental stock?
Then look for the points of difference – these include:
Does the property have a pool
If the property is located in an area of transient workers, would it be best to rent the property fully furnished, to obtain better rental returns. (Having said that, never throwtoo much money at furniture for a rental, Gumtree is great!)
Building Condition, Plumbing and Electrical, and other Reports
Prior to purchasing any property it is essential that you are armed with all the facts. A comprehensive building report will give you an overview of the building certification and upcoming repairs and maintenance that will need attending to. This should give a solid basis for your cost analysis of the eventual cost of the building. For example: How is the roof, can it be repaired or will it require replacement? Are there outstanding certifications for the existing building? These are not things that are easy, quick or cheap to obtain!
Hot water systems have a life span, how much life can the plumber ‘guestimate’ the hot water system has left?
Depending on the age of the house, an electrician will look at the wiring and advise if it will require upgrading with any future renovations. They will also be able to advise you on what is allowed due to the age of the house, and what will require upgrading to current Australian Standards if you add to, amend or change the house.
If there is a body corporate, check to ensure you factor into your proposed rental the cost of the body corporate fees and any proposed budgeted maintenance or capital works issues or increase in body corporate fees. These can easily blow the budget.
I can’t be more direct, other than saying: Get professional advice before renovating!
Seek the advice of a building certifier before you start renovating and removing things like bathrooms and kitchens. There are rules in place about protection requirements for splash backs and wet areas, so you need to ensure that these are complied with. Bathroom and kitchen renovations are also likely to require a suitably qualified plumber and/or certifiers to sign off on the works.
Check for dangerous substances.
Asbestos has been used and is still currently in many houses of a certain age in the Northern Territory. Asbestos is not only particle board sheeting but has also been found in old glues used to affix linoleum floor tiling.
More recently the use of chemical drugs like “Ice” are found to have a serious health concern to inhabitants of homes where it has been used or manufactured. There are now companies in other jurisdictions such as NSW and QLD that order drug reports on houses to ensure that these illegal drugs are not present. Chemical drugs can permeate walls, flooring, ceilings and household items and may be a major issue to remove.
Ensure the work you do obtains the correct certification
It is imperative that the property you are renting out is coded correctly. For you to be able to charge rent for someone to reside in a property, the property must be coded as a “residence” and be safe to live in. Correct certification is essential to retain the value of the property. Properties where uncertified works have been completed often end up being discounted for the cost of the certification and valuers won’t take the uncertified works (such as kit sheds and other outbuildings) into consideration, uncertified items are usually valued as NIL.
Do the numbers, ensure you have all the costs and quotes for the residence and anticipate the highest cost of the financing to ensure that it fits with the lowest likely rental return.
Get good financial advice as to what the mortgage will cost and what tax benefits are currently available to see if it is worth it. This will avoid unnecessary financial stress which often causes many people to sell their investment properties as it all just gets too much for them.
Return on investment relying on capital growth.
Take a long-term look at the property market and likely capital growth of the area. Darwin used to have a safe, strong market with good returns on investment, however things can change! While there may be positive predictions for the Top End for the coming years, you will still need to make your own independent assessments as to the risk you are prepared to take.
Renting your property
Ensure that any prospective tenant is not listed on TICA (short for Tenancy Information Centre Australia), not just for your region but Australia wide. The right tenant can make or break your investment experience and they are not easy to find. Rarely do tenants treat your property as well as they would treat their own property, despite claims otherwise. Rental references can dubiously be provided by friends of the tenant who represent themselves as their past landlord, or adequate references can be given by previous agents or landlords wishing simply to move them on.
Ensure that all tenants pass the test. This must be done as often others move into your tenancy as subtenants or new partners arrive who will be of bad character. This is difficult to keep abreast of but it is essential that you do!
Real estate agents charging you a fee for a 3 monthly inspection is not necessarily a bad thing as it gives the agent an incentive to keep up with regular inspections, and regular inspections are necessary to show how the tenant is living and who is living in the tenancy. Insist on your agent providing a report and updated photos after each inspection.
You should think carefully before making a deal with the tenant to do any work on the property, because many negative issues can arise! It is suggested that you do not exchange reduced rent for rectification, maintenance or beautification works, as you may not be satisfied with the outcome. Instead, it is suggested that you rely on a good, all-round, reliable handyman who will invoice you with an ABN so that you may claim the work as a possible tax deduction.
Currently the tax system for investment properties favours repair over replacement for such items as dishwashers and air conditioners because you can write off the repairs in the same financial year whereas the cost of replacement is only depreciated over a number of years, say 10 or 15 years for example. However, such matters should always be reviewed with your own accountant.
“The government giveth and the government constantly taketh away”
What was once able to be claimed on your tax return, changes regularly. Don’t count on anything – rather, get professional advice. Red tape, tax incentives and changing government policies can leave you in distress. Recently the Australian Government amended the taxation legislation regarding GST to widen the net of what GST applies to and when GST is required to be paid. For example, a residence that has been substantially renovated is not just subject to capital gains but may also be deemed to be a GST taxable supply. If so, GST could be payable at settlement on any sale of a substantially renovated investment property and the owner will be required to have an ABN.
Subdivisions are an interesting area, as they are sometimes allowed and then not allowed. Government may want to increase rental stock by allowing a second residence on large residential blocks in the form of dependant dwellings, then at some point in the future they are no longer required and therefore no longer allowed.
Subdivisions of land may be allowed in larger block sizes but then there are a myriad of other issues to consider – for example, what about the infrastructure that you may need to provide before the subdivision is titled i.e. additional power substations, bitumen road access and provision of water.
Previously the rural area of Darwin was able to be subdivided without provision of water as the buyers could put down a bore. Then the developers, prior to title issue, were made to provide a bore on each block with a minimum required amount of water for domestic supply. Now, transactions are showing titles that are in good water yielding areas which have wording to the effect that ground water may not be available in this area and therefore the residents shall be required to capture water by using rainwater tanks. Again, another issue that must be discovered and considered carefully prior to the purchase of any property.
As you can see, while there can be financial rewards gained through the purchase of property, there can also be many pitfalls with exposing yourself to this type of investment. Investing in property is of course possible, but it can only succeed with proper research, planning, professional advice and consistent review … and sometimes a little luck!
For advice or assistance with property conveyancing, please contact Bowden McCormack on 08 8941 6355 or email the writer at firstname.lastname@example.org