The best investment

Data from AFG show property investors currently account for 36.4 per cent of all home loans written – or more than one in three borrowers – and this has remained relatively consistent over the past 12 months.

Better yet, QBE LMI’s annual study of the mortgage market found that more than 70 per cent of property investors plan to invest again within the next five years.

According to the report, 48 per cent of investors believe now is the ideal time to buy a residential property, reflecting a positive sentiment that is absent in other potential client sectors.

This data is backed up by research conducted by LJ Hooker Finance, which found 26 per cent of existing homeowners are currently looking to buy an investment or holiday property.

“Residential property is a traditional favourite amongst Australian investors due to the long-term stability of the market, potential capital gains or opportunity to boost income through regular rent,” says LJ Hooker’s deputy chairman, L.Janusz Hooker.

“The multiple double-digit losses experienced by the share market in 2011 are driving a stronger interest in property investment.

“Data shows that over a 10-year period, property investment yields a higher after-tax return than shares. Uncertainty in the share market is drawing Australians back to traditional investment options to ensure long-term results.”

Mr Hooker’s comments were echoed by 1300HomeLoan managing director John Kolenda, who believes falling term deposit rates combined with the volatile share market will continue to drive investors back into the property market.

“Many investors would be shocked when their term deposits matured this year and they were offered less than a five per cent interest rate to roll their deposits over,” Mr Kolenda says.

“With the level of savings increasing and large sectors of the market – like retirees – reliant upon annuity security, investment property seems to be coming back into view as part of their investment mix.

“Culturally, Australians love property and it appears that investors are starting to look with fresh eyes at the property market where the benefits of higher yields, tax savings and potential capital gains are much more attractive than the bank deposit rates.”

AFG’s NSW/ACT state manager, Chris Slater, says these trends and developments have created a great environment for brokers to target the investor market.

According to Mr Slater, investors are eager to purchase, they are surveying their options and they will “no doubt” be keen to get advice from finance professionals.

“Investors are savvy, they know that their property transactions can be quite sophisticated and, as such, they are happy to seek the advice of a professional mortgage broker,” he says.

“They want to deal with somebody who really understands the complexity of the transaction they’re dealing with.”

For brokers, investors can be very lucrative clients, according to Mr Slater, because they do not stop at one transaction.

“Investors don’t just buy once,” he says. “They are in it for the long haul and are looking to make multiple transactions over their entire financial life.

“Moreover, investors tend to socialise with other investors, so they can become incredibly good referral partners for a broker.”

There are many ways in which a broker can find investor clients and tap into the investor market, Mr Slater adds, the most obvious being analysing their own database.

“If you revisit all of your clients you will find some of them are looking at or thinking about purchasing an investment property,” he says.

“Failing that, brokers can always establish referral relationships with real estate professionals or other financial advisers, including accountants and financial planners.

“And then there are all the other traditional avenues – advertising and direct marketing.

“Many investors would be shocked when their term deposits matured this year and they were offered less than a five per cent interest rate to roll their deposits over”

What the future holds

With rental yields on the rise and mortgage interest rates at near historic lows, investors could be set to dominate the property market once again

NEW STATISTICS from RP Data confirm property prices in several key locations have bottomed out, providing further incentives for investors to increase their presence.

In the first 17 days of August, RP Data recorded a 0.3 per cent increase in dwelling values across the capital cities combined.

As with June’s RP Data-Rismark Home Value Index results, August’s improvements in property values were relatively broad-based.  

August’s results indicate mean dwelling values have now improved across the combined capital city markets for three consecutive months, suggesting market conditions in some locations have passed the bottom of their cycle.

Residential vacancy rates have also tightened, with recent data from SQM Research putting the national residential vacancy rate at 1.9 per cent.

RP Data’s Cameron Kusher says he wouldn’t be surprised to see investors re-enter the market.

“There are definitely a lot of good opportunities out there for investors,” Mr Kusher says. “Property prices have reached the bottom of the cycle, yields are on the rise and mortgage interest rates are hovering near historic lows.”

Mr Kusher’s comments are echoed by RateCity’s Michelle Hutchison, who agrees the property market has been bolstered “dramatically” over the past year.

“Australia’s property investment market has certainly improved compared to last year, with property values falling, and some areas saw increased asking rents, which has improved yields,” Ms Hutchison says.

“Year-on-year gross rental yields for the June quarter have increased for every capital city except for units in Hobart.”

Moreover, Ms Hutchinson says increasing competition between Australia’s lenders will now also encourage property investors to review their options closely.

In July 2012, 46 lenders trimmed the interest rates on their three-year fixed rate home loans, highlighting just how intense the competition for mortgage market share has become.

Citibank’s head of broker distribution Aaron Milburn agrees and believes lender competition will encourage a greater number of investors into the market.

“I believe investors will continue to represent a growing proportion of the market, particularly as demand for housing continues to grow, particularly in cities with population growth,” he says.

“This means that more demand for renting is pushing the prices up. We continue to see an increase in interest from overseas investors looking to invest in the Australian property market,” he adds.

Mr Milburn says that as the number of investors entering the market increases, so too will demand for inner-city properties.

“No doubt property investors will look for dwellings that are located in cities with population growth as this will guarantee a high renting demand and ensure consistent tenancy,” Mr Milburn says.

Richard Glynn, managing director of Bell Partners Finance, says investors will also be looking closely at the various mining towns when it comes to buying their property.

“There is no doubt that it is a good time to buy investment properties,” he says. “Some mining suburbs are offering great yields at the moment, which is incredibly enticing for investors.

“That said, you do have issues of capital growth and whether or not it is sustainable. If there’s going to be any capital growth in the mining areas, the businesses in those areas have to be sustainable.”

I’ve just the thing for you

There’s no shortage of loan products tailored to the investor market place; the challenge is to find the right one for the individual client

INVESTORS’ PROPERTY needs and goals differ from those of owner-occupiers, so not surprisingly, their product requirements also vary.

“Products for investors are often completely different from those products looked at by owner-occupiers and first home buyers,” says My Loan Expert’s director, Stewart Noble.

“The broker needs to be educated on all of the appropriate products and structures.”

Investor clients are generally more experienced, know what they want, aren’t exclusively rate-focused and seek structure, according to AFG’s NSW/ACT state manager, Chris Slater. “So, from a broker’s perspective, it’s really about understanding what investors are looking for,” he says.

Investors generally do have a fairly good idea about what they’re looking for but, according to Mr Slater, brokers can offer them a real understanding of up-to-date product offerings, different credit policies and mortgage insurance options, including outlining mortgage insurers’ appetite for credit.

Most investors’ purchases are not emotional ones; the investor is looking at the business transaction overall rather than just the loan.

“The one key thing investors should, and often do, is focus on a loan/lender that will actually help them achieve their goals,” adds Mr Noble. “These goals can be varied, but an investor looking to acquire five properties in a five-year period is likely to focus far less on interest rates and fees and more on policy issues that will allow them to stay with that lender throughout their investment experience.”

No investor is the same, Mr Noble points out: “There is no single lender or product that will suit everyone; however, there are a few options,” he says. “You can set up a line of credit for clients to use to access equity for deposits and purchase costs. Interest-only is a popular repayment option for investors, particularly if they have a non-deductible home loan and, hence, they should focus any extra funds they can spare on [paying this off] before they look to reduce tax deductible debt.”

Tim Brown, chief executive of Vow Financial, says line of credit, split loans, SMSF and fixed-rate loans often suit investors.

“Sometimes it might need to be a fixed rate loan because they need to be comfortable with their rent for a period of time,” he says.

Mark Haron, principal of Connective, believes many investor borrowers like to ‘set and forget’ their loans, because they want to have as few surprises as possible.

“They are conscious about having to put their hands in their pockets for repairs and maintenance, periods of no occupancy and property management expenses – having a loan on a longer-term fixed rate means one less thing to worry about.”

Flexibility and security, Mr Brown adds, are key drivers in product decisions for investors.

RIGHT PRODUCT, RIGHT CLIENT

Aaron Milburn, head of broker distribution at Citibank, says product knowledge is imperative if brokers are to create lasting relationships with investor clients.

“Investors are sophisticated borrowers and financially savvy,” he says. “The broker needs to be extremely knowledgeable about the options available in the market.”

Brokers need to understand their clients’ financial objectives and help investors build their portfolio through optimal product packages.

Investors’ goals can vary from growing their wealth to optimising their tax position, to growing their super for retirement, says Mr Milburn.

Connective’s Mr Haron agrees. “It is important that brokers ask investors about their property investment strategy, expected term they will look to hold on to a particular property, the entity they will purchase the property in – SMSF, joint, single names et cetera – and ensure they have good tax advice around these structures.

“If the investor is looking at multiple property purchases over time, strategies to utilise equity are also crucial to consider.”  

Investor clients come to brokers so they can access a full range of products, policies and possibilities, so up-to-date market and product knowledge is essential if brokers want to effectively tap into the investor market.

Know the investor market

While there are great opportunities out there, to secure investor clients brokers need to understand how their needs differ from those of owner occupiers

IF EVER there was a need for a savvy broker it’s in the investor sector.

Unlike first home buyers, investors are already extremely savvy themselves, so for brokers to secure them as clients, being on their A-Game right from the start is a must.

Connective’s Mark Haron says that more than anything investors are looking for a knowledgeable broker.

“Knowledge of lenders’ products and policies can save an investor thousands of dollars and enable them to achieve their investment goals sooner,” Mr Haron says.

It’s also crucial that brokers acquire a solid grasp of loan structures and tax laws as both of these can dramatically influence a purchase.

“Often, an investor will have tax reasons for making an investment so brokers need to understand what an investor wants in terms of deductions to get the loan to perform as they require,” says Vow Financial’s Tim Brown.

My Loan Expert’s Stewart Noble agrees with Mr Brown, adding that knowledge of a loan structure is even more important than knowing about the loan products themselves.

“A lack of knowledge of structures can lead to loans that are not tax effective, and in some cases they can be deemed illegal by the ATO,” Mr Noble says.

Investors are often keen to create intricate and ‘fancy’ things with their financials and a small mistake can be very costly for a client, he says.

House & Home Loans’ Rael Bricker has seen plenty of examples of costly mistakes. As a broker, with investors making up a majority of his clients, Mr Bricker says he spends an inordinate amount of time undoing inappropriate loan structures.

“Typically, a bank will have cross-collateralised a loan so when the investor wants another property, their loan structure doesn’t have the flexibility to help them purchase the next property,” he says.

“Brokers need to ensure as much flexibility as possible when structuring a loan to enable an investor to buy well into the future.”

The key to understanding investors, Mr Bricker adds, is realising that they are far more interested in how much they can borrow rather than in just the rates.

According to Mr Brown, a large number of investors are now looking at self-managed super funds (SMSFs), so brokers also need an understanding of how to set these up.

“Many clients still don’t understand the new superannuation rules and how SMSFs work, so they need a broker to explain if that set-up would suit them,” he says.

NO FRILLS, NO FUSS

Investors are time-poor – that’s why they enlist the services of a mortgage broker. They need an expert to streamline the process of purchasing for them and to make it easy and fast.

Citibank’s Aaron Milburn says investors are also astute and quick to make decisions. Their purchases are based on business and investment strategies so, unlike first home buyers, they won’t be waiting to find somewhere with which they have an emotional connection.

Keeping pace with them is therefore crucial to ensure their success in the market.

“Investors need very fast service as the type of deals they go for don’t hang around for too long,” says Mr Milburn.

Connective’s Mark Haron agrees that for an investor, buying is a very different process from that experienced by first home buyers.

“They view the purchase as a business transaction, so investors will walk away from a broker if they’re not performing,” Mr Haron says. Investors are not looking for a friend; they’re looking for someone who can get the deal done.

Conversely, investors tend to be older and more experienced, which makes them easier to deal with.

“They know what they want and have very little requirements in the sense of handholding,” he continues.

“Provided you communicate with them as to what stage their loan is at and everything goes according to plan, they’ll be very satisfied customers.”

LONGER-TERM BENEFITS

According to Mr Milburn, opportunities to cross sell to the investor market have never been better since most investors require some form of insurance.

“As investors tend to be financially better off, they’re more able to take up insurance, including life, income and disability protection,” adds Mr Brown. “[Also], their lack of spare time means investors are happy for you to go and deal with their insurance to a level where they’re starting to build a reasonable asset base.”

Investors also represent a great source of referrals to other professionals, with the possibility of boosting a broker’s income stream.

According to Mr Bricker, they are the type of client that every broker wants since significant long-term relationships can be formed with them relatively easily.

As Mr Milburn notes, “these relationships can grow to benefit both parties over time, not to mention the subsequent referral opportunities [that come with them].”

Mr Milburn is also very optimistic about the investment market and what it will offer brokers in the future.

Investors, he feels, will continue to represent a growing proportion of the market as demand for housing continues to grow in cities with high population growth.
    
Finding and keeping hold of investor clients

Securing a stable of investor clients and retaining them will pay dividends provided you do the right thing, as The Adviser reveals

INVESTORS ARE, without a doubt, way up there on the ‘most wanted’ list of many brokers.

They’re easy to deal with, they generally know what they want and the financial rewards for having them as clients are lucrative.

Getting a foot in the investor market is very much about securing the right referral partners. Once you have those in place, you’re all set to deal with the extra business.

It’s important, however, to respect the referral relationship: “Investors are great for business but it requires you as a broker not to be greedy and really be straight up with clients if a property isn’t right for them,” says House & Home Loans’ Rael Bricker.

The way you treat your client will reflect on the referring partner, who will be quick to terminate the arrangement if you’re not doing right by the client.

USING REFERRAL PARTNERS

Since investors will often approach an accountant, buyer’s agent or real estate agent initially, developing the right relationships with these professionals is critical if they are to be valuable referral partners.

According to Mr Bricker, the sale process in today’s investment market is so sophisticated that it’s extremely difficult to get into it without being on the panel of one of the larger sales organisations.

Vow Financial’s Tim Brown says developing relationships with accountants in the investment area can be particularly advantageous.

“Accountants are extremely useful as they’ll often advise clients when they need negative gearing to reduce their income – this is where a broker can step in to refinance the loan,” Mr Brown says.

Once you have some established referral relationships, Mr Brown continues, you can start holding events such as investment seminars to give people the confidence to use your services – they’re also a great way to raise your profile.

“Often, you’ll have a good turnout for these things and people who attend often have the intention to buy,” he says.

Interestingly, mining companies are becoming another great referral source, according to Richard Glynn, managing director of Bell Partners Finance.

“You can ask them who out of their staff would be looking to potentially buy properties in the area they’re working in,” Mr Glynn says.

The mining company will likely have a good understanding of the property market in their area and the longevity of business there, he adds.

HOLDING ONTO THE CATCH

An important characteristic of investor clients is their loyalty to their broker. If they are provided with exceptional service every time, the broker is well on their way to having a client for life.

Offering investors support and the assurance that you’re there if they need you goes a long way, Mr Noble adds.

Mr Brown agrees and says that once investors are comfortable with their first investment, they’re very likely to invest with you again.

“It’s about having annual reviews, seeing how they’re going with their current investment and helping them make that next step – these are the things investors need,” he says.

Mr Bricker likes to keep in regular contact with investor clients via traditional means. “We have regular mail-outs around four to six times a year and my referral groups are doing the same, so investors are getting a significant amount of touch points,” he says.

GREAT CLIENTS, GREAT REFERRERS

Many brokers argue that first home buyers are the best source of referrals.

Brokers with a large number of investor clients, however, know that it’s this type of client that really generates wealth for them.

“As investors are so passionate about their purchases, they’re intent on telling everyone about it,” says Mr Bricker.

“All investors want to do at dinner parties is tell their friends they’re investing in property, so the referral network we generate from them is huge.”

Mr Brown adds that it’s the age range of investors that makes the difference.

As most investors are in the 40 to 50 bracket, they’ll have many friends in that age range also looking to make investments.

But while investors might tell their friends about their latest investment with great passion, they generally lead with their head and not their heart when making purchases.

This is one of the main reasons why Mr Bricker says these clients are so easy to work with.

“Investing is a dispassionate type of lending, where the buyer wants the cold hard facts,” he says.

“If the valuation doesn’t stack up, for example, they walk away and find another property because it’s not like they’re buying their dream house.

“You’re not dealing with people’s emotions, so it’s much easier to talk rationally with them.”

“Retaining investor clients is quite easy as long as they are in a competitive product that suits their needs and are kept up to date with basic information”