Module 3
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Part One: Theory Training
Q1. Explain how real estate agents may have a conflict of interest by acting for the seller and also advising the buyer. What options do buyers and sellers have to protect themselves from misinformation?
Q2. Why is it useful to know the vendor’s reason for selling? How can you appropriately use that information?
Q3. Why might it be useful to know if there have been any previous offers on a property you are interested in potentially buying?
Q4. How does a buying budget help to answer:
How much cash an investor needs
How much borrowing capacity an investor needs
An understanding of the true ‘cost’ of an investment
Q5. How much transfer duty (aka stamp duty) is payable on a financed investment property purchased for $400,000 in the following states and territories?
[Include your calculations if completing by hand, or else you may use a well labelled spreadsheet and attach it to your assessment submission; you may also attach print outs from online calculators from relevant government departments.]
ACT
NSW
NT
Qld
SA
Tas.
Vic.
WA
Q6. Explain four things you could do to improve your knowledge of a potential investment area?
1.2.
3.
4.
Q7. Why should you set your desired profit outcome and preferred investment strategy before looking for property?
Q8. Using the illustrations of a coal mine (1) starting and (2) finishing, explain the relationship between job prospects and house prices in a nearby town.
Q9. What is the median house price in Port Hedland, WA? Where did you source your answer from?
Q10. What is the median house in Perth, WA? Where did you source your answer from?
Q11. How do you explain the price disparity between property in these two WA locations?
Q12. List three items you might want to consider when creating a target property ‘hot list’. For each, explain why it would be relevant.
1.2.
3.
Q13. Assume you are interested in subdividing a vacant block of land and then selling the parcels individually. List up to four people or organisations you might approach (and why) to determine the suitability of this investment strategy.
1.2.
3.
4.
Q14. How does defining the right ‘target market’ and matching it to the right property position result in an investment with above-average returns?
Q15. You find a property that is priced at more than 10% below comparable values for that area. At first glance it seems like a bargain, but identify three due diligence issues you would want to investigate (and explain why) to ensure you weren’t buying a dud.
1.2.
3.
Q16. Your research uncovers what looks to be a fantastic investment property. The price is good, and there is a tenant who has been there for 10 years and wants to stay for the foreseeable future too. In chatting with the agent, she tells you that “your return can be even better because the tenant hasn’t had a rental increase over the past three years, and the property is now about $50 per week under fair market rent”.
1.What alarm bells might be ringing when you hear this? Why?
2.How might you approach the tenant so that the prospect of a rental increase doesn’t seem unfair?
Q17. You are thinking about purchasing a tenanted investment property but find out there is no written lease or condition report. Explain what you could do (or ask for) before you purchase, to ensure you have security that:
1. The tenant will stay and has an obligation to pay the said rent
2. The property is in the same condition when you purchase it as it was when you inspected it
Q18. Using the terms ‘assertions’ and ‘assumptions’, explain what due diligence means.
Q19. Why is the ‘return on investment’ formula of limited use for property investors who borrow for the majority of their purchase?
Q20. It’s been said that cash flow, rather than profit, is a more reliable measure of investment performance. Do you agree? Explain your reasoning.
Q21. Gavin is in the final stages of a due diligence on a commercial property. His potential investment is a retail shop near the beach that is leased to an established ‘fish and chippery’ (there is three years left to run on the lease, with annual CPI adjustments).
The rent is $2,000 per month (+GST), and the tenant is required to pay all outgoings except for the annual rates (which are currently $1,850 per annum).
Gavin has sought finance from the XYZ bank, and has been given pre-approval on the basis of a 70% LVR loan, with interest-only monthly repayments (interest at 9%).
The asking price is $200,000 (+GST).
Aside from the information above, Gavin’s research indicates:
He can expect 7% growth in the value of the shop each year
He will be able to self-manage it
He will be able to claim depreciation of $3,500 per annum on the fittings.
Based on this information, calculate the following: [include your calculations if completing by hand, or else you may use a well labelled spreadsheet and attach it to your assessment submission.]
Gross Rental Return (%)
Return on Investment (%)
Cash-on-Cash Return (%)
Growth-on-Equity Return (%)
Net Profit Percentage (%)
Q22. Using the risk-free rate you could achieve on a term deposit, explain whether you feel Gavin should proceed with this investment.
Q23. How has deregulation of the banking industry allowed house prices to increase in value?
Q24. Explain the following terms:
Loan-to-Valuation Ratio (LVR)
Debt-to-Income Ratio
Lender’s Mortgage Insurance
Q25. Explain how each of the following may be relevant to an investor, and how they are ‘paid’ as a result of your business:
Bank salaried loan writer (example: ANZ employee)
Business banker (bank employee)
Bank franchisee mortgage writer (example: ANZ mobile lender)
Independent mortgage broker
Independent valuer
Q26. Explain three potential differences between residential and commercial property loans:
1.2.
3.
Q27. Explain the key difference in the return normally offered to a ‘money partner’ versus the return typically offered to a ‘joint venture’ partner.
Q28. Identify three potential sources when seeking money/joint venture partners.
1.2.
3.
Q29. What do accountants mean by the term ‘structuring’?
Q30. Outline two reasons why it might be ‘unwise’ to own investment properties in your own name?
1.2.
Q31. What is meant by the term ‘joint and several liability’ as it applies to partnerships?
Q32. Why is it seen as unwise to own appreciating assets in a company structure? When could it be wise to use a company as part of your asset structuring?
Q33. Explain the following terms:
Company director
Company shareholder
Partner
Trustee
Corporate trustee
Beneficiary
Discretionary trust
Fixed trust
Q34. Explain how a family trust allows an investor to control a positive cash flow property, share in the income it generates, yet not actually own it.
Q35. Explain one instance when the ‘corporate veil’ could be pierced, meaning a director’s personal assets may be accessed to pay for company debts.
Q36. When making offers, what do the following terms mean?
Conditional offer
Unconditional offer
Subject to finance clause
Sunset clause
Cooling-off period
Q37. Explain how an investor can use the following phrase to become an effective negotiator: ‘be flexible on price or terms, but not both.’
Q38. What is gazumping? In your answer outline two ways that an investor can reduce the risk that they might be ‘gazumpted’.
Q39. With respect to a property transaction, what do the following terms mean?
Conveyancing
Settlement date
Settlement adjustments
Vendor
Purchaser
Guarantor
And/or nominee clause
Q40. How can investors use the following insurance products to reduce their investment risk?
Public liability
Building
Contents
Landlord
Life
Income protection
Construction
Q41. What is self-insurance? What kind of property owner/investor may choose to do this and why?
Q42. Explain whether costs incurred by becoming an educated investor are likely to qualify for an income-tax deduction:
If you don’t already own an investment property
If you already own an investment property
Q43. Place a tick in the box to identify whether the item needs to form part of the property’s cost, or whether it could be written off as an income-tax deduction.
Added to the property’s cost / Qualify for an immediate income tax deductionPurchase price
Lawn-mowing expenses
Stamp/transfer duty
Cost of initial repairs
Rental management expenses
Annual rates
Steam-cleaning the carpets
Replacing a broken window
Advertising for replacement tenants
Pre-purchase inspection costs
Agent’s commission on sale
Q44. What is a quantity surveyor? How might a quantity surveyor be of benefit to investors looking to maximise their depreciation income-tax deductions?
Part Two: Practical Training and Research Assignments
Research Assignment #1: Agent Commission
Outline
The aim of this exercise is to help you research agents’ commissions.
Requirement
Step One: Approach three real estate agencies in your local area in order to get a cost estimate of the following services:
a)Standard commission/commission structure for selling a property (by private treaty)
b)Standard commission/commission structure for selling a property (at auction)
c)Additional costs (marketing, advertising, etc.)
d)Rental commission for managing a property
e)Other costs passed on to the landlord associated with renting a property.
Step Two: Using your findings and your ‘feel’ for each agency, assuming you had a property for sale, explain which agency would get your sale listing and why.
[Word length: 300 to 400 words]
Step Three: Using your findings and your ‘feel’ for each agency, assuming you had a property for rent, explain which agency would get your rental listing and why.
[Word length: 300 to 400 words]
Documentation
Aside from your written answers, provide supporting documentation as evidence of your research.
Research Assignment #2: Purchase Questionnaire
Outline
The aim of this exercise is to help you to build skill and confidence by interviewing a real estate agent to gather more information and evidence about a property they have for sale.
Requirement
Step One: Using an advertising channel of your choice (i.e. internet, print media, etc.), identify a property that is currently for sale (by private treaty would be best) that you would like to find more information about.
Step Two: Taking on the role of a potential purchaser, use the question template provided on Pages 19-19 to 19-20 and interview a real estate agent from the listing agency in order to gather information about the target property.
Make sure you get sufficient answers for at least 10 of the questions.
Step Three: Based on the answers you receive, write a brief report on the information you have gathered about the property. In your answer be sure to touch on the following points:
a) How easy or difficult it was to get the agent to answer the questions
b) The agent’s manner towards your phone call
c) Why the vendor is selling
d) How negotiable is the asking price
e) What terms are the vendors looking for
f) Would they accept a lower price for an unconditional contract
g) What is a potential weekly rent.
[Guide to word length: 400 to 500 words]
Step Four: What investment strategy would best suit this property? Write a brief report [100 to 200 words] that explains your answer.
Step Five: Assuming you were interested in this property, what other information would you need to gather, or investigate, before you would feel comfortable submitting an offer?
Research Assignment #3: Buying Budget
Outline
Prepare a buying budget based on a mix of your own research and the information provided in the case study below.
Background
Jennifer is interested in purchasing her first investment property, a two-bedroom, one-bathroom investment property in the state where you live for $320,000. She has pre-approved finance for 80% of the purchase price. She has $70,000 to pay for the deposit, and her parents have offered to lend her the money (interest free) for any other costs.
Her financier, the XYZ bank, has the following fees and charges:
Application fee: $750 (includes valuation fee)
Loan preparation fee: $300
Other fees: $600.
Jennifer plans to have her conveyancing done by a local solicitor, who advertises a flat fee (including searches and disbursements) of $600. The conveyancer has recommended that she allow $2,500 for settlement adjustments.
In completing her due diligence (she has already paid $400 for a building and pest inspection), Jennifer expects that aside from some general maintenance, she will need to repaint and recarpet. She has allowed $5,000 (total) to do this. It will take four weeks from settlement for this work to be completed.
The property is being purchased with ‘vacant possession’, but Jennifer has a rental appraisal suggesting that it could be rented for $475 per week. It’s been estimated that it will cost $500 in advertising and marketing to find a tenant.
Step One: Using the template on Page 20-12, complete a ‘buying budget’ to help Jennifer estimate:
a)The eventual ‘cost’ of the property
b)How much money she may need from her parents to complete the sale.
In your answer be sure to include the duty and other government charges that are applicable in the state where you live.
Step Two: Assuming Jennifer only had a deposit of 10% of the purchase price, and could not rely on her parents for money, what finance options might she have if she wanted to proceed with the purchase? Name any extra costs that might be applicable in the options you canvass.
Research Assignment #4: Area Expert
Outline
The aim of this assignment is to provide evidence that you can research and collate data to improve your knowledge of an area.
Requirement
Pick a suburb and then using the approaches outlined in Sessions 19 to 43, answer the following questions:
1.What is the best street in the area? Why?
2.What is the worst area in the suburb? Why?
3.What has been the trend in median house prices over the past:
a)Year
b)Five years
c)Ten years?
4.What is seen as desirable about living in the area?
5.What is seen as undesirable about living in the area?
6.What would tenants value (as property features) in a potential rental property?
7.What is the median rental cost for a three-bedroom home:
a)In that suburb
b)In that state?
8. Explain how you went about researching and obtaining answers for the questions above. Include any supporting information/evidence of your research.
Research Assignment #5: Area Assessment
Outline
The aim of this assignment is to provide evidence that you can research and collate data to improve your knowledge of an area.
Requirement
Step One: Pick a suburb and then, using the Area Assessment Template on Page 22-9, perform research on the categories mentioned (i.e. jobs and income, etc.) and form an overall rating on the area.
For each category, provide a short outline of your answer [word length: up to 100 words per category].
Step Two: Based on your findings, would you invest in this area? If so, why? If not, why not? [Word length: up to 200 words]
Research Assignment #6: Property Assessment
Outline
The aim of this assignment is to provide evidence that you can research and collate data to improve your knowledge of a property.
Requirement
Step One: In the suburb you chose in Research Assignment #5, and using the Property Assessment Template on Page 24-11, perform research on the categories mentioned (i.e. general and street appeal, etc.) and form an overall rating on the property.
For each category, provide a short outline of your answer [word length: up to 100 words per category].
Step Two: Based on your findings, would you buy this property? If so, why? If not, why not? [Word length: up to 200 words]
Research Assignment #7: Tenant Assessment Template
Outline
The aim of this assignment is to provide evidence that you can research and collate data to improve your knowledge of a property that is being sold with an existing tenant.