13. June 2013

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The Australia Interest Rate Forecast

The Australia interest rate forecast is dependent on the Reserve Bank of Australia. Looking at its past history, the Interest Rate has averaged 5.46 Percent from 1990 to the current 2013. An all-time high of 17.50 was recorded in January of 1990 and lowest was in May of 2013 at 2.75%. The official interest rate, which is the cash rate is charged on overnight loans. It depends on demand for and supply of overnight funds. With the global economy at a lower trend as compared to the last year, it shows signs of picking up only by next year. United States continues to show moderate expansion while growth in China has been more sustainable.

The Australia interest rate forecast also depends on what is going on in the rest of the world. Those looking for some dependable answers are in for a disappointment. The cash rate has been lowered by 125 basis points by the Board and brought it down to 3 per cent. The borrowing rates are nearer to their previous lows but there are signs of the economy responding to the lower interest rates. The investors’ portfolios are getting modified so as to higher expected returns and the asset values have risen for some. The dollar, the supporting demand and the low trend growth are all some of the decisive factors.

The low Australia interest rate forecasts are meant to cushion the economy. RBA or Reserve Bank of Australia has surely made a surprise move. Australian dollar remains at a 30 year high but the high currency is hampering the growth for the nation’s manufacturers and exporters. The rate-sensitive sectors such as home-building and consumer spending have taken their time to respond to the yearlong string of decrease in the rates by the bank. We have seen the Australian dollar fell more than half a cent after the decision on the rates.

The recent years have seen Australia pumping billions of dollars to curb recession and stimulate the spending power. But the government is already facing a 17 billion Australian dollar deficit in the current fiscal year. This is a big dilemma for the RBA. Sectors like tourism and retail are still weak and country’s dominant resources industry is expected to peak earlier than expected. The Australian consumer is expected to spend more money abroad, trying to take advantage of the favorable exchange rates. The Australian economy seems to be repositioning and trying to get normal in global terms.

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13. June 2013

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Appraising the Worth of a Property by the Income Approach (A Translation)

The Income Approach also goes by many other names including Present Earning Value Method, Income Capitalization Approach, Investment Approach and etc. But whatever name it goes by, it is a valuation method that relies on income to compute the value of an asset, and not cost nor investment amount. In other words, it ignores the amount of capital invested and only makes use of income to determine an asset value.

The Income Approach is commonly used for property that generate monies, income or has income-generating potential; such as industrial buildings, commercial buildings, playgrounds, food center, theaters, etc. (as opposed to schools, military bases, parks, recreational facilities and other non-profit public assets). Furthermore the property has to be in continual operations. Hence future income and risks can be quantified in dollars and cents.

Property net of income; of course, refers to the net housing valuation after deducting the cost and interest – net income generally refers to the rental minus income. Net income that is subject to excess profits usually have the profit coming from three avenues: When profit exceeds what is normally earned in a similar business, it can be because demand outstrips supply leading to a rental hike; possession of exceptional business foresight like converting a forsaken warehouse into a eating place or a dance studio; finally, obtaining licensing to conduct a niche business.

Other factors that affect excess profit is the discount rate (a.k.a. capitalisation rate).

The discount rate can affect the profit level as it reveals the level of impatience of an individual. It varies between 0 and 1.

The mathematical notation for the discount rate is

Beta = 1/(1+r)

where r = interest rate

When Beta > 0 and approaches 1, it means that the individual has a high level of patience and expectation, thus driving the result of an excess profit.

Another factor is the earning period. The right to use a property and the duration of use are determined by the terms of the contract; hence the duration is directly related to the earning period.

Net income is a key determinant in the income approach of housing valuation because Value = Capitalisation Rate (capitalisation rate is the rate of return which is the discount rate or yields).

But first you must obtain the excess profit before you can find the net income (this will, of course, involves lots of calculation and adjustment); after which you can find the interest rate and thus the discount rate. This way the expected value of the property can be computed.

If you are renting out a property, as the owner you can earn a net income of $100,000 from rental. With a rate of return equal to 0.1, you can easily arrive at the value of the property, which is $1 million. This figure comes about because Value = Return / Rate of Return ($100,000 / 0.1 = $1 million). The income approach attempts to predict the value of a property by making use of the expected income to forecast the final value of the property. This valuation amount forms the basis for negotiation in the sale process. A purchase price below this value implies a discount.

In order to arrive at a reasonable valuation figure, you have to collect accurate, reliable and useful data for income. In addition you also need the terms of contract, rental regulations, interest rate, tax rate and cost. Using these information, you can ascertain the net income from rental and discount rate to calculate the value.

The discount rate is not the same as the interest rate or yield. Rather it can be seen as the Return of Investment. In the process to find the property value through the income approach, the discount rate simply becomes the capitalisation rate.

Chai Qiang in his book, Real Estate Appraisal (revised second edition), defined the income approach as: “The income approach uses the expected net income of the property and an appropriate capitalisation rate to discount to the present value of the property.” Chai Qiang added that,”From the point of view of the income approach, the value of real estate is its present value of future net income.”

We can also strengthen our understanding of the income approach by familiarising ourselves with some terminology:

1) Investment yield or rate of return.

This variable is commonly used in valuation or investment analysis to find out the returns. It is expressed in percentage and found by dividing the annual net income derived from capital value. It measures the potential returns. The smaller it is the better the potential of the investment and the lower its risk is; hence the investment price will be higher.

Using our previous example of an owner with a $100,000 net rental income and a rate of return of 0.1, here we change the rate of return to 0.08. Based on the formula, we get Value =100,000/0.08 = 1,250,000. Compared to when the rate of return was 0.1, our value has increased by 250,000.

2) Capitalisation rate.

This variable discounts the net income of the item to be valuated; hence it can be seen as a form of rate of return and discount rate. The latter is used to find the present value of the net income of different years.

But we must recognise that the discount rate is not the interest rate or yield. Interest is the return from investment whereas the discount is the return to management. The discount rate reflects the interest payment after the due date. The yield is the internal rate of deduction.

The discount rate (a.k.a. refinancing rate) is the interest rate after subtracting the yield.

For example, if you are due to receive payment of $100,000 at a future date, but you are in need of money now you can go to a financial institution with this promised future payment and obtain a loan now. The financial institution will conduct checks to determine the interest rate that will compensate them for risk and earn them profit.

The yield is made part of two types of interest rates: First as the payment is not yet due, the financial institution has to lend from its own reserves. This will involve borrowing cost or interest. Secondly, lending entails risks, an interest is attached to compensate for the risk. Hence two components make up the interest. Finally the balance (less than $100,000) after subtracting the interest will be lent to you. This is termed the yield.

3) Years’ Purchase or YP.

This variable is the revenue ratio of the property, it shows the number of years needed to recover the value for a given net rental income.

It directly reflects the value of a property.

Expressing it in mathematical notation, it becomes

V = a x YP

where V is the value

a is the net income

YP is the number of years needed to recover the value for a given net rental income

To illustrate this further, we use an example of a 3-room flat in a non-mature estate

with a net rental income of $25,000 and a YP of 15, the value of the flat will thus be

$25,000 x 15 = $375,000.

However, a similar 3-room flat in a mature estate also with a value of $375,000, but a YP of 10, its net rental income will be 375,000/10 = $37,000, based on a = V/YP.

The next question is how do you obtain the YP. As YP is the revenue ratio of the property, it is similar to the Price / Earning Ratio (PE Ratio) of a stock. If you have a PE Ratio = 20, it means you have to wait 20 years to recoup the price you paid for the stock. A market analyst will say the stock is undervalued.

A stock with a PE Ratio of 1 or less is considered a poor performer and nobody will buy it as reselling it is going to be an uphill task. On the other hand, a PE Ratio between 60 and 150 is a high performing stock with strong potential.

4) Internal Rate of Return or IRR.

This variable measures the real value of the return on an investment. It is a discount rate based on a net present value of zero.

If the Investment Value is $1,000,000 and the Revenue is also $1,000,000, the net income becomes $0, and so the investment yield is 0. For such an investment, the investor loses the replacement cost and time.

Conversely, if the investment has a net income that is negative, it is definitely loss making.

Thus the net income has to be positive before the investment has a value; otherwise you should just abandon it.

When the net income is positive, investors will rely on its magnitude to decide on a commensurate purchase price.

In conclusion, I will say that the income approach is a highly complicated valuation method with plenty of formula. But this article has not discussed the formula aspect as it is a dry academic topic; instead through this article I hope to bring to readers a basic idea of the income approach, so that in future they will be able to engage in intelligent discourse about the subject.

I am a writer for iCompareLoan and PropertyBuyer.com.sg

You can find more articles on our websites.

We offer FREE expert home mortgage advice and Singapore’s most advanced loan analysis system. You can also make use of our FREE calculators for your home purchase planning.

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13. June 2013

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Investing on Home Liens

Learning about concepts related to real state can seriously cause confusion especially if you are starting from scratch. A beginner who hears the words tax deeds for sale and tax certificate sales can surely trigger a migraine considering that these two words are not part of our daily conversations.

Knowing that not everyone is familiar with home liens any individual can agree that investing on these liens should be thoroughly thought of. Otherwise, it could end up in the duster. Returns of investment can be acquired provided that you’ve invested using the right strategies. Still, you need to be mindful of the taxes you’ll be paying; one factor that has been overlooked by many real estate investors.

Talking about tax lien certificates for sale, what should we be cautious about when we invest money on these documents?

Before you conduct a research on tax liens, it is best to investigate the county you are in. It may seem confusing but in the end, you’ll realize that using this method is a great tool to save time.

Take note that you don’t have to travel all the way to the county if you want to know more about it. Rather, you can take advantage of the World Wide Web. Upon finding the website, utilize it by getting the list of tax liens that are offering.

It does not matter if you have previously participated in an auction from a different county or not, it’s still extremely important to read the procedures before buying tax liens. Always remember that each county have different systems when conducting auctions and sales.

Do not forget to make an account before you purchase or begin bidding. Most counties though don’t require fees when creating an account. However, you need to verify that you’re making an account in the county where you’ll be buying tax liens.

When buying or investing on tax liens, it’s also important to know the mode of payment that the county allows. Perhaps all counties accept cash but not all allow check payments. Therefore, if you prefer to pay by check, confirm it first.

Since we are talking about tax certificate sales, it is obvious that we are dealing with auctions as well. Certain preparations have to be made when you want to attend auctions. First, you need to verify the exact time and date as to when the auction will be conducted. Next, find out if online bidding is allowed. If not, find time to be physically present during the event. If you really want the tax lien, it will not matter how busy you are; you will surely end up making time for it.

Before you travel to the venue to where the auction will take place, make sure that you have a budget for your bidding’s. Otherwise, you will end up frustrated.

Hence, home liens can truly bring great profits. But by being reckless in making investments, you could end up with irksome results.

Tax liens can be an interesting investment opportunity for anyone looking to take advantage of a housing market that continues to be slow. However, you must have the right contacts to ensure you aren’t wasting time researching properties that aren’t for you. Visit tedthomas for more information and details.

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13. June 2013

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Did You Buy Real Estate As a Kid?

Real Estate Can Help You Build Wealth

Remember playing the game Monopoly? You had all of the cash. You were raking in the dough. You bought real estate… and you built houses. You were killin’ it! People would land on your properties and they would have to pay you rent. Cash money baby!

This passive income stuff doesn’t have to be pretend. It can actually happen in the real world… to you… if you are smart about it.

For your personal finances – I’ve got one idea for you that is right under your nose. Go look in the mirror. It says real estate.

I think right now could be a great time to invest in real estate – especially homes. But why today? Real estate prices seem to have stabilized, and mortgage rates are crazy low.

You’ve probably already read something about this (Rich Dad Poor Dad?) But are you doing anything about it? I am not talking about flipping houses. I’m talking investing and owning property on a long term basis.

I am NOT a real estate expert. I’m a financial planner. I’m merely saying that investing in real estate could be a nice part of your overall financial plan. How cool would it be to get $5000 a month for doing very little? Especially as you approach retirement? You could keep your lifestyle – or even have a better one – more travelling anyone?

Investing in real estate is all about leverage and passive income. Leverage in the sense that you are borrowing money from a bank (with the exception of your down payment) – and passive income meaning that you are renting the property out to someone that is paying your mortgage, property taxes and insurance.

Keep in mind there are risks with investing in real estate. You can lose money if you buy property and sell it for a loss. There is also a risk of a renter not paying on time, or if you simply cant find a renter which means you are on the hook for the mortgage payment and other expenses. You also will spend time being a landlord and dealing with tenants. You can farm that out too although it could eat into your profits.

Real World Example

You own a house and you are looking to buy another house. Maybe you want something bigger (or smaller!), or want to move to a neighborhood with a better school district. Maybe you want a shorter commute to work.

I get this question all of the time: Should I keep my current house as a rental, and then just buy another house?

Here’s the key thing: you need enough money for a down payment on the 2nd house. You aren’t going to sell house #1 and use your equity for the down payment on house #2. Bottom line: You need to have enough cash set aside for the down payment on house #2.

(You may be thinking I don’t even have enough money to buy my first house! Why you talkin’ about house #2? I need house #1!!! It’s time to start saving – either through reducing your expenses or making more money in your biz.)

So if you move from your original house (let’s call it house #1,) house #1 becomes an investment property. You rent out house #1. You want the rental income to cover your mortgage payment, property taxes, insurance, and maintenance. The goal is to have the rental income pay all of the expenses on house #1.

At some point down the road, oila! You have no more mortgage on house #1. Your renter has been paying your mortgage for all of those years. Now you are just collecting rental income and you are sitting pretty. Sweet! That is what passive income is all about. You also have the option of raising rents which is a great hedge on inflation.

I have interviewed a bunch of smart real estate investors. They have told me to get in the real estate game. If you’re not in the game, you can’t start building wealth this way. Most of them say to start small. You don’t have to be a gazillionaire to invest in real estate. You just have to have enough money for the down payment, and enough money in cash reserves to cover the mortgage in case your renter flakes out. The smaller the property you buy, the smaller the mortgage, and the smaller the risk you are taking.

For those of you renting and are looking to buy a house, I also think now is a great time to buy, for all of the reasons I mentioned above. The key is not to spend more than 28% of your gross income on house stuff – mortgages, property taxes, and homeowners insurance. I have created a killer tool that you could use to figure this stuff out. My clients really love it. Email me and I will send it to you.

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