Property Hub - Investment Insights & Inspiration - Realty Talk: Make LMI your friend

Episode Date: January 2, 2024

For many people, the property market must be very frustrating and seem like a goal that is forever out of reach.  By the time they save the deposit, the property values have increased so much that they never seem to have enough to get started.  The solution could be Lenders Mortgage Insurance but why do so many people go to such great lengths to avoid it?  That is the topic Bushy talks about this week.  Also in today’s show he rounds out the second installment of his look at Property Management by laying out the risks of self management. NEW – join our Facebook group, The Property Hub Collective: https://www.facebook.com/groups/1857513011165686 Join the Property Hub community on Substack! Sign up to get Australian property news, opinion, and episodes in your inbox: https://propertyhubau.substack.com/ Subscribe to RealtyTalk on the Property Hub channel: Apple Podcasts | Spotify | Google Podcasts | Email Property Hub is a collaboration between Bushy Martin from KnowHow Property, Kevin Turner from Realty, Andrew Montesi from Apiro Marketing and Apiro Media, and Australia’s largest independent podcast network DM Media. Business and partnership enquiries: [e-mail] omnystudio.com/listener for privacy information.

Hello, I'm Kevin Turner and welcome to this week's Realty Talk show. For many people, the property market must be very frustrating and seem like a goal that's forever out of reach. By the time they save for the deposit, the property values have increased so much that they never seem to have enough to get started. Well, the solution could be lender's mortgage insurance. But why do so many people go to such great lengths to avoid it? That's a topic that Bushy talks to in this week's show.

Also in today's show, he rounds out the second instalment of his look at property management by laying out the risks of self-management. Hi, if this is your first time with us, welcome. You're going to find us on all podcast players and through the Southern Cross Austereo Network. If you like the show, make sure you hit the subscribe button for us, please. Help us to continue to bring you the best guests every week. A reminder, too, that you can join the conversation anytime on Facebook by going to the Property Hub Collective. We'll be back in just a moment as Bushy kicks off this week's show.

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Have you ever been running late for a train and you arrive on the platform just as the train starts leaving the station? And you start racing to catch it, but the faster you run, the further it pulls away. As it gathers speed and you're left gasping and frustrated as you miss it and just see it disappearing into the distance. Well, this is very much what the property market looks and feels like for many buyers and investors. By the time they save the deposit, the property values have increased so much that they never seem to have enough to get onto the property ladder and they're caught short and frustrated like cats that are constantly chasing their tails. But what if there was a ticket that you could buy to get you on the property train faster and easier? Well, there is. It's called Lenders

Mortgage Insurance, better known as LMI. Many borrowers will move heaven and earth to avoid paying it. But is LMI really as bad as people make it out to be? And are there situations when you can use LMI to your advantage? Unfortunately, lenders mortgage insurance is often maligned and very misunderstood. So today I'll debunk some of the LMI myths so you can understand clearly what it is, what it means and when it's appropriate. Now LMI is a tool that allows you as a property buyer to purchase a property with a small deposit by protecting lenders that against you if you default on your repayments. And as mortgage insurance is insurance that you pay to cover and protect the bank's position. And when does LMI apply? Well, for most banks and lenders,

LMI is only applicable if you're looking to borrow more than 80% of the purchase price of the property. And what does it cost? Well, this depends on various factors like a property purchase price, how much you're looking to borrow, the type of loan that you're looking to take out, the type of borrower you are, and of course, the bank or lender that you're talking to. An LMI applies on a sliding exponential scale that's dependent on how much you borrow and the ratio of the loan as a percentage of the value of the property. So starting at zero with a loan at 80% of the value of the property for most banks, LMI rises to approximately 3% to 4% of the purchase price once you hit the maximum borrowings of about 95% of the purchase price, again depending on the

bank. Now as an example, on a $500,000 property purchase with a loan of 80% of the value of the property, no LMI is applicable. But if you take out a loan that equals 90% of the value of the property, then LMI premiums range around about the 5,900 mark or approximately at 1% of the purchase price. And if you lift the borrowings to the maximum of 95% on the same $500,000 property, then the LMI premium doubles to about 12,700. And there's a big variation across the bank, so it's really worth shopping around or getting a savvy mortgage broker to show you the comparisons. so why would you want to spend an extra six to twelve thousand dollars to buy a property isn't it about minimizing your cost at all times well here's the rub you don't have to stump up the

thousands in lmi in a lump sum because most lenders will allow you to add it to a loan in this way the twelve thousand seven hundred in lmi for a 95 percent loan on a five hundred thousand dollar property purchase converts to just ten to twelve dollars a week at current interest rates. That's equivalent to just two or three cups of coffee a week. So this is the difference between viewing LMI as just a cost versus seeing it as an opportunity cost, or the difference between seeing LMI as a tax versus a ticket, because LMI is a key to a much bigger property opportunity, a gateway to give you much more access for a low ongoing cost. Now let's look at what LMI means to home buyers, particularly first home buyers that are struggling to save

enough deposit to secure a property, particularly when property values are rising strongly and the rate of price increases is faster than you can actually save. Again, it's like running after that train leaving the station that's just beyond your reach and keeps getting further away from you the faster you run. This is where LMI can come to your rescue and give you the ticket to get safely on that property train. So let's say you're starting to buy a property of about $500,000. You need to budget an extra $30,000 or approximately 6% of the price to cover all of the establishment costs. So a $500,000 property is going to cost you about $530,000 or up. Now, if you're hell-bent on minimizing your costs and want to avoid LMI by limiting your loan to 80%

of the value of the property, then you're going to need cash savings of $130,000 to complete that purchase. Now, that sounds like a lot. How can you reduce the size of the cash savings deposit that you need to get into property faster. Well, this is where LMI comes to your rescue. If you borrow 90% of the $500,000 property, then your deposit drops from $130,000 down to $90,000, which is 40 grand less or a reduction of 30%. And if you borrow the maximum 95%,

your deposit drops down further to just $70,000. That's nearly half the deposit required if you're buying without lender's mortgage insurance. So for the cost of $10 to $12 a week in repayments in LMI, you can drop the deposit you need to secure a half a million dollar property home by close to half. So it's clear that LMI enables home loan borrowers to get into the housing market with a much smaller deposit and much faster. And there's another way to look at lender's mortgage insurance, which is relevant to home

buyers, but also investors. And this revolves around the value of property the LMI actually enables you to purchase. Let's say you've got 70 grand in savings that you want to put towards a property. If you buy a property to minimize your cost without LMI, then borrowing a maximum of 80% of the purchase price, your 70 grand is only going to get you a $270,000 property. But if you go the whole hog and borrow 95% of the purchase price,

your 70,000 buys you a $500,000 property with LMI costing you just an extra $12 a week in repayments. so for the cost of three cups of coffee a week the maximum lmi is going to help you secure an 85 percent higher price property now this is very significant particularly as a property investor looking to build your wealth as the size and the value of your property portfolio will have a massive impact on the size of your nest egg over the long term now i don't know about you but that sounds like an absolute no-brainer and if you're an investor with a good accountant then the LMI costs are tax deductible

and can be written off over one to five years. Now, I reinforce that nothing I'm talking about today can be considered as financial advice and you need to seek out independent advice from an accountant or a financial advisor so that you're making fully informed decisions based on your needs, your circumstances and your risk tolerance.

And make sure that you seek out guidance from a savvy mortgage broker so you fully understand the ins and outs before you commit to purchasing a property. So on balance, LMI is not the evil cost that it's generally painted out to be. Quite the contrary, LMI enables borrowers to get into the housing market fast with a small deposit.

And with home ownership increasingly appearing to be out of reach for many Australians, LMI can be the key and the ticket to enabling you to secure a property. So while many say good things come to those who wait, in situations like this, the early bird catches the worm. And early birds who buy property sooner with a minimum deposit have the opportunity to secure their property or their investment property before prices rise further and potentially capture capital gains as their property values increase in a rising market. Now, LMI can act as a leveraging tool to purchase higher property values. So LMI is actually an asset amplifier

for home buyers and investors, allowing you to secure a much higher property value to grow your nest egg. So ask yourself the question, is LMI a cost or an investment, a tax or a ticket? If you continue to focus on minimising costs and avoiding LMI, you run the danger of minimising your opportunity. For me, LMI is not a cost but a key, an opportunity investment that gives you a low cost to get off the stationary platform and catch the accelerating property train. That's more food for thought. This is Bushy Martin from Know How Property Finance. Stay tuned for more. Successful property investment is a game of finance. Do you have the right team and the right game plan realty talk is brought to you by know how property more than mortgage brokers

bushy martin and his team of investment architects set you up with a sustainable strategy structured to lower your costs tax risk and stress while increasing your capacity for growth know how has helped over 1900 homeowners and investors secure more than 800 million dollars in property wealth. So get set to live more, work less and live your legacy. Want to know how to invest in your freedom? Visit knowhowproperty.com.au. This is Realty Talk powered by realty.com.au. Greetings and welcome. This week, we continue our focus on the question of whether you should DIY versus professionally property manage your investment property. Last week, we revealed the stats on property management, confirming that between 400,000 to 660,000 investors

still self-manage their properties. I outlined some horror stories, I gave an outline of everything that's involved in managing your property, and I gave you the questions that you need to ask yourself to determine if self-managing is actually the right option for you. Today, we pick up where we left off by weighing up all of the risks of self-managing your rental property. So in addition to some of the risks that I outlined last week, other risks of self-managing your rental property include the following five key considerations. Firstly, while a private landlord can place ads in the local newspaper and online, the prospective pool of tenants is smaller than property managers, hence the potential to find the right tenant and best available tenant is also smaller. Secondly,

as mentioned last week, tenants who look for private rental ads that don't involve a property manager quite often don't have the best rental history. Because these prospective tenants understand the ins and outs of the rental process, they quite often opt for private listings to avoid background checks that could turn up some unsavoury information. And thirdly, without access to the most accurate and full information, private landlords often are forced to make decisions based on gut instinct. And this can prove to be very costly down the track if the wrong tenants are chosen and the rent goes unpaid or the condition of the property decreases drastically. And getting the right tenants into your rental is clearly an imperative. A good tenant will pay

their rent, not make endless trivial demands on looking after the property, and they will look after it as if it were their own. A bad tenant, on the other hand, can be your absolute worst nightmare. Rent arrears, damage, illegal activities, the headaches and the hassles can be endless. Then there's the risk of not following all of the required procedures to the letter of the law. It's not uncommon that disputes involving rental payment, lease conditions and bond claims end up in a tribunal or court hearing and the judge or mediator will take into consideration whether you as the landlord have taken all the appropriate steps and can provide the appropriate records as evidence that this has all occurred.

For example, if you wish to evict a tenant, you need to be able to demonstrate that you've provided the required reminders, notices and applications at the correct intervals and on the right dates in order to get the demand you require issued. If you can't do so, you may not get the order you wish,

such as an eviction notice, and the tenant is likely to be allowed to stay in the property. Then there's the risk that if you become friendly with the tenants, which often occurs, enforcing the lease agreement can also become very complicated and breaches of the lease agreement can be detrimental to you as a landlord and in some cases may actually void your insurance

if for example your tenants sublet or run a business from the rental. On the flip side here are five other reasons why I believe it's actually worth investing in a good dedicated specialist professional property manager. Firstly when it comes to sourcing tenants good professional property managers can tap into databases that give you access to a larger pool of quality tenants. In addition, property managers have access to thorough screening procedures which can weed out applicants that are simply not suitable for the property right off the bat. Thirdly, property managers also have access to blacklisted tenancy databases for tenants who have bad rental histories. And property managers in a local area often talk with each other to share details on bad

tenants to protect the area and their landlords. Now this is information that private landlords never get to hear. Fourthly, property managers also perform all the time-consuming tasks involved with the rental. They arrange repairs and maintenance and usually have a panel of preferred suppliers on hand to perform the work. Property managers also deal with tenant requests and any complaints from neighbours 24-7. They conduct the rental inspections and provide a comprehensive report to the owner, ensuring important matters are raised with landlords and resolve to comply with all the legal and duty of care requirements. And finally, professional property managers give you access to specialist landlord insurance policies that are generally

not available to private landlords because the insurers are actually protecting their interests and reducing their risk by only dealing with properties that are managed by property management professionals. For example, the common inclusions and landlord policies are loss of rent and tenant damage. However, one that's sometimes overlooked is denial of access. If the tenant refuses to leave the property and you have to go to court to get them evicted, a denial of access clause in your landlord insurance will cover this and you should be able to claim for loss of rent while you go through the eviction process. Because we often see landlords really struggle when it comes to this loss of rent.

If they don't have specialised landlord insurance and the tenant has defaulted on the rent, they quickly discover that the bond is nowhere near enough to cover the missing rental income and then the clean-up when the tenant vacates, which is what most landlord insurance policies provided by the major general insurers rely on. And while the bond is absolutely there to protect a landlord,

the timeframes to legally get a tenant out of a property when they default on their rent can often really stretch out. It generally takes about 8 to 12 weeks and sometimes longer to get into tribunal or court, depending on the state, and there's the additional 14-day period where the tenant needs to vacate. So you could be looking at anywhere between 10 to 14 weeks until you get possession back of the property. On this basis, the four-week bond is nowhere near enough to cover this and this is where specialised landlord insurance via reputable property managers steps in. And making sure appropriate records are kept is absolutely super important, especially when it comes to making a claim against your insurance. And in our

experience, it's not a matter of if you'll ever make a claim, it's just a matter of when. When you need to make a claim, you often need to submit a pile of paperwork including the tenancy application, lease agreements, bond lodgements, details about property inspections, notes on repairs and maintenance, and of course, the ledger of payment collected. Reputable property managers are required to have a trust account, and they usually have all of this information right at their fingertips. And if things go pear-shaped, and the tenancy needs to be ended, a good property manager knows precisely what to do to meet all of the statutory obligations. For example, issuing notices, applying for termination orders,

and appearing at tribunal and if you end up in tribunal and you will at some point during your investment property journey you need to have professional representation as the legislation in all states is slanted in the favor of the tenant and the courts often look more favorably on your case if it's being professionally managed and property managers intimate knowledge of the legislation and ability to follow due process to the letter of the law will save you thousands a lot of stress and a lot of sleepless nights. So understanding all of the laws and obligations is a key benefit of engaging a professional property manager. They're required to be up to date with legislation and all of the regulations and compliance codes that apply to rental

properties, not just the Residential Tenancies Authority, but also other applicable legislation including building safety, strata laws and short-term accommodation. Now no one wants to fall foul of the law and having a competent property manager handling your investment property can help ensure that this doesn't happen to you. Now in my humble experience the costs of engaging a good property manager are often more than offset by the additional rent an experienced manager can get you, the savings enjoyed by reducing tenant changeover and vacancy periods and property managers often save you maintenance money because they generally get better deals from tradies they use when they have them regularly on repairs. And of course, there's the considerable

saving of your time, which will be better spent on earning additional money through your work than saving a few bucks on property management. With property management being around the cost of a large cup of coffee a day, you need to ask yourself whether it's really worth putting your highest priced assets at risk by trying to save this measly amount. So what are the approximate costs of using a property manager? Well, in return for relieving you as the owner of all the time-consuming and sometimes onerous obligations of leasing, managing and maintaining a property, of course, the property managers charge you fees. Commission usually ranges from somewhere between 6% to 15% of the weekly rent and other fees can sometimes apply for various

services such as letting and lease renewal, admin fees, tenancy database checks, file preparation and tribunal attendance, end of financial year statements, lease transfer fees and insurance claims. Some will charge a flat fee or a flat percentage and often it's the ongoing fees involved that are the reason that some landlords choose to self-manage. However, property management fees just like landlord insurance premiums are generally fully tax deductible and remember it's never about cost it's always about the value achieved so don't get caught chasing the lowest property management rate again the difference between the cheapest property manager and the most expensive is often only a cup of coffee a week so if you're prepared to put your highest

price asset at risk for the cost of a cup of coffee then you really need to think seriously about this. Being penny wise and pound foolish can end up being very costly. Now, we understand that managing a rental can be complex, especially in terms of legal obligations and requirements. And for all of these reasons, we believe a great property manager is worth their weight in gold. So while self-managing might be the preferred option for those who can cope with the workload and have the time to fully understand the legal liability risk that's involved with do-it-yourself, Engaging a property manager can be a wise move to ensure that you achieve and maintain a good return on your investment. So in my humble opinion, in the context of the ever-changing

legislative environment that's increasingly favouring tenants, I don't think it's ever been more important for an investor to engage a good, dedicated, professional property manager. This is because a property manager can help you navigate all the changes in the latest legislation and make sure you don't inadvertently do anything wrong without even realising it. I also think it's important that there's a professional distance between the owner and the tenant.

Sometimes this relationship becomes a little too cosy and it can be a lot harder to issue a breach notice or have a discussion about upping the rent if there's a friendship involved. So if getting a good, dedicated specialist property manager is so critical to the success of your investment journey, how do you go about ensuring that you find and engage the best one available. Well, this is exactly what I'll help you with in our next

property management series installment. I'll give you the lowdown and share with you all of the questions that you need to ask and the performance benchmarks that you need to know to ensure you're engaging the best available property manager in your area. Because it's often what they don't say that's just as important. So being able to read between the lines is absolutely critical here. and for more deep dives on the importance of all things property management look out for my recent conversations on both realty talk and the get invested podcast with dennis yusuf from inspired growth training that's more food for thought thanks for listening and i look forward to sharing with you again sometime soon hi just before we go back to the show i want to spend a few seconds

and tell you about a book that was sent to me that's now become my go-to reference when I'm looking for inspiration about property investment. You know, sometimes it's not about knowing all the answers. It's certainly more important to know what questions to ask. This book by Rasti is called The Property Wealth Blueprint, and it's one that you don't read just once and then put it away. it stays out as a reference. It's a book that you go back to time and time again as I do because it's packed with personal experience and with great examples of how to get property investment right. It's very frank, it's to the point and as you can see here I've needed to bookmark several points and I can tell you that it's a constant companion on my desk here.

The remarkable thing is that it's absolutely free on Rasty's website, getrare.com.au. Get Rare, it's a gateway to a richer life. The website there for you again, getrare.com.au. So get this book, get it for yourself. Realty Talk exclusive to The Property Hub. And that brings us to the end of this week's show. before I leave you a reminder to make sure you don't miss a single episode of Realty Talk or Bushy's Get Invested podcast, both delivered to you each week. And you can do that by subscribing

to the Property Hub now on your favourite podcast player or wherever you're listening to or watching the show. Also, join the conversation anytime on Facebook at the Property Hub Collective. Thanks to our supporters and content partners, Realty.com.au, BMT Tax Depreciation, Know How Property Finance, Get Rare Property and Apiro Marketing. I'm Kevin Turner and on behalf of Bushy and the Property Hub team, we look forward to seeing you again next week.