module four - finance and structures 2016 v2€¦ · 0rgxoh )rxu )lqdqfh dqg 6wuxfwxulqj...

Module Four: Finance and Structuring

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MODULE FOUR:

Finance and Structuring


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Table of Contents MODULE FOUR: Finance and Structuring Introduction ................................................................................................................... 3 Aim ............................................................................................................................... 3 Program aim ................................................................................................................. 3 Module aim ................................................................................................................... 3 Pre-requisite knowledge and skills ................................................................................ 3 Getting the most out of this Learner Guide .................................................................... 4 At this level of learning, your expectations are: ............................................................. 4 To be deemed competent in this qualification: .............................................................. 5 The learning approach .................................................................................................. 5 Assessment .................................................................................................................. 5 Content outline.............................................................................................................. 7 Module objectives ......................................................................................................... 7 Module 4 Learning Objectives ....................................................................................... 7 Disclaimer ..................................................................................................................... 8 Contributing authors ..................................................................................................... 9 Suggested study schedule .......................................................................................... 11 TOPIC ONE: Financial capacity .................................................................................. 12 TOPIC TWO: Loans .................................................................................................... 26 TOPIC THREE: Types of loan products ...................................................................... 38 TOPIC FOUR: Types of borrowers ............................................................................. 45 TOPIC FIVE: Sources of finance ................................................................................ 53 TOPIC SIX: Borrowing capacity .................................................................................. 61 TOPIC SEVEN: Applying for the loan ......................................................................... 68 TOPIC EIGHT: Determining client ownership structures ............................................. 80


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Introduction Welcome to Module 4: Finance and Structures. This is the fourth module in the QPIA Course. In it we talk about how to work with clients to gather relevant information from which to build sound property investment strategies. This module will provide an overview of both a client’s financial capacity as well as their borrowing capacity. You will need to have knowledge of different types of loans and loan products available to your clients and which ones may be more suitable given their personal circumstances. We also cover the various loan structures, types of borrowers and client ownership structures, which may be applicable to your clients. Each part of the loan application process is also covered.

Aim Program aim The Property Investment Professionals of Australia (PIPA) has developed the PIPA Accreditation Program, a professional industry award, to address the need for professionals in the property investment industry and related industries to be appropriately qualified to give advice in property investment. PIPA is committed to the development of industry standards in property investment advice. It has developed the Accreditation Program as the first step in quality education for all those involved in giving property investment advice to retail property investors. The Accreditation Program has been aligned with the Financial Services Reform (FSR) provisions of the Corporations Act and with ASIC Policy Statement 146 training requirements for regulated financial services.

Module aim The aim of Module 4: Finance and Property is to give a comprehensive overview of all major factors that need to be taken into account when investors prepare to borrow money. This includes client’s potential borrowing capacity, different loan types, ownership structures and how property is valued for finance purposes.

Pre-requisite knowledge and skills

There are no pre-requisites for this education program. It is expected that participants will come from a range of backgrounds including accounting, financial planning, banking, mortgage broking, real estate agencies and property development.


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Getting the most out of this Learner Guide It is important to let others close to you know that you are completing this program and that you will need time and space to work through the course materials. This will assist in balancing your workload and seeking the necessary support or assistance to help you in your learning. It will also assist in minimizing interruptions. Ensure that your surrounding environment is suitable for learning. Consider such factors as sufficient lighting, room temperature, adequate seating arrangements, desk setup and comfort level. If small environmental factors are not right, it will be harder to focus. It is important to take the time to thoroughly read all information and instructions carefully and complete the questions and activities as they arise. Use this Learner Guide as your manual. Make it your own by making as many notes as you wish, in addition to the questions and activities included. You will find a combination of Self Reflection questions and Activities included in this Learner Guide

At this level of learning, your expectations are:

To demonstrate a competent level of theoretical knowledge

To apply the range of skills outlined within this course to your role

To apply solutions to common problems

To take responsibility for your own learning and the application of your knowledge

Your learning pathway


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To be deemed competent in this qualification: Complete and submit all required assessment tasks Be assessed as competent for the requirements of each unit of competency.

The assessment methods used in this qualification, may include any or all of the following:

Written questions/answers Verbal Assessment and/or Telephone Role Play Short answer or project based assessment Trainer/Assessor Observation

Your assessments will give full instructions on how to complete them. If you have any questions, you may contact PIPA head office to clarify instructions. Best of luck!

The learning approach This program is delivered by distance education, using a blended learning approach involving a combination of printed material and electronic materials. You will be sent study material in a printed book (the study guide). The handbook and some of the assessment will be available electronically and online. You will be required to access the Internet from time to time as directed in the study guide. You may also be directed to do some research of properties in your local area. You will not be required to do library research. When you receive the study guide you will be able to work through it at your own pace. You are likely to move faster through areas with which you are already familiar, and slower through areas that are new to you. The recommended study schedule will give you an idea of how to pace your learning. Even where you think you know the subject you are advised to skim through just to make sure that you know what is in this course. The treatment of subject content in this program will not necessarily be the same as in other courses as they are designed for different purposes. Throughout the study guide you will find activities that are designed to assist your understanding. While your responses to these activities will not be assessed, you are encouraged to try them in order gain maximum benefit from undertaking the course.

Assessment Assessment for this module will consist of an online multiple-choice exam and an assignment. The successful completion of this module is achieved by receiving a pass grade in both the online multiple-choice exam and assignment.


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Content outline Topic 1 - Financial Capacity Topic 2 - Loans Topic 3 - Types of Loan Products Topic 4 - Types of Borrowers Topic 5 - Sources of Finance Topic 6 - Borrowing Capacity Topic 7 - Applying for the Loan Topic 8 - Determining Client Ownership Structures

Module objectives Module 4 Learning Objectives By the end of this module you will be able to:

List and explain the importance of the four factors that affect a client’s borrowing capacity

List the different loan types typically offered by lenders and their suitability to different investor needs such as Principal and Interest, Line of Credit and Interest only

List different types of lending institutions that lenders may access to purchase investment properties

Describe the process for applying for loans from start to finish Explain the four different methods that borrowers may use to raise a deposit Compare seven different types of client ownership structures and their relative merits Explain the rules associated with a client investing within a self managed super fund Describe the process for valuing property using both the net present value and

discounted cash flow techniques as well as other valuation methodology


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Disclaimer All rights reserved. Except as permitted under the Australian Copyright Act 1968 (for example, a fair dealing for the purposes of study, research, criticism or review), no part of this book may be reproduced, stored in a retrieval system, communicated or transmitted in any form or by any means without prior written permission. All inquiries should be made to the Property Investment Professionals of Australia (PIPA) head office. The material in this publication is of the nature of general comment only, and neither purports nor intends to be advice. Readers should not act on the basis of any matter in this publication without considering (and if appropriate) taking professional advice with regard to their own circumstances. The authors and publishers expressly disclaim all and any liability to any person, whether a student studying this course, in respect of anything and of the consequences of anything done or omitted to be done by any such person in reliance, whether in whole or in part, upon the whole or any part of the contents of this publication. It is important that you as a property investment advisor have a knowledge and understanding of:

Different ‘real property’ and property related products, including trusts and superannuation;

Your own advisory limitations; and Your obligation to refer clients to seek additional, authorised advice where the best

solution for the client may include products other than real property. Unless you are authorised to give advice on these products, you are required to refer the client to seek additional, authorised financial advice.


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Contributing authors Margaret Lomas, QPIA®, Dip Fin Adv, Cert. Investment Property Advice, Senior Associate of FINSIA, Member of MFAA. Margaret is a property investment author and founding director of Destiny Financial Solutions (DFS), a company, which provides specific property investment advice to consumers. She is a past Telstra NSW Businesswoman of the Year and is the host of SkyNews Business Channel's Your Money Your Call and Property Success with Margaret Lomas. Benjamin Kingsley, QPIA®, Cert IV Financial Services - Mortgage Broking, Member of MFAA. Ass Dip Business - Tourism & Travel. Ben is an active property investment analyst and media commentor. He is the Founding Director of Empower Wealth, a wealth advisory firm specialising in residential property investment. He has over 17 years research and personal property investment experience and has personally amassed a multi-million dollar residential portfolio. Ben also has over 7 years experience in mortgage investment finance. For the last 6 years he has been a presenter of regular property investing and finance education workshops Ben brings a long history of property investing knowledge and corporate business acumen that will provide a greater voice and awareness for PIPA. Damian Collins, Founder and Director of Momentum Wealth, a full-service property investment consultancy group based in Perth, Western Australia. Aside from acquiring a multi-million dollar property portfolio, Damian has earned a Bachelor of Business at RMIT University in Melbourne, a Graduate Diploma in Property at Curtin University in Western Australia and has also completed the stringent requirements for membership of the Institute of Chartered Accountants in Australia and the Financial Services Institute of Australasia and is currently a member of both institutions. In 2007 Damian was a recipient of the prestigious 40 under 40 awards for business entrepreneurs. Damian is a highly sought-after presenter and speaker; and is a regular media commentator.

Other Contributors Timothy Biles, BA, Dip.TRP, FPIA Timothy Biles is a geographer and town planner, and a Fellow of the Royal Australian Planning Institute. He has worked for planning authorities at the local and regional level, lectured in town planning at Royal Melbourne Institute of Technology and has been in private practice since 1980. Melinda Chapman Melinda Chapman is the Director of a Registered Training Organisation and the co-writer of the Diploma of Property Investment competencies. She is a training and development consultant with Trainingways Pty Ltd. Bill Dimovski, DBA MBA BBus CPA The property development companies for which Bill is a director have developed hundreds of commercial and residential properties in the past 20 years. Prior to this, Bill worked for two of


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the ‘top four’ accounting firms in their accounting, taxation and management advisory services sections. Scott Keck, Managing Director, Charter Keck Cramer Scott has more than 35 years’ property valuation and advisory experience. He is frequently engaged as a senior advisor and strategist in complex commercial and statutory issues related to the national and state property markets and for advice in relation to large portfolio valuations for major private, public and statutory corporations. Owen Lennie, MUP, BA, DipFinMgt, GradDipAppFin&Inv, FCPA, FAPI, FPIA, FAICD, ASIA Owen has been involved in property asset management and investment evaluation for more than 20 years. He was a director of McIntosh Knight Frank Limited, which floated the Grand Hotel Group. With Gary Weaven, he launched the Industry Superannuation Property Trust. Phil Osborne BA, ANZIIF (Aff), Dip FP, CFP® Phil has been involved in the financial services industry for 16 years, the past five years as a financial planner and business development consultant. He has been a consultant to the Financial Planning Association of Australia as part of their education taskforce, as well as conducting face-to-face training sessions Natasha Palich, B.Arch.Hons, Grad.Dip.Soc.Sc, RAIA Natasha has a background in sustainable design, having worked for both the Royal Australian Institute of Architects and the City of Port Phillip as a sustainable design advisor. Thanks also to Brad Matthews, Group Managing Director of ResCom Group of businesses, which offer mortgage management, finance broking, real estate, insurance and conveyancing services. Brad has a Business Degree from Monash University (major in Banking & Finance), is a Life Member and Fellow of the FINSIA (Financial Services Institute of Australasia), is a QPIA®, Licensed Real Estate Agent, a Fellow of both the Australian Institute of Company Directors and Leadership Victoria-Williamson Community Leadership Program (year 2000) and a past awardee of the Rotary Youth Leadership Scholarship Rohan Birmingham, Grad Cert bus, Lic Builder, Lic Real Estate Agent. Rohan is Managing Director his own property investing advisory company “Affordable Property Investments”. Rohan is highly skilled in his field and has a great ability to transfer that knowledge in simple and concise language. Rohan is a successful property investor in his own right and has become financially free. Rohan is often asked to speak at investment nights on the subject of Property Investing due to his skill of keeping it simple. Malcolm Allan (Rick) O’Shea. QPIA®, Director of Queensland Property Sales Pty Ltd, a specialised Real Estate agency which focuses on providing a high level of personalised service to military personnel and their friends and families. Rick has been board member and committee member for many associations, and is a qualified JP in Queensland and holds a QPIA®.


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Suggested study schedule The following is a suggested timeframe only. As this is a self-paced learning program, you can take as much or as little time as you need. How much time you are able to spend on the program will depend on your work and other commitments. The following schedule is suggested for a person who is fitting in study around work. If you are not working and can study full-time, you will probably find that you can progress more quickly. We recommend that you do not attempt the assessment until you have completed studying all eight topics in Module 4.

Week 1 Read through the Overview. Read Topic 1 and do the activities. Week 2 Read Topic 2, Topic 3 and do the activities. Week 3 Read Topic 4, Topic 5 and do the activities. Week 4 Read Topic 6, Topic 7 and do the activities. Week 5 Read Topic 8 and do the activities. Commence assessment.

Please refer to the participant handbook for information regarding assessment.

Module Four: Finance and Structuring Topic One: Financial capacity

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TOPIC ONE:

Financial capacity


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Table of Contents TOPIC ONE: Financial capacity Financial capacity ....................................................................................................... 14 Factors determining a property investor’s borrowing capacity ..................................... 17 Capacity...................................................................................................................... 17 Collateral .................................................................................................................... 18 Summary .................................................................................................................... 24 References ................................................................................................................. 24 Suggested answers to activities .................................................................................. 25


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Introduction This topic considers the impact of your client’s property investment strategy on their personal financial circumstances and seeks to assist you to ensure that a property investment is affordable for your client. It also explores borrowing factors which impact on your client’s income.

Learning objectives Topic 1 - Financial Capacity By the end of this topic you will be able to:

Explain the factors impacting a potential client’s financial capacity List and explain the importance of the four factors that affect a client’s borrowing

capacity Answer questions, complete activities and other self- paced learning tools to enhance

your understanding of this topic

Module Four: Finance and Structuring Topic Two: Loans

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TOPIC TWO:

Loans


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Table of Contents TOPIC TWO: Loans Loans .......................................................................................................................... 29 Principal and interest (P&I) ......................................................................................... 30 Interest only (IO) ......................................................................................................... 30 Principal and interest compared to interest only .......................................................... 32 Lines of Credit............................................................................................................. 32 Which option suits which property investor? ............................................................... 33 Fixed versus variable .................................................................................................. 34 Summary .................................................................................................................... 36 Suggested answers to activities .................................................................................. 37


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Introduction This topic takes a broad look at loan types to ensure you are familiar with the marketplace for property investment funds. It describes different types of loans and their features and drawbacks.

Learning objectives Topic 2 - Loans By the end of this topic you will be able to:

List the different loan types typically offered by lenders and their suitability for different investor needs such as principal and Interest, line of credit and interest only

Answer questions, complete activities and other self-paced learning tools to ensure your understanding of this topic

Module Four: Finance and Structuring Topic Three: Types of loan products

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TOPIC THREE:

Types of loan products


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Table of Contents TOPIC THREE: Types of loan products Types of loan products ................................................................................................ 41 Standard variable home loan ...................................................................................... 41 Introductory home loan ............................................................................................... 41 Basic home loan ......................................................................................................... 42 Professional package.................................................................................................. 42 Fixed-rate home loan .................................................................................................. 42 Combination loan ........................................................................................................ 42 Line of credit ............................................................................................................... 43 Summary .................................................................................................................... 43 References ................................................................................................................. 43


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Introduction The last topic took a broad view of the loans market and the loan types, or genres available. In this topic we will look at actual loan products and explain how they work. The purpose of this topic is to familiarise you with the vast range of potential loan products so that you can better advise your client. Note that this information is for your general knowledge only. If you intend to provide loans advice, the correct licenses must be fist obtained.

Learning objectives Topic 3 - Types of Loan Products By the end of this topic you will be able to:

Explain the following loan types: o Standard variable home loan o Introductory home loan o Basic home loan o Professional package o Fixed rate home loan o Combination loan o Line of credit

Answer questions, complete activities and other self-paced learning tools to enhance your understanding of this topic

Module Four: Finance and Structuring Topic Four: Types of borrowers

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TOPIC FOUR:

Types of borrowers


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Table of Contents TOPIC FOUR: Types of borrowers Types of borrowers ..................................................................................................... 48 Fully verified ............................................................................................................... 48 Self-certified ................................................................................................................ 48 Credit impaired ........................................................................................................... 49 Asset lend ................................................................................................................... 49 Types of securities ...................................................................................................... 50 Summary .................................................................................................................... 51


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Introduction Your clients will have a variety of personal circumstances which will impact their capacity to borrow. The types of loans they can use will also be different from borrower to borrower. Being familiar with how a lender assesses your client for a loan is a vital piece of information and in this topic we explore the range of possibilities.

Learning objectives Topic 4 - Types of Borrowers By the end of this topic you will be able to:

Explain the following types of borrowers: o Fully verified o Self certified o Credit impaired o Asset lend


Module Four: Finance and Structuring Topic Five: Sources of finance

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TOPIC FIVE:

Sources of finance


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Table of Contents TOPIC FIVE: Sources of finance Sources of finance ...................................................................................................... 56 Banks, building societies and credit unions ................................................................. 56 Securitised lenders ..................................................................................................... 56 Non-conforming lenders .............................................................................................. 56 Insurance companies .................................................................................................. 57 Mortgage trusts ........................................................................................................... 57 Trustee companies ..................................................................................................... 57 Private loans (asset lend) ........................................................................................... 57 Summary .................................................................................................................... 58 References ................................................................................................................. 58 Suggested answer to activity ...................................................................................... 60


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Introduction There are many players in the lending industry and a variety of options available for your clients. Not all sources come with the same terms and conditions and both you and your client must be sure that the loan source provided suits their personal needs and circumstances at the time. The wrong choice of loan and lender can result in a strategy which performs less well than expected. In this topic we explore the many different sources of loan funds.

Learning objectives Topic 5 - Sources of Finance By the end of this topic you will be able to:

List the different types of lending institutions that lenders may access to purchase investment properties including:

o Banks, building societies and credit unions o Securitised lenders o Non-conforming lenders o Insurance companies o Mortgage trusts o Trustee companies o Private lends

Answer questions, complete activities and other self- paced learning tools to enhance your understanding of this topic

Module Four: Finance and Structuring Topic Six: Borrowing capacity

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TOPIC SIX:

Borrowing capacity


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Table of Contents TOPIC SIX: Borrowing capacity Borrowing capacity ..................................................................................................... 64 Fully verified borrowers ............................................................................................... 64 Self-certified borrowers ............................................................................................... 64 Credit impaired ........................................................................................................... 65 Asset borrowers .......................................................................................................... 65 Selecting the right loan from the right lender ............................................................... 66 Summary .................................................................................................................... 66 References ................................................................................................................. 66


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Introduction You may at some time meet with a client who has the intention to invest in property, but lacks the financial capacity to do so. At other times you may meet with clients whose ability to borrow far exceeds their desire to buy property. It is your job to ensure that, not only do your clients not overcommit but that they invest within their personal risk profile to do so. In this topic we will explore borrowing capacity so that you can provide the right guidance for your client.

Learning objectives Topic 6 - Borrowing Capacity By the end of this topic you will be able to:

Explain the concept of borrowing capacity Answer questions, complete activities and other self-paced learning tools to enhance


Module Four: Finance and Structuring Topic Seven: Applying for the loan

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TOPIC SEVEN:

Applying for the loan


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Table of Contents TOPIC SEVEN: Applying for the loan Introduction ................................................................................................................. 70 Learning objectives ..................................................................................................... 70 Topic 7 - Applying for the Loan ................................................................................... 70 Applying for the loan ................................................................................................... 71 Competitive market ..................................................................................................... 71 Paying the deposit ...................................................................................................... 71 Established purchases ................................................................................................ 72 Cash ........................................................................................................................... 72 Borrow ........................................................................................................................ 72 Deposit bond .............................................................................................................. 73 Bank guarantee .......................................................................................................... 74 Off the plan ................................................................................................................. 75 Cash ........................................................................................................................... 75 Borrow ........................................................................................................................ 75 Deposit bond .............................................................................................................. 76 Bank guarantee .......................................................................................................... 76 A word about purpose ................................................................................................. 77 Summary .................................................................................................................... 78 References ................................................................................................................. 78 Suggested answers to activities .................................................................................. 79


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Introduction The process of applying for a loan is a lengthy one. A loan can take many weeks to apply for and many more to advance. While you may not be qualified to provide loan advice, you can assist your client to be prepared so that this process runs more smoothly. In this topic we look at the loan process and explain each step. We also look at the methods by which a client can raise the deposit required to invest in property.

Learning objectives Topic 7 - Applying for the Loan By the end of this topic you will be able to:

Describe the process for applying for loans from start to finish Explain the four different methods that borrowers may use to raise a deposit Answer questions, complete activities and other self-paced learning tools to enhance


Module Four: Finance and Structuring Topic Eight: Determining client ownership structures

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TOPIC EIGHT:

Determining client ownership structures


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Table of Contents TOPIC EIGHT: Determining client ownership structures Determining client ownership structures...................................................................... 82 Types of ownership structure ...................................................................................... 83 Personal ownership .................................................................................................... 83 Entity ownership ......................................................................................................... 85 Self-Managed Superannuation funds (SMSF) ............................................................. 90 Business premises ...................................................................................................... 90 Comparing the different types of ownership structures ................................................ 93 Valuation of property investment opportunities............................................................ 95 Discounted cash flow techniques ................................................................................ 95 Net present value ........................................................................................................ 96 Non-discounted cash flow methods ............................................................................ 99 Payback period ......................................................................................................... 103 Accounting rate of return ........................................................................................... 104 Summary .................................................................................................................. 104 References ............................................................................................................... 104 Suggested answers to activities ................................................................................ 106


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Introduction In this topic we will introduce you to the different ownership structures which are possible when buying property, It is important that you liaise with the client’s tax planner to ensure that the ownership structures are consistent with the tax strategy for that client. The topic also considers other ownership structures outside of those individually held, such as superannuation funds and companies.

Learning objectives Topic 8 - Determining Client Ownership Structures By the end of this topic you will be able to:

Compare seven different types of client ownership structures and their relative merits

Explain the rules associated with a client investing within a self-managed super fund

Describe the process for valuing property using both the net present value and discounted cash flow techniques as well as other valuation methodology


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