What are the things that I should know as a foreign investor?
This guide serves as an introduction to property investment in Australia from a foreign investor’s perspective, along with the regulations and processes involved should a foreign investor decide to purchase an Australian property.
How do I invest if I am not an Australian citizen?
Foreign investment brings forth fundamental benefits to the Australian Government. However, there are foreign investment policies in place to regulate the stability of the Australian property market. Though off-shore investments are welcome, certain restrictions must be abided by, that are managed by the Foreign Investment Review Board (F.I.R.B). Generally, non-residents have the liberty to invest in new and pre-construction residential development. Australia’s foreign investment policy dictates that foreign investments should be channelled to the housing sector to increase the supply of new residential properties.
As a result of this, new residential properties form the majority of purchases by foreign investors, with many of them purchased even before construction is completed.
Foreign investors are free to invest in pre-construction or newly built residential properties (including apartments and townhouses) as long as the property has never changed hands and has been vacant for more than 12 months. Generally, any residential property purchase by a foreigner is subject to the Foreign Investment Review Board’s (FIRB) approval and application is fairly straightforward and normally approved within 30 days. Buyers must submit their applications to the F.I.R.B before purchasing a property. A contract can also be prepared before obtaining approval from the F.I.R.B, as long as there is a special clause in the contract that states that the sale is ‘subject to approval by the F.I.R.B’ within a specified period.
Application is fairly straight forward, free, and generally approved within 30 days of submission. We are also here to assist you in the making your property purchase a smooth and hassle-free experience.
Similar to other banks around the world, many Australian banks generally loan up to 80% of the property’s value to foreign investors. Legal Procedures - It is required to be represented by a lawyer should you decide to purchase an Australian property. Your lawyer in Australia will assist in reviewing the Contract of Sale, sending over the documents to you and be your legal representative in matters about your Australian property.
Sample of A Typical Property Purchaser Process
Note: The sale process above serves as a guide and could differ slightly on case to case basis.
Engaging the services of a property manager is the easiest way for foreign investors to deal with the everyday operations of their properties. A property manager will advertise your property and find the right tenants, submit application forms, and preparing tenancy agreements. They will also settle any maintenance issues that may arise, and compile and update you with cash flow reports, taking the hard work out of property maintenance. Property management fees range from 5.5% to 7.7% on gross rent.
Certain States and Territories offer rebates on stamp duty when purchasing pre-construction properties, therefore buyers only have to pay a fraction of the stamp duty based on the stage of work completed when the contract is signed. Australia’s fairly competitive depreciation rates also make Australian properties fairly tax effective. Stamp Duty varies according to State. (Approximate stamp duty for Victoria (Melbourne) & New South Wales (Sydney) is approximately 5.5%)
Foreign Investor’s Levy: In addition to the local stamp duty imposed on property purchases, foreign investors are required to pay an additional 8% of the purchase price in stamp duty.
Similar to other countries, you will be taxed if your property investment generates income. But there are many methods of reducing or deferring tax through tax deductions (expenses incurred as a result of generating the income). When it comes to maximizing your tax deductions, you can rely on our specialized expertise and experience will guide you through your claims. Having an accountant who is seasoned in property investment will also help to optimize your cash flow.
While financing is not offered to foreign investors by Australian banking institutions, some banks in countries like Malaysia and Singapore finance investors in their countries to purchase properties in Australia. There are also finance available from reputable Private Lenders to foreigners.
Where Should I Invest?
We continuously source for good property investment products for our clients. Scour the whole of Australia to find opportunities for property investment. Location is still the most critical criteria, and properties within a 5-10km radius of a major CBD remain highly sought after by prospective owners and tenants. We emphasize on areas with amenities, schools, public transport access, high demand, and not forgetting upcoming areas.
ARE focuses on certain factors when researching a particular development; these include:
- Distance to the CBDKey Commercial Centre
- Demographics of the area
- Reasons for population growth
- Public transportation within the vicinity
- Surrounding amenities and recreational facilities
- Proximity to commercial zones
- Value of surrounding properties
- Past growth trends
- Rental yield statistics
- Property supply and demand in the locale
Other factors we consider are how appealing the property or location will appear to potential tenants, and expected rental yields and demand.
The buying process
PROCEDURE TO INVEST IN AUSTRALIAN PROPERTY.
The procedure involved in acquiring a property in Australia is not much different from doing so locally. However, there are several vital differences:
Preparing to acquire a property:
Investors can sometimes be hasty when purchasing a property without understanding the procedures involved. Please take note of the following:
Seek advice from your Australian financial consultant on a comfortable loan amount and structuring of the purchase to maximize tax deductions.
You will require the services of a lawyer to study the Contract of Sale and advice you accordingly. Your documents will be couriered to you to sign and before they can represent you. At your request, we can recommend a local lawyer.
A deposit of 10% will be required should you decide to purchase an Australian property. Upon receipt of deposit and signing of Contract of Sale, only are you legally committed to purchasing the property. You may pay the deposit by international transfer or deposit bond (not all developers accept deposit bonds, therefore seek advice from your Property Consultant).
Find a property
CHOOSING A PROPERTY
A holding deposit of $2000 - AUD 5000 might be required to be transferred into a Trust Account, depending on the property that you choose. This will ensure that the property is reserved for 21 days so that no other party may purchase it.
Once the property has changed hands or you decide against purchasing the property, the holding deposit will be refunded to your account. The holding deposit cannot be withdrawn without your consent as it is held in a Trust account.
You will receive the legal documents by courier, which you will be required to study, sign and return the Contract of Sale to your lawyer in Australia within 21 days, along with the mandatory 10% deposit.
An application for approval to purchase residential property will not be considered until the relevant application fee has been paid in full.
Strict penalties (including civil and criminal penalties and disposal orders) may apply for breaches of Australia’s foreign investment rules.
Cases of non-compliance with Australia’s foreign investment framework may also be brought to the attention of law enforcement agencies and other Commonwealth departments such as the Department of Immigration and Border Protection.
OBTAIN FORMAL MORTGAGE APPROVAL
When you’ve found a property to buy, you can forward the contract of sale to your mortgage broker to proceed with the formal approval.
Remember, don’t commit yourself to buy a property until your mortgage is formally approved.
The real estate agent may pressure you to sign because there are “other buyers” but the only time you should do so is if there’s a cooling off period in place.
Once you forward the sales contract to us, formal approval can be obtained within a week.
EXCHANGE CONTRACTS AND PAY YOUR DEPOSIT
You can exchange your contract after your loan has been formally approved and your solicitor or conveyancer gives you the go ahead.
Normally, you’ll need to put down a 10% deposit.
The amount of the deposit is negotiable and differs between the states.
Note that once you’ve committed to a property, you can’t back out so please seek legal advice before signing any contracts or paying your deposit.
Signing the Contract of Sale
The developer’s lawyer will prepare the Contract of Sale and send to your Australian lawyer, who will review the contract and attach a contract summary. The Contract of Sale will then be couriered to you. Kindly take note of the following:
An extended period has been negotiated for you to sign and return the Contract of Sale, factoring in the time needed to courier the documents overseas. Be sure to take note of the stipulated timeframe that is clearly stated in the Contract of Sale (usually 10-21 days). In the event the completed Contract of Sale is not received within the specified time frame, the property will be released onto the market.
SIGN AND RETURN THE CONTRACT
Ensure that each page of the contract is signed as required by your lawyer. You will want to take note of the tracking number provided by your courier so that you can track the document while it is in transit.
Your Contract of Sale should state the payment details of the 10% deposit. The deposit will usually be required to be transferred through your local bank or international wire transfer.
Once all the steps above have been completed, your lawyer in Australia will inform you when the property has been officially ‘exchanged.’
Seek FIRB approval
It’s very important that the contract you’re signing has the clause “subject to FIRB approval,” allowing for 30 days for a FIRB decision.
At this point, it’s vital to check with your conveyancer or solicitor that the clause is stated in such a way to ensure that if your FIRB proposal is rejected, you won’t lose your deposit.
A FIRB application is simple to do and will usually be taken care of by your conveyancer.
You may need to provide a copy of the approval to your lender before your loan being advanced.
Once you have exchanged the contract, forward a copy of the signed contract to the FIRB for approval.
Your bank would have sent out the loan contract to you after formal approval.
You can ask your mortgage broker to go over it with you or get help from your conveyancer or solicitor.
If you are living overseas, you may need to visit the Australian embassy or consulate to get identified or to have your loan contract witnessed.
If you have a trusted friend or relative living in Australia, then you can appoint them as a Power of Attorney (POA), and they can sign the loan contract for you.
You have the right to obtain independent legal advice about your loan contract, but the good news is that most contracts are in plain English and easy to understand.
To accept the loan offer, sign the appropriate sections, and return the loan documents to the bank.
Do a final inspection on your property on the day of settlement. Your buyer's agent can complete this if you’ve hired one.
“Settlement” is the term used when the property changes hands and your loan is advanced.
This will be handled by your conveyancer or solicitor in conjunction with your bank and mortgage broker, so you don’t need to be there for this to happen.
The title for the property is held by your lender for safekeeping, and the keys are available for pick up from the selling real estate agent. If the property is being rented out, then the property manager can then commence advertising the unit to prospective tenants.
The Settlement date refers to the actual day when the remaining balance of the purchased property is paid in full. You will then receive the keys and take ownership of your property. If it is a pre-construction property, the settlement will only occur upon completion of the property.
This should preferably be arranged three months before the settlement date
TRANSFER OF FUNDS
The balance payment should be transferred to your lawyer’s Trust account before the settlement date
Most states require the stamp duty to be paid at settlement. Therefore the amount should be transferred to your lawyer’s Trust account
We recommend that you engage a qualified building inspector to inspect the property on your behalf a few days before settlement.
You may engage the services of a qualified valuer to ascertain the market value of your property.
We ensure that you are familiarised with Contents Insurance and Landlord Insurance before settlement.
A property manager will be engaged before settlement to begin marketing and seeking prospective tenants. Ideally, your property should be tenanted soon after settlement has been completed.
The date when the final payment is settled, and ownership of the property is handed over to the buyer.
TRANSFER OF OWNERSHIP
The final stage of the settlement process is to transfer the ownership from the developer to the buyer’s name. This is done at the Registrar of Titles and will be handled by your Australian lawyer.
After the settlement process is completed, you will be liaising closely with your Property Manager for day-to-day matters or tenant related inquiries. ARE would also like to have a continuous relationship with you and will be glad to answer your queries and extend our support to make the experience of owning your Australian property a pleasurable and memorable one.
How do I manage the property?
If you’re buying the property as an investment and intending to rent out your property, you have two options.
You can either manage the property yourself, or you can use a property manager.
Engaging the services of a property manager is the easiest way for foreign investors to deal with the everyday operations of their properties.
Professional managing agents will look after every aspect of your tenancy.
A property manager will advertise your property and find the right tenants, submit application forms, and preparing tenancy agreements. They will also settle any maintenance issues that may arise, and compile and update you with cash flow reports, taking the hard work out of property maintenance.
Their job includes collecting the rent, maintaining financial records, conducting regular property inspections, handling any disputes, and arranging all repairs.
You should also expect to pay additional one-off fees when they find a new tenant or negotiate an extension on the lease.
Many property managers are reactive and do not increase the rent when the market rent increases.
However, we recommend that you contact them once a year and ask them if the rent should be increased. If you have a good property manager, then they’ll be contacting you each year with a recommendation.
Last but not least, please make sure that the managing agent you are interested in using is licensed by the Office of Fair Trading (or state equivalent) before you enter into any formal agreement.
Their license will be displayed in their office or on their website.