Module One - An Introduction to Property Investing 2016 v3 ......0RGXOH 2QH $Q ,QWURGXFWLRQ WR 3URSHUW\ ,QYHVWLQJ ó &RQWHQW RXWOLQH 7RSLF ± 3URSHUW\ ,QYHVWPHQW $GYLFH 7RSLF ± 3ULQFLSOHV

$Page 1: Module One - An Introduction to Property Investing 2016 v3 ......0RGXOH 2QH $Q ,QWURGXFWLRQ WR 3URSHUW\ ,QYHVWLQJ ó &RQWHQW RXWOLQH 7RSLF ± 3URSHUW\ ,QYHVWPHQW $GYLFH 7RSLF ± 3ULQFLSOHV$
Module One: An Introduction to Property Investing

1

MODULE ONE:

An Introduction to Property Investment


2

Table of Contents MODULE ONE: An Introduction to Property Investment Introduction ................................................................................................................... 3 Aims ............................................................................................................................. 4 Program aim ................................................................................................................. 4 Module aim ................................................................................................................... 4 Pre-requisite knowledge and skills ................................................................................ 5 Getting the most out of this Learner Guide .................................................................... 5 At this level of learning, your expectations are: 5 To be deemed competent in this qualification: 6 The learning approach .................................................................................................. 6 Assessment .................................................................................................................. 6 Content outline.............................................................................................................. 7 Module 1 Learning Objectives ....................................................................................... 7 Disclaimer ..................................................................................................................... 8 Contributing authors ..................................................................................................... 9 Other Contributors ...................................................................................................... 10 Suggested study schedule .......................................................................................... 12 TOPIC ONE: Property Investment Advice ..................................................................... 1 TOPIC TWO: Principles of Strategy Development ...................................................... 17 TOPIC THREE: Other Property Strategies and Exit Strategies ................................... 43 TOPIC FOUR: Markets ............................................................................................... 59 TOPIC FIVE: Codes of Practice .................................................................................. 88 TOPIC SIX: Consumer protection ............................................................................. 113 TOPIC SEVEN: External regulatory advisers ............................................................ 142 Conclusion ................................................................................................................ 168


3

Introduction Welcome to Module 1: An overview of Property Investment Advising. This module covers several aspects of property investment and introduces the concepts that provide the basis for the entire course. In Module 1, an overview of the property investment process and the key concepts of property advising are included. It is important for you to be able to define ‘advice’, ‘investment’, and in particular, the term ‘property investment’. This module includes a brief introduction to the principles of risk and return, considers the aspects of direct property that distinguish it from other asset classes, as well as providing a brief history of property investment. This module will also cover some of the relevant pieces of legislation, regulations, codes of practice and regulatory bodies that are required in your role as a property investment adviser. It covers the main pieces of legislation, FSR regulation and industry codes of practice that currently govern the Australian financial services industry. Together, these provide the framework for the provision of fair and consistent advice by professionals to consumers. Although property investment advice is not yet subject to the same regulations as other financial products, PIPA envisages that much of the legislation discussed in this topic will eventually apply to property investment advisers. Legislation, regulation and codes of practice are designed to minimise risk and protect the investor, the industry and the adviser. They are a necessary aspect of a maturing industry and provide a way to build confidence in the professionals operating within the industry. This module seeks to ensure, property investment advisers are acquainted with the key points contained in these frameworks and to encourage them to consider and discuss these with colleagues to ensure ongoing professionalism of the industry. Current discussion underway may change the way in which property is regarded by regulators. This may include placing investment property advisors under the financial services reform (FSR) provisions of the Corporations Act as a financial product. This has the potential to change the way investment property is currently treated by financial planners and real estate agents. This course has been primarily developed to ensure that a high standard of knowledge and expertise is provided to clients by those involved in providing property investment advice. It has also been designed to anticipate regulatory changes and to equip people from various backgrounds to adjust to potential requirements by regulators. Module 1 is therefore designed to provide you with the foundational knowledge base to complete the rest of the course.


4

Aims Program aim The Property Investment Professionals of Australia (PIPA) has developed the PIPA Accreditation Program. It is a professional industry award which aims to address the needs of 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 1: Introduction to Property Investment is to give you an overview of the property industry, including aspects with which professionals from other industries (such as accounting and financial planning) may not be familiar. In this module, a variety of aspects of the property industry will be discussed including; basic investing principles, the economy and its cycles, an overview of the legislation that you need to know, as well as regulatory information and the different types of property investments. A property investment adviser needs to have a basic understanding about each of these aspects of the industry and to be able to access further information if needed, when advising on specific properties.


5

Pre-requisite knowledge and skills

There are no pre-requisites for this educational 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.

Getting the most out of this Learner Guide It is important to let others close to 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 some level of theoretical knowledge To apply a range of skills within this course To apply solutions to common and reasonably

straightforward problems To take responsibility for your own learning and the

application of your knowledge.

Your learning pathway


6

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

The assessments will provide 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 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.


7

Content outline Topic 1 – Property Investment Advice Topic 2 – Principles of Strategy Development Topic 3 – Other Property Strategies and Exit Strategies Topic 4 - Markets Topic 5 – Codes of Practice Topic 6 – Consumer Protection Topic 7 - External regulatory advisers

Module objectives Module 1 Learning Objectives By the end of this module you will be able to:

Explain the aims of the program and this module Outline the main content of the module Define the concept of financial ‘advice’ and the difference between personal and

general advice Define the concept of ‘investment’ and what constitutes an investment Define ‘property investment’ and compare to other investment vehicles Identify the roles and responsibilities of property investment and financial planning

professionals Identify the importance of different types of basic investing principles such as diversity,

risk, research and finance Describe property investment strategies such as trading, developing and speculating Define the importance of an exit strategy for your clients and what that involves Describe the concepts of property and economic cycles Define the factors of supply and demand Define opportunity cost risks; market risks, interest rate risks and client affordability

risks Describe the PIPA code of conduct and participate in ethics based issues and

discussions Define financial literacy Understand the relevance of major players in the property investment and financial

services sector


8

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 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 taking professional advice with regard to their own circumstances. The authors and publishers expressly disclaim all and any liability to any person with respect to 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 property investment advisers have a knowledge and understanding of:

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

2. Their own advisory limitations; and 3. Their 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.


9

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 commentator. 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 investment 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. He 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.


10

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 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 adviser 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 was responsible for the floating of the Grand Hotel Group. Together 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.


11

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 Business, Licensed Builder, Licensed Real Estate Agent. Rohan is Managing Director of 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 a board member and committee member of many associations, and is a qualified JP in Queensland and holds a QPIA®.


12

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. The 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 full time work. If you are not working full time and can devote more time to study, you may find you can progress more quickly. We recommend that you do not attempt the assessment until you have completed studying all seven topics in Module 1.

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

Please refer to the participant handbook for information regarding assessments.

Module One: An Introduction to Property Investing Topic One: Property Investment Advice

1

TOPIC ONE:

Property Investment Advice

Module One: An Introduction to Property Investing Topic One: Property Investment Advice

2

Table of Contents TOPIC ONE: Property Investment Advice Introduction ................................................................................................................... 3 Learning objectives ....................................................................................................... 3 Topic 1 – Property Investment Advice ........................................................................... 3 Defining ‘advice’ ............................................................................................................ 4 General Advice ............................................................................................................. 5 Personal Advice ............................................................................................................ 5 Defining ‘investment’ ..................................................................................................... 9 Investment .................................................................................................................... 9 Defining ‘property investment’ ..................................................................................... 13 Property compared to other investment vehicles ......................................................... 14 Summary .................................................................................................................... 15 Suggested answers to activities .................................................................................. 16

Module One: An Introduction to Property Investing Topic Two: Principles of Strategy Development

17

TOPIC TWO:

Principles of Strategy Development

Module One: An Introduction to Property Investing Topic Two: Principles of Strategy Development

18

Table of Contents TOPIC TWO: Principles of Strategy Development Helping your clients consider property investment ...................................................... 20 Investment principles .................................................................................................. 22 Diversification ............................................................................................................. 22 Specific Property Risk ................................................................................................. 22 Area risk ..................................................................................................................... 23 Sound investment principles ....................................................................................... 24 Profit ........................................................................................................................... 24 Trade-off ..................................................................................................................... 25 Risk ............................................................................................................................ 25 Canvassing property investment options ..................................................................... 26 The importance of research ........................................................................................ 28 On-going costs associated with property ..................................................................... 31 Property management – Collecting rent and getting a tenant ...................................... 31 Property Management – Repairs and maintenance .................................................... 32 Other investment costs – adding value ....................................................................... 32 Recommending appropriate financing ......................................................................... 33 Initial costs .................................................................................................................. 33 What the loan provider looks for ................................................................................. 34 Assessing properties to meet your client’s requirements ............................................. 35 Summary .................................................................................................................... 40 Suggested answers .................................................................................................... 41

Module One: An Introduction to Property Investing Topic Three: Other Property Strategies and Exit Strategies

43

TOPIC THREE:

Other Property Strategies and Exit Strategies

Module One: An Introduction to Property Investing Topic Three: Other Property Strategies and Exit Strategies

44

Table of Contents TOPIC THREE: Other Property Strategies and Exit Strategies Trading Property ......................................................................................................... 45 Speculating ................................................................................................................. 48 Developing .................................................................................................................. 50 Dangerous ‘get-rich-quick’ strategies .......................................................................... 51 Helping your clients ‘exit’ their investment ................................................................... 52 Sell part of the portfolio ............................................................................................... 52 Sell the entire portfolio ................................................................................................ 52 Keep the entire portfolio .............................................................................................. 53 Other important investment considerations ................................................................. 53 Wealth Protection ....................................................................................................... 53 Property Investment Report (PIR) ............................................................................... 56 Summary .................................................................................................................... 57 Suggested answers to activities .................................................................................. 58

Module One: An Introduction to Property Investing Topic Four: Markets

59

TOPIC FOUR:

Markets

Module One: An Introduction to Property Investing Topic Four: Markets

60

Table of Contents TOPIC FOUR: Markets Business (or economic) cycles .................................................................................... 61 Business (or economic) cycles (cont’d) 63 Real Estate Cycles ...................................................................................................... 64 Supply and demand concepts ..................................................................................... 67 Opportunity cost .......................................................................................................... 71 Market risk .................................................................................................................. 73 Interest rates and interest-rate risk .............................................................................. 75 Affordability Risk ......................................................................................................... 78 The role of Government .............................................................................................. 78 Legislative risk ............................................................................................................ 80 Financial Services Reform .......................................................................................... 82 National Consumer Credit Protection Act (2010) NCCP .............................................. 83 Summary .................................................................................................................... 85 Suggested answers to activities .................................................................................. 87

Module One: An Introduction to Property Investing Topic Five: Codes of Practice

88

TOPIC FIVE:

Codes of Practice

Module One: An Introduction to Property Investing Topic Five: Codes of Practice

89

Table of Contents TOPIC FIVE: Codes of Practice Ethics ................................................................................................................................ 93 Industry codes ................................................................................................................... 92 The PIPA Code of Conduct ............................................................................................... 93 PIPA Code of Conduct ...................................................................................................... 95 The importance of investment literacy ............................................................................... 96 Due diligence .................................................................................................................... 97 Financial Planning Association Code of Ethics and Rules of Conduct ............................... 99 Banking Code of Practice ................................................................................................ 100 Auctioneers and Valuers’ Code of Ethics ........................................................................ 101 The Real Estate Institute Code of Conduct and Rules of Practice ................................... 102 Building Code of Australia ............................................................................................... 104 Mortgage and Finance Association of Australia ............................................................... 105 Code of Practice ............................................................................................................. 105 Institute of Chartered Accountant Code of Professional Conduct .................................... 107 Law Institute Professional Conduct and Practice Rules ................................................... 109 Summary ........................................................................................................................ 111 Suggested answers to activities ...................................................................................... 112

Module One: An Introduction to Property Investing Topic Six: Consumer protection

113

TOPIC SIX:

Consumer protection

Module One: An Introduction to Property Investing Topic Six: Consumer protection

114

Table of Contents TOPIC SIX: Consumer protection Common and Contract Law ......................................................................................... 118 Common law ............................................................................................................... 116 Contract law ................................................................................................................ 116 Duty of Care and Fiduciary Duty ................................................................................. 119 Competition and Consumer Act 2010 .......................................................................... 121 Future projections ....................................................................................................... 121 Unconscionable conduct ............................................................................................. 122 Misleading and deceptive conduct .............................................................................. 125 Consumer Credit Code ............................................................................................... 126 Exclusions from the Consumer Credit Code ................................................................ 127 Privacy Act .................................................................................................................. 129 Corporations Act ......................................................................................................... 131 Background – Financial Services Reform Act .............................................................. 131 Chapter 7 of the Corporations Act ............................................................................... 132 The ‘reasonable basis’ rule ......................................................................................... 133 ASIC policy statements ............................................................................................... 134 Implications for the property investment adviser .......................................................... 134 Further implications of the Corporations Act ................................................................ 136 Financial product ......................................................................................................... 136 Description of service .................................................................................................. 136 Licensing requirements ............................................................................................... 136 Hawking guidelines ..................................................................................................... 137 Advice ......................................................................................................................... 137 Summary .................................................................................................................... 139 Suggested answers to activities .................................................................................. 141

Module One: An Introduction to Property Investing Topic Seven: External regulatory advisers

142

TOPIC SEVEN:

External regulatory advisers

Module One: An Introduction to Property Investing Topic Seven: External regulatory advisers

143

Table of Contents TOPIC SEVEN: External regulatory advisers Regulatory bodies ....................................................................................................... 144 Australian Securities and Investments Commission (ASIC) ......................................... 145 The Australian Prudential Regulation Authority (APRA) .............................................. 147 The Australian Competition and Consumer Commission (ACCC) ............................... 148 Practice guidelines ...................................................................................................... 149 Purpose of the guidelines ............................................................................................ 149 Mercedes or Holden, what differentiates practice guidelines? ..................................... 149 Where do I fit in the hierarchy?.................................................................................... 150 Laws and their regulatory context ................................................................................ 151 Which laws apply? ...................................................................................................... 151 Laws applicable to an AFSL holder ............................................................................. 152 Retail and wholesale clients ........................................................................................ 153 Documentation required .............................................................................................. 157 Risk register ................................................................................................................ 159 OH&S policies and procedure ..................................................................................... 162 Working with solicitors – getting the right legal advice ................................................. 164 Compliance professionals ........................................................................................... 164 Sources of compliance advice ..................................................................................... 164 Summary .................................................................................................................... 165 Suggested answers to activities .................................................................................. 166 Conclusion .................................................................................................................. 168

Documents

Module One - An Introduction to Property Investing 2016 v3 ......0RGXOH 2QH $Q ,QWURGXFWLRQ WR 3URSHUW\ ,QYHVWLQJ ó &RQWHQW RXWOLQH 7RSLF ± 3URSHUW\ ,QYHVWPHQW $GYLFH 7RSLF ± 3ULQFLSOHV