I have to say that I just read Steve McKnight’s book and it appears to be a bit on the unrealistic side. The major flaws that I see are:
1) Steve’s rule of thumb, or the “11 Second Solution”, seems a bit fanciful. I have just spent the last few weeks looking at the cost of renting and buying country real estate all within a 2-hour commute of Melbourne. Most low to mid range weekly rents are around the $200 p/w mark. Based upon Steve’s formula I should be looking for a purchase price of $100k. Get real!
Most of Steve’s examples in his book are based upon pre-property boom times, siting house prices of $60k. I challenge Steve to show me one property that satisfies the 11-second solution in Melbourne or a country location that has the kind of attributes Steve recommends for selecting the “right” area.
2) Even if one could find properties that satisfied the 11-second solution, your average mum and dad would hardly be able to go from 1 – 5 houses with 3.5 years let alone 130! For example:
Let’s assume we buy a property in rural Victoria for $150k (and let’s not forget that using Steve’s 11-second solution we would expect rent of $300 per week). Steve recommends 80% finance. Including deposit, stamp duty and costs one would have to find about $35,700. Using our unrealistic rent of $300 p/w ($1,300 pcm approx), we have a positive cash flow of $192 pcm assuming a 7.5% rate on a principal and interest loan over 25 years. Note: we have not made any allowance for repairs, maintenance, insurance or management.
We now have our first property, although I have to say these figures are dubious, but let us go with it anyhow. If we add our $2,304 positive income to our savings and we are able, by working like buggery, to save $35,700 per year after-tax money, we can add our $2,304 to this to make $38,000 in order to buy the next home.
We now have 2 properties. Using the same rental figures as before (as I do think the tenants would kick-up if we tried to increase their rent beyond the $300 they are already paying) we now have $4,600 to add to our annual savings.
If we continued this for 5 years, we would be receiving a positive cash-flow of approx. $12,000. I might have the financial independence Steve talks about in 50 years time, but 0 – 130 in 3.5 years, unlikely.
The whole premise of Steve’s book is that negative gearing is restrictive in that there is a limit on the number of properties one can buy based upon ones ability to cover the repayments – true. What Steve fails to point out is that another severe limiting factor is the ability to raise the deposit and costs. Sure there are a few schemes such as a wrap, but they are not likely to be your starting point.
I have browsed a number of the discussions going on in this group, and the underlying theme is “we can’t find these properties Steve talks about”. Finally, I think the book fails to point out the pitfalls. Concentrate on positive cash flow properties is the mantra, but the sort of dwellings likely to fall into this category are high risk as they are not likely to satisfy the maxim of location, location, location. This can’t be ignored, certainly if you are concerned about the risks of buying areas that could be problematic.
Hi Martin,
I actually really loved Steve’s book.
I am certainly no expert in this area (yet), but I’m sure your “average Mum & Dad” would have some equity in their own home that they could also access for deposits…. well, that’s what I’ll be doing, anyway…!
The other option of course might be to be creative and source deposits elsewhere (eg – other investors, or doing a deal with the sellers of the property…)
I agree with you — I printed out a map of Victoria, and started looking at all the towns of “reasonable” size, and there aren’t too many properties within 2 hours drive of Melbourne for under $100k.
Anyone else got any ideas on this?.
Lozza
G’day Martin…
“Timing” is critical in both the Real Estate and Share Markets. In reading your post I’m sure you will agree with me.
As you said…worked then on $60k properties. So what do you do now….I know, I’ll write a book and do seminars and coach others in what I have done in the past.I’ll make money while I am waiting for the “correction” in Real Estate and then I’ll get them at the right price.
Have you noticed that those flogging the benefits of the Sharemarket last year were saying that it’s NOT “Timing”…..but, Time in the market.
What else could they say….cause the market was so negative. Probably time to get in the Share market…as the crowd is still avoiding it. Historically, a buy in late October and a good run into January…..All this while we watch the Real Estate market start it’s correction.Please read my post…”Madness of crowds etc” let me know your thoughts and comment…Please
Billfromoz
Okay I am no expert but I did read other posts that quite a few people do NOT use the 11 second rule but you are lucky if you are able to [
]I think Steve also said with in a 2 hour radius of where you live because it is easier for YOU to keep an eye on it but I know people who are considering further out and smaller towns. The growth factor may not be there but the rental income may be.
I know others who don’t care where they buy because they have found really good trustworthy agents who do it all for them ( wish I could afford it) but anyway I think you’ll find parts of his book useful and parts not, it is a starting point for exploration and you do the rest! [
]Bill and Martin, I don’t have much to add. I think you’ve summed up the shortcomings and pitfalls with the investment methods, investment types and the current-future market concerns.
Everyone, take your time.
The market(s) will always be here. Choose wisely and choose only those investments that will take you to your goals.
Beware the herd mentality (not the herd itself).
Michael
I think martinw has made some good points – its tough to make real money in property at this time. Rental yields for residential real estate are low, generally between 3 and 5 percent. I have yet to see any properties meeting the criteria for the “11 second rule”.
I think its dangerous to make assumptions about the future based on past historical data. What may have worked for Steve McKnight in 1999 may not work today.
It may be time to consider investing in other asset classes – shares perhaps?
I am also considering investing in shares, but is it at complicated as it looks?
I mean it seems you need to learn a whole new language before you can even begin to understand how it all works.
I know some will say property is also complicated, but I think we feel more comfortable with this as we can see it and most of us have had some experience with our PPOR.So I guess the question is – Is investing in shares as complex as it seems?
Keep smiling,
Sue [
]Be careful not step on the flowers when you’re looking at the stars
“Be careful not step on the flowers when you’re looking at the stars.”
Sue, I just love that quote.
Re: share investing.
If you want to invest long term, read the book “Buffetology”. There is no better. It basically teaches you to look for value in the sharemarket(you won’t find much value atm[
] unless you look real hard), and view the shares from a business perspective.If you want to “play” the market, I would advise you to learn some technical analysis……(in itself a minefield with a lot of BS and seminar sheisters)
Don’t pay thousands for seminars there is nothing you cant learn out of a book, (or free from my website if I ever get it finished[xx(])
Visit some sharetrading forums and find the “REAL” traders in them. They are only too happy to help, just like the good people here on this forum.
And its not that hard……K.I.S.S. (Well, your mind can make it hard, but the mathematics and techniques are easy)
Wayne
The sharemarket is as simple or as complicated as you choose to make it – up to a point!
Personally I think that if you want a relatively simple system with a medium to long term time frame, then “Active Investing” by Alan Hull is fabulous. And he’s Australian!Keep smiling
FelicityLozza, if you use the equity in your home to fund your deposit, unless you sell it and realise any capital you may have, you still have to repay any further borrowings against the equity in your home. Wherever you source your deposit from, unless it’s cash in the bank or you have a generous benefactor, you have to fund it. And since the margins in Steve’s book are so low, it would not take much to turn a positive into a negative.
martinw,
You are right in saying that there are alot of people on this site that say they cannot buy properties according to the 11ss. Just remember that Steve only uses this as a guide and not the be all and end all of investing (that has also been repeated many times on this forum).
The fact is, Steve worked this solution out and where to buy properties many years ago and not in the last 3 months that everyone seems to think. It really pisses me off when some people post “where can I find an 11ss property” and then get cranky because no one replies to them. Where is the thrill of finding a place that does suit it when it has been handed to you.
I agree it is hard to find these places but if you are prepared to do some of your own work instead of expecting people to tell you where they are you will find them. I recently purchased a property (1 month ago) that didn’t fit the 11ss but came pretty darn close. It didn’t mean that I gave up on it because it didn’t fit Steve’s formula. I knew that the town it was in was going to get some capital growth as well as a high rent demand. How, the same as Steve and, I dare say, alot of people on this forum – RESEARCH.
If you want to be as wealthy as Steve but don’t want to do any of the work involved then perhaps you should look at buying lotto tickets every week. Steves book has great information in it that people can use, so I suggest you use it to your advantage and to start and get serious about investing instead of being like all the other masses and whinging that it’s not laid at your feet.
Carl
Carl, the point of my posting was a critique of Steve’s book, nothing more. The whole point is that Steve is promoting his book and aiming at ordinary folk who will take his advice literally. Where’s the value in giving advice if it is out of date and unrealistic in today’s marketplace. I believe Steve’s book is not much use if readers are unable to make his recommendations work.
Perhaps the title should have read:
“From 0 to 130 properties in 3.5 years based upon a rule of thumb that worked in 1999 but is not that workable now, and you might have real difficulty finding properties that meet the criteria I set out in this book.”
Because that’s what you’re defending.
Martinw
martinw,You are right in saying that there are alot of people on this site that say they cannot buy properties according to the 11ss. Just remember that Steve only uses this as a guide and not the be all and end all of investing (that has also been repeated many times on this forum).
The fact is, Steve worked this solution out and where to buy properties many years ago and not in the last 3 months that everyone seems to think. It really pisses me off when some people post “where can I find an 11ss property” and then get cranky because no one replies to them. Where is the thrill of finding a place that does suit it when it has been handed to you.
I agree it is hard to find these places but if you are prepared to do some of your own work instead of expecting people to tell you where they are you will find them. I recently purchased a property (1 month ago) that didn’t fit the 11ss but came pretty darn close. It didn’t mean that I gave up on it because it didn’t fit Steve’s formula. I knew that the town it was in was going to get some capital growth as well as a high rent demand. How, the same as Steve and, I dare say, alot of people on this forum – RESEARCH.
If you want to be as wealthy as Steve but don’t want to do any of the work involved then perhaps you should look at buying lotto tickets every week. Steves book has great information in it that people can use, so I suggest you use it to your advantage and to start and get serious about investing instead of being like all the other masses and whinging that it’s not laid at your feet.
Carl
Yes Martin,
Again I do see your point…. I was just trying to offer another possibility, other than “working like buggery” to get a deposit, as you put it. I myself plan on buying six or seven properties using my current available equity. Then I will have to worry about finding other deposits after that.
But I am still a Newbie, so I’m sorry if my comment wasn’t applicable for your situation.
Lozza
Hi all–there’s always going to be a sceptic out there and it looks like we’ve found one of many. There’s always going to be deals out there–as Dolf de Roos says “The deal of a lifetime comes along once a week!” I believe this because I’ve done my research and have seen them for myself both in Australia and New Zealand.Realize that they’re never going to be handed to you on a plate–you have to do your own due diligence. Noone is going to tell you exactly where they’re buying now because they’ve done the work themselves–there’s no easy ride in life but lots of great advice if you’re prepared to accept it.
ONE OF MY FAVOURITE QUOTES IS:- WHETHER YOU THINK YOU CAN, OR YOU CAN’T YOU’RE RIGHT!!!!!
Freedom’s one is good too—Think outside the Square!–when it comes to investing that’s what we have to do now.
Lastly my other favourite thought is instead of ‘I can’t!!” think “How can I?”!!!!
All the best to those of you out there doing it rather than criticizing it. Thats just alot of wasted energy which could have made a sceptic some money!
HannahThe whole thing is, if there’s the option of positive gearing vs. negative gearing, which would you choose? Sure it might be hard to save deposits, but if you are negative gearing then you have to do that anyway! Add to that the fact that you’ll also have weekly repayments so saving for more deposits just becomes a whole lot harder.
I’ve never liked the idea of negative gearing. It just doesn’t make sense to me to ‘invest’ in a loss. So for me, all I can say is that I agree with Steve’s book. Even if it is hard to find these properties with positive cashflow.
Hey Hannah, who’s Noone. Can you introduce me?!!
Hi all–there’s always going to be a sceptic out there and it looks like we’ve found one of many. There’s always going to be deals out there–as Dolf de Roos says “The deal of a lifetime comes along once a week!” I believe this because I’ve done my research and have seen them for myself both in Australia and New Zealand.Realize that they’re never going to be handed to you on a plate–you have to do your own due diligence. Noone is going to tell you exactly where they’re buying now because they’ve done the work themselves–there’s no easy ride in life but lots of great advice if you’re prepared to accept it.ONE OF MY FAVOURITE QUOTES IS:- WHETHER YOU THINK YOU CAN, OR YOU CAN’T YOU’RE RIGHT!!!!!
Freedom’s one is good too—Think outside the Square!–when it comes to investing that’s what we have to do now.
Lastly my other favourite thought is instead of ‘I can’t!!” think “How can I?”!!!!
All the best to those of you out there doing it rather than criticizing it. Thats just alot of wasted energy which could have made a sceptic some money!
HannahI think we’ve all gone off the track a bit here. It’s not about getting off your arse and stop being negative; it’s about paying $30 for yesterday’s news. And if you concede that finding deposits for multiple properties is beyond the reach of the average mum and dad investor, and finding a property that nets in the region of 10.4% CoCR is nigh on impossible, then you’d have to agree Steve’s book is not that helpful as that is the basis of the whole concept – a concept that is almost impractical because the book is out of date and not relevant today.
Hi all–there’s always going to be a sceptic out there and it looks like we’ve found one of many. There’s always going to be deals out there–as Dolf de Roos says “The deal of a lifetime comes along once a week!” I believe this because I’ve done my research and have seen them for myself both in Australia and New Zealand.Realize that they’re never going to be handed to you on a plate–you have to do your own due diligence. Noone is going to tell you exactly where they’re buying now because they’ve done the work themselves–there’s no easy ride in life but lots of great advice if you’re prepared to accept it.ONE OF MY FAVOURITE QUOTES IS:- WHETHER YOU THINK YOU CAN, OR YOU CAN’T YOU’RE RIGHT!!!!!
Freedom’s one is good too—Think outside the Square!–when it comes to investing that’s what we have to do now.
Lastly my other favourite thought is instead of ‘I can’t!!” think “How can I?”!!!!
All the best to those of you out there doing it rather than criticizing it. Thats just alot of wasted energy which could have made a sceptic some money!
Hannah
[/quote]as far as negivive gearing goes as long as you have equity in a property you can borrow the full purches price including all costs so no deposit is nessasery if you positive ly gear a property you have to keep your borroed amount down as low as you can so that you make more money week to week.
but in saying that it is still posibal to be able to buy a property with no deposit (equity) and still have a positivly geard investment i bought 2 propertys in april at $125000 (total price borowed 132500) with a rent return of $220 per week althought its not to positivly geared i still dont pay anything out of my own pocket.
just my oppinion………
The whole thing is, if there’s the option of positive gearing vs. negative gearing, which would you choose? Sure it might be hard to save deposits, but if you are negative gearing then you have to do that anyway! Add to that the fact that you’ll also have weekly repayments so saving for more deposits just becomes a whole lot harder.I’ve never liked the idea of negative gearing. It just doesn’t make sense to me to ‘invest’ in a loss. So for me, all I can say is that I agree with Steve’s book. Even if it is hard to find these properties with positive cashflow.
it’s about paying $30 for yesterday’s news. And if you concede that finding deposits for multiple properties is beyond the reach of the average mum and dad investor, and finding a property that nets in the region of 10.4% CoCR is nigh on impossible, then you’d have to agree Steve’s book is not that helpful as that is the basis of the whole concept – a concept that is almost impractical because the book is out of date and not relevant today.OK, even though at the moment, it is yesterdays news, IT IS ALSO TOMORROWS NEWS IN ADVANCE!!!
Its all about cycles and getting active at the bottom of the cycle.
Will those +ve geared properties pop up close to town in the future. You betcha they will. Just gotta wait; and armed with the knowledge attained through the likes of Steve today; you will recognize them for what they are, a golden opportunity.
Cheers
Thanks for sharing martinw, have a good day
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