New to IP. Looking at the 11 second rule, Golden Rule and 1.6 rule

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Mullsey
Participant
@mullsey
Join Date: 2016
Post Count: 1
June 10, 2016 - 12:27 pm
I am new to IP. I am looking at IP to hopefully generate a passive income.
Having looked at these rules on different forums, unless I am missing something obvious I cannot see how you can get close to getting a +ve geared cashflow.
Using the Golden rule
Rent = min 1.4 x interest cost
If rent is $400 p/w = $20,800 then Golden Rule says pay max of $297,000
i.e. $297,000 x 5% int = $14,850 x 1.4 = $20,790
Using the 11 second rule
Take 50% of weekly rent x 1000 = purchase price
If rent is $400 p/w x 50% x 1000 = $200,000 purchase price
In all of the areas I have looked at I am not even getting to close to a +ve geared IP. In the case of the Golden Rule the typical properties are 30% more expensive and close to 50% more expensive using the 11 second rule.
Am I missing something here? Do these rules not work in this current market? Am I looking in the wrong areas?
Any advise for a noob would be much appreciated….
Benny
Moderator
@benny
Join Date: 2002
Post Count: 1,416
June 12, 2016 - 2:05 pm
Hi Mullsey,
Welcome to propertyinvesting.com – I hope you find your answers somewhere in here. First there are many useful Articles that give a new investor a bit of a leg-up. Look for the “Training Centre” on the home page. Other than that, go trawling and look for forum topics where the title sounds like it might appeal.
It is a good question you have asked, and one that many newer investors might want to know the answer to. Let me start by saying that property investing has two forms of value – one is income (Rent) and the other is growth (equity gains). A simple way of appreciating where you might find positive geared property is to look at areas where growth is minimal, but income tends to be higher. e.g. the North Shore of Sydney likely has VERY low rent compared to house values, so the Income is likely to be NEGATIVE because the Growth is so high.
For properties exhibiting positive gearing, you might need to look in areas where Growth is low (thus Income tends to be higher relatively speaking). These can be Regional areas (small towns) or in “further-out suburbs” of larger cities. Or, you might find the odd “wreck” in a good area where the owner doesn’t want to spend any money doing it up. These can also lead to being positive geared depending…..
You might try ask a local RE agent “What is the house that is inexpensive around here that other buyers just DON’T WANT?” As Steve says – buy problems and sell solutions. So, buy the house with the problem that is going cheap (but be sure YOU can provide the solution to that problem before committing to it). Try it as practice – then, with the RE agent providing “numbers” (likely sale price and expected rental income) see whether you can make this a positive gearer.
Steve was buying in Ballarat over 15 years ago – since that time, with Interest Rates changing so much, the yields have dropped too, so old “rules” don’t seem to work as well as they did. Back in the 80’s, getting 10% return was the norm – today a 5% or 6% is good.
But here is a story about one young bloke who DID find 10%-ers in 2011 thru 2013 and created himself a nice portfolio of positive geared assets. Take a look to see how he did that :-
https://www.propertyinvesting.com/topic/4410491-the-big-picture-for-new-readers-especially/#post-4697977
Maybe look in similar areas to see what you might find. And, as he did, look to renovaters to add a bit extra in equity, AND a better rent.
Benny