Check out Cherie Barber, I hear really good things about her programs.
The JSS was all on line, not as expensive as CB but still expensive, really high level basic stuff at the beginning of the course. I did not like it and requested to be withdrawn. Any course that doesn’t actually give you materials I’m always suspect on anyway.
If I was doing renos, I would definitely be checking out Cherie Barber.
If there are 30 properties for sale, albeit some still under contract then there’s an entire years worth of supply, even if the sales are ‘trending’ upwards.
average days on market almost 3 months, 12 month growth -13%.
Although far from being a fan of stats, and knowing past performance isn’t always an indication of future performance, just thought I would ask where the ‘severe’ shortage came from? can you elaborate? vendor discounting etc? same same for rental demand – do you have figures for rental vacancies – the couple I had a look at for sale on rpdata had returns around 5% – very low for those chasing a CF+ property.
I’m interested because I have a lemon property a couple of suburbs over and the market is in decline there, and rents even when geared still are losses.
Very well explained Ben..thanks for the example as well. Makes a lot more sense to me(and a lot like me I am sure) now. Any good accountants with a property focus in Melbourne or nearby that anyone could recommend?
Thanks Ben, thanks Terry.
Does anyone have good accountant with property focus in Adelaide? Or do anyone use good online accountant who are very good at investment property, etc?
Google Unwin and associates and talk to Mark Unwin. He’s the accountant in Melbourne that took over Steve McKnight and Dave Bradley’s firm. He’s also relatively cheap, about 250 ish an hour or so, he does my accountants, trusts, companies, advice etc. He won’t tear your arm off in costs or get trusts that no one can understand unlike chan and naylor. Give c&n a miss, unless you really want to run those hybrid trusts, but get a second opinion always, you may find you don’t need them.
Tell Mark I recommended you, Ben Stanton, from this forum, they always like referrals, and it looks good for me too. I don’t receive any incentives or anything like that, I just like to support good trades and professionals.
I’m in Perth so don’t worry about not being in the same city or state. Mark does a lot for developers, and can scale down to one property or advise on a 10 townhouse project.
I’ve sacked 4 accountants in the past, Mark is really good.
Hey mate, looks like Terry here has already replied.
That’s my understanding as well.
I’d advise going in and seeing your accountant, working out your cost base, working out a running position on your cost base, estimate sales pricing and costs, so you know your tax liability.
That’s what I do for my properties, then it sits in a spreadsheet for when I need to work out what I would bank, after tax and after the mortgage is paid.
Then you have an accurate net cash on cash return, because you’ve worked out your profit or loss.
Cost base is affected by the depreciation you’ve claimed.
Running costs, strata, insurance, all that stuff that are week to week expenses, do not affect the cost base.
Just be careful with renos, that’s when things start getting a little more complicated.
Invest in a good accountant with a property focus.
To answer your original question, its a different equation, its not working out your total ‘negative gearing’ per se.
I’ll run an example.
Bought property for $400k, SD is $10k, legals and other costs in acquisition are $5k. (other costs could be inspections, buyers agent fees)
Cost base is $415k
Now when you sell, say for $500k, you take off your cost of selling – agents commission $10k, advertising and legals $5k. = $485k. So for capital gains purposes your numbers run like this.
$485k-$415k = $70k capital gain
If held for more than a year, than a 50% CGT discount applies. Lets assume you held it for 5 years.
BUT
say you’ve claimed depreciation each year, and it was a new house, so there was $5k worth of dep. each year that you claimed in each tax return.
this gets taken off your cost base.
So, $415k – (5 years x $5k) = $390k.
So now your tax liability is $485k-$390k = $90k capital gain.
You’re still eligible for the CGT discount, but be aware of the extra tax burden when you sell. A lot of rookie negative ‘gearers’ who refinance and then sell, could find themselves with a larger tax burden because of all the dep. claims over the years, that they suddenly may not be able to pay.
Invest in good education and good professionals, e.g. an accountant.
I would probably do a couple of things in your situation.
The first is to do a proper cost analysis of selling and see what you really will end up with as a profit or loss. There are some figures in your text, but even if you bought it for $310,000 and sold for $330,000 I would be surprised if you came away with any profit from a capital gains point of view, even though it was off the plan with what I assume is some stamp duty concessions (Vic new properties).
Remember to work out your cost base for when you bought as well.
As you say you are green, I’ll just point out a couple of things although you may already be aware of them.
If you sell using a real estate agent, commissions are typically around 2.2%. RE agents can and typically do charge for marketing above and beyond their commission, and its not uncommon for about $2000 worth of marketing for a standard agent (this is: professional photos, “feature” ads on realestate.com and domain, billboards, etc.). So on a $330,000 sale, expect a $7260 commission, couple of grand worth of marketing, $1500 for legals (contract etc.) and you easily can say good bye to $10k.
You purchasing costs include stamp duty, not sure what that looks like on this particular property but it would be in the correspondence you have with the conveyancer (legal team that did the transfer of title), as well as the legal team cost, plus any inspections that you had done, e.g. pre settlement inspections to identify defects etc. If you bought this off the plan you may have paid a fee to an investment group or buyers agency, that’s also a part of your costs. Anyway, for a $310,000 purchase price, it wouldn’t be far fetched if you actually had to spend $320,000+ to get it (more if it was an existing house as you would pay more in stamp duty).
By the time you work out your sales costs and your buy costs, there isnt a lot left for a profit margin. And dont forget capital gains tax weighs in here – if you have made a profit.
I have a similar situation with a property so I can more than emphasise.
However, this isnt to say that you dont have some capital to roll into your next investment which you allude to. I am assuming your loan is around $290,000 or less. You mention early exit fees from your financier, there should only be minor fees unless you have a fixed interest rate for 6 months plus. Otherwise its pretty straight forward, some discharge of mortgage documents and the like, but nothing expected in the thousands, at least at the conventional ‘big four’ banks anyway for a standard variable investment loan.
The real estate agent can do a market appraisal and/or a comparative market analysis – some agents call this one and the same but just beware your terminology. ‘Valuations’ are typically reserved for valuers, who assess a property and give a formal report. A valuation is typically ordered by the bank (at your behest), in order for you to get them to realise any growth so they will look at financing out some of the equity. Have a look at what the RE Agent gave you, hopefully there is comparatives in there (some times the appraisal is just a letter) so you have an idea yourself – real estate agents can inflate a price to get you to want to sell so just run some diligence on this side of the fence as well.
I’m a numbers man, I like to do a lot of analysis because the numbers dont lie, and informs you exactly what point you may sell at to make a loss, or make a profit (dont forget CGT).
The other side to this is your concern about your market. This is another conversation however what I would say to you is this: How well dialled in is your goals and strategy? Are you not sure about them, and you’re not sure about this property as well? Really take the time to evaluate your goals and strategy and plan. I wish I had done that before I started my portfolio, buying and selling assets, making losses and some profits. If your concern is about the over supply, then get informed, really dig into it, all these apartments on the way, well what does demand look like? Whats pop. growth? Hows employment looking? Whats the economy (interest rates/consumer sentiment) doing? how much supply will these developments give? whats the feeling on the street – talk to real estate agents, buyers agents, existing investors, locals, council, town planners – whoever.
Not saying dont sell, just saying do the numbers, and if you are going to sell, know what you will make or lose before you do it, and have a reasoning for why you can take the loss or profit at that time that stacks up. Do the research and be informed. Perhaps its just that you can do better with that capital somewhere else as you mention. Realise the time it may take you to sell the property, or even find a property that is in line with your strategy.
I’ve sacked a few property managers, isquared, guardian, ark etc.
Check your management agreement (between you and the property manager (real estate agent)) – dont get this mixed up with the tenancy agreement, which is between the real estate and the tenant.
It’ll say in there the terms for termination. Most of the time it is 30 days, or can be “less if agreed”. Typically the property managers will not take the termination well, and can get real nasty, I’ve seen it happen a couple of times.
Before you give notice for the RE agency termination, make sure you have another property manager lined up – interview them on the phone – tell them whats happening, why you are not happy with the current property managers etc. Set your expectations from the start, I always ask potentials about the market where my property is, when there is more rental activity through the year, what they would do with a tenant that didnt keep the place clean, what they would do if the tenant didnt pay etc. Make sure they know the law inside and out, breaches, notices, civil and administrative tribunal etc.
Do this with a few and you’ll get a feeling for them. Also get a copy of a property management agreement with the new agency (not to sign – to look over the schedule of fees).
In terms of recommendations:
I sacked two real estate managers and took all my business to Eric Muriniti at RestOnRealEstate. He does Western Sydney (pretty wide scope) and is awesome. He got in touch with me as an owner when some dodgy stuff was going down in the complex that I owned an apartment in, the real estate agent at the time couldnt care less when I called and asked them about it.
Eric is the man in Western Sydney, he’s also helped me successfully sell two properties there. He’ll sort you out and understands the demographics – critical.
I dont have any affiliation with the real estate agency or anything like that, this is just my humble opinion. Good property managers are worth their weight in gold and should be rewarded with more business.
Anyway, getting off track, find your replacement PM, have them help you through the process.
I used US Invest after a friend of mine recommended them.
Stay away from US Invest, as well as any one associated, Ryan Mcfarland, Lachlan McPherson and all those guys. They are out to take your money and put it in their pockets with zero concern for your position.
For example, I bought a 1 bedroom unit in GA, Atlanta. There was a rent guarantee that came along in case of vacancies.
Well there was a vacancy about 1 month after I purchased – for around 5 months. US Invest paid for 1 month, and then stopped paying, stopped responding to emails, wouldn’t even reply after threats of legal action. They currently owe me around $2500 and have refused to pay.
Stay well away from them, they are the people that damage the investment property market and truly are sharks.
I try not to use acronyms with people I dont know, particularly when they arent widely used or are based on formulas that aren’t necessarily always the same.
As for the above:
1) Gross Rental Return (GRR)
GRR=(Annual Rent/Purchase Price) x 100
Agreed, I call this rental yield.
2) Return On Investment (ROI)
ROI=(Annual Profit/Purchase Price) x 100
What is annual profit? and is this a after-tax or gross amount? Realised or unrealised gains? If the profit considers that it has been held for a year do you consider inflation and what the real worth is?
3) Cash-On-Cash Return (CoCR)
CoCR=(Cash Back/Cash Down) x 100
As above. Before or after tax “cash back”? And what is your definition of cash down? Total initial outlay? That’s what I would go with.
4) Growth On Equity Return (GoER)
GoER=(Expected Annual Growth/Current Equity) x 100
Why would you use a GoER anyway? Would you not want to work numbers on total growth on your property? just working out what the percentage growth on equity is and not the total amount of equity usable…. I dont see where you would use such a formula, or how it would dictate into your rationale for buying something (see below).
5) Net Profit Percentage (NPP)
NPP= [(Annual Cash Flow + Annual Expected Growth)/Cash Down] x 100
I personally dont use expected growth rates in my evaluation figures because it is really speculation. What is to say an area will go up 2%, 4% or 6%? I’m all for considerations of different growth rates, but at the end of the day I don’t use this formula when I evaluate purchasing a property.
I do consider growth but not in a formula as above.
The thing is with the formulas, what percentage you need or you consider to be acceptable comes down to your strategy and where the next purchase comes into your goals.
For example (simply) cashflow vs growth. If you wanted a cashflow property then the above figures would all be cashflow biased. If you wanted growth, then perhaps your rental yield (you call it GRR) may be quite low. It depends.
And then there are added considerations. Say you have a house and an apartment both with 7% yields. An apartment is going to have extra (standard) costs of strata fees, sinking fund fees etc., so that eats into your margins.
I am a heavy number crunching guy when it comes to looking at the next investment, and I’ll tell you what I use.
Rental yield = annual rent/purchase price x 100.
This is a good roundabout percentage that gives you an inclination on cashflow. I tend to look at property over 6 per cent where possible, however again it comes down to your strategy (e.g. a buy hold/sell with negative cashflow may have a lesser yield but can be bought $30k under market value).
first I work on cashflow returns as this is easy.
Cashflow before tax.
rental yield – interest – outgoings
tax rates that I use in excel as a guide =sumproduct(–(C30>={18201;37001;80001;180001}),(C30-{18200;37000;80000;180000}),{0.19;0.135;0.045;0.1})
then I work on capital
Total initial outlay
Sales costs (selling price based on CMA’s)
Cost base
CoCR (but I use after tax profit, so working through CGT etc. and I do them for holding for 12 months and one for less (full CGT))
Tax considerations in trust structures (includes parallel figures for the cashflow above as personal income doesnt come into play for my cashflow/tax credits)
I also work out my equity access, this % is dependent on the type of property – remember the bank will loan different LVR’s dependent on the property type and use.
Then after working out my equity access, I work out my after settlement cash availability vs my total initial outlay.
When you’ve done the above you should have:
before and after tax flow (in personal names)
CoCR if sold (at different CGT)
Equity accessible
And then you can work out your accessible equity – total outlay and see how much it will “cost” you to pick this property up (not including ongoing interest if you’ve used equity) out of your capital base.
Anyway hopefully there’s a few bits and pieces in there to get you thinking. A lot easier on a spreadsheet, and again, this is just a guide for figures.
At the end of the day you need to do an evaluation far beyond the numbers. The above might all be terrible but the property is on two lots
and you can knock down and develop. That would be another set of figures for evaluation.
It all comes back to strategy.
Good luck and happy investing.
Ben
This reply was modified 9 years, 3 months ago by Stannis.
I agree with all the above. Mate, rates are important, but it isnt be all and end all.
I’ll give you an example.
So you want to purchase an investment property on a decent block and decide to build a granny flat to rent. This would give you some good cash flow that you need in order to balance or offset a future negative cash flow property. Now broker A with the best rate may just say “go with Bank X because of the 4.1% rate” and you settle with a loan for the purchase of the initial IP. You go to build the GF and find out that Bank X will refinance, but only at 70% of the perceived value of the GF. As a result you end up chipping in another 10 or 15% than you originally expected. This can equate to $15k+ depending on the size of the GF and the quality of the build.
Now broker B may know that bank X will lend only 70% of the GF, so advises you to go with a different bank, Bank Z. Bank Z has a higher interest rate of 4.25%, however will lend at 85% – which means you keep more capital in the bank. You save $15k on the capital towards the GF, but you pay more on the interest rate. How much does this equate to? Looking at the above – the difference on a $450k loan between 4.1% and 4.25% is a grand total of $675 for the year. I know which one I’d take.
Structuring your loans with the right lenders is important. A decent broker will be able to give you this advice, and even if you aren’t doing these types of investments, your broker should know the score – surround yourself with a good team that can advise you when you become more and more sophisticated with your investments.
In the objective realm of wealth, I would consider that it would be assets that allow you to pay for all your costs after tax (without the requirement of a job).
These costs can be quite subjective (e.g. private school costs for children, extravagance of holidays) and basically comes down to what your cost of living is.
I would consider someone that is wealthy as not needing to work, being able to afford a comfortable standard of living (subjective) and still have funds left over. I aspire to be wealthy, and this means firstly defining what that amount is for me and what a comfortable standard of living is.
The rough figures I work on is $2.85 million in net worth. Little bit different to $750k. $2.85 means that I do not eat into my capital and have a comfortable standard of living after tax on my gross income.
I looked at Quest serviced apartments a couple of years ago. There’s a couple of things to consider.
The bank believes these are higher risk investment, and there will be a lower LVR (so less funds from the bank). From memory ANZ said they would only loan 70% (check these figures) which means more capital and harder access to any equity growth.
The resale can be harder, as you are only marketing to people who want to buy into a serviced apartment complex. Effectively you cut out a lot of your market in comparison to say, reselling a house.
The other thing is the marketing – sign up to the quest service apartment marketing and they will hammer you with “specials” on a weekly basis. I ended up un-subscribing.
Rental yields and guaranteed returns are always great, it just needs to be weighed up with the rest – higher capital outlay, less access to equity, more difficulty in resale. Also there is the consideration that you are in a strata scheme, which can have its own difficulties and costs.
Consider your strategy and what your cashflow will be like after tax, as well as your cash on cash return. I much prefer to build duplexes (owning both sides), which has a higher yields, you are totally in control (no strata or if you strata title you own both titles) and although duplexes may also be a lesser LVR (as opposed to a standard 90% house – I got a 85% LVR) there is a much higher ability to resell. Consider what your exit plan is.
I’ve got an apartment in Georgia and its been nothing but head aches when it comes to the administration. Not to turn you off your prospective investment, just to inform you that I have had to employ an American-Australian accountant to advise me on such matters, and file my LLC tax returns (state and federal). Such people are hard to come by and will cost you significantly more than say a standard Australian accountant. My LLC is in Georgia, and I havent had to file a BE12 or 15, however I have only owned it for 2 years. My accountant has not mentioned this however this may be because of how long I have held it for.
I would recommend finding an american australian accountant (they are out there) and pay for the advice. If you have no joy, PM me and I will put you in touch with Jason, who has fixed a lot of the gaps that the “investment group” that I went through missed.
Mate there are a lot of questions in there and I would have a lot of questions for you in order to give you any decent advice, and I would suspect that that is why you’ve had so many views and nil replies. I will throw some questions back to you which I would consider the best way for me to give you advice – that is that you’ll come to your own conclusions as a result of asking more questions and getting the answers to them.
The questions I would ask you is (looking at your dilemmas respectively):
1. Do you live in the area? How much do you know about it? Established vs fringe comes down to a couple of items – what is your pre approval at (as this will dictate how much you can borrow and in turn invest) and what information do you have that supports each area? Break it down as pros and cons for established (better area?/yields?) and pros and cons for fringe (lower entry price?/better yields?/possibly better growth (take off? why do you think it will take off, what evidence is there to support it?)) – all depending on your budget and strategy (as you mentioned).
2. It depends on your strategy. Is that too much? its up to the individual to ascertain what is too much or too little – attempt to make it as objective as possible (and not subjective). Work on your strategy – what are you trying to achieve in the next purchase? What is your exit plan? what is your overall goal? These will dictate what your purchase next and what your return has to be.
3. This is a question about the specific market and you should consult the local real estate agents for a comparative market analysis (CMA) for perspective rental yields, and by all means look at the local market through any means to get more information – even go on realestate.com and look through it for rentals in that area and get a feel for it. Go to open properties in that area and ask the RE Agent what the rent would be. Learn the area and ask the locals. RE Agents will be able to tell you what properties rent out faster and why. Always get a second/third/fourth opinion, do not just talk to one person and take their advice as gospel. And of course you can always hire a buyers agent.
4. I dont know what your capital is (cash/equity) that you are going to use, so I dont know how much you need to borrow on a rough listed price. Is it too much? Depends on your strategy and risk, and the potential return of the property (folds back into strategy).
My advice would be to sit down and do a consolidation of everything. This is typical advice I give to a few friends and colleagues – if you have access to equity – how much? How much can you save month to month (do you have a good budget in place and are you saving?)? How much can you borrow? What strategy do you have and what does this dictate for your next property? What is your exit plan for that property? Are you buying in personal names or a trust (dictated by strategy)?
I hope I’ve given you a few things to take away and work on. Good luck, and happy investing. I just got contracts exchanged on my 9th property, and those questions above are questions I always consider for the next purchase or sale.
Cheers
Ben
This reply was modified 9 years, 4 months ago by Stannis. Reason: typo
This reply was modified 9 years, 4 months ago by Stannis.
There are + geared properties around, I have a few myself that I have bought over the last couple of years. As the others say, these wont fall in your lap.
Apartments/units/townhouses and duplexes are what I have that are + geared. Be wary though of anything with strata, as apartments etc. may have better rental yields than your standard 4×2 house, however they also have a higher amount of outgoings that will dig into your cashflow, particularly if the strata has not been managed effectively.
Also there is a massive range between a + geared property and a ‘gangbusters’ + geared property with a myriad of reasons. For example, my apartment in Western Sydney is $1k + geared a year, but say my duplex (both sides) on the Sunshine Coast is $5k + geared. Which one is better in my portfolio?
These reasons can include a high rental yield and low expenses, but can also include a high deposit (smaller mortgage & less interest) which gives you good cashflow, but may not be the best strategy for your success. It comes down to your strategy and the best use of your money. And yes, you guessed it, the Sunshine Coast was a 85% lend, so a smaller mortgage and a good rent return, however depending on your circumstance, this may not be the best use of your funds even though its $4-5k a year + geared.