Forum Replies Created
@crj : no I didn't factor in the interest, that's a good point from a purely financial perspective. I think all told it would have swallowed about $100k in cash during the ownership period. If this was in the bank earning interest, after taxes, there's probably $10,000 there.
If I had rented during this period and put that $100k into, say, a resources index fund during the period (and got out within 10% of the top of the market in 2008) I probably would have made a lot more money than with the buying/renovating. Yes, we did OK but we bought well in the first place, which makes all the difference. The original purchase was $30k below the asking price because the owner needed to sell and couldn't shift it. I waited until the exclusive listing agreement with the agent had finished, and made an offer direct to the owner with no pesky agent to get in the road. Nobody wanted a tenanted property in a poor state of repair (note it was in bad repair before we moved in!) that had languished on the market for 60 days+ The property was in a sought after location, and after we renovated it to a standard consistent with the area and asking price, it sold within 3 days us listing it.
@devo76 : you're spot on. The big winner for the average person is the forced savings of making mortgage payments. However, this doesn't outweigh the fact that too many people dip into their equity as soon as they've built it up. A little discipline goes a long way for both renters and owners.
Scott : add back in the lost weekends searching for a new place to buy and the removalist problems for that, and it's about even.
devo76 : it's not necessarily a no brainer. Sure, convential wisdom is that it's a no brainer, but I doubt many people really sit down and work it out. For some people, in some situations, it's better to rent, particularly if you can find a place that you like and that has a good owner interested in maintaining the property and keeping the tenant happy.
I've heard banks state that the average life of a home loan is 7 years, which probably means that few people stay in the one location for 10+ years, and lots of people churn in the 3-5 year period, which isn't necessarily a good idea.
I've enjoyed reading this thread, but I'd like to address the other side : property supply. There clearly isn't enough properties in places where people want to live. This is because the state governments have a monopoly on handing out licesnses to build a residence. Monopoly = shortage to keep prices up. Everyone is in on the game, including the developers who own large tracts of lands and drip feed them to keep prices high. Credit growth ensures the 'number' on the purchase price is high, shortage of properties is what makes people miss out and bid to the top of their affordability range. High credit growth due to structural lending changes means that the top of their affordability range has been going up, but as discussed, can't go up much further. You can't go any higher than 50% income and -5% equity.
Expected result of a joint property investment??
= tears
Unless you have in writing an agreed plan on what to do when:
– one person needs to bail on the investment
– how the property will be valued if one party wishes to buy out the other. Who pays the stamp duty on transfer of the title into one name and the associated costs – is it the buyer or the person wishing to get out
– the investment holding time if all goes well
– how a decision will be made to sell
– who is going to be the primary contact point for day-to-day management of the property
– what type of legal structure will be employed
– is it to be a single mortgage in joint names or two separate mortgages.You will probably not be able to borrow against the property in the future to make more acquisitions because you do not own it outright, therefore a bank won't lend against it if you wish to purchase an investment on your own.
People make successful joint investments all the time, but only when they approach it professionally and structure themselves that way from the start. Mates who, over a beer, say 'hey let's buy a house together' usually end up regretting their decision when one goes and gets married/has kids/goes overseas/loses their job – basically has any sort of life change. I've seen it happen a couple of times.
Well my answer would be – where can you make the best return on your money. If you can exceed the 12% interest with your investment, then you should invest the money as you will earn it back at a faster rate than you pay the interest.
However, this has a caveat : it must be a SURE 12%+ return, not a 'hopeful' or prospective return. If there is a risk involved, then the return needs to be adjusted upwards to compensate. So perhaps you want a 20% return with an 80% chance that you will get it.
Additionaly, the 12%+ return has to be net after taxes and everything else.
The reason for this is the 12% interest is a definite thing, there is 0% risk the lender wont charge you for the interest next month, and you must pay it out of post-tax income because it is not deductible.
If you think you can beat 12% return on the cash invested in after-tax cashflows, then you may want to consider leaving the debt and moving towards investing. If you don't think you can do this as a sure thing, pay off the debt. And you should look at ways of transferring the debt to a lower interest rate as a matter of course. Everyone gets offers to transfer debt to honeymoon rate peronsal loans and credit cards, you shoudl investigate these to get off the 12%.
I don't want to sound too presumptious, but given the continuing tax cuts on offer by both sides of the political spectrum, are you paying that much tax now? Yes I agree that tax should always be avoided where legally possible, but doing complicated transactions to 'save tax' needs to be looked into very carefully – don't end up spending $1 to save 50 cents – I've seen it happen over and over again. Do the sums and be realistic is my advice.
Given you can't get out of the current mortgage, and you aren't planning on doing anything for 3 years anyway, I"d consider paying the maximum amount off your mortgage. Many mortgages now allow a small number of redraws per year of built up principal above and beyond the payment schedule, so you could always pull it back out if necessary (for instance, to use as a deposit)
Putting money into the mortgage will benefit you for two reasons :
1) the interest saved will be at a higher rate than the interest earned on a savings account (8% vs 5.5%) – if you reduce your debts it's the same effect as earning interest.
2) the interest earned on a savings account is taxed, whereas 'saved' interest is notAdditionally you're less likely to 'crack the piggy bank open' for silly spending when it is in the mortgage rather than a savings account.
When it comes to buying another place and turning it into an IP in a few years (assuming that's what you want to do) then you can refinance to a IO loan at the same time.
Under my stairs is a lockable cupboard. You can fit all sorts of things in there, but you do have to leave room for the door to swing…
The post topic should really be 'never do any type of investment strategy that doesn't suit your personality and investment goals'.
Handy people who love getting their fingers dirty will always find renovating an rewarding experience.
Desk jockeys who like to think and analyse will always regret opening a tin of paint.
Neither is right. What is right is doing things that suit your personality and outlook.
Well I live on the Sunshine Coast in QLD, and we have very good rainfall and full dams. Maleny is a very lush, green area and some people are attracted to that, although I see it as 'bonus' issue rather than the whole reason. What I mean by this is that people who are already thinking about moving to somewhere like Maleny will justify it to themselves with 'oh, and they get lots of rain', rather than thinking 'we need to move somewhere where it rains more'.
The other side of low rainfall is that some people will actively seek out drier areas to live in. Ask some British migrants to Australia and many of them couldn't care less if it never rains (assuming the water can be supplied somehow). Take a drive through Arizona and Nevada and you'll find people who like living in an arid climate. Whether the water supplies can be supplied to them is another issue, but in the case of Coastal Australia, the desalination / recycling option is there to help solve the problem.
One thing not answered so far for you was to do with Capital Appreciation. The scarce thing in Real Estate is Land. Realistically, the only thing that makes Real Estate go up in value is the scarcity of the land underneath the building.
So in terms of Residential vs Commercial, the major determinant of capital appreciation is (a) how desirable the piece of land underneath the building and (b) what percentage of that land do you own? Without fail, owning the entire piece of land as opposed to a unit in a strata titled property will provide better capital appreciation over the long term (all other things, such as location, being equal).
So when weighing up the long term potential, ask yourself how much land are you buying? High rise apartments tend to do worse in terms of captial appreciation because they represent 1 piece of land divided by 100 or so units. A single-family-residence or a commercial building on it's own piece of land is a 1/1 investment in the land. Buildings depreciate, wear out and go down in value, land appreciates in value.
Note I am only talking about the capital appreciation aspect of the investment here, not the suitability of the investment as a whole.
Nothing wrong with renting to friends. It’s just very difficult to ask friends for money when things go bad. Just realise you may have to face a moral dilemma one day. Sometimes it’s great to forgive a debt to get a friend back on two feet if they do fall into trouble.
So I think rent away – but make sure you fill out a proper condition report, lodge a rental bond form and do all the paperwork properly. Your friend may be a great guy but you don’t know the girlfriend at all, and she could be very difficult. She should also be named on the lease if she is going to live there.
As others said, you need to be clear about putting the rent up from time to time. You could agree to a 2-yearly rent review and agree to price $15 under the market rent, or something. That way he gets a bargain and you get more than you would with a manager. You said that he may resent paying off your place after a while. You may also resent the fact that he is no longer paying market value if you’re still getting the same rent in 3 years time while the market rents have moved up.
I’m sure lots of people rent to friends and family and on the whole it’s a positive experience. However problems occur when expectations aren’t met, so just make sure everyone’s expectations are laid on the table before the keys get handed over.
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‘if you do more of what you do, you’ll get more of what you’ve got’ -S.McKnightThink about your extended family and friends. There is probably someone in that group who has made a bit of money from real estate. Maybe a long lost uncle, a friends’ parents, and old boss – someone.
Ring that person up and ask politely if you could come and see them and have a quick discussion about real estate investing. Unless their heart is made of cold stone they’ll generally accept. Take your partner around to their place and let the feeling of ‘we could have this’ sink in. Obviously it helps if they have a nice place.
I have a friend whose parents are very wealthy property investors. We are often invited around for dinner where real estate is always discussed in great depth. After a lovely dinner in a beautiful home with plenty of nice food and wine, I always return with renewed enthusiasm for breaking away from the crowd.
Even 20 minutes talking to someone who has ‘made it’ will give even the most slothful of procrastinators a burst of inspiration. Or it could even lead to that person offering some level of mentoring or current suggestions.
You just need to keep your eye on the goal, plus get some smaller, shorter term goals to tick off. Give yourselves a small reward for completing a goal, and work towards it.
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‘if you do more of what you do, you’ll get more of what you’ve got’ -S.McKnightFrankston probably has markets within markets. My sister lives in Frankston and has a large home on a large parcel of land, surrounded by large homes in a peaceful verdant street with views of the bay. It is all very pleasant. HOwever I tell other people from Victoria that my sister lives in Frankston and they look at me with pity, as though she is on welfare or something. Clearly we she lives and the types of properties being discussed in this thread are completely different markets linked by name and postcode only.
People need to be aware of this when they start reading statistics and making generalised statements about suburbs and towns – sometimes the same postcode can span palace to outhouse, and the statistics just group them on postcode because it’s the easiest. If you concentrate on good value investments regardless of the postcode you’ll do much better than declaring a particular suburb ‘hot’.
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‘if you do more of what you do, you’ll get more of what you’ve got’ -S.McKnightJust to add to that…
The price of anything is determined by the supply of the thing and the demand for the thing.
The supply of land in any area is fixed. You can’t create more land. The supply of houses is not fixed. You can build pretty much as many houses as you like. Even on the one piece of land – it’s called a highrise.
The demand for land varies with many factors, be they lifestyle, aspect, amenities and infrastructure, plus the allowed uses of that land. That’s why changing the allowable use of a piece of land can dramatically change it’s value – it just gets put into a different demand category. Land in cities is really only useful for putting properties on it, whether they be commercial or residential. As all land supply is virtually fixed, then the price is determined only by demand.
Remember a building is just a way to enjoy the land and keep the rain off your head. A tent works just as well, but the council won’t let you live in one. The value of finished houses should never exceed the cost of the land + the cost of the building. As the building gets older it loses value, but this is generally offset by the rising value of the land as more and more pairs of feet are in the country with a demand for land. If the value of finished houses exceeds the cost of the land + the cost of a building, then developers move in and start building on vacant land, until the market is brought back into equilibrium. The reason new houses generally cost more than old ones is because the old ones have lost value. If you don’t think houses lose value take a look in Bunnings on the weekend and observe the people madly trying to keep houses as new as possible to preserve value. It’s like the difference between a classic ferrari and a commodore. The ferrari owner does nothing to make sure his car keeps it’s value. The commodore owner spends lots of money on accessories and still falls behind. Reason : no more classic ferraris, and another commodore off the production line in 10 minutes time.
The reason that people don’t generally knock down houses is because it is not generally economic to do so. The cost of a house + the cost of the land + the cost of removal + the cost of a new house is generally more than a similar house in the same area, and rational property investors won’t demolish. Often old, small buildings on large blocks of land are demolished to make way for either larger houses, or multi-dwelling buildings. This helps unlock the value of the land and lets it get taken up by the demand better. In a way by putting a house on land, it actually devalues the land as it can’t easily be used for something else. Because you can live in a house the value roughly what the house is worth, but, for instance, you turned your land into a dump you’d devalue it further than vacant land.
The reason those victorian terraces are worth so much is not because of the building, it is because of the value of the land underneath, even though they can’t be knocked down. You can see this clearly because the value of an unrenovated building costs about the same as the value of a renovation less than a renovated one. ie unrenovated building + land = renovated building – cost of renovation + land.
When you buy an apartment in a building of 100 you are buying 1/100th of the land value underneath, and you are buying 1/100th of the building. As an example (these are just guesses):
land : $5,000,000
apartment building (100 units) : $20,000,000
total valueof building and land : $25,000,000
Your apartment :
1/100th of building : $200,000
1/100th of land : $50,000
Rough value of apartment : $250,000
But 80% of your apartment is a depreciating asset, and only 20% is an appreciating asset.Now look at a house :
Land Value : $300,000
House Value : $250,000
Total Value of house/land : $550,000
55% of your investment is an appreciating asset, and 45% is a depreciating asset.Over 10 years this is going to make a big difference!
Like most economic concepts, it’s happening around you every day, but you don’t really see the mechanism working. Yet everytime you buy a property, the first thing you look at is ‘what else can I get for my money – is this the best deal for me?’ By everyone doing this, those properties with the highest land value component always perform the best.
Sorry about the long post!
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‘if you do more of what you do, you’ll get more of what you’ve got’ -S.McKnightI think you’ll find that most agents won’t reply to email enquiries unless they look particularly tempting. They probably get a couple of hundred emails per day, and if someone is overseas they aren’t likely to be seen as a ‘hot buyer’.
I don’t know what format you are sending your emails in, but I’d suggest compiling a short list of agents in the area, and putting together a very specific, clear plan of your objectives, then sending this to all of them. In this I’d include how much money you have to spend, when you are going to spend it buy, whether you have a pre-approval and specifically what specifically what type of property you are after, down to the number of bedrooms, bathrooms, land size, rented or not.
Put yourself in their shoes – they get an email either from someone overseas saying ‘I’d like to buy some property in Coolum’. They are going to think ‘sheesh, is this guy for real, or will I be wasting my time even replying’. Time is money to an agent, so unless you’re a hot prospect on a particular property then you’re unlikely to get much response.
However, if someone emails them and says ‘I’m looking for a 3 bedroom house within 5 km of Coolum town centre in the price range of $400,000 – 450,000. I have a pre-approved loan for that amount and I would like to purchase a property before the end of march. If you have anything suitable I can make a decision in a matter of days. Please contact me if you have any current listings’
Now if you got that email as an agent you’d be thinking, OK, I’ll scan my list and keep this guy in mind.
WHile it does happen, very few people buy property sight unseen so I can understand an agent’s reluctance to respond to an anonymous email lobbed from the other side of the world. You’ve also got to remember that an agent spends most of their time out and about, not driving the keyboard.
The other (radical!) strategy you could use is to actually pick up the phone and call an agent or two. You will get 30 emails worth of chit-chat achieved in about 2 minutes. The agent will know youare serious and is more likely to deal with you. There is nowhere in the world that you can’t ring Australia from, even if you’ve got to get up at 3 am to do it.
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‘if you do more of what you do, you’ll get more of what you’ve got’ -S.McKnightMy sister put vinyl wrap doors in her kitchen about 7 years ago, and she swears she’d never use them again, but I think they don’t look too bad.
The thing with any kitchen surface is that it will depend on the treatment. You can get 20yo laminate that looks OK if it was in a decent colour to start with, and if it has been looked after. 2 Pack looks great when it’s new but also needs care. VInyl wrap doors also have care instructions and these need to be followed. Anything can look rough in 12 months if not looked after.
When I moved into my place the previous owner had burnt holes in the laminate, melted the oven front by leaving a teatowel on the handle while the grill was on, which allowed it to catch fire. They had cracked 80% of the tiles, half the hinges were hanging off the cupboards and the trims around the doors were all peeled back. There was water damage here and there and the ceiling was covered in black soot. But a lovely old lady who lives in the same complex has exactly the same kitchen and it looks ‘as new’ despite being 15 years old. (i’ve since replace the kitchen)
My advice would be to not spend too much money on a kitchen if you are keeping it as a rental and are going to be upset when it starts to get knocked around from tenants – only about 1% of tenants really care about the kitcehn of their rented place. I think with rentals you need to budget a new kitchen every 10 years or so.
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‘if you do more of what you do, you’ll get more of what you’ve got’ -S.McKnightAre you talking about the complete block of flats, freehold? If that is the case the flats every time. It’s not the house that makes houses better investments than units, it’s the land underneath. With a single unit in a strata titled investment (flats, townhouses, apartments ect) you only get a fraction of the value of the land underneath. With a house you get the whole value of the land underneath. The buildings always depreciate, it’s the land that goes up in value.
With multiple flats you’ve got a much higher density of people living on the one piece of land, and higher density means higher yield as each person pays for at least a bedroom. More bedrooms means more money.
If the flats are run down you also have a lot more creative strategies for releasing value. With a renovated, nice house there’s not much you can do to unlock value. You could renovate the flats one by one and increase the rent each time and hold on, or you could strata title the lot and then sell them off one by one when the market is ready to accept them. Don’t flog the lot off at once or you’ll flood the market.
Problem + solution = profit. Where’s the problems, and what are the solutions?
Tell you what, you buy the house and I’ll buy the block of flats.[biggrin]
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‘if you do more of what you do, you’ll get more of what you’ve got’ -S.McKnightFirstly, an agent must present all written offers. Remember that they are a negotiating professional, while it sounds like you aren’t that experienced in price negotiation.
As already answered, write down your offer on a contract for sale, attach a $1000 deposit check to it and instruct the agent to submit the offer. Whether you seem keen or not will be used by the agent in assessing whether or not to push the vendor to come down to your offer, or push you to up to the vendors amount.
It’s a fallacy that the agent is working for the vendor of the property. The agent is working for no 1 – themselves. $5k will make so little difference to their commission they aren’t going to bother with trying to get more for the vendor. What they are looking for is the fastest way to close the sale, get their commission and move onto the next one. With this in mind, remember the agent is going to find the weakest one out of you and the vendor and spend the most effort on conditioning that person to come to the other persons level. By putting your offer down on paper and instructing them to submit it, they are obliged to present it. The vendor will either agree or not. If not, and you feel like offering more, then do so. But not because of what the agent says.
You have two ears and one mouth when it comes to negotiating, and I suggest you use them in that order. Listen to what the agent tells you about the other party and tell them very little about yourself, what you think of the property and what your circumstances are. If you’ve already given them your life story, don’t stress but be aware of the agent using your own story as arguments for you to close the deal above a level you’re happy with. For instance, if you say ‘I need to buy something before valentines day because we are going away for two weeks’. Then during negotiations you’ll hear from the agent ‘well, if you offer another $5k, at least you’ll have it all finished before you go away on valentines day’. Thus to disagree you’d have to disagree with your own statement, which would make you a liar, so chances are you’ll agree. But better to break your own statements than pay too much and stew about it for years.
Bottom Line : Work out how much you’re willing to pay, and remember the deal of a lifetime comes around every saturday.
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We all need somewhere to live – but do we all need a CBD apartment?…not until I’ve had my two cents…
I think everyone, especially younger people, should firstly forget about ‘baby boomers’ and ‘gen x’, ‘gen y’ etc. This is all just marketing BS that someone made up so they could stereotype a whole generation.
The same with median house prices. It’s just a statistic and not a very good one. Where I live the median house price jumped by 80% for 2006. Someone congratulated me after reading the paper, and I told them my house was worth about the same or maybe even a bit less than 12 months ago. However, in my postcode one of the ‘best streets’ has seen a flurry of development with several new properties changing hands for 1.5 million plus. So the median price went up. Is my house worth more? Nup. It’s all lies and statistics.
Then you’ve got the problem of comparing housing multiples over time. 30 years ago the median was 7 times average earnings, and now it’s 14 or whatever. OK sure, but what was the weekly payments in fractions or a person’s take home salary? The median house 30 years ago would have probably been a 3 bed 1 bath chamferboard home with a single garage. Now the median is probably 4 bed, 2bath with 2 garages.
My point is forget about statistics and trends and marketing generalisations. Work out how much you’re prepared to borrow, and find a house that fits your criteria. When you can’t find any, then you can say ‘the dream is dead’. Forget about medians and boomers and all the rest.
And as for the people hanging on, waiting for some type of crash where houses are worth 30% less than they are now, I hope you realise your attitude is holding you back. There are worthwhile investments in every market. It’s true that some people overpaid a few years back and are looking at losses, but all the while there are more people looking for somewhere to live than there are houses to live in, coupled with the continued shrinking of household size, there’s not going to be a crash in house prices any time soon. Rents are rising swiftly in most places, partly due to the cost of the first home, but also due to the lower development numbers in the last year or two. It doesnt matter if you are a buyer or a renter, you still need somewhere to live, and that keeps prices at least on an even keel. Prices will crash only when households start consolidating and the population starts to trend downwards, neither of which are likely to happen in Australian any time soon.
And don’t forget about inflation, which everyone shoudl be aware of as it has featured in the news a lot recently. Inflation not only increases the value of your property in numbers (not necessarily in real terms) because of the rent-mulitplier. (ie if rents increase 3% year on year, values must eventualyl catch up) inflation also reduces the size of your mortgage in comparison to your salary. The amount of inflation from 30 years ago to now is mind-boggling to say the least.
Even if the bank has to liquidate a lot of properties, it’s still not going to send prices crashing. Most people mistakenly assume that a bank wants to get your house. That’s patently not true and a lender will do anything in its power to keep a loan going, because they make far more profit from someone sitting there and paying the mortgage. In fact if a lender has to foreclose on someone they think it is a very good result if they get all of their mortgage and outstanding interest back, which doesn’t happen very often.
The cynic and pessimist have to realise that the person most damaged by their forecasts and knowing declarations is themselves, because the cynic and pessimist will continue to drive the armchair or monday morning wisdom until the day they die, and won’t ever know what it’s like to take a chance, live some life and fulfill your potential.
(sorry that got a bit long, but I do feel strongly when I see cynicism and negativity. )
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We all need somewhere to live – but do we all need a CBD apartment?
