Forum Replies Created
Thanks Nigel for your comments. I have replied to an earlier post which provides my property equity status. You make good points and I am sure that it is best I hold on to this property as it still has significant growth potential as like all my properties are sitting on land close to the city. My understanding is though that CGT is realistically not so high as 50% but even if lower I don't think the money invested elsewhere will do as well long term. As already said I'm not comfortable with time required for investing on stock market not just for research and buying/selling but the persistent urge one has to constantly check on the prices of your stocks. Some people I know are never off their computers and that is not for me. The more I think of that the more I'm so glad I'm just in good properties. As per my other reply I was losing interest a bit but putting it down in writing in this forum and thinking more in the context of your replies I have to get out of this "giving up" groove I've been gravitating towards in not going further with property investments. I know that I have to keep going as in a way it is work that I love doing …and the work is so little really. For the relatively small amount I have in a self managed super fund ($100k) it is more like betting on flies going up the wall than real investing (from my point of view). All the properties provide me with a very comfortable net income so I'm happy with that and I'll probably not sell any for a very long time…..of course every man has his price….and as Catalyst suggests best we all keep reaching out for the stars and don't give up. This now I intend to do for the good of my family and charities I support long term. Thanks Jack
Thanks Catalyst……I am now late 50's and my financial goals was always property wealth as a single dad. I have a loan of $1m on the 5 investment properties worth $4m and my home also on a redevelopment site is worth $1.3m unencumbered. As I have implied why I'm in two minds on what action to take is because I think I have achieved my financial goal…and wonder do I need more?. I never expected to be so successful in property but it has happened and I'm grateful. Though I have the wealth I still live a very humble life though I do travel a lot (voluntary conservation). Yes the costs of value adding and rates etc reduce the yield and as you say it is the capital gain growth that is significant for holding on especially as all properties are on largish plots of land in prime spots. In all cases the properties I'm proud of as I have valued added them to a high standard of presentation and quite honestly the thought of them being bulldozed horrifies me….so seemingly I am the wrong sort of person to be doing property investing. There is no point in owning a cake shop if you just eat all the cakes. So I guess you can see why I'm in the mood of limiting myself to 5 investment properties plus my home. The cash flow now is very good but of course as the rents go up and the loan comes down then taxation digs in so super plans can appeal. But as I've said I'd rather be in the properties I have even if taxation is greater.
However on further thinking, you're right and I should not "give up" on further property investing as I seem to be doing and instead reach for the stars that will not only support my family long term but also the charities I support. For sure when I decided not to sell the property that I mentioned, it was like a load off my back so I guess I just have to change my mindset not to "love" the properties I buy and keep my mind in business mode. Thanks for your comments as it helped my thinking and I'll check out the book you suggest.
Jack
Scott No Mates wrote:Rates of return on commercial property vary widely ie I'd be expecting around 12-13%+ net for rural industrial property whereas it would be slightly less for retail (9-10%+) and somewhere inbetween for office space.You will need to pay some consideration to the size of the property (nett lettable area) and hence the net rent $/m2. If the rate looks high, it is probably unsustainable (something stinks), if the land value looks high (after deducting the building cost), something stinks.
Do your thorough due diligence.
Hi Scott No Mates
We have been in communication before …I'm also interested in buying a commercial property (this would also be a first). This one is in a big city prestigious building in a premium location and the cost is around $2m with a net yield of 9.5% which appears to be in the target area you have suggested. Based on the figures I have to date I'd appreciate your comments:
Part of the building for sale is 4 storeys with a basement, ground floor and 2 storeys up top. The total space is 536sq m comprising of ground floor (retail Govt operation 5 yr lease) 100 sq m (rent $63k), basement 140 sq m (rent $37k) with 2 years lease remaining (internet cafe business) and 2 top floor office spaces …295sq m (a Council reporting to Govt) has 2.5 years remaining lease (rent $116k).
So the total income is $216k and outgoings are $30k. They have all been long term tenants and the property is in excellent condition (so I'm told and will see tomorrow).
I can borrow the lot for this purchase at 7.61%…..so on paper I'd be making 1.89% per annum (net $37k). All have 4 or 5% fixed rent increases per annum over the term of the respective lease.
I'd appreciate your comments on whether you think this seems to be a good investment….I think so myself but as I'm really only experienced in residential investments I need feedback from those of you in the know. Am I right to assume that capital on commercial rises at least as fast as it does on residential properties or is this not necessarily so.
Also when you talk of due diligence ….who do I get to do it?????
Cheers
CarpeHI "the Crest"
The returns seem good for a freehold but I get the feeling that it might be difficult to sell down the track…..I think you yourself might be experiencing this. Have the capital gains for a freehold motel been on a par with other commercial or indeed residential gains? Whilst the cash flow for a rock solid residential investment in a prime location might be low initially (5%) they do tend to increase steadily. But the big returns on residentials in good locations are on capital gains which seem to multiply well over a short time frame. So while I'm thinking of entering into commercial I keep going back to my thoughts on residential investments with large plot of land in the best locations. The motel in the country returns the dough for leaseholders but I'm not sure that the capital gains are there for the freeholder. Do I want an investment for 25 years that brings in 9% rent pa but does not grow in terms of capital gains as say a good residential in a prime location?
Cheers
CarpeHi "The Crest"….you have given me some useful advice on another posting to do with my buying shops and factory. I note you are experienced in motels and wondering if I might be better off investing in this area. I'd be happier to have a single leaseholder and receive a good return for my investment. I think I noted somewhere you said the capital gains are perhaps relative to the profits the business makes…..do you mean for selling the business ie the lease of selling the freehold.
Thanks
CarpeThanks again for comments. "Scott NO Mates" it is good advice and something I will definitely do. If the lease backer decides to jump ship after a year would he not only do this if he 'sells" his business……it must have quite a bit of value although perhaps he can just transfer the business to another shop? Sorry, this is probably a naive question……perhaps I don't have enough experience to enter into commercial although this is probably a relatively small commercial investment. I'm also wondering does the capital property value of a commercial freehold increase at the same level as the surrounding residential areas?
Cheers
CarpeThanks for feedback guys….all very helpful. In terms of your comments "thecrest", I would not purchase unless the net income is above 8% of the purchase price plus all costs. The seller is well respected in the town and it looks they're selling the freehold as I suspect there are family reasons following the death of a key family member and I think a redistribution of the wealth among family members entitled. It was mentioned earlier about 5 year leaseback but now some sceptism has been drawn into the situation…they want a lease arrangement of 1×1. I'm getting a bit cold on it as one of the shops relies on the factory out the back to produce the products. Hence, I have asked them to supply a profit and loss statement for the shop/factory business over the past 3 years at least. It narrows who I can lease the shop/factory to later on. Two of the shops are leased to others and they are solid with 5×5 year leases. The shop/factory, other shop and the house leased back by the current "owner" is now looking a bit dodgy. Great looking buildings and well maintained including the fully renovated house in a town beginning to really start moving…….but it is the factory that bothers me……it currently just makes wooden toys etc so very limited on who I get to go into the factory later. I know I can get interest loan at under 6% at the moment so on paper it looks good at the moment but the future is a concern especially a factory and shop for wooden toys. So even if I manage to get better deals on the leases what do you think about taking on a shop dependent on the production from the factory?
Cheers
Carpegod_of_money wrote:I would rather invest in Westfield Trust… 8-9% yield.
CP is very risky type of investment… just becareful
In another post I have discussed my intention to enter into commercial investments for the first time. I was feeling confident about it until I read this post about the dangers. I can get a freehold for around $1.2m. I have a lot of equity so can borrow the lot from my bank at a rate of below 6% if I put my house up otherwise it's below 7%. They are for shops and based on the returns of around 8% net I thought it would be good as up to now I only invest in excellent residential houses/locations. It has been great for me over the years and I currently live comfortably off the income. My equity is significant around gross $3m in value with a $450k loans so plenty to borrow from. Not been into investments outside of bricks and after the credit crash I'm glad. I don't have anything in super either but as I say I live off what I rent ……basically 3 valuable properties besides my own home. Not sure what to do next…..What do you reckon? Is something like a Westpac trust worth pursuing? Perhaps I should meet a good financial planner? Or perhaps do nothing? I guess I'm a dyed in the wool natural capitalist until I die so I should do something. Cheers Carpe
CarpeThanks ……yes I realise there will be lots to do pre buy and thanks as I had not thought about some of what you have said…. to me the return on an investment is the most important….low return and low capital gain prospects rules out any further consideration on a buy. There are 4 shops, factory for producing the items for one shop (and a 2storey spacious renovated house). Two of the shops are 1×1 leases but have been leased for a number of years to the same tenants. I would probably get the leases changed to 5×5 if I can. The other 2 shops, factory and house is to be leased back to the current freehold owner. They are keen to stay on and a 5×5 is in principle agreed. I thought 2.5% rent increase was rather standard for commercial…..to be honest in all the residential properties I own I'd rather have the same tenants staying on (I manage myself as I live off my investments) so I don't increase the rents more than about 3% which I know is below the market but it keeps them happy and they look after the places……and I know them all which I know one shouldn't do ie to mix friendship with business. But for me it works well. The 7.5% return is net as there are no outgoings but I could have it up to 8% if they agree to the offer price that I might make.
If you were borrowing $1m to invest would you put it in commercial, residential, super or stockmarket? In my own case I would feel uncomfortable in anything but the first 2 but maybe I need brainwashing to become more diverse.
Cheers CarpeThanks Yorkie and Kum Yin
This site is so amazing ….so many generous people with their time, ideas and support…..most of the people around me in life somehow seem to be so busy busy busy they don't seem to have time to do anything for anyone but themselves. Some of us in normal daily life, including perhaps me sometimes, might be like the aforementioned but seemingly a strange kind of metamorphosis takes place when we log on to this site. Anyway sorry for rambling on totally off the topic.
Thanks
Cheers
CarpeThanks Kum Yin and Azalia for more information to stew over that helps me tremendously so very grateful for everyone's input. It does seem a bit scary in many ways to go down such a path of being a developer through to the sale of the units. Another option I'm now thinking, which some may see as a cop out, is to sell the block with the plans for a development proposal already approved. Wondering about the ccorp course as there are two different views posted on this topic on the value of this course but I'll check it out further.
Cheers CarpeMavoz
Despite what fairy stuff is said in the last post, remember that the essence of true debate is to seek out all manner of views. Then the real decision can be applied to your individual circumstances. The purpose of this forum is precisely this otherwise we wouldn't be all on it. People are not talking crap to you and standing on pedestals ….they are simply making an effort to provide you with a different view or a point to consider.
CarpeI think this may have already been covered but remember if you rent out the Melbourne home and rent out a home in the country you can do this for 6 or maybe it's 7 years and as long as you move back into the Melbourne house you don't pay capital gains tax as the Melbourne home remains the family home . If you buy a country house to live in then immediately it becomes the family residence and hence the clock starts for capital gains tax liability on the Melbourne house that is being rented and of course there is no such liability for the country home. You probably don't want to rent a house in the country as it seems you've made your minds up this is where you want to live. The rent on the Melbourne house is only 5% and you borrow for the country house with interest at around 5% then you're making nothing other than some capital growth on the Melbourne house which will be subject to capital gains tax when it is sold. If you sell the Melbourne house and buy outright your country home and reinvest the leftovers in another investment or you can reduce any debt you have on the unit investment. Your debt is probably low anyway and you could go for another property but we are certainly living in times when it could be wiser for awhile to eliminate as much debt as we can.
Thanks Yorkie and Mike for more assistance. Yorkie you are so right ….. this area is hot (close to city and close to ANU) for 1 bedroom apartments so I can get 10 on it no problems being a corner block. I still need to do more research/investigation but this is certainly the way I'm leaning. I've "almost" scrapped for example my heart plan to have built large townhouses (1 for me to live in). However 4 on the block which would no doubt sell won't yield as well as 10 x1. One little problem I have to deal with is am I putting greed ahead of quality architecure if I go down the multiple unit path…..something of course I and only I can resolve…..unless anyone on this site happens to be God. Sorry I might be on the wrong site for this issue.
Cheers
CarpeHi Tony B
There is no better investment than a PPOR. Any capital gains made are not taxable. Find the worst but livable house in the best location at the lowest price and deposit into it whatever you can afford with enough cash to run your business (it won't be easy but all gains cost), Try and pay extra off the loan and/or fix it up a bit until you decide to sell it in say 5 to 10 years when it's value has increased if you feel you don't want to live there any more. No tax on the sale so you are then in a much stronger position to buy something better perhaps in a better location. The location of a property is what gives you a much better chance of capital gains. To be sure as you also agree the price of the property might decline a bit during these times but it will recover that's for sure. To have no debt on your PPOR should be a primary focus as quite honestly if you're paying interest it's not a tax deductable so it is money going down the drain as like paying rent.
Anyway, I'm sure you know all this so I guess I"m just reinforcing it.
Cheers
CarpeHi Walpy
There are certainly overall trends indicating ongoing difficulties in the housing market but notwithstanding this there are still and always will be investment opportunities for those who do their sums and those willing to make sensible risks. As I said in my previous note I am very strong about keeping debt relatively low especially in times like this when the bubble on inflationary prices that we have experienced in real estate is under pressure. You have not indicated how much in percentage terms you have in equity on the current townhouse and how much equity you will have after you pay the deposit on your new place. My stance is 50% equity across a property portfolio because I'm a conservative but your circumstances may be different to enable you to enter comfortably into the investment with less equity. A lot has to do with affordability particularly in the context of your starting out with a family and the impact this will have on your income to service the debt. To be sure the interest rates are low at the moment but they won't stay down for ever so this has to be considered (what if it was 9%?). You have to also consider the impact the credit crisis will have on your income/employment. At the same time it seems wise to move into a large house that you love with a growing family…..and it will be a house you will be in for many many years so it is not really an issue of whether the capital gain does fall for a few years after you buy it and it doesn't matter…..as one thing is certain it will increase in capital gain in the long term. As "Mister" says in his note above the notion that house prices will keep on doubling every 10 years as many say is definitely a myth and in fact it is a ridiculous concept that it can be ongoing for ever. Some of course will double and most won't but they will all go up as incomes keep rising. Whether the capital gain is inflationary or real is another matter …..the former being fuelled by easy access to debt eg no doc loans. So as long as your debt is not going to be crippling as you gain a larger family in the context of above then this might be your decider. If it becomes too difficult later on then you can always bail out by selling the townhouse or even sell the townhouse now if it makes it easier.All the Best
Carpe (no not a fish …short for carpe diem or "seize the day")Hi
Interesting stuff. I'm a very successful property investor….one of the "smart arses" to have got in early I guess but my investments have always been very carefully structured based on the 4 x L's: land, location, loot flow and low debt (never having debt of more than 50% in total property portfolio). One property I bought in 1985 cost me $120k when interest rates were 17% and is now worth $1.5m……but of course my loan was only 60k so repayments were not a problem) To be sure I will lose capital gains in the few years ahead as we go through a predictable difficult period . I have always had concerns about the escalating house price ratio to income in Australia (up there with Britain, USA and Spain) . Only a few years ago it was 2.5 times income for the price of a house. At it's peak recently it went as high as 7.5 times income which in my view cannot be sustained even if we didn't have the credit crunch. House price increases have been fuelled by the capacity for investors and home owners to borrow at a low equity to debt ratio. My other big concern is that Australia is very dependent on it's export markets to countries especially China which again in my view has yet to suffer a lot more. Without an export market of significance Australia will have to shed it's labour which of course is not good for us including the housing market. The immigration numbers will be downgraded again reducing the number of buyers. From this I see that as house prices start to fall more people will be reluctant to sell so are likely to stay or temporarily rent their properties and as the rental supply increases returns on rentals will fall. To be sure if you're investing for the long term you will definitely be in for opportunities for bargains and with the interest so low it gives you a chance to pay off more and to improve on your equity at a higher proportion to debt. On the other hand I see blue chip shares being a better investment for the next 7 years…..but of course there is nothing better than a sensible balance in your investment portfolio based on a longer term perspective for both shares and property. All the best to everyone with your investments.
CarpeHi
The good days of property investments are over (unless you have plenty of real, not inflated, equity). Despite all the doom and gloom of the credit crisis putting everyone in a spin on what to invest in one thing is certain. The gap between income and house prices has widened in Australia so much so it is up there with the US and Britain ….it's probably the worst at the moment as prices have already crashed in the latter two countries as they head into recession. Prices in Australia have gone from 2.5 times income to 7.5 times which means people investing have to borrow more and more to purchase something. I've been a winner from property investment but I think it's time to change grounds for a few years and invest in good blue chip stock……prices are so low at the moment and one thing is certain they will outdo property investments over the next say 7 years.
CarpeHi
I have properties in university areas which I've rented out like this for many years to different nationalities but mostly Australians. The key I believe is to start with one person or two who you yourself select for acceptability. You can tell very quickly and see it over a couple of weeks the standard of caring for your property. It is very important to present the property at a good standard even being quality furnished. This attracts people who like to live in this kind of environment and who don't want the burden of bringing in a new item (fridge etc) every time someone departs . These starters then have the choice of taking on the extras eg 2 more for the house so give them the right to select the extra people required. They are not going to take on house wreckers or grotty people if they have proven already the standards you started with in initial presentation. At this point you take over contact with the new ones in terms of the financial transaction only and welcome them in the usual way. It does not mean the first one or two takes responsibility for the others but it frees you from the continual selection process as tenants change over time. You check the scene a couple of weeks after and then if everything is ok extend the period until your next visit. People do not like being told what to do but they usually love the feeling of responsibility being handed over in a diplomatic way. As far as cleaning the house goes it is there responsibility and certainly if stoves and bathrooms start to get grotty then simply tell them (diplomatically) it is not acceptable and on your next check if the problem persists then give them notice. The earlier you nick things in the bud for most people they respond……and if you don't do this it gets worse. The best students are in their 3rd year or postgraduate as most of the newbies have little idea of domesticity, want to party being free from parents and fail a lot of units in their first year…..so not good for your house.
CarpeJames
Don't want to scare you off. You have a low debt on your house so that is good so that is a definite plus. With the interest rate so low pay as much off the capital before the rates increase once inflation forces them up. Although you built the investment place rid yourself of emotional attachment and look at it as if it was a business. The unfortunate forces coming at us are unpredictable in their power but their impact will be greater if China buckles more than what we hope. You have indicated that the loss per year is $7k or $49k over 7 years. It is more than likely that the value of your investment will not be much higher than what it is today although, being positve, allow for it going up a bit. If the predicted loss instead was put into your mortgage then in 7 years it would be paid out (a dream for many). Alternatively, you could invest in blue chip stocks over the next 7 years with some of the money you're currently losing on this investment. One thing is more than likely and this is that stock market prices for blue chip will outdo housing over the next 7 years. I have always been a property investor with no regrets but I'm shifting ground for the next few years. This is certainly not advice to you to sell your investment property but rather for you to consider your position especially if the town where your property is located relies on employment in areas more subject to and at risk to the forces coming eg car industry etc. What if you couldn't rent the place? Your lowering of employment income is another factor. I don't know the reasons why your employment income is slipping but this is a time to maximise your employment potential for the future if you want to realise particular dreams you have for retirement in 15 years . You have a good start with near to owning your home so it really is up to you to make the next move. Sorry that you've already been forced to sell your other investment properties but the past is over so just move forward.
There are many people in much worse situations from the crisis (Fortescue Mining prime investor has lost $9Bn) Oh poor thing!! So go for what is driving you and accept the risks you take without whinging later I should have done this or I should have done that…. I keep saying we should not look back on our terrible decisions as they just bring us pain (unless we treat them as mistakes to learn from).
Good Luck
Carpe
