Forum Replies Created
Mark,
Don’t be worried about questioning anything. In fact, I think many people might buy a book or watch a program and think this is easy. Whereas, I think the message is not that it is easy, but that it is achievable if that is what they will focus on. Many people will never go further than buying a book because even going into investment scares them. I had an instance last year where some friends were interested in IP as they had seen some success I had had. We were on holidays in a solid country town, saw a block of flats advertised, they thought it met their objectives. But they didn’t follow it up. I spoke to them a couple of times after, they’d decided to leave it till they reorganised their finances, something else came up. Sure, some people will leap in based on a book or a show or a conversation, but they’re the exceptions.
However, I don’t think Steve’s books present a one-sided picture. His first book details a renovation that took extra time etc. His second while it presents success, also points out that it comes at a cost which many people are not prepared to pay even at the start very few people did a journal which was one of the prerequisites to be considered for selection.
Far be it from me to paint a rosy picture and indeed i share obiwan’s concerns about a number of generalisations.
I share Mark Twain’s views about statistics. Rather than use average weekly earnings, maybe average household income would be a better picture.
Second there will be a spectrum of people eg
own PPOR no debt
buying PPOR Debt $
IP no debt
buying IP debt $
A number of owners without debt may be retired and have a lower than average income. Others will have purchased at various stages before, during and after the boom. Working out numbers at risk might give a more accurate picture.
This is not to deny that a recession, increases in unemployment and in interest rates will affect all of us, some much worse than others and while we play with statistical models we need to consider our risk management.
If people are concerned about the possibility of interest rate increases, then there is the possibility to fix rates at close to today’s variable rates even for long terms that might ride out a recession.
Should we dispose of something that is less desirable.
Do we build in other safety margins.It’s easy to make money. Keeping it is the difficult part.
Maybe investing in a listed property trust could help while you build savings.
Others can probably help you more specifically, but as someone who has had some involvement with Armidale over many years mainly distance ed residential schools, it seems to me Armidale’s major asset is its educational and cultural activities. When I was doing some looking in Armidale a couple of years ago, the agent told me most leases were 12 months. If students went away over Christmas they usually kept their house/flat on as they needed somewhere to keep their gear. A friend who was a student at UNE confirmed this to me.
There seem to be some good and some bad areas in the town.
I don’t know if the uni is increasing in staff, student nos – that might be relevant. Armidale seemed to be fairly static in price for a lot of the 80s and 90s. Tamworth overshadows it and is a faster growing area.
If your Golden Bay property is an asset of your Super fund, you will not be able to use it as security for a loan unless you want the wrath of the Australian Taxation Office to fall on you.
Can you find out anything about the owners and their motivation for selling eg from neighbours. Might help you in negotiating. My suggestion is look at the total you are willing for the property to cost you over the next few years eg price you are willing to pay plus interest you will be paying on whatever you borrow less income from property or tax advantages if any.
Say hypothetically you are willing to pay $700K and would need to borrow $500K over 5 yearswhich might result in $90K interest. Disregarding tax benefits if you got interest free vendor finance you would be in the same position if you paid $790, put 200K down and made monthly paymnets over 5 years of the balance. If there’s a deceased estate or someone needs to move into care or something like that this might satisfy both your needs, but you will need to know more about the vendors.
As Robert says there is nothing embarassing about making a low offer.
In relation to caveats, if you are buying from the registered proprietor (owner) and there is a mortgage or caveat registered on the title, the owner has to give you a clear title ie a discharge of the mortgage and either a withdrawal of caveat or otherwise have the caveat removed from the title at or before settlement.
If you are buying from the first mortgagee (bank) because the owner has defaulted on the mortgage and there is a second mortgage or caveat that has been subsequently registered on the title, the bank transfers the property to you exercising its powers under the mortgage and you get a clear title without the second mortgage or caveat having to have been discharged or withdrawn In this case the 2nd mortgagee and caveator have no claim against you as the new owner, but would have claims against the previous owner.
What I meant was that it strikes me that in the regional cities I follow there are a few sub-markets for strata units eg say $120,000, then $150-$160,000 then say $195,000.
Depending on the location, building etc, if these sub-markets exist where Snowgum is looking a more extensive renovation might increase the price. If that kind of market exists, then it might be possible to do the work to show a strata subdivision is possible and has been approved and then sell to a developer.
LifeX, unless there is something odd in these flats 70% occupancy would be very low. I work on 4 weeks vacancy (about 7% vacancy as realistic) and budget my worst case on 6 weeks vacancy (11.5%). Even when I’ve had longer vacancies for a particular flat, the others have stayed rented. A longer vacancy might occur when you’re lifting the rent to a higher level than was traditional in that area. Snowgum should be able to get a rental history and a bit of investigation would show how likely $140.00 per week is
I agree there’s a lot to consider. Obviously increased borrowing capacity is one and no doubt the possibility of being able to free one flat from a mortgage so you can use another lender when making further investments. My comments are looking at the things to be considered in whether the strata title is feasible. There might even be a better profit to be made if a more extensive renovation could lift the flats to a higher level and the work done is simmply to get all the approvals for a strata development and then onsell to a developer
If you want some more detail on questions 1 & 2 read “$1,000,000 in property in one year”. Your local library may have it.
The book might not dot every i and cross every t, but it answers a lot of your questions. How these people achieved what they did differs, but they’re certainly inspiring examples of people who set goals and aimed for them. Even if some did not reach the goal, I’m sure they got much closer to it than if they’d had no goal.
Read the book – it can challenge you. It can get you to rethink your comfort zones.
For almost 20 years I worked in a job where I considered my role was to find solutions. Someone would say we want to do “X”. My job would be to get to “X” legally, ethically, and cost-effectively. I won’t say you can always get to “X” or that “X” is necessarily the right place to go, but there are solutions. But unless you know where you want to go, even if you get there you won’t know you’ve arrived.
Derek’s points are good. What suits one person might not suit another, what is a good strategy for one person at a particular time in their investing cycle might not be at another time.
In my case I made an investment a few years ago with a shortterm P & I loan. The income from the property is making the payments. I can and have accessed the increased equity from the principal repayments to borrow for other property. During this property boom the increase in value far outweighs my increased equity from the payments of principal. But it’s not always going to be the same.
The principal payments also assist with interest rate risk management although obviously fixing rates does the same and probably better.
There can be an issue in P & I loans when you can start to get squeezed in cashflow because of tax, particularly if all your loans are P & I as the more payments you have made the less of your monthly payment is tax deductible as you are paying less interest.
If we think inflation is going to remain low, we are not losing a lot in the value of our money by making principal payments.
But, having said that there is obviously a lot we can learn from other members on these forums, and the way I set up the initial loan is not the way I would do it now, although from my point of view I would still have gone P & I as that helps me with my strategy.
I’ve got a small block of flats and from my experience about one-third of gross rent or slightly under seems about right for expenses – managing agents, rates, insurance, repairs, lawnmowing. But you should be able to check most of this.
In relation to strataing the flats a couple of things to look for are:
a. does the building meet current fire standards. Older blocks might not if the roof space between the units is not separated.
b. council requirements eg are there going to be any extra contributions for water, sewerage etc. I came across a situation a number of years ago in a regional city where if an existing block of flats was strataed, the contribution the council wanted for services depended on when the block was originally built. I can’t remember the cutoff date that council used but it did add a fair bit. In NSW there would also be survey fees so you should get a quote for those.
You indicate there’s a fair difference between prices per flat for non strata and strata blocks. It seems to me that after your estimated expenses the flats are being sold on a 5% net yield. If you are able to do the flats up relatively cheaply and increase the return by $20.00 per week, then on your initial purchsase price your net return after expenses is going to be about 6.4%.
When I had my flats valued last year the valuer looked at net return. It might be worth speaking to a local valuer to see how they would look at valuing flats. If net return is important then if 5% net would still apply that could give a value of around $535,000 or $107,000 without the expenses of strataing.
If you’re intending to strata to build up extra equity that might be worthwhile, but your council rates at least in NSW will increase each year.
I’d be a bit concerned that the profit margin might be too small for the risk if something extra comes up. Even a 5-10% drop in prices might eat up most of the profit.
Purchase price $418,000 $83,600 p.unit
Purchase Costs
Renovation costs
Strataing costs
Selling Costs
TotalSale Price $550,000 $110,000 p.unit
I think you may find it is income tax. There was a Business Review Weekly article touching on issues such as this. I think 4 March 2004 issue
I’ve seen a number of properties recently where the returns are cf+. The issue is whether the towns they are in are good risks, prices in many of the smaller towns have dropped, some of the smaller towns based on agricultural industries in NSW particularly in the north west where irrigation farming has been a driver of employment are going to have to adjust to restricted water availability, in many small towns managing agents don’t exist.
Look for things like demand from gov’t dep’ts for longterm leases eg police force etc which might minimise vacancy risk/tenant selection riskThere seems to me to be a fundamental difference between a disclosed vendor bid and dummy bidding. In the first instance the vendor is saying your bid is too low and you know it is the vendor, it’s just a different way of negotiating and more honest than the chestnut some agents use in private negotiations ie someone else is interested.
In the case of dummy bidding the vendor is attempting to deceive the public by thinking there is additional genuine interest than there is.
If the vendor wants to auction and have the right to disclosed vendor bids that’s fine. It’s also more honest than the situation I have seen where a dummy bidder bids and the property is passed in on the dummy bid and the vendor’s agent then puts in the paper that the property was passed in at $x. At least now if you’ve been to the auction you can see it was passed in on a vendor bid.Not having attended any seminars, it seems from this thread as if the principles are based on Steve’s new book ie problem plus solution equals profit.
I like to look at a number of scenarios, worst case, medium and best case and prepare a cash flow over a number of years. If I then consolidate the cash flow with my other investments I can see where there might be problems and look at how I manage those risks. I’ve gone for P & I loans so that although I can have a good taxable profit, the effect of the principal payments and tax payments might give an investment a negative cashflow. One of the other advantages of this approach ie worst, medium and best case is you can look at strategies to reduce your worst risks, and improve your returns. Second your bank or lender can see you have done a business plan and that you’re not winging it. My bank manager comes into town periodically so I can say to him where we’re up to etc what might be possible in the future etc. After all if times get tougher, the people with better management have a better chance of prospering.
We’re not slow in the country – that’s just what can happen in guaranteed rent offers.
As always you need to check whether the rent paid reflects the rental market in the area
1. Purchased 1 property. Increased rental return by 3 x, so it’s CF +, still potential to increase return as property not fully let.
2. Finished M Comm by distance ed and 3 more subjects in MBA
3. More involvement in church activitiesFor 2005
1. Investigating 2 more IPs.
2. Taking a break from formal study
3. Looking at some business venturesGross rental yield is annual rent/(price plus closing costs) converted to a percentage. I prefer to include closing costs as they are part of the purchase price
This is different from calculating the percentage for cash on cash return which looks at the cash you receive after payments out divided by the cash you have put into the deal
Whilst your anecdotal stuff is relevant, you might not need a high proportion to make the “sea-change” “tree-hugging” demography work. Eg if 1 in 100 retired to the “coast” 20 years ago and 2 in 100 retire to the coast in 10 years, there is still going to be solid demand for city dwellings, but there might also be a substantially increased demand in some rural/regional areas. Bear in mind average life expectancy in Australia has increased substantially in the last 20 years and people are still physically and mentally active well into their retirement.
Also, bear in mind technology means people are not as bound to their workplace as they once were. Eg someone could have a weekender a couple of hrs from their work, work there a couple of days a week and go back to the city say 2-3 days a week. When/if this occurs people will build up friendships and community and may change locations for retirement particularly if there is good infrastructure available
