Forum Replies Created
My view is that the family home is something you want as safe as possible and ideally without any debt, however at the same time most people need to use the equity in their home to get started with investing (in property) and creating wealth. So whether you pay off the loan on your home or use the funds to continue investing would depend on your risk profile and your investment progress to date. When you're young and still have a long way to go on your wealth creation journey I would say you use all the money you can to create wealth. You can ofcourse do P+I and then when you have created sufficient equity use it for investment purposes…
I'm with James, but take your time and make sure property fits with your longer term strategy. If you have the interest/skills look for something where you can add value. With interest rates coming down and rents going up its becoming easier to find cashflow +ve property with decent capital growth prospects.
Woopi, with the equity you have and the income from a pension, I would suggest you think carefully about using real estate as a vehicle to create wealth when you only have a time horizon of 5 years in mind – unless you're an active investor i.e. buy, add value and sell.
I'm not giving advise here but what crashy mentioned, i.e. downsizing and investing your remaining equity might be a very good alternative if you want to be a more passive investor. Be careful with using advisors, as most advisors make their living from commissions. Also, the majority of fund managers underperform the indices they benchmark against. If you intend to invest in shares/funds learn a bit about asset allocation (just google it) or read the book "gone fishin portfolio" and consider developing a portfolio of index funds. The share markets world wide have been hammered so you could have picked a worse time to enter (but we may not be at the bottom yet so a dollar-cost-averaging approach to get in the market might be an idea).
Never keep all your funds in cash, as inflation kills over time.
Steve,
The near term picture may indeed be gloomy, but doesn't the longer term picture look very solid for Australia?
Continued strong population growth (both natural and through immigration), continued decline of household sizes and if anything a shortage in supply would suggest property values are likely to continue along their long term trend. Housing affordability may be an issue but I doubt that will drive pricing, but rather force the demand towards much more medium-high density housing (like e.g. in Europe).
Add to that the Australian economy is one of the best placed in the western world to avoid recession, fiscal structures that are more robust than countries (e.g. UK and US), plenty of room to maneuver for the RBA with relatively high interest rates and a vast amount of commodities which will continue to remain in high demand (indeed, maybe at reduced prices) I see quite a rosy future for Australia beyond what might indeed be a turbulent 1 – 2 years.
With that in mind I think the next 6-12 months, when the market is likely to be at its softest, could be a very good buying opportunity for investors who keep an eye on longer term growth trends…
But, you've made your money in property and I haven't (yet) so would be interest ed to hear what you have to say…
With "close to the bottom" I was referring to the various share markets around the world, property markets will take longer to sort out and some I would avoid. I do believe that well selected areas in Australia will suffer relatively little from this downturn and we will not see a wholesale 30% or 40% price reduction across the market (even in the US or the UK this is NOT happening, certain areas are being hit hard and others are holding up quite well)
About interest, yes the current lower interest will drop the treshold yiled at which a property will become cashflow +ve, how much depends on your LVR. But remember, interest rates will go back up even though they're likely to keep coming down for now.
Crunch the numbers… then decide. Sounds to me that the least work would be to use it as a 4 bedroom property, this would allow you to rent to 4 students and most likely give substantially more rent than if you make it a family home? If so that's more yield for less investment.
As far as I remember the 11 second rule says: minimum rent for cashflow positive = (property cost /1000) * 2. This rule basically assumes you want about 10% gross yield on the property to become cashflow positive.
So depending on what your holding costs will be you might be ok with less e.g. 8%. You have to do the math as it depends on many things e.g. what LVR will you use, body corporate costs, maintenance costs etc etc and this varies enourmously from one property (type) to the other. I've looked at some student accomodation in the past, attracted by the high gross yield of 14% quoted in the realestate.com.au advertsiement only to find out that after taking in all the costs the deal was not that cashflow +ve at all, not more than some dual occupancy accomodation within 10km of the CBD, which had much much better capital appreciation prospects.
These rules of thumb are handy but you do need to get a spreadsheet and crunch the numbers for a whole range of properties and you'll soon start to see what kind of yield you need/want in what kind of situation.
Mdees, I would suggest you some background reading first, think about what you want to achieve and what your personal situation is and then figure out if you're after high growth or high yield or some combination of the two. This decision alone will have a huge impact on what type of property you'll look for and where. To help you make this decision read some of the Jan Somers books like "More Wealth From Residential Property" or "Building Wealth. Story by Story" (these are grwoth orientated) and Steve McKnight book "From 0 to 130 properties in 3.5 yrs" or the sequel (which are cashflow +ve orientated) or the Michael Yardney "How To Grow A Multi-Million Dollar Property Portfolio – in your spare time" (growth again).
Once you know that you can focus more on types or properties and areas. Read some articles on Australian demographics and trends, considering some of Terry Ryders Hotspotting articles to help you with focussing on an area. Once you have the area and you start looking at properties, just approach agents and use realestate.com.au etc. to get a good idea what is on the market. Read a book like "20 Must Ask Question For Every Property Investor" written by Margaret Lomas.
I don't live in Australia so I have personally bought these books but I guess you could get most of them in your local library!
I would argue that this is not the time to pile up cash in bank accounts, but to put it to good use and after careful consideration buy either property (Australia or overseas), buy into overseas shares or funds which at the moment present real value for money. We may not be at the bottom of many markets, but I do believe we're getting close and that means it's time to get back in.
I looked into DHA investments in the past because the security appealed but once I did more reserach I moved away from it because (1) you do pay a substantial premium for the security and (2) rental yields appeared low compared to the market. Also, the properties are often not in places I would select for good capital growth or high yield.
If you do your due diligence and select you investment property well should be not need to pay a premium for a secure lease, because a well selected IP will rent out well and at good rates. And if you also select a good property manager then you should not have too much problems in managing the IP and the benefit that DHA pay the maintenance and do some refurbishment at the end of the lease is also limited.
I think if you're a serious investor you can do (much) better on your own, but if you want minimal involvement and high security and are willing to compromise your ROI for that comfort then it can be a good solution.
Lance, think about why you are investing in property and translate that into goals (in $ terms), then look at your current financial situation and see what kind of strategy may suit you best. If you are a high income earner with a heavy tax burden, buying high growth negative gearing property may a good place to begin. Alternatively, if you have less income and don't want to much of a cashflow burden on a monthly basis indeed look for more cashflow oriented properties. Despite what the majority says, you can (with a lot of work) find cashflow neutral/positive property which has good growth prospects especially in the current environment of lower interest rates, higher rental yields and a soft market.
If you go pure growth you are likely to end up with so much negative cashflow that you soon hit a wall and can't expand your portfolio, if on the otherhand you go pure positive cashflow, you are likely to end up with a much larger number of properties to achieve a similar equity, this can be a strain in terms of management.
I feel it would be best to get a couple of growth properties first so that you can later on leverage of the equity growth and then invest in more income focussed properties to balance your portfolio, but again, it all depends on your actual circumstances and personal views.
Dave,
I subscribed to their site to get the details of the properties they offer – mainly to speed up my learning curve on where to find CF+ properties in Australia, what is typically on offer and how the numbers stack up. Also it helps me to get ideas to take non CF+ properties into CF+. From that perspective the money I’ve paid for just access to their data has been worthwhile for me (overseas investor). I haven’t bought anything through them so I don’t know what their buying service is like.
As for what they offer… now that I have spent some time looking around and comparing what they have with what I can find through e.g. realestate.com.au it’s clear that they offer nothing unique as in almost all the cases I have been able to find the properties listed with them on http://www.realestate.com.au but they do sometimes (not often !!) provide additional data for the property and suburb data. What they typically offer is mining towns, blocks of units, student accommodation etc. They get their stock from local agents, so instead of one there are two middlemen …
For an experienced investor who knows the various markets well they would probably not offer much value apart from maybe saving you time of digging through realestate.com.au… I don’t think their negotiating skills would justify paying the commission so if you end up buying you are paying quite a bit for saving time especially since you’d still want to do your due diligence anyway…
Ness1474, I would suggest you don't use percentages for most of the items you list, instead make a spreadsheet where you can enter the numbers for each IP individually and then see the results. The variations between these items can be huge and this is what makes one IP a good investment and another a mediocre at best. As part of your due diligence for each investment you need to get all these numebrs above the table (don't rely on verbal advice of the seller's agent!!) and crunch the numbers. If the don't meet your requirement, do some reverse engineering i.e. see what price would make the deal work for you and use that to develop any offers.
French property prices have gone up a lot in the last decade especially in the popular tourist/retirement areas (largely due to UK buyers). I've just come back from a month in France (Midi-Pyrenees and Provence) and still find the prices quite steep in many areas. There is a huge amount of holiday homes for rent and the peak summer months offer great rates and good occupancy, but in the low season the demand really dwindles fast leading to much lower rents and very low occupancy.
If the UK property market gets hit hard – which is not unlikely – this may push prices in rural/tourist areas down or at least provide some opportunities for good buying as overleveraged owners need to exit.
What might be worth a look as an alternative is the so-called lease back scheme which many developers now use and it provides very attractive tax breaks if you hold a (tourist designated) property long term e.g. I saw some interesting offers in the past in the Alps and other tourist areas. Financing should not be a problem, low interest, yields not too exciting though and in many places I would suspect limited capital growth. You need to buy right … or just have the cash for a lifestyle investment …
You can buy freehold property in most if not all of Europe: UK, Netherlands, France, Spain, Italy etc. also in Eastern Europe like Romania, Hungary, Poland etc.
US could be a very good opportunity now if you buy well (a lot of lemons on the market).
If buying in Asia (Thailand, Philippines) you are often limited to condominiums (but there are ways around that) and in Malaysia you can buy freehold qs long as you buy over a (relatively low) limit.
Just spend some time on the web… but be careful as higher returns are typically associated with higher risks and many overseas investors have burnt their fingers, also watch for any taxation issues and think about the practicalities of renting out your IP in another country (incl. banking – someone I know had major issues with getting banking sorted in Brazil and in the end it made him pull out of his investment)
Thanks for the tips… In the meantime I've engaged REMAX so let's hope that works out ok.
How about some more balanced posts… less doom & gloom and less unrealistic optimism.
Topics I am looking at myself:
– house prices are likely to correct, maybe crash, but isn't it more likely that the level of decline is going to be much more pronounced in certain sectors/areas than in others? Some may even stay neutral or increase to a small degree? If so where? SEQ and other strong growth areas?
– as an overseas investor I know that housing affordability is often quoted as an issue in Australia with the a 6-7 multiple being highlighted, but one thing I do observe (anecdotally rather than based on statistics) is that the size and quality of housing is higher than in countries like the UK. Maybe Australia is likely to follow other countries in that expectations for the size/quality of the average home need to come down to get housing affordabilty improved?
– population forecasts show from ABS show very strong population growth in Australia during the 21st century, combined with demographic trends (baby boomers, decreasing household size etc) this must ultimately come to play in the housing market. Leading for larger demand, and maybe more demand for non traditional housing solutions?
– the australian economy still looks well placed to weather a global recession, emerging markets like Africa, India, Brazil, China and others are still forecast to grow at 6%-9% over the next couple of years and probably faster thereafter and that will keep the demand for commodities healthy (but not as extreme as in the last 6 months)
I personally see a long term opportunity in the Australian market given the above and look to invest in properties that will align with those long term trends of population growth, demographic shifts, more and more medium and high density housing closer to CBDs… but I do agree that keeping your pwder dry for the next 6-12 months might be a good idea. Although I am looking to get back into the sharemarkets much sooner (after I exited in June-July).
Any constructive thoughts?
Hi Nich4 I've looked into student accommodation like http://www.varsityapartments.com.au to do exactly what Richard described above, balance the negative cashflow from my growth properties, but what I found was that despite apparently very high rental yields (11% – 15%) most of this disappears into high management and maintenance costs.
E.g. in Varsity you could get a unit for around $220,000 and it would rent out for $600 per week, but your costs will be high, something like the following (these numbers are 6 months old):
Regular Expenses
Management Fee 3.5% of gross rent
Letting Fee 5.5% of gross rent
Monthly Charges
Postage and Petties $5.50
PABX $52.00
Internet $69.36
Austar $26.00
Common Room Clean $34.65
Electricity per month $60 – $80
Advertising – 6 months $45.00
Rates per year $2000 approx
Body Corp per year $3900 approx
Also, don’t forget during breaks most students will not let the unit but instead return home so you’ll be faced with no tenants during this time. However, in this particular complex they rent the units out as holiday accommodation and that seems to be working better each year.One of my main concerns was that the cashflow is not that great due to the high costs and I believe you have very limited capital growth due to the restricted nature of the property and you can find comparative cashflow with better room for growth in other property types…
SM – thanks, but the projects I was referring to is a $8.8 billion LNG project by Santos (and Petronas) which will see coal seam gas being converted into LNG at an LNG plant in Gladstone. There is also a BG (together with QGC I believe) LNG project which is also aiming to produce coal seam gas and sell LNG through a Gladstone LNG terminal. Both projects are in their early stages and probably 5 yrs away from being operational. The LNG terminals will create a big amount construction jobs, but probably only about 200-300 jobs once operational, not sure how many staff they will have in the field to operate the coal seam gas wells – nor I do I yet know where they are getting the gas from. Will do some more research…
