If you are a cashflow investor you wouldn't touch either of them; especially with little depreciation left on the bulding and fixtures/fittings. but if you're not scared of neg gearing, then go for it. just try and buy the best property you can in the chosen area. his doesn't mean the best condition; it means best for position, add-on value potential, depreciation, rental demand etc.

If you are a cap growth investor, you need to ask yourself f the areas are going to boom soon, are they booming now, has the boom ended etc.

If the prosepects for either scenario above are not good, then find another area that you can afford that will give you better cashflow, better tax benefits through depreciation and better cap growth.

You may do better by looking further afield for a property with land that may have subdivision potential for adding more value. There are no BC costs with houses such as this, so the cashflow may be better.

I agree with your successful investor friend.

Our PPoR has 180% uninterrupted bay and city sky-line views, and is about 700 metres from the beach, on the hill of Arthur's Seat.

In 2005 we bought a block of land immediately across the road from this house with even better views, and settled last month. It was a stretch, but there are only about 10 more undeveloped blocks with views in our entire town. It was an opportunity too good to miss.

In the 2 years until settlement, both have appreciated very well in value, and we are not in a traditional high growth area (Dromana on the Mornington Peninsula in Vic).

In our general area, prices have done well since we bought our PPoR in 2000, as we are now within commute distance to Melb and the general price range in the town was low, but the properties up on the hill with the views have outscored all the others, except the absolute beachfront properties on Point Nepean road.

I would venture to say that this would apply to almost everywhere, and is certainly the case in L.A. Houses with views in places like Pacific Palisades, Malibu, Santa Monica etc, are half as much or even double again as the same house nearby without views.

Simple reason; small supply; big demand, and if you can offer a very good quality property into the bargin, then the demand is even greater, and in my opinion will only get better as the supply of properties with views isn't increasing too much, but the people wanting them is.

Option 3, part 2 for me.

Unless the extension is going to radfically improve the rent return, or the value of the property noticably more than the cost of the extension, I wouldn't bother right now.

Better to put the funds into another IP elsewhere and have 2 properties accumulating cap growth for you. Also, you may be able to find a good cashflow property with god depreciation, tax benefits and rent return, and hopefully return a pos cashflow that will off-set the neg cashflow of your existing one.

Nice ad.

Administrators??

Hopefully it will be a short-term tenant.

In defense on the negative comments on the site, I think you'll find that a lot of them are from very experienced investors who have seen the busts as well as the booms, and are trying to protect everyone.

People like Foundation are not trying to put us off property; he is trying to make sure we have our eyes open.

From my perspective, and I certainly fall into this category; a lot of the comments are about warning everyone of the dangers in property investing. It is easy to make costly mistakes, and if we can help you avoid them we will try.

Many people start out in this game with rose-coloured glasses, so we feel obliged to say; "hey; be very careful out there" to the newbies and less experienced.

In my post earlier I tried to show how it can be done with safety. This is not being negative to me, as I am very positive about property; even in this current climate of incertainty (check out other forums and you'll see this).

I get scared when I hear of 100% LVR's, coupled with neg gearing and rising interest rates. That is a recipe for disaster in my opinion, but there seems to be a lot of people wanting and willing to take on such a precarious financial position.

So, take the negative stuff on board, but use it in a positive way; use it to help you make a safer investment plan.

Phil,

welcome to this forum, I hope you enjoy it and learn as much as we all do. This argument comes up frequently, and many people are unaware of the other factors that make property investing such a good thing to do. It is more involved and can be more tedious than buying a share, and you don't need lots of money to buy them and that's why so many people buy shares and not property, as well as the fact that you can make some spectacular short-term gains (but also losses) with shares. Financial planners love to use the above types of figures to put their clients off property and talk them into managed funds and the like. The planners make more money out of those products of course.

I'm not saying that shares are better than property; there are plusses and minuses on both sides, but your example is missing a few bits which distort what can really happen.

You are also missing what your cash-on-cash return is; this is the return you get per year on the cash you use for the investment.

The factors that you haven't included are the rental income and the tax benefits, and the leveraging. With property, you can depreciate the entire building and its fixtures and fittings if it was built after 1987.

So, let's assume the building was completed in 1989, and the rent return is a paultry 5% return and we use the $350k property you mentioned. This will be a buy-and-hold strategy, which I use.

With property you can borrow up to 80% without having to pay Mortgage Insurance, but let's say you can only dig up 10% deposit, and you take out an interest only loan. As mentioned by Tyson, the cap growth rate has averaged well above your 5%, but let's stick with that. Your interest rate is rather high; mine just went up to 7.87%, so let's use 8% interest only, with an offset account on the loan. We will assume that the rates rise and fall over the 10 years, but average at 8%.

Costs on buying a property are usually around the 6% mark (or slightly less; but in this case we need to take Mortgage Insurance), so, the all-up cost for the property is $371k. Your required cash deposit is then $56,000. Keep in mind also that you can buy a far cheaper property than this with a much smaller cash input. Cheaper properties usually have much better rent returns as well.

Let's run this example over 10 years, and it will be in approximate figures for ease.

So, here goes;

Initial Cash Investment: $56,000
Cap Growth: $350k x 5% x 10 years = $175,000
Rent Return: 5% x 10 years = $175,000 (rent will increase each year, but not in this model)
Depreciation and Tax Return: $2,000 x 10 years = $20,000 (this is an unknown, and will vary from year to year, but would be more than this conservatively based on my experience, so I used a consistent, conservative amount).

Total Return on the property = $370,000

Now, let's deduct all the costs from this amount.

Loan Interest: $350k x 8% x 10 years = $280k
20% of rent for All Holding Costs: = $35k (this is an over-estimated figure, and includes 4 weeks vacancy per year. From my experience it is more like 12-15%, and includes such things as management, repairs, insurance, rates etc).

Total Costs = $315k.

Total Nett Return on the Property = $55k

Your cash-on-cash return per year is 9.82%. That is not that great a return, but it is after tax, as the tax returns have already been factored in., and it is a positive number; not a negative as you depicted in your example.

Of course; there are a few factors with this model that are easily improved which further improve the COCR;
1. the tax returns would be re-invested back into the loan via the offset account, thus decreasing the loan.
2. it is easy to get a rent return of around 7-8% if you choose cheaper properties and select better areas (not cap cities).
3. it is easy to get a cap growth rate of around 8-10% by selecting better areas; towns/cities that are experiencing above average growth.
4. the tax returns themselves would probably be higher; in my experience this is the case.
5. due to the decreasing debt from the re-invested tax return and the cap growth, you can purchase again after around year 6 with no cash input, thus accelerating the cash-on-cash return.
7. there will be rent increases along the way, which I didn't include.
8. lower holding costs with fewer vacancies; I have 2 properties that have never been vacant in  the time I've owned them).

The good thing about this compared to say, a managed fund, or a share, or superannuation is there is far less likelihood of a negative return. You have far more control over the investment return; you can select the area, the rent return, the building type etc, etc and maximise every aspect of the investment factors.

My preferred option is to buy 2 x $175k properties rather than 1 x $350k property as it is easier to improve the rent returns, and also acts as a hedge against slower cap growth if they are bought in different areas.

I tell it like it is, and there are some who get upset. This is an open forum, where everyone has an opinion, and some won't like yours. Don't be afraid to speak up if you think it going to add some value.

You may have noticed that I also give credit where it is due, so I don't always single out people for a slag-off every time.

Having said that; I give the agents more of a serve than anyone, but I think that most people are in agreement on that. I was an agent for a time, so I'm not talking out of school about them.

Good to have you on the forum; it's been getting a bit boring of recent weeks.

Get in there and make some posts!

Lease back apartments are generally considered not that good an investment.
There is virtually no ability to add value, the management company can be the make or break for these places insofar as they may not rent out your place, and if the rents aren't pooled, then you could have a lot of vacancies.
They tend not to have a lot of cap gain.

The purchase structure varies from person to person and situation, so it is advisable to talk to an accountant about this aspect.

The cbd property you mention sure has a great rental return – 10% which is unheard of these days; especially in cap cities, and my scam antenna is up.

My big concern would be the 'holding costs' for this place – what percentage of the rent will be eaten up by things like rates, body corp, insurances, any  "on site" management costs etc.

If it is in a larger apartment complex, you may find that the body corp fees for things like common area maintenance, lifts, pools, gyms etc will be very high.

I anticipate that around 15-20% of the rent on my properties will be eaten up by holding costs, and this includes 4 weeks vacancy per year.

Do the numbers on these costs for that property you have seen, and if it is over 20% (including 4 weeks vacancy) then it is probably too high.

Your friend should first do some extensive research on the land values in the immediate area to get an idea of what the value of his/her block is.

Call all the local agents, check the recent sales either with the agents or at the local Council. realestate.com.au lists a lot of recent sales, but not always the prices.

This wouldn't be the first time a developer asks someone to buy their land, hoping that the Vendor is uneducated and doesn't know the value of their land.

It may even be worthwhile asking their Bank for their list of Valuers for that area, then ringing one to do an official valuation. Cost is about $300.

Then he/she will know if the offer is "at a premium".