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This is actually to your advantage. Most people don't want, or don't have the time or passion to look further afield and try a lot harder to find the hidden areas that no-one knows about. The more people like that around, the less competition for you and me.
To look outside the mainstream requires more leg work and time on the phone, or driving etc, but it can be well worth it.
Forums like this will give you a bit of a heads up about upcoming areas as well, and remember that the amount of people who are into investing is small, and the ones on the forums is only a percentage of all investors anyway.
Also, there are many different price ranges, strategies and criteria that people use, so there are always going to be plenty of properties for you to buy.
devo76 wrote:I am 30 and only just starting to head down the investing road. 6 months ago i believed that if you bought a house it will double in value every 7 to 10 years. Now i know there are other drivers that control prices and none are looking that great for the next few years. But if i was given the chance not to buy my IP 6 months ago i still think i would have as my goals are long term and im more concerned of its value in 10 to 20 years. My immediate plans are to pay my PPOR of completly in the next year and also pay about $50,000 of my IP in the following year thus making it cash flow neutral and not a burden on my personal cash flow.My job is very secure and i may have kids in say 3 to 4 years.If the above plan happens a bust will not effect me greatly and i should be in a position to snap up a bargain if one presents itself. I considered jumping in now to buy another property but i feel reducing debt at the moment would be a smarter move for me.
I have no other debt like store cards,credit cards or car loans.
I owe $100,000 on my PPOR and $300,000 on my IP at the momentGood plan Devo, except I think that as soon as you are able to SAFELY service another I.P you should do it. Make sure your PPoR repayments are never in jeopardy though.
(by the way; is your name from Devo – the band?) Whip it good!
I am 46 and I think I'm one of the oldest bas***rds here, judging by what I read about the gloom and doom of the future in property.
I started buying properties in 1984 (first PPOR @ $92k) and have seen some monumental disasters worldwide, high interest rates (Bob and Paul era), 2 property booms and 2 "busts', wars, 2 stockmarket booms and crashes, high unemployment, droughts etc, etc. All stuff to make you worry.
At the end of the day, property was always hard to buy for the first home buyer, petrol was always too expensive and the wages never seemed to go up in line with the cost of living.
But one thing has always kept happening; well positioned, good quality housing (units or houses) or land, always went up in price. This is because it is a life necessity; people need it whether they rent it or buy it. The 7-10 year double in price rule still works.
I agree, there are horror stories of people going to the wall through property, horror media reports on market slumps, but this is usually "operator error"; they over-extend, or get over-exposed in LVR, pay too much, don't factor in life in their expenses, their money habits are bad, buy an off-the-plan speculative apartment at the wrong time etc. No-one forced them to buy, but for various reasons they have to sell, and sell low.
Market demand and "ability to buy" will always determine the price – nothing else will, from my experience. When credit is tight and the buyers disappear, prices slow down for a while. When credit is easy, jobs are plentiful, prices go up.
The wild card in today's world is the (consumer) debt levels. Personally, I think this will only affect the market short term like any other factor I've mentioned. There will always people with out of control spending and no financial intelligence (sadly; 90% of the population) and there will always be people who are financially solid.
The finacially challenged will crash and burn as always, have to sell their homes, or be evicted for not paying the rent, or just continue to scrape by, living pay check to paycheck.
But the housing will still be there and there will always be someone who can afford to buy or rent it.
If you have any sort of consumer debt (car loan, credit card, furnitureloans etc) then use the cash to wipe this out straight away. If there is any cash left over put it on the loan.
If you have the correct loan that allows you to re-access the money you pay onto the loan, I would be putting the money into the loan until you are ready to invest again; unless your savings account is returning a better interest than what you are being charged on your investment loan? (I'd doubt it).
Every cent of debt reduction you can make will improve your cashflow (unless it is a fixed repayment loan) and increase your overall equity and save you thousands in interest over your life – more wealth.
Some people advocate never paying down investment debt as it is tax deductible. This makes sense to me if you have consumer debt – clear that first, but any debt reduction is a good policy; especially if you are planning to keep accumulating properties, as your equity position or LVR (Loan to Value Ratio) and your debt servicability will be healthier.
Did that years ago. No consumer debt here thanks.
Now the card is used solely for the purpose of racking up more frequent flyer points, but we pay the balance off every month.
Notice the f.f flights are harder to get these days?
Has anyone seen "sicko" by Michael Moore yet? I needed a moggy to calm down after it.
His conspiracy theory in one part of the movie was that the whole debt situation is engineered by the Govt and Corporations to keep the average joe trapped in debt, needing the job and too scared to make a move, obedient little footsoldiers for the Corporations earning $10 an hour until they die.My cynical mind tends to agree; wonder if the same system is in motion in Aus? At least the pay rate in Aus is still ok…for now.
Hey Liz,
That search was about 1 minute, so it was by no means comprehensive.
To go out on a limb,
I reckon that you can't go wrong with virtually anywhere on the Bay, especially with water views, that is within commute distance of either Geelong and Melb; especially if it is at the bottom end in price. Look at Seaford, Frankston, Edithvale; these areas were always shockers, but not now. People are commuting from an hour and a half away these days. Poor bas**rds; now THAT'S the rat-race!With affordability at record lows, the demand for all of the above can only go up.
The demand for bayside with views is already unbelievable. On the other end of the scale; bayside, water views and top end quality houses still go well; just the enrty level is the killer and the rent returns are usually crap.
Back to your comment about pos gearing; I don't think it is possible in the areas you mentioned. We just had another .25% interest rate rise today, and to be pos geared the rent return would need to be at least 10%. I can't imagine those figures are in Clifton Springs, if they are; buy as many of them as you can.
Yep,
make the I.P interest only and pay the minimum interest each month, and pay the PPoR mortgage off as fast as you can.
The I.P interest is tax deductible but the PPoR interest isn't so it has to go.Another option is to move out of the PPoR, use it as an I.P. This way the mortgage interest becomes tax deductible.
It means you will have to rent somewhere else yourselves of course.The benefit of this is there are no purchase costs for the new I.P as you already own it (as your PPoR), no new loan so no bank fees, and if you still have a sizeable mortgage on the PPoR, you may find it is cheaper for you to rent than to keep living in the PPoR, PLUS you get the lovely tax deductions that go with the I.P.
Many people won't do this option however, as they are too emotionally attached to their PPoR, but if you can get past that, you may find your wealth accelerating more quickly.
Me too!
Type cashflowcapital.com into the search box in the top right hand corner of the screen and you will see several posts about them.
Liz,
I just did a quick check on r/e.com.au and found 103 properties for sale in Clifton Springs, with 17 available rentals. No doubt there are many more, but the agents don't put every property on the site.The cheapest property for sale listed was $209k.
Look at this one: Property No. 103314511
http://www.realestate.com.au/cgi-bin/rsearch?a=o&id=103314511&f=0&p=10&t=res&ty=&fmt=&header=&c=85906265&s=vic&tm=1186597860Not even close to pos geared.
Are we talking about the same Clifton Springs?
If the property was built after 1987 you can claim 100% of the building cost at 2.5% for 40 years. There are different "depreciable lives" for the fixtures and fittings.
I have to agree with the other guys,
a cap gain like you've had without doing much work is nothing to sneeze at.
Of course; it would e better if you had a pos cashflow or at least neutral or very small neg cashflow to put the icing on the cake.
As the two properties are so new, have you had a Depreciation Schedule prepared for each one? This costs about $500 per property, is tax deductible and will pay for themselves in the first tax return.
The "on-paper" deductions from the depreciation can make a huge dufference to your cashflow.
If you haven't had them done, do it immediately for the last financial year's tax return. You will need to contact a Quantity Surveyor firm/s near where the properties are to get them done.Hi Sean,
(good name – my son is Sean).
To answer the questions:
1. As you probably know, the rent returns Australia wide at present are not that great. Many people are finding good returns in rural areas, but the problem is cap growth may not be great. We haven't been looking seriously since moving to the USA; as we are currently in a deal we did before we left Aus and needed to consolidate for that, so we have just been reducing our investment debt. The settlement for our deal happens in about 10 days (supposed to happen Aug 1st but was delayed) so we will be looking again after we get back to Aus in May '08 – it will be a business not a property.
Having said all this, I think the better areas to look are still more regional, but the popluation size needs to be at least 10,000, and with some good strong employment history and future prospects. This will give the best combo of rent returns and cap growth.
I only know the Victorian markets at present, and I think that with the improvements in transport (roads) generally, this brings areas that are within 100kms of the major cities under the magnifying glass, whereas 10 or so years ago they were simply too far away. A good example is the town where we are currently living in the USA; Sant Rosa (population 150k). It is 60 miles from San Francisco, and is now part of the commute to the Bay area. House prices have doubled here in the last 4 years, and are still going up while San Fran has stalled.
So, I would be looking at decent sized towns within 100kms of the major cities, with good transport or plans for improvements in that area, good support for employment, shopping, schools etc. Cheaper price ranges within these areas will attract people who are happy to commute, but can't afford the cost of closer in. Areas like Frankston, Dandenong, Kilmore, Pakenham near Melbourne are good examples, but the cap growth in these areas of recent years has left the rent returns behind. No doubt there are better areas for growth and rent combined, but I haven't been looking.2. There are always micro-markets all over the country, no matter what the state of the general market is. The media will always give a broad view, and as such you would have heard the last 3 years since the end of '03 described as property slump. But both Perth and Darwin boomed, we have enjoyed very good cap growth with our portfolio during that time (not Perth or Darwin). So, no matter what the state of the market is, there will be somewhere that fits the criteria and will outperform the trend at the time.
Also, the slump in the markets is a good time to buy as there are few buyers, but people still need to sell for different reasons, and this is when you can pick up some bargains, so there is never a bad time to buy (I sound like an agent).
My decision to buy is always based on my financial position at the time. I am a cautious investor, and don't like to over-extend myself (been there, done that; can't sleep at night). We always work on about a 60% maximum LVR, so if a purchase will take us over that we don't do it. This always gives us a nice buffer of useable equity in the event of a catastophe that life might throw our way. At present we are at around 56% LVR, the new deal will take us up to around 58%, and that will do until we get back next year in May.
I never get lump sums of cash – tax returns are the only lumps we get, and these are pumped straight back into the investment loans to reduce the LVR, and improve the cashflow.
a) In a market that is booming and is offering low rent returns, it would make sense to throw a lump of cash into a good quality property to take advantage of the rising market and to hopefully turn a neg cashflow into a pos cashflow. Dumping money into a high dollar property will usually give you a bigger dollar return than a cheaper property, but it's all relative and the percentages are what I look at. Buying a more expensive property requires a higher entry level, but if the rent returns are lower this maybe over-extend you on the finances, there may be more vacancies as there are less tenants at the higher end – possibly more risk and emotional stress to make a bit more money than splitting the same money over 2 or more properties.
b) Buying 2 cheaper properties rather than one more expensive property is often better than as the cheaper properties usually deliver better rent returns. Not only that; you spread your risk of vacancies and market changes. Two properties in different areas might go up (or down) in value at different times and the likelihood of both being vacant at the same time is small. I would prefer to buy 2 x $200k properties than 1 x $400k property for these reasons.
The $400k property feels nicer; maybe a new, sexy townhouse etc, but that is an emotional purchase not an investment purchase.Lastly, I think you always need to adjust your strategy as you go to suit the conditions, but so far we haven't had to. The conditions for satisfying my criteria definitely are harder right now, but the conditions still exist to satisfy them; they are just harder to find. As you saw with Opportunity In Everything's post, he is only concerned with cap growth and is happy to carry a neg gearing until sale time. It works for him.
If I was following that startegy, it would be easier to narrow down the search area to just cap growth suburbs and I wouldn't care about the rent returns. I don't know O.I.E's finacial situation; whether he still works full time or not.
I have made more work for myself to locate the right properties in today's real estate climate, but the reward is that I can still keep buying property, still sleep at night and still play golf all day.Further to Tyson's post;
I've read all R.K's books, and Tyson is right; they are more mindset and concepts – not so much nuts and bolts, but the mindset shift is probably the biggest factor. They will change you from a consumer to an investor.
I now look at people driving around in $50k cars knowing they are leased or on h.p, and I think "that's another I.P deposit right there" and so on.
You can get a L.O.C with more than one sub-account.
The day-to-day use is in one, and all rent, personal income and expenses for both property and personal get paid from here (it is a good idea to have your property manager pay all I.P expenses on you behalf from the rent, and send you the invoices with your statements).
We actually live off the credit card, and pay the whole balance every month via internet transfer from this account. This minimises interest and racks up frequent flyer points.
The investment loan interest is in another sub-account. The only time this account is used is for more investment if there are enough funds available.
The interest on the investment loan account is paid from the day-to-day account and can be set up to be transferred automatically every month.
There is a separate statement for each account.
This makes accounting for the purpose of each loan easy for the tax returns.
Hey Ini,
Units can still be a good investment (we bought one for $105k in 2003 that has doubled in value) and when you are beginning investing and price/finance is an issue, then the cheaper option of units will still get your foot in the door. The neg side is the body corp fees and the inability to change a lot to add value, but you can still add some.
It is better to stick to smaller complexes of less than 20 (the one we have that has doubled is in a complex of 4), and go for individual garage parking if possible.Based on my criteria of the yield being 1% above the current rate, those units wouldn't qualify for me, but look at the over-all picture;
it is an area of growth in tha corridor between Frankston and Cranbourne,
it is in a smaller complex with good parking,
the unit sounds as thought it would be newer? (based on the double garage) so the depreciation aspect will be good.Have you done some research of the immediate area on prices of similar sold properties as a comparison? Is it in a good location for amenities? Can you add value through a cosmetic reno of some sort?
Assume you get it for $240k:
Add 6% for purchase costs = $254k approx (probably around $250k)
You put in a 20% deposit plus costs in cash, the Bank lends the rest = $62,400.
Interest rate on an I.O loan of, say; 7.5% on 80% borrowing ($192k) = $276 p/w
Factor in 20% of the rent being eaten up in holding costs, leaving a nett rent of $192 p/w .
Your shortfall = $84 p/w.If you are borrowing the whole amount plus costs, your shortfall is $174 p/w approx. A good depreciation allowance may bring that figure down by say, half approx. You are still up around the $90-$100 per week shortfall. Can you carry that neg cashflow?
Of course; these are the worst case figures; you may have a cheaper interest rate, you may have far less costs, you may buy it a lot cheaper, you may be able to increase the rent.
If you are putting in a reasonable cash deposit (as above), and there are good on-paper deductions, this property may be cfp after tax.
Using your PPoR as an I.P while you rent another place for yourself may be a better option. You can access up to 80% of the equity for investing, but of course, these funds are borrowed and will attract interest.
The interest is tax deductible, but will have an impact on the cashflow from your new investments.
By keeping the PPoR you will save a lot of money in selling costs.
On the flip-side, if you do sell, you will have more cash to use as deposits to help close the gap between outgoings and the rent. The bigger the deposits, the easier it is to create a positive cashflow.I would only use a buyers' agent if they can find you a pos cashflow property in your chosen area. Anyone can find you a neg cashflow property; they are all around you, so why pay five grand to someone else to do what you can do yourself?
Buying units really limits your ability to add value and increase equity, unless it is a total shocker. Body corps limit your movements on the outside of the building, leaving you with only cosmetic changes inside. Things like landscaping etc are usually not allowed in a dramatic way with units.
Factoring in rate rises to you numbers before you buy will cushion the blow of every rate rise that occurs. If you only ever buy cashflow positive or neutral properties (harder to do these days) and keep practicing active debt reduction as you go, you are covering any risk or impact of rate rises.
Also, the interest on your I.P is tax deductible, so the effect of a small rate rise is less dramatic anyway.The other thing to do is lock in the rates as long as possible if you are worried.
Even though you are going to manage it yourself, you are still bound by the Tenancy Act. Make sure you get a tenancy agreement set up to cover both parties.
Think hard about this option as the cost of a good manager is tax deductible – worth every cent.Have you signed a 'sale authority' at any stage with your managing agent?
Unless you have signed a 'sale authority' with the r/e agent that is still binding, or allows them to keep a commission if you sell to a buyer that they have introduced even after the sale authority has expired, then the tenants are not the managing r/e agents' client.
You can sell it to them and the agent can't touch you.
You will need to speak to a solicitor about forming a sale contract and doing the settlement for the sale.Commissions are negotiable. The going rates when they first quote you are around 2.5-3.5%.
Offer them whatever you want, structure your commission payment however you want.
Offer them a flat fee, with a bonus above a certain fugure if they achieve it,
Offer them a sliding percentage based on the result.
Offer them 1%. (probably a bit low, but you never know)
It's up to you.
The stuff about paying peanuts etc is all BS. If a buyer makes an enquiry about a house that exactly matches yours, they will sell it to them no matter what the commision is.
On the flip-side, if there are two house that exactly match yours, they will try to sell the one with the higher commission first (that's only standard sales tactics).Of course, many agents will try to reject you offer and put in their preferred structure, so if you low-ball them too much you may not find many agents who will accept your offer.
