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Quick calculation for you;
Assume purchase price of $70k
Add 6% for purchase costs. – $76k
Assume interest rate of 7.5% interest only (current market rate) – $107 p/w (not including bank fees)rent – $120 p/w
Allow 20% of rent to be eaten up by holding costs, 1 month vacancy – $96 p/w NETT RENT.Initial cashflow = -$11 per week.
These figures don't factor in bank fees and interest rate changes.
6% purchase costs are approximate but generally over estimate the actual cost by a little bit.
20% of rent is also an over-estimation, but it is a good guide to use to eliminate nasty surprises.
Tax return has not been considered.The nett result is theses properties are not pos geared, but probably would be pos cashflowed AFTER TAX. If they are built after 1987 there will be on-paper deductions to improve your return.
The other thing to consider is there may not be much cap gain in a small rural town of this size. Also, there is very little land content in apartments. You may do better to buy a house, townhouse or villa unit with some land.
You would want a better rent return if there is not a lot of cap growth. Maybe there is an increase in population forecast for the town, or improved infrastructure etc? What is the future for the town?
The lesson to be learned here is get educated, do your own research and buy directly in to property.
Buying through investment companies that source the properties, or providing mezzanine finance at very high interest returns and investing in projects is proven to be dangerous, and it need not be the case.
The victims of Westpoint, Fincorp and god knows how many other dodgy investment companiess were, for the most part, mum and dad investors (like most of us) who were not educated in investing, or were too lazy to get educated or spend the time to research their investments.
You can never know too much.
One of my pet hates – cars.
It is a financial mistake to ever buy a new car – leased or for cash.
When you drive it out the lot you have done up to 20% of the value of it COLD.
Many people think they are clever leasing a new car because the repayment interest and the depreciation are tax deductible. They are not clever.
Many people lease an expensive car to impress other people. No-one cares, and worse; people like me think they are stupid. On top of that; people dent the doors in parking lots.
A car payment has to be paid whether it is tax deductible or not. It is a business expense, a liability, and impacts on the business cashflow. A car payment restricts your ability to borrow money to buy more investments.
A car depreciates and provides no income. The cost of running the car can be as much as the car payment itself – double dumb.
The less you pay for a car the better. Spend about $10k maximum and put the rest into an appreciating and income producing asset – property, business or shares.
Read Stanley and Danko's "Millionaire Next Door" and see what they say about the type of cars the average millionaire drives and how much they cost.
There is no industry standard, and you can make it whatever you like. I would make it 2 weeks. Good work crunching them to 21 days; they hate that.
Go for it Girl!
Depending on the severity of the termite damage, you could still proceed and negotiate a discount. Sometimes the building reports show up damage, but no evidence of termites still in the structure.
You would need to get a termite treatment done if you proceed in any case.
If in doubt; exit the contract and look for another deal of the century. There should be one in a few minutes.
In today's real estate market, it is hard enough to find a pos cashflow property without spending another $5k on a buyer's advocate to find them for you.
They can maybe find you one, but you would want to know what the area is like, is there any cap growth prospects, is there any rent demand etc.
I saw a property advertised on realestate.com.au a few years ago that had a good rent return, high "on-paper" deductions and was not expensive. I did some research on the area and discovered that not only would I struggle to get a tenant, but there was no local Property Managers and the standard of the tenant would have been questionable.
I did not look any further, and then I saw the same property advertised to buy on a pos cashflow property finder's website a few months later. The purchase price was $3,000 cheaper, but then you had to pay the finder's fee – $3,500 + GST.
Save yourself the dough and find your own, but if you must use them; research the area very thoroughly yourself first.
The buy, reno, sell or use the increased equity idea works well in a boom. You'll find most of the proponents of this strategy made their money during either the last boom or the one before. The reno kings made most of their dough in the early nineties boom when QLD houses were cheap. You need to take this into account as you follow their strategies. The world has changed.
If there is no boom you will struggle in the short term to see any significant increase in equity above the cost of the renos, unless you can buy the property a long way under the market price to begin with.
Don't forget; the increased equity is not all usable. The banks will usually only let you use 80% of the property value, less any outstanding loans. The remainder is the USABLE equity .
Some lenders will let you borrow more than 80%, which can accelerate your investing plans, but if you keep on starting new products with this strategy you will become very exposed and this can be dangerous if things go wrong.
Living in a reno while you do it is a double edged sword; close to work, security for the project and you don't pay cap gains tax as it is your PPoR. The negative is you are living in a construction zone – paint smells, dust, noise, drafts, disruption to utilities such as elec and water, the time to complete can be months.
Don't be fooled by the reno king's 12 hour renos; they don't exist in the real world unless you hire a team to do the work and the cost will cut out much of the gain.
I've done 3 renos, and the shortest and cheapest one was 6 weeks. Granted, it wasn't full-time work, but even if it was, it would have been at least 2-3 weeks at a guess.
Having said all the bad stuff, I found the experience to be fun and eventually financially profitable and I plan to do it again, but don't expect the overnight riches from one or even 2 projects.
You've sort of missed the boat on this one . The renos should have been organised to start as soon as the current tenant moves out, then re-advertise for the new tenant with the rent increase so you can start recouping the reno costs immediately.
The incoming tenants have signed the lease with the property in its current condition, so they are probably not expecting to have it renoed before they move in.
Most, if not all of the rent increase will be eaten up by the renos costs initially. They are tax deductible which will offset the cost to a degree.
I would only be doing it now if the rent was going to increase with the incoming tenant in May.
Long term it is the right thing to do, but it may be better to wait until the current tenant moves out, or at the end of their lease when you can increase the rent.
Never spend any money on advertising.
It is a total con. Agents make a good part of their income from it and they rely on it.
The punters are already out there looking in the windows, the streets and on the internet. besides; there are already many other people advertising their houses, so there is plenty of advertising to draw their attention to your area.
All you need is a photo on the internet, a photo in the agent's window, maybe a very basic sign on the property and a few fliers on the reception desk at the agent's office if people ask for one.
Make the agent pay for all of this out of their commission.
Finally, spend the saved ad money on getting the house valued by a VALUER (not an agent as they will try to "buy" your listing by promising the world).
Also, do your own research on the similar houses in the area and what they are selling for right now – not 3 months ago or longer.
You will then know what the actual value of the property is worth TODAY, and you can put the correct price on it and sell it in a short time.
You can sack an agent at any time; just send them a written letter stating they are terminated. Unfortunately you can't recoup the ad costs, and there may be a period after the contract ends where the agent is still entitled to a commission if you sell to a buyer they have already introduced to the property. See the fine print on the contract.
You may have to wait a little while before signing another agent to avoid this clause. This is not a bad thing, as by now your property is "stale". All the buyers have seen it, and they have either bought something better value, or are waiting for you to drop your price.
It may be best to take it off the market for a month or two, then start again.
Next time, stipulate to the new agent no advertising unless they pay for it out of their commission, and only sign them for 60 days maximum (45 is even better – they will get to work as they are short on time).
People are inherently lazy and don't like to make decisions; they take the path of least resistance.
So a house and land package could prove very easy to sell.
The problem is there may be lots of competition in the area from major building companies which may make it more difficult to get a good price. You will need to research this.There are also a good deal of people who like the idea of buying raw land and building their dream home on it.
Another option might be to;
1. renovate the older house first.
2. while this is going on, start the subdividision process on the the block into the 3 parcels.
3. after subdivision is complete, sell the vacant block and the renovated house.
4. use funds from the sale of the house and block to build a brand new house/townhouse etc on the remaining block.
5. retain this property as an I.P which would be probably pos cashflowed and almost debt free.
6. the on-paper deductions from this property would be significant as it is new (keeping the older house instead will not have the same amount of on-paper deductions and won't have the building guarantee)
7. use the equity from this property to go again.
8. as above.
9. as above.
10. you get the picture.After 4 or 5 of these projects you would probably have enough passive income from your pos cashflow properties that you retain to retire if you want.
Finding a neutrally geared property will be a challenge. I assume you do not pay any tax at the moment?
With no history of income your only hope for "normal" finance is a No Doc or maybe Lo Doc loan. You can also access private funds and loans from cash partners, but there are dangers to look out for for the inexperienced.
But here's the catch; if you have not been putting in tax returns and declaring income for that casual income, you may come up on the A.T.O radar for a nice audit. Even now, if your savings are in an institution of some sort, they may be wondering how you saved $60k with no income to show for it.
Also, if you have no taxable income and haven't paid any tax, then most of the tax deductions you can use from an I.P will not be allowed. You are sort of shooting yourself in the foot by existing the way you are right now.
You don't necessarily need to be on a salary to start your investing career, you can still do what you do now, but It is time to come clean and start declaring taxable income from the ebay etc funds if you are going to continue that way. You can then use your tax deductions from your I.P to reduce your tax payable at the end of the year. You may still have a tax bill, but it would be small. Everyone has to pay tax; get used to it. You just try to reduce it through various means legally.
You can either pay it as you make your income by way of weekly/monthly/quarterly instalments, or just wait until the end of the year and put in a tax return with your accountant and they will work out the final result and tell you how much you owe.
A good accountant is needed to set you up properly so you can maximise your position and not get into trouble with the A.T.O.
Hi cjay11,
Here a few good questions for you to ask about Buy and Holds. These are a few I use myself as I am a buy and hold investor, but you need to also establish whether you are in it purely for cap gain, or for cashflow (rent return), or if you need good tax benefits etc, or all of the above. I am in it for all of the above so there are different quiestions to satisfy each strategy.
Keep in mind that agents need to sell properties to make money. They are sales people – not experts. Very few agents are investors and therefore many can't answer investor type questions. They will quite often try to tell you what you want to hear, they tell half-truths and are known to inflate or deflate figures as the need arises. It is a good idea to still do your own research and ask the questions already knowing the real answer. Then you can test the integrity of the agent and you will know how to handle them during a sale.
1. why is the Vendor selling (are they motivated)
2. is the price negotiable (can you put in a low offer)
3. how long has the property been on the market (you should already know this answer from your Due Diligence)
4. what year was the building constructed (for on-paper deductions)
5. how much will this property rent for (already know this answer)
6. is there much demand for this type of property to rent in the area (as above)
7. does your office manage rental properties, and if so, how many do you manage and how many are vacant right now.
8. what is your management fee and would you be interested in managing the property should I buy it.
9. what sort of people are renting properties in this area – singles, families, students etc
10. has the area seen much infrastructure improvements and/or plans for any in the near future.
11. how many sq/m is the building and what size is the land lot. (these should be in the Section 32)
12. are the terms negotiableThere are several more to ask for buying sight unseen, but if you are just starting out this is not a good thing to try until you have some experience.
Yeah, GCG,
To buy an I.P and stay a renter is, for most people, the best thing to do financially; especially if the I.P has very good on-paper deductions and other tax deductions. These are the icing on the cake and can really accelerate your wealth plans.
The problem is, everyone is conditioned to follow the Australian Dream of owning your own home and living in it from day one, so they resist this strategy and just jump into a PPoR as soon as possible; quite often whether they can REALLY afford it or not. It seems that these days lenders aren't too concerned about that.
If you can get your head around living in a rental (and a budget one at that) for a few years instead of a PPoR, you can accelerate your wealth amazingly. Most people don't want to make this sacrifice.
Personally, I don't like to see people going for 100% finance loans, unless they are already financially educated, financially secure and experienced in property buying and investing. I like to see people go for the traditional, safe route of the 20% or more deposit with repayments under 35% of nett income. A bit old fashioned these days, but keeps people in their homes and out of bankruptcy courts.
Having said that, if you can 100% finance an I.P, and after factoring the worst-case scenario figures (20% of rent per year eaten up in holding costs and vacancy factors) find that your loan repayments would not go above 35% of your nett income before you get a tax return, then I would go for it. This is a fairly safe level of exposure for you. Of course; your tax return gets re-invested straight back into the loan, accelerating your returns and your wealth creation, not to mention your all-important cashflow.
The trick is going to be to find a property that fits the above criteria in price and rent return etc. It doesn't really matter if it is a unit or a house – they all go up in value eventually, but you want to buy the best quality property in the area and price you select. Land content is important, so units or townhouses with yards do better usually.
In a few years you will be able to fund a PPoR quite easily if you want, but keep in mind if you borrow equity from an I.P to buy a PPoR, the interest on that part of your loan is not tax deductible.
It's very hard to build a low cost home in Aus when the Govt is padding out the cost of buying and building by nearly $100k in Govt costs and taxes. Maybe the Govt will change it's ways and not add charges and taxes to the housing industry? Good luck.
I have no doubt that the Aus market will suffer a similar fate as what is happening over here in the USA. Foreclosures over here are at all-time highs in several States as all the fringe loans are reaching the change-over dates.
The "fringe" loans that lenders and M.B's are putting people into in Aus will come back to bite many on the bum in the next 3-5 years (maybe even sooner). It's a pity that Aus follows the USA in so many things as so much of what they are dong over here is not working for the majority of people (another story).
I believe that a good part of the current "revival" of the Melb market is due to the influence of buyers who are in the market thanks (or no thanks) to theses types of loan products. In previous times they would not have qualified for finance, so the market would have stalled as we all thought it would after the boom ended in '03. This doesn't seem to be happening, even though it is well known that affordability is not good in many parts of the country.
Even though there is a new spurt of growth happening in Melb right now as others have attested to in the "Melbourne Boom?" thread, watch out when the affordability hits a new low in a couple of years – many of those adjustable rate mortgages that are being signed now will hit the change-over rate and there will be many houses around that are worth less than the loan, and the owners won't be able to afford the new interest rate.
When people are supposedly paying $60-$80k above the listed price of a house in an era when affordability is supposedly so low, I get nervous; especially when those houses are in the average or above average price range. I can understand the lower end still ticking along, as these houses are still within reach for many home buyers and investors, thus there should be more activity there. Another reason why the middle range houses are still being sold for good prices in my opinion is because of overseas investors whose own backyard has become un-affordable and see our shores as cheap by comparison.
But this renewed mini-boom seems to be fulled by the higher earning middle class who want to trade-up or start off with a better property to keep up with the Joneses; wanting to move into suburbs that have just boomed and should still be in a period of little growth.
Hey Gold Coast Girl;
I can promise you… Australia is the best country in the world. Stay there.
You can still buy elsewhere and live in Aus.
Personally, I think you can always find a good deal in Aus, and I recommend that everyone becomes an experienced player in their own back yard before venturing to another pond.More land releases only has a short term impact on investors and it is only minor.
A land release usually doesn't have much impact on lowering prices; this is governed by interest rates, inflation, supply and demand, and sadly, how much the price of ciggies, petrol and a sixpack, have gone up in recent times, or how much the punters blew on xmas pressies on the credit card.
The government really doesn't have any way to control prices, other than to change the rules for investors in relation to tax incentives and/or cap gains tax rules such as what happened in NSW a couple of years ago, or when they rolled back the neg gearing rules back in the '80's. These changes scared investors away by the thousands, forced up rents as there was no I.P's to rent, and ultimately there was another boom not long after. The new cap gains rule in NSW had a contributing effect in the big slump in that State in recent years.
What tends to happen is there is a small rush of renters to buy the cheaper new estate properties on the edge of town. Some may even move to those areas as renters still and there are always a few investors to buy these properties as well hoping for some cap growth, but they try to buy low, so are not an influence on the prices.
But in the end, people who rent will tend to live near work and transport to their work, people are always looking to move up to better houses and better areas as their income grows, people always want to be near the good things such as cafes, beaches, malls, good schools etc, so there will be areas that never go down in value no matter what the state of the market.
Just keeping an eye on it from afar Dom.
My joint has gone up since the start of the year based on sales of similar properties in the immediate area.
The area is still going well, but it could be micro-markets, so you need to look closely at where you are thinking of buying.Hey Martin,
Yeah, I'm with you on the M.I.
Totally wasted money.
If it doesn't cost anything to set up and there are supposedly no fees, why not give it a go and send a few dollars across; say; $10 per week for 3 months and see what happens?
