Thanks Richard. You beat me to it.

I was going to explain it this way;
the ‘useable’ equity is what you can actually borrow after the exisiting loans have been deducted from the 80% of the house value.

For example; you have a house worth $400k.
80% of this is $320k. The Bank will let you borrow this amount, less any existing loans. You have an existing loan of $200k.
The $200k is deducted from the $320k, which leaves you with $80k of ‘usable’ equity.

I still stand by my statement earlier – I don’t think it is a good idea to gear or leverage over 80% of the PPoR, or even across the portfolio.

Life can throw curve balls and I think it is wise to keep a bit in reserve just in case.

My personal cut-off point is 60% LVR, but I like to sleep at night.

Cheers,
Marc.
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“we get sent lemons; it’s up to us to make lemonade”

I think everyone is hanging back waiting for someone to answer.

My 2c worth;

I looked at the site and I get nervous when I see a house advertised for $280 purchase price with a $580 per week rent. If it was that good why don’t they buy it themselves?

These sort of crowds are good for people who are:
a) time poor (too busy)
b) too lazy to do the searching themselves
c) to scared to go out and find a property because they think they don’t know enough.
d) all of the above.

I guess they could be useful for doing all the work for you to find a property. The trade-off is that you will save time and pay them for theirs (a few grand I suspect).

The question is do you think you could find the same properties and save yourself a few grand in fees. If you spent one full working week searching for properties and then found one, is that worth your time – would you earn more in one week of normal work to cover their fee?

The other factor to consider is where are the properties? There are cashflow properties around, but many are in very dodgy areas that I wouldn’t invest in. Are you able to find out through this crowd what these areas are like? I suspect that this info would be unavailable, which means you have to do all your own legwork to research the area to make sure it is viable. You may be buying a property with great rent return which is almost impossible to rent on a consistent basis, tenants from hell etc.

And finally, by letting them do all the work for you you are giving up much of the control, and your knowledge is not increasing as you are not actively involved in the process. I think investing without knowledge is dangerous to your financial health.

I’m not saying they’re bad; just keep your eyes and brain open.

Cheers,
Marc.
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“we get sent lemons; it’s up to us to make lemonade”

I once read an article which was an interview with John D. Rockefeller jnr about his life.

He said that he and his brothers were all given an allowance at around aged 6 by their father J.D.Rockefeller snr (had a few bob under the mattress).

J.D jnr said that the boys had to give their dad a financial report every month on what they did with their money, and they were never allowed to spend 10% of it – had to be saved for future investments.

I think that if this practice is good enough for one of the richest families in history then it’s good enough for everyone else.

My 5 year old son (nearly 6) has recently started learning the basics of counting money in kindergarten over here, and now that he can grasp it he is being given $5.00 per week pocket money (apparently you give $1 for every year of life as a guide).

He is on his second week and now has ten $1.00 bills in his wallet. He already knows that for every $5.00 I give him, he must keep $1.00.

Yesterday I asked him how much he has to spend after giving him the second lot of $5 and he said “I’ve got $8 daddy; next week I’ll have enough for a new Ben 10 figure”. (Ben 10 is a cartoon on t.v over here; he changes into 10 different creatures – my son is collecting them).

I then said “what are you going to do with the other $2.00?”

He answered without any hesitation “buy a house”.

My job is done.

Cheers,
Marc.
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“we get sent lemons; it’s up to us to make lemonade”

Yes, I agree with Terry.

We had a tenant do a runner and owed rent, left some minor damage and rubbish.

We went through the normal process with the agent of applying for the bond money, going to tribunal and then putting in claim for damage/lost rent etc after this.

Whole process took a couple of months to get the money. Not a big problem really – more of a nuisance.

This hasn’t put us off either; we accept that there will be the odd problem like this – part of the deal I’m afraid. Most people are good.

Cheers,
Marc.
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“we get sent lemons; it’s up to us to make lemonade”

Notwithstanding the F.H.O.G, buying a cheaper property may be better for a few reasons;
1. Cheaper properties quite often give better rent returns. The rents don’t necessarily increase with the price of the properties. Better rent returns helps with further purchases as the serviceability on the loan is better from the Bank’s point of view.
2. Having 2 x $200k properties as opposed to 1 x $400k property will spread the risk of vacancy – it is less likely to have both vacant at the same time.
3. Having them in different areas improves your chances of consistent cap growth as one property may not go up in value at the same time as the other, but the other might and vice-versa. If you have 1 x $400k property you only have exposure to cap growth in that one area.
4. The rental pool for cheaper properties is much larger than the pool for more expensive properties (less vacancies).
5. The resale of cheaper (below median) properties has a much larger pool of buyers than more expensive properties.
6. The cheaper properties may be in ‘under-developed’ suburbs that can experience a sudden boom in times of low cap growth.

Cheers,
Marc.
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“we get sent lemons; it’s up to us to make lemonade”

You can turn any property into a cashfIow positive one simply by putting down enough cash as a deposit. The problem is most people don’t have enough ready cash to use for this.

The less you borrow, the more chance you have of the rent covering all holding costs, thus a +cashflow.

Selling your PPoR and using enough of the excess cash as deposits will do this for you. Of course, then you have to rent a place yourself. For most people, renting themselves and owning I.P’s is a more sensible financial strategy, but most people are too emotionally attached to their PPoR and won’t make the move.

I prefer the strategy of retaining the PPoR, moving out and converting it into another I.P, and renting a place myself and using the increasing equity in the properties I buy to fund the next one. This way I am using none of my own money to increase the portfolio; the cash-on cash return is infinity. The smaller your personal cash input is, the higher your cash-on-cash return is.

If you refinance your PPoR and use some of the equity as a deposit, you will still need to borrow the remainder, thus you have a 100% (usually more) finance on the I.P, which makes it harder to create a +cashflow deal, but it can still be done.

The trick is to use as little of your own money as you can, and still acquire I.P’s that pay you money and/or go up in value a good amount.

Doing it either way is o.k, but to use lots of cash for each deposit decreases your leverage and thus your returns.

Cheers,
Marc.
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“we get sent lemons; it’s up to us to make lemonade”

When the media talk of the markets crashing or correcting etc, they are usually quoting across the board, median and average prices.

The problem with these stats is that a sudden spike in sales of properties, or decline is sales of properties either side of the median and average affects the figure, giving a distorted result.

For example, the median price may be $300k in say, Melb. This is the cost of the house exactly half way between the total number of sales for the city – there may be 1,000 sales; the 500th sale house is at $300k.

But then you get an interest rate rise, the first home buyers disappear, but the cashed up wealthy buyers don’t get affected by the rise so the sales above the $300k mark increase.

The total sales are still 1,000; but the 500th sale is at $400k now due to all the higher end sales. The median has risen.

In a nutshell; forget about these stats – real estate is driven by micro markets, which fluctuate within and also outside the market trends.

You can find deals in any climate if you look. Having said that, I think 2007 will be mostly flat around the main traps – especially if another interest rate rise occurs in the first half of the year.

Look for the micro markets, undervalued suburbs near more expensive ones, look to add value through subdivides and renos.

I don’t think Perth will crash – just slow down an awful lot. Flat for a few years maybe.

Here’s a good case in point; in L.A the boom has ended, prices are dropping, but they are still so high that people are forced to move out of the city to cheaper areas and commute. The cheaper areas are now booming as the herds move in to buy up while the prices are still affordable – a boom within a bust! Australia is no different.

Cheers,
Marc.
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“we get sent lemons; it’s up to us to make lemonade”

This is an old real estate agent’s trick.

What is actually going on with these $xxx+ offers is the real estate agent has initially quoted the Vendor a too high sale price to ‘buy’ the listing, then cons the Vendor into advertising the property this way, telling the Vendor this sales strategy works (and it does – for the agent).

This is so that the agent then gets (hopefully) a lot of interest at the low figure advertised.

He/she then goes back to the Vendor and tries to condition the Vendor down on the price, using all the ‘interest’ at the lower end of the price range to justify to the vendor that ‘this is what the market is telling us’ and that you had better drop the price down.

Then, in the face of all the low offers, the Vendor drops the sale price down to what the property is really worth, not what the agent originally quoted the property would sell at.

The agent then gets the sale.

The same tactic is used when the agents con the Vendor into advertising the property with a price range,
eg; “buyers’ price range: $250k – $300k”.

The Vendor is thinking $300k, but the agent knows they will get mostly closer to $250k interest or less as all the $250k buyers inquire, but only a handful of the $300k buyers inquire – they are usually looking at the $350k price range properties, trying to get them for $300k!

Cheers,
Marc.
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“we get sent lemons; it’s up to us to make lemonade”

Sounds good. Could be the next boom suburb that no-one has discovered yet! You’ll be on the ground floor.

If you know the area, the values and trust your judgement, then go for it!

How are the rent returns and the rent demand? Is there subdivision possibilities for the blocks?

If the answers are yes! then I can’t see much of a downside.

Cheers,
Marc.
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“we get sent lemons; it’s up to us to make lemonade”

Both types of properties can be good.

Some factors to consider for maximising your investment returns;

1. Land content – townhouses usually have more of this than units.
2. Townhouses seem to be the more popular trend for families and even singles as they seem to want their own separate space, but without the work of huge yards, and the statistics tell us that family sizes are shrinking and single person purchases are increasing.
3. There may be more ability to add value to a freestanding townhouse (inside and out). Units can be more restricted by the others in the complex – you may not be able to alter the exterior too much.

Cheers,
Marc.
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“we get sent lemons; it’s up to us to make lemonade”