This can happen (read up on GEHA leases), but the figures Mant gives are reasonable for the regional city that I’m pretty sure it’s in.

My two 3br IPs there are as follows:

Cost $92k (2003) Rent $180pw
Cost $112.5k (2004) Rent $205pw

Both are unfurnished. They’re older than yours (late 80s/early 90s) so get less depreciation but have higher gross yield.

Furnished IPs rent for more; I’ve seen 1br f/f units claim to rent for $180pw.

Steve, a 10.1% management fee for a furnished IP there would not be uncommon. The standard there for unfurnished is 9.35%, but I’ve been able to get it for 7.5% due to the two IPs there.

Mant, as for whether it’s a good buy, only you can answer that when comparing with other sales data and what you want to do. But depending on your tax rate it should at least break even after tax.

For me though, it wouldn’t be my cup of tea; I’d prefer longer term tenants & 3br unfurnished, not in a large complex and with no body corporate if possible.

The main thing is that you’ve taken the first step. Most people don’t get that far.

It might not make you a bucketload of capital gain but you will have learned a great deal and it shouldn’t cost you much (if anything) to own.

Thus you should be able to get No 2 pretty soon!

Rgds, Peter

If you were on a modest salary had reasonable deposits and could get approx $300k finance, you could either:

1. Buy one modest place (a small unit in an inner suburb or a house in a cheap area of a cap city)

2. Buy three $100k IPs (in regional cities with good prospects)

3. Buy eight or ten $30-40k fixer-upper houses in declining farming towns.

I’d go with 2. If you lose a tenant you don’t lose all your income and yields are likely to be higher (portfolio could be neutral or close to it). Note that 2. involves purchases of attractive and highly rentable properties large towns with strong rental markets. 3. is high risk and 1. is a bet that cap growth will exceed losses through massive -ve gearing.

If you were on a higher income had a higher borrowing capacity (say $900k) and wanted to invest in the big cities only, you could:

1. Buy one $900k house

2. Buy three houses for approx $300k each

I would still go for 2. There’s lower risk, most people can afford to rent them and most can afford to buy if you need to resell.

Peter

I have two points:

1. Many property authors (eg Monique Wakelin) consistently say ‘always buy within 10km of the CBD for max capital growth’.

However NOT ONE of those suburbs fits this criteria; they’re either (1) beachside or (2) cheap areas.

2. Some of those suburbs contain new housing or redeveloped housing. Are the growth figures comparing like with like? Are they measuring median house prices when the median house in that particular area has changed dramatically? Is there a new waterfront development pushing up averages? If so then the figures could be misleading and not everyone who owns in these areas will have necessarily done as well.

Rgds, Peter

That sounds very much like a small unit in a well-known large WA mining town with which I’m familiar!

If I’m right, then that rent figure quoted will be for a fully furnished unit.

Your figures do not include property management (10% minimum – more like 12% for a fully furnished place) and contents and landlords insurance (which you’ll need especially for fully furnished).

Buying in a large complex means that you are only one voice on the body corporate and have limited ability to add value. Also at any one time one unit will be To Let and another will be For Sale. This limits the abilty to set your rent (or sale price).

Consider your rental market and that you want a long-term tenant to get steady cashflow. An unfurnished unit might be better in this regard. Also will your unit appeal to just mine workers, or others such as nurses, teachers, retail workers, etc? If those 1br units are where I think they are, then they might not be as conveniently located to town as other properties.

Why pay $109k for 1br when for little or no more you can buy an unfurnished 2-3br unit in a smaller complex (or none at all) and get a rental return that’s almost as good?

So whether it’s a good investment depends on much more than the figures. Personally I would pass and buy a larger unit in a smaller complex, well-located and unfurnished to attract longer term tenants.

Regards, Peter

I used LMI when I bought my previous IP and borrowed 90%. The LMI cost about $1500.

Yes, I could have afforded the full 20% deposit but to do so would have required me to drain my non-property cap-growth oriented investments and eat into a cash buffer.

I didn’t want to do this (having already done this for previous IPs and wanting to keep a balanced portfolio) so I thought paying LMI was the best way to buy another IP sooner rather than later!

The property concerned was bought mainly for cashflow not growth. However the gross yield (9% based on a lowish rent) and the high building depreciation claimable (built 1991) meant that it is not a drain after-tax even with the higher lend.

Regards, Peter

Yes it can be a bit of work, but it’s all part of due diligence and I regard it as important. I do seek advice from my PM but ensure that it’s not my sole source of info.

Because yield was an important reason for buying this particular IP, it was important for me to establish which types of properties have good yields and low vacancies BEFORE I purchased.

Also the PM I proposed to use was from the same REA agency as I purchased from. Therefore I considered it desirable to do as much independent research as I could. Also note that selling agents will often give a slightly higher rental estimate than PMs.

I hate vacancy. For as long as I have a vacant IP, I will be comparing the rent I set with others to ensure that mine is attractively priced compared to others.

But when my properties are all full, I’m not contemplating further purchases in that area, and there are no lease renewals for a while (like now!) I slacken off and don’t look at rental lists too often : )

Regards

Peter

Possibly losing $10pw (and having a stable tenant) is heaps better than losing $100-200pw by having a vacant IP.

I have followed Domo’s approach in looking at rents.

I looked at online to let ads and rental lists. Then sorted them by type of property (eg 2 br unit, 3 br unit, 3 br fibro house, 3br brick house).

You soon get a rough idea of what is reasonable, though expect some variations (eg a new 2br f/f unit might rent for much more than an older 3 br house).

Note that some will stand out as being cheap or too expensive, so look at the majority around the middle.

Look at rental lists 2-3 weeks old and ring PMs to find out which have been filled – those that remain vacant could either be badly presented, badly located or have the asking rent set too high.

One of my places was to let for a while at $220pw with no takers. I dropped it to $210pw – again no takers. The vacancy rate had increased somewhat (it was the middle of winter).

My earlier research had similar places advertised between $200 and $240pw. However four weeks later $200 was the most commonly asked rent. So I dropped it down to $195 (ie slightly below the $200 median) and got a tenant. (maybe people doing internet searches clicked on $100 to 199 not $200-$299 option and/or $200pw was a psychological price point for many people).

Regards, Peter

The best book?

Depends on what you want.

The big flaw in Lomas’ book is that she relies too heavily on tax deductions. Many people on average wages would run out of tax deductions after they buy 3 or 4 properties.

This is not quite enough even for a modest income (you really need to own at least 4-6 outright, and maybe 2 or 3 extra to provide some leverage and growth prospects.)

McKnight relies on smallish margins from a large portfolio of cf+ IPs to provide income, even before the debt has been paid off (or significantly reduced). Assuming you hadn’t fixed interest rates, you’ve had no capital growth AND interest rates rise, you could be forced back to working if properties become negative.

Even if using PMs, such a large number of IPs, this must present a management nightmare, especially if you don’t have established infrastructure such as your own business, a business partner and spouses.

Others rely more heavily on capital growth, with some authors saying that -ve properties eventually become +ve (ie repayments remain constant while rents rise with CPI). There are huge -ve gearing losses in the interim which would mean massive cuts to living standards and other savings programs for me.

None of these approaches by themselves are quite right for me, but I am happy to choose and take from these (and others) for my requirements.

Regards, Peter

I would be wondering why?

Are you going for growth or yield?

Hobart prices are no lower than Perth’s. Yields in Hobart might be slightly higher, but Perth has far better growth prospects.

As for Launceston and other country parts of Tassie, these have experienced enormous booms driven by interstate investors. Yields are low and I can’t see much room for growth given there’s been so much of it recently.

I’d think that those regional cities in WA and Qld with growing populations would still be better value, though to get more than 8% gross yield would be quite hard.

Regards, Peter