Forum Replies Created
What I’m curious about is what gets you three stars. It seems to be number of posts, but 100 isn’t enough. Somewhere near 110 seems to be the cut-off.
Of course stars only measure quantity, not quality ; )
Peter
Jane – what about paying more than the required payments for the first 5 years so at the end of that time you have a fair amount of equity and a lower outstanding amount.
Then in 5 years time if you find repayments hard going at 10% interest, you could refinance, but for the smaller, remaining amount, so reduce the size of the payments. Of course you’d be reducing the principle slower than if you’d stuck to the original loan as well as paying more interest, but it might keep you afloat.
Alternatively (or as well) maybe put money aside for growth-oriented investments (eg shares) and reinvest the dividends (bit like a sinking fund that interest-only investors use). If the shares do well, in 10 years time you could pay off a large slice of the mortgage. Note that this is riskier than accelerating your repayments, but you might progress faster this way if returns are good.
Peter
Margaret Lomas recommends it provided you get building & pest inspectors, etc to look at it for you. She argues that if you look at a place your emotions get carried away.
But there are lots of other matters that an inspection report won’t reveal (eg habits of neighbours, whether the street is too busy to back out of, general quality of area etc) which could affect your ability to keep long-term tenants.
So there’s lots to be said for going there yourself!
Peter
To respond to Sooshie, here’s the key messages I got from the books on my shelf:
Wakelin’s ‘Streets Ahead’: Go for capital growth by buying quality inner city properties
Fitgerald’s ‘7 steps to wealth’: Go for capital growth by buying inner-city properties with a large land component
Somers (various books): Property investing can work at any time. Both growth and yield strategies will work equally well.
Airey ‘The Property Investors Manual’: If you’re not over 35, don’t own your own home and are unwilling to personally fix leaking taps, don’t bother!
Lomas: ‘How to create an income for life’: Go for cashflow positive (after tax), use depreciation tax benefits and don’t buy anything built before 1985.
Bell: ‘Your Investment Property’: Don’t trust anyone – do your own due diligence. Scrimp and save, buy cheap properties and pay them off quickly.
McKnight: ‘From 0 to 130’: Every property should put money in your pocket (before tax). Go for high returns so you can buy an unlimited number to become financially independent ASAP. Also consider alternatives like wrapping.
Peter
Hi Chris77:
‘I’ve produced a spreadsheet showing population numbers and growth in all 10k+ WA towns. Post your email address and I’ll send it to you’
Yes please! My email address is [email protected]
I’m not too worried about the Geraldton population stats showing a 0.5% decline, which is misleading due to local government boundaries, and is typical of established suburbs in any capital city. ALL of Geraldton’s recent growth has spilt over into the neighbouring but little-known Shire of Greenough. To get a fairer picture try adding Geraldton and Greenough to get a ‘greater Geraldton’ figure.
Here’s some stats:
Geraldton 1986 20040
Geraldton 2000 19510Greenough 1986 5814
Greenough 2000 11942Thus while not spectacular, greater Geraldton has shown reasonable long-term growth.
There is also overall growth in the regional area that Geraldton serves. But this is not evenly distributed throughout the region. Coastal areas such as Irwin are growing while inland farming areas are not.
Peter
Erika wrote:
‘I cant beleive the number of people on this site that dont have a budget!!!!!’
I can. A detailed budget is only one means to give you control over your own finances.
Though a line by line budget works for some people, I’ve so far managed without it. And I consider I run a fairly tight ship on a very ordinary salary.
My recipe has been:
1. Pay yourself first by having investments taking out of your savings account each month. I use managed funds for this purpose, both share funds and fixed interest, to maintain a balanced portfolio. Some people say save 10% of your income, but I like 30% better!
2. The remainder is your spending money. But question every expenditure. Do you need it? Will it contribute long-term to your wellbeing? Does it save or waste time and money? Can you get one cheaper that will do the same thing?
3. Monitor your savigs account. If you see your savings account starting to rise over a period of months), increase your investments by (say) $50 or 100 per month. Do this until your savings account stablilises 3-6 months worth of expenditure for emergencies.
4. Review finances every six months to see if your portfolio allocation is OK.
With properties, I agree with budgeting for expenses, you you’re not caught short if there are several lots of rates, insurance, etc to pay at once.
For this I like the idea of putting 100% of your rent into paying it off (quickly). Rates, insurance, etc could come from your regular savings. Also I like the idea of saving with some growth investments (eg shares) so you can pay out your property loans when you want to retire.
Peter
This post won’t be as long as the last (I promise, I promise!!!) but thought I might have a go at Chris’ very good question about whether it’s possible to do well in country towns where the population is declining.
Though some might attain Tasmania-style investor driven capital growth, I would not rely on this.
Instead the only reason I would invest would be yield. But I’d want long-term yield. There is a big difference between a town that has had static population for 30 years (eg Mt Gambier) and one that’s losing 3% a year. Using the Rule of 72 (for another purpose!) that means that population will be cut by half in under 20 years!
But let’s say that decline is only very slight. Could you still make money from certain types of property in such a country town (even if there is no investor frenzy)?
Consider country towns, their housing stock and demographic trends.
Country towns generally did not go through the 1960s/70s flat boom that capital and regional cities underwent. Therefore most have heaps of old unrenovated asbestos or timber houses on large blocks. There might be the odd duplex, but nice brick and tile villas might well be scarce.
Given the ageing of the population, there are likely to be many couples or single people living in houses like this. Most would own, but a few would rent. There might also be younger single or couples like teachers.
Such people may not be worried about having a quarter acre back yard. However they want a smart-looking low maintenance place. If it’s 5 min walk from the main street, that’s a bonus as well.
If I am right in this, the rental prospects for a well-located modern villa or duplex in a country town might be quite good due to their scarcity compared to older houses.
Comments anyone?
Peter
Chris – An excellent question : ) that I hope others with more experience than me can answer.
I don’t know the answer, but I’d be wary about investing in areas showing long-term population decline, such as agricultural areas where the trend has been nothing but down for 40 years. On the other hand yields can be fantastic, and there may even be capital growth due to investor frenzies (the ‘Tasmania effect’).
Mining towns tend to be more volatile, which could present both opportunities and threats (especially if you have to sell during a slow time).
Kalgoorlie-Boulder for instance showed strong population growth between 1992 and 1998, a flattening off and then a decline as you pointed out. You are correct in pointing this out as a negative statistic and being concerned about this.
However information from http://www.regional.wa.gov.au/rti/KalBould.pdf ) present other stats (though a year old) that are more encouraging.
The three I consider most significant for landlords are:
1. Reasonable employment growth (note the decline in the March quarter of each year and the strength of the rebound in June)
2. Unemployment below the state average (4.4% in June 2002)
3. Taxable income well above the state average (unusual for a non-metropolitan area)
The above stats also show strong non-residential building approvals, but declines in agricultural and mineral production, so it’s a mixed picture. The increase in residential building approvals could be a concern if sustained as population is not growing and vacancy could be the result. However there are lots of old asbestos houses there that deserve to be knocked down and replaced with something better!
Stats from elsewhere show a large proportion of the population who are renting and rents higher than the state average. Added to this is anecdotal evidence that the vacancy rate is low and good property finds tenants quickly. Property prices have been stagnant and yields are higher than average for comparable towns.
In summary, though not all stats are as I would like, there is sufficient in it to make the area worthy of investigation.
It is interesting to compare these stats with other areas, for instance the Latrobe Valley. The stats for this area also show population decline, but over a longer term. Unemployment is much higher than the state average and incomes and rents are lower. A few years ago prices were even lower, thus providing the average yields in the state. However the recent investor frenzy has led to capital growth even though the fundamentals like population and employment are poor and worse than Kalgoorlie.
I would imagine that most investment decisions are based on a weighing up of good and bad stats, and that it’s very seldom that all the planets line up! But if we wait for that we will be dead, so it might be better to bite the bullet now on something that we think is mostly OK and hope for the best! And try to diversify into other areas in case your judgement proves to be mistaken.
Peter
Lifestyle wrote:
‘How ever people seem to be making money just purchasing land’
Not possible unless they can get someone to rent the land from them, eg agist horses or farmers wanting extra land for more crops.
However if you’re willing to bet that prices will go up, or you are able to get the land rezones, you might make money when you sell.
‘Can anyone verify this’
No doubt there are people who’ve made money from land. But they’re unlikely to be your average ‘mum and dad’ investor as you need lots of money to afford the loan payments as there’s no tenant to pay them for you!
‘please tell me where to get some of this land.’
Try a real estate agent.
But before doing so, do yourself a favour, do lots of reasearch, buy property books by McKnight, Bell, Lomas, Wakelin & Somers, follow up Sooshie’s links and search for previous newcomer questions.
Strategies vary, but you could do worse than buying established houses/units that are well-located, attractive to tenants but not too expensive.
Peter
Hi Cookster: I’m fairly new at all this myself, but I’m finding out that there are three very important factors. These are:
1. Education
2. Capital available
3. Determination and the will to do it3 is absolutely necessary. 1 and 2 are partially replaceable by one another. For instance if you have $500k cash, you don’t need to know much to get started. On the other hand, if you have nothing, you need to be much more ingenious to get started. And this is where education comes into it.
But it is true that it gets heaps easier once you have access to about $20-30k cash, and you should save all you can to get it.
EnjoLady mentioned Geraldton. I’ve just been there and think it’s an OK place to invest. However beware that rents there are low and it’s swarming with investors from over east, so it may be hard to get a decent return. Higher yields (9% instead of 7-8%) could be available elsewhere. Accordingly you might wish to investigate a largish place a long way east of Perth where they get shiny stuff out of the ground!
Peter
Chris – yes there will always be booms and busts and anyone who says otherwise is underestimating human emotions of fear and greed.
But I look at it this way. The human population is not falling. Housing is a basic necessity (about number 2 or 3). Thus people will sacrifice almost everything to get a roof over their head. So provided that it meets a basic necessity (which the more expensive houses certainly don’t!) and it’s in an area in which people want to live, I think you will do OK.
Buying overpriced properties? Well if you buy something that attracts 8-10% yield, even if the price were to fall that’s not a bad (though not fantastic) return on your original investment. If house prices were to fall yields would go up. In a period of uncertainty, I’d imagine that people would be rushing to get 10% or more on their money, especially if the sharemarket is weak and the international situation was uncertain. This might limit any fall in prices.
What about a general recession? Unemployment would reduce people’s capacity to pay. Even so, housing would be one of the last things they’d cut out. If they’re in an expensive house, they might want to move to something cheaper. Average rents might fall, especially at the middle-top end. There might be a short period of high interest rates and high unemployment (eg 1982) but you’d expect that one of the other would fall eventually.
If you’re worried about prices falling, why not buy one cheap place now, and save up so you’d be able to afford another in about 2 years time? Then you’re not buying both places at the peak of the market if your judgement is correct.
Peter
Try CGU. Approx $400 for the lot for a small property.
Peter
Hi Chris – My suggestion is get a week or so off work in about a month’s time.
Book (and pay for) a return Prospector train ticket to Kalgoorlie for that week. Now you’ve got a deadline to meet and work towards!
In the next month spend every spare moment researching Kalgoorlie. Find out all you can about the place. Population trends, rents, wages prices, industries, etc. Also get preapproval for your loan.
Ring up locals and ask lots of questions (eg shire will help you re appropriate construction style and problem streets, property managers will give you an idea of what’s letting well, and what tenants in the area prefer, etc). Also contact RE agents and ask what they have available in about the last week. While you’re talking, ask about costs like rates, water, strata for properties they’re advertising. Send away for a Home Price Guide or WA Dept of Land Admin list of recent sales in the area and compare with ads on the web.
See Archicentre’s website re inspecting buildings. Find out the local pest inspectors & building inspectors in town and ring them.
Use the rents, prices and cost info you’ve gathered to do some sums to see if they work for you. Your bank will be able to tell you what the loan repayments are for loans of various sizes. Or you can use software to do it (most computers already have a Microsoft loan calculator somewhere).
Make a shortlist of ads you’ve seen that appear the best prospects (quality of property, location, rate of return, etc).
With all that you’re ready to go! Have a look around town, make an offer, buy something that is suitable and go home!
If you pay $100k for a place, you will need about $25k if borrowing 80%. With your $40k, you should be able to get a second place in 12 mths time, or however quickly you can save the next $10k!
So it is quite possible that in 12 mths time you could have two IPs, be receiving about $15-20k pa rental income (before costs) and planning the purchase of a 3rd IP!
Peter
Anita Bell’s ‘Your Investment Property’ has a good checklist.
In my opinion you need two checklists. One for various towns you’re considering investing in and then once you’ve made this decision, one for each individual property you want to look at.
The individual property list would start with some simple sums to gauge the investment worthiness of a property. You can use the forumlas out of Steve’s book and/or refine them if you wish. You’d look at things like income, costs, repayments, etc as well as other factors that might enhance the property’s worth (eg <1km to beach & shops, large land component, brick construction, etc).
Note that at this point you don’t need to look at a property – all the salient info can be got from the selling agent who will know all this stuff.
Then if the figures work out, you can visit properties and fill in the remainder of the list, ticking off things like building condition and any repairs needed. Bell’s book is a good starting point for this part of the list.
Then based on your assessment, put in an offer on the best place you find!
Steve’s book is good, but doesn’t go into as much depth in some parts as Bell, Lomas & Somers. But there are things in Steve’s book not in the others. So buy several books and take the best from each of them.
Peter
BDM wrote:
‘For example, here in Melbourne (and also any other capital city around the country), as a gross generalisation, rents go up over time roughly in line with property prices.’
If that was correct, rents would be unaffordable to many and there’d still be cashflow positive properties in our major capital cities. Yet yields at the moment are historically low.
Here’s an example from the place I lived in between 1998 and 2003 (a 1br flat Melb SE suburbs):
1998: Value $80k approx. Rent: $115pw
2003: Value $154k. Rent $120pwRents in this area have starting to move up, and the typical rent for a similar place (which would now sell for $160-180k) would be about $130-140pw.
I would say that rents have been more in line to CPI and people’s ability to pay them (ie wages) than house prices.
Peter
Hi Long: I can’t speak for Steve, but my answer to your questions would be:
1. Buying in rapidly rising market
Getting a 10.4% yield on good quality property is tough when the market is hot. In most areas to do it you’d have to do something special, eg make it a boarding house. If you refuse to buy under a particular (fairly high) yield level (Steve says 10.4%, Neil Jenman says 7%) that should protect you from paying too much. It’s analogous to only buying shares with low P/E ratios (ie value stocks).
2. Dealing with a market crash.
If you’re buying purely for income and deemed 7, 10 or whatever % yield as acceptable when you bought it, a crash might not be too much of a concern. Assuming you’ve got something in reserve, the main problem is that you’ve got less to borrow against when planning future acquisitions. If you’re still worried, why not set a max LVR across your portfolio of (say) 50% rather than 80%, so there’s a bit of leeway? You don’t need to have all that as equity in the properties; it could be in shares, etc instead.
Peter
Definitely Perth : )
Photo taken from south – South Perth area.
Steph- you’re spot on re identifying the skyscrapers. Melbourne has heaps more -ve geared apartment skyscrapers, which sort of doesn’t match the contents of the book!
Peter (visiting Perth soon returning to Melb)
freby: gotta ask, why do you want to minimise tax?
Taxes bring schools, hospitals, public transport and other good things that make things civilised and add value to your IP (if it’s well-located).
If you’re paying lots of tax, it must mean you’re earning lots of money, which is a good thing, is it not?!
Peter
Well he would say that as he’s premier!
Think of all the extra stamp duty his govt will collect if hordes of eastern states investors descend on WA ; )
Peter
For a beginner who wants something that does not recommend stupid things (eg quitting your job when you’ll need it to help get finance) I suggest Noel Whittaker’s ‘Making Money Made Simple’. It was a best seller and you often see them at garage sales, school fetes, etc for a couple of bucks.
Anything by Paul Clitheroe is also good, even though I remember him vigorously pushing international shares a few years ago.
Note though that the strategies for someone wanting to be well off by 65 are different to someone wanting to be financially independent in 10 years.
That’s why you will see different opinions of diversification versus concentration of risks and the extent you should borrow to increase your portfolio. It’s the old risks/returns thing.
Peter
