Forum Replies Created
Hi PB – you might also have a look at Carnegie (12km SE), though prices have shot up lately. Vibrant local shops, walking distance to everything, train & tram, not far from Chadstone, etc.
Peter
Maybe it’s OK in theory, but money often creates friction in families, even though you may all be well-intentioned now.
I personally wouldn’t do it.
Think of the opportunity cost and what you could do with the $100k. For example, buy a $95k IP now, and borrow against it for your PPOR deposit when you want to buy your own home? The IP should give you some surplus income to pay off your (non-deductible) mortgage quicker.
$100k now will be worth more than $100k in the future. Property prices may rise even more.
Thus your relative may have to pay you $140k to get the same value out of your $100k today.If he does not grasp that, he might only want to pay you back $100k which would disadvantage you greatly. Thus he gets your cheap money, saves thousands, while you are left short.
Also you are paying him a substantial lump sum. Will he do likewise for you, or will it be little bits every month over many years? If the latter he’s ripping you off (see other thread re wheelbarrows & time value of money). If a lump sum (whether $100k or $140k) how will he get it if he has to turn to you to help pay his loan?
Whatever you do, get professional advice and get everything in writing. It’s his house, his loan and he should first look how he can increase payments without relying on others!
Peter
Way above my head, unfortunately : ( but I like the general idea.
Put a one-off $5k payment into a P&I loan, save maybe $20k (future dollars) in interest and shorten the term of the loan 5 years.
Spending 5k today to get $20k more equity over (say) 20 years is not that bad (7% pa) for an unleveraged risk-free investment like paying off a loan. Even if the 20k future saving is worth less than $20k today.
As I see it the main disadvantage is that the 5k put into the loan reduces what you can buy today. If you think the property could grow in value or returns CF+ then that could be seen as a disadvantage assuming you’re willing to bear the increased debt.
Peter
Congrats Richmond! Too bad I choose not to have a telly so can’t watch your efforts
‘good’ salary?
Leaving aside Arty’s comment that there is no such thing ; ) for a single person receiving no govt benefits, $20-25k is very modest and permits only limited savings ($2-5k annually?). Maybe add a bit for Sydney where rents are higher.
If we boost it up to $30-35k, a single person should be able to buy their own home in at least parts of the smaller capital cities. Syd/Melbourne is tough for them, so these people would be better off renting their PPOR. If you’re really focussed, saving $5-10k per year should be doable.
Anything more would require creative thinking, eg sharing a place, or buying a 5br house and taking in 4 lodgers to pay the mortgage.
But overall this is not a bad income level – if you have good savings, you should be able to get enough finance for about 3 country cf+ IPs which would be an excellent start and boost your income to near $45k!
But to answer the question, my nomination for what’s a ‘good’ salary would be around the $40k mark for a single person.
Peter
I don’t worry too much about budgets, but I:
1. Have a very clear idea of what is essential and what is not
2. Question every non-essential expenditure at point of purchase
3. Have money automatically taken out of my bank account by managed funds, extra payments on your credit cards, home mortgage or special ‘IP deposit savings account’. (20-25% of pay is good)
4. Buy IP so that the tenant’s rent provides an income used to build equity in real estateAs for motivation, for me that’s simple! Think of the end product of all this. As your portfolio grows think of the growing proportion of your income coming from investments and the declining proportion from your job. Eventually you’ll be able to quit or reduce the latter and have more freedom.
Then once you have freedom, what do you want to do with it? This is a tough question that only you must answer. If you have no idea, then you will waste your freedom. Also bear in mind that with freedom comes responsibility. But if you get some serious answers on this one, this should help motivate you to do what is necessary.
rgds, Peter
Hi Alf – For WA properties, try Dept of Land Administration (DOLA) ($24 per postcode, they email you the info). Or use Home Price Guide ($49.95) who also email.
I then go down to the local internet bar and print it out on their laser printer (cheaper than wasting half my inkjet cartridge on it).
Peter
Yes, I’d be on the side of claiming the depreciation allowance if it’s available.
But a slightly different angle of this discussion only came to me last night when I was looking at property prices in a town. I was trying to compare like with like, so was looking at 2br villa units.
Older (1970s) places were about $60k and newer (1990s) places were about $100k. Assuming same location and land size you are paying a premium for the newer place.
Offsetting this might be the slightly higher rent ($10-20pw more) you could charge on the new place, lower repair expenses, possibly better tenants and building depreciation allowance.
But over 100% of this saving could well be swallowed up by bigger repayments and interest bills, so the older place might have higher yield (say 9% vs 7%) and be cashflow positive, whereas the newer one wouldn’t be (before tax).
Another concern is that land depreciates, and buildings depreciate, so the $40k difference in purchase price is all depreciating building. Thus the $100k place would have a small land value component (especially in country) and be like tiny flats in the inner city but with less possibility of appreciation.
You get some of that higher depreciation back in tax, but (especially) if you’re paying a low marginal tax rate, it’s much less than half, so you’re losing.
Thus it doesn’t make sense to get big loans for new properties that won’t grow in value, unless the rent it attracts is high and you save heaps on repair costs.
The city property marketeers often go on about the depreciation benefits of their property.
But to me being attracted to this where the land component is small and unlikely to appreciate quickly (eg a very expensive and very new place in a small country town) doesn’t make sense.
Claim it if it’s there, but don’t make it colour your buying decision.
Let me know if I’ve missed anything.
End of sermon (if anyone’s still reading)!
Peter
no websites = lots of cheap properties outsiders don’t know about = opportunites
Thus the modus operandi might be to look up the yellow pages for REA in the area and phone them!
The smaller the town the less online-minded they seem to be. Even where properties are listed on the web, they are not necessarily on the big RE sites, but rather on the agent’s own site.
Peter
‘as I can borrow the full amount, I should be able to get the property for nothing.’
Yes, it might be ‘nothing down’, but it’s not nothing. Consider the opportunity cost of the finance going towards something better before proceeding.
‘My philosophy is if I get a bad to mediocre property for nothing is better than no property at all.’
Yes, but only if you have good tenants. If it’s the sort of property that would attract poor tenants, you might be better off not to expose yourself to those hassles. Will people choose to live in the place, or would it be considered to be a ‘house of last resort by the desperate’ as there’s nothing cheaper in the area?
‘What do you think’
Well it could still be a good deal, but I’d personally go for either a higher return in this town or a similar return in a bigger centre.
Peter
Hi Alf – I don’t disagree with the concept of buying interstate, though as one whose just booked (another) trip to WA, why not look around WA country areas first?
To answer your questions on info sources:
a. vacany rates
Ring up property managers in the area and ask what properties/locations are in demand. Firstly ask about what they can offer as a PM. Say you’re thinking of using them and want to find a place that will be easy to let out and won’t be a hassle for them to manage.
b. jobs
Get stats on unemployments rates from govt or ABS websites.
c. future plans
Contact local council or regional development authority.
Find out what are the area’s main industries and read about developments in those industries.
Look up websites for local papers and ABC regional news.
d. infrastruture
As above.
e. house condition
Get a property manager, valuer, or builder to look at it. Maybe even give them a checklist so nothing’s missed.
f. location
Find out which locations are best from your discussions with PMs. One volunteered that once I have several places on my shortlist I ring them to get their views on the street before proceeding. I will do this and will most likely use this person as my PM (after I’ve met them in person).
There are a lot more questions to ask about things like rates, BC costs, etc.
Time frame – from deciding on a location, doing research and selecting a place could be 4-8 weeks. Once I’m in a town I’d allow 7-10 days to walk the area, select a place and buy it.
My approach which I am planning to test (very soon) goes something like this:
1. Beforehand: Get details of previous sales over the last 6-12 months. Get street maps of the area. Ring PMs re good and bad areas. Make an assessment of preferred suburbs. Ring REA a few days prior to your visit. Tell them what you’re looking for. You might also say that price is less important than rate of return and you’re aiming at somewhere near 10%. They might suggest some places, which you should take note of.
2. Arrive in town on a Friday night. Ideally you’d have dinner in town and look in agents windows afterwards.
3. 9am Sat morning: Quickly go around REAs grabbing rental lists and having another look in the windows.
4. 10-11am Sat morning: Actually go into agents and ask about what properties are available. The only info you need is: 1. Asking price, 2. Adddress, 3. Rates, 4. Strata levies, 5. if tenanted, the rent it attracts.
5. Sat afternoon: Using the rental lists you’ve gathered as guidance, estimate the rent of each place for sale would fetch.
6. Sat afternoon: Look at yields (rents/price) of various places as well as comparing fixed costs (rates, etc). Develop a shortlist of high yielding properties to inspect.
7. Sat evening: Have dinner and walk around areas on your shortlist.
8. Sunday: Wonder around looking at places on your shortlist.
9. Monday: Get back to the agents and tell them which of their properties you’d like to inspect.
10. Based on what you see, previous sale prices and what would be a reasonable rental return, put in offer(s) and arrange building/pest inspections.
Regards, Peter
Cremin: I’m surprised about Bunbury being a positive haven. My observations is that rents there are lower than Kalgoorlie and prices are higher.
My own (brief) looking is that there is very little under $100k. What $90k properties I’ve seen have rented around $120pw – well short of 10.4% rtn.
What sort of properties down there have given $240pw rent? I can only think of shared student houses.
Peter
Me? Electronics salesman!
It strikes me that IT people are heavily represented amongst us. Wonder how many participated in the tech boom/bust?
Angels: liked your comment about there being no such thing as boredom. To me, people who complain of boredom severely lack imagination. As do those who say their schooldays were the best parts of their lives.
Sach: IP humour – love it! Do you find the real world behaviour of some is so bizzare that parody becomes impossible? Any pointers on websites with investment, landlord, tenant or property homour (for Sooshie’s Links List of course)?
Peter
Hi Carbloke: Care to mention the % return you’re getting in Kal? I find that the average is close to 9%. 10% should be doable if you bargain hard on several places until you get one to accept your offer.
Though I’m a skeptical re ‘discounts’ being offered. I’d thought they’d want to charge you extra for all the due diligence work they’re doing on your behalf!
Peter
Steve’s book seems to be everywhere at the moment.
Picked up a copy of MX on the train earlier tonight. On the back was a full page ad from the ‘Today not Tomorrow Institute’ seminars (anyone know about them?). Then a few pages in was a quick rundown on ‘From 0 to 130’. It only got 3 out of 5 stars – I reckon it’s worth at least 4!!!.
And off the train and past the local (small) bookshop was the same book in the window.
Peter
I’d be worried about the population growth of some of those places. SA as a whole is growing slower than the national average, and many country parts of it even slower.
But having said that, you might do OK with villa units or duplexes (for example).
Flats/villas are a small proportion of the housing stock in many country towns. Given changing demographics, with more single, childless and older people, could attractive well-located villa units (for example) still be a reasonable investment in such places, due to their relative scarcity?
This is especially when for similar rents tenants could choose between an old fibro house on a big block and a modern brick unit with less garden to look after.
If well-located, the unit might win out.
Peter
Forgot to answer Mel’s query re brick vs other.
‘spose it’s my West Australian bias, where double brick & tile is dominant in the suburbs. Also growing up in non-brick houses while better-off relatives resided in brick & tile places reinforces my prejudices.
But yes, apart from that, it’s the supposed higher maintenance costs of non-brick houses.
Has anyone (particularly long-term owners of both types of houses) done a comparison between average repair costs by construction type, so we can see if there is significant variation? If not, we can delete this question, and make it a 21 (or 109) second calculation!
Peter
Yep, everyone’s right – it’s more like 110 seconds rather than 22 seconds! But still quick enough to do while in the RE agents, before going out to look.
Peter
Hi Alf – I’ve found Jan Somers is fairly even-handed re growth versus yield, particularly in books & articles written in the last couple of years (refer to ‘More Wealth from res prop’ & a recent article in API).
However Monique Wakelin is very staunchly in favour of neg gearing.
I share your concerns re debt, though make sure that you aren’t using these for an excuse to do nothing! I notice that though Steve seems to advocate putting down a reasonable deposit (even though this lowers C on C Returns) there is little mention of prudent maximum debt ratios across the whole portfolio.
This is fine if you want quick results and are willing to take big risks.
But if you’re unwilling to take this risk, why not proceed, but set a max debt ratio, eg maximum of $100k loans for every $200k of equity?
Of course this will slow your portfolio’s growth, but at least keeps debt levels down.
Peter
I’m a sucker for reading and own & recommend the following (even though they advocate different approaches, not all of which I will use):
* Property
From 0-130 properties in 3.5 years (Mcknight)
Seven Steps to Wealth (Fitzgerald)
Your Investment Property (Bell)
Your Mortgage and how to pay it off (Bell)
How to create an income for life (Lomas)
Building Wealth story by story (Somers)
More wealth from residential property (Somers)
The Property Investors Handbook (Airey)
Streets Ahead (Wakelin)(Note that Fitzgerald, Wakelin and probably Airey are strong advocates of capital growth/negative gearing approach)
* General
Borrowing to Invest (Whittaker/Resnik)
Making Money made simple (Whittaker)
Rich Dad Poor Dad (Kiyosaki)
Retire Young Retire Rich (Kiyosaki)
The Millionaire Mind (Stanley)
Unlock the secrets of your money personality (Smith)Peter
I’ve been lucky and my family have been very supportive (even though the IP is about 2500km away from me). Not only that, but they followed my reasoning on my choice of town and thought the price I paid was reasonable.
Also as I bought in the state in which they live, property ownership there will allow more family visits : )
Peter
