Forum Replies Created
Bruce – yes, there may be many ‘I know thats’ when reading these books. But many times people may know something, but do exactly the opposite, either due to laziness, cowardice or just plain forgetfullness.
It could be anything from quitting smoking to putting off needed repairs, to not doing due diligence.
So if the book gets you to act on what you know (possibly by formalising it with checklists so you don’t overlook something) then it will have done some good.
Peter
hotchocolate – thanks for your comments re London. Can you comment on trends in the north of England – places like Leeds, Birmingham, etc?
Would prices be lower and maybe even CF+ there?
Peter
Several points spring to mind:
1. If average people can only afford the time to own 5 or so IPs, how do professional property managers, who might manage 100 each cope? Admittedly they’re doing this full-time, and have secretarial support, but if you’re up to 100 properties, you should be able to quit your job (more time) and/or hire a secretary/manager to oversee all the PMs!
2. Steve seems to want lots of properties because he wants a high passive income BEFORE the loans are paid off.
If you’re happy to move a bit slower, you might need fewer properties to meet your aim. Then you’d put all your savings into paying the loans off quicker and maybe retire in 10-15 years. At between years 10 and 15 you could cut down your hours as loans successively become paid off.
3. When you’ve done well with lots of country properties, and you can afford the reduced income due to the lower yield, why not sell (say) your 10-20 country properties and buy 5-10 city properties if you think that overseeing many properties is getting you down? Low maintenance brick & tile places, in the same city you live in might be suitable. At least you’ve got a choice as by retiring age there’d be substantial equity to play with.
4. Another issue with cheap properties is that holding costs (eg rates & strata levies) are high. I know people assume 20-25% of rent as a rule of thumb, but some cheap places I’ve asked about have been nearer 40%!
Peter
Haven’t read Building Wealth through Investment Property, but I’ve just finished ‘More Wealth from Residential Property’ which is much more up to date (2001).
In this book shares and property returns are compared, but are much closer together between 1980 and 2000 (13.2% shares, 15.6% property).
I find the (later) book fairly even handed re the merits of yield and growth. P93-95 mentions you can buy more high yielding properties and that your net equity is about the same as if you’d gone for growth.
I did some calculations before I read this book. I arrived at a similar conclusion to Jan, finding that equity was the same whether I went for growth or yield. But for various reasons (some of which are mentioned in Jan’s book) I have favoured CF+.
Peter
Thanks Doogs!
It seems as if I’m already calculating it right by including the full principal repayment in my figures.
Also a few days ago I rejigged my spreadsheet to include (1) before tax cash flow (2) after tax cash flow and (3) cash on cash return.
I should probably learn more about accounting sometime, but it might just confuse a simple mind like myself!
I’ll claim depreciation, as it can help build equity faster (on the early purchases), but won’t rely on it.
As for interest only loans, there are differing views, but can appreciate the benefits especially if you were wanting to pay off a (non-deductible) PPOR mortgage.
Despite the reduced tax deductions and the higher payments, I followed a conservative approach (substantial deposit, P&I loan and accelerated payments) for the first property. My reasoning is that I get equity in it quickly and can redraw funds to obtain deposits for future purchases.
As these future purchases would also be CF+, surplus funds would be put back into the loan for the first property. As there are now two cashflow surpluses topping up that loan, equity would be growing faster than before, making the purchase of a third IP possible sooner.
However I see a limit to this – looking at loan payment versus term tables shows that making small additional payments can shorten the loan from (say) 30 to 10 years, but once you get below 10 years, you’re not saving much interest and I’d rather lash out and buy another IP!
As to whether future IPs should be on IO loans is an open question for me (especially not being in the top tax bracket). Yes you could service larger loans if paying IO and all your payments would be deductible. But I also like the idea of building equity as well as income and keeping LVR under control, maybe by investing an equity component into a sinking fund. Whittaker/Resnik’s ‘Borrowing to Invest’ talks about this and I should re-read it.
Peter
‘would you buy without knowing the area first (but purely on returns)’
The answer is NO!!!
You MUST get to know the area, starting with at least a couple of months research into the sustainability of the main industries in the town, population trends, vacancy levels, prices, rents, etc. Make sure the town is big enough to support property managers, tradesmen, etc, as you’ll need these to manage & maintain the property.
You should also get maps and familiarise yourself with the area. Note that RE Agents can be a bit ‘creative’ with their suburb naming, and the place you buy over the web might be away from everything else.
If all still looks OK, contact local agents, book a plane ticket and spend at least a week up there looking around.
The markets of towns dependent on a single industry or employers can be very cyclical and you could lose a lot of money.
Don’t scrimp on travel or inspection costs as they are your safeguard to ensure that you get a good property in a good area.
But if your research shows the place has got a future and the numbers stack up, then go ahead and buy, knowing you’ve made an informed decision.
Peter
My vote is also for the phone.
Recently I asked one sales rep on the phone if they could email me something.
The remark was ‘I don’t know how to send an email, I’ll have to get one of the office staff to do it!’.
I’ve found that many people in sales might be very good at talking and persuading but often lack (i) the ability to write and (ii) intellectual rigour. Thus it is necessary to work around this and do our own research.
Peter
Hi Trevor:
‘Now I understand that with no security such as a house under my own name, I cant purchase an investment property.’
Nothing can be further from the truth! With your excellent cashflow, I would say that you are in an in an excellent position to buy. The property you buy becomes your security. The bank does not care if it’s an investment your your own home. In fact if it’s an investment you might be better off as it’s giving you extra income.
Even if you have nothing now, you should be able to save a deposit (say $25k) and buy a property in about a year. A second should be fairly easy to finance as well, about a year after that.
Let us know how you go!
Peter (who has less income and more expenses than you)
Chris – I’m with Robert K on this one.
Robert K says ‘an asset is anything that puts money in your pocket’.
Does your own home put money in your pocket?
No. Not unless you take in lodgers.
You have to pay rates, insurance, buy furniture, etc for it. And the more expensive the house, the more expensive the costs associated with it.
If you lived in a $2m house and had no other income, you’d starve (until the council comes around to recover their unpaid rates). On the other hand, if you owned a $500k house, and had income from $1.5m of investment property, you’d be comfortably off and not have to work.
What is your own home good for, financially speaking? If you’re game enough, you can borrow against it to buy income-producing investments.
‘but I’m not paying rent if you own your home’ you might say. Yes, your expenditure may be lower, especially if you’ve paid off your mortgage and bought in a country town where houses cost under $100k.
But if you took out a mortgage on your home, you may have a house at the end of it, but still no passive income (which is RK’s aim).
The aim of financial independence is changing your income mix so that most is derived from assets rather than your job. To do this from available finance, you have to ensure your capital (and that you borrow) is working harder than you. This means not borrowing for items that do not provide income.
Though there are far worse things to do with finance than borrowing for your own home, I reckon using it on an IP or two is better, especially if you live in Sydney or Melbourne.
Peter
Hi Shezian – they exist, but seem to sell quickly (and maybe more quickly now with Steve’s book!).
I recently missed out on a 2br flat in a country town getting $105pw rent and costing $45k. I was willing to pay the full asking price, but, buying from interstate, I put in some subject to clauses (building inspection, valuer, pest inspection, property manager). This lost me the deal as someone else bought it unconditionally. Ah well – the price of prudence!
But was it that great after all? All the other costs soon eat into the 12% yield, eg $700 council rates, $500 body corp, $391 water, $500+ property manager, so you’re down to somewhere near 7-8%. For this place, costs are nearer to 40% than 25% of rental income.
Assuming you’re paying cash for the place, the after-tax return might be hardly better than fully franked Telstra shares at the moment, so I’m not that disappointed that I didn’t get it!
Peter
Agree 100% Rich re country areas and cf+ homes in country areas which meet all of Wakelin’s criteria EXCEPT they are in country towns.
I enjoyed reading Wakelin’s ‘Streets Ahead’ and found it gave me lot of useful info, but she is one-eyed towards buying properties only for their growth.
She does not seem to realise that people have different objectives, incomes and wealth levels, and that a growth only approach is not suitable or realistic for everyone.
Before I decided on my strategy, I compared growth/cf – properties versus high yield/cf + properties. I assumed 20% deposits, P&I loans and paying properties off on retirement. It was true that one high growth property made me wealthier than one cf+ property. But I found I could afford to buy two or three cf+ properties for the same outlay as one -ve property. So the wealth outcome was EXACTLY THE SAME!
Later on I read Jan Somers ‘More Wealth’ book. She arrives at the same conclusion as I did.
I found that going for capital growth may make sense if you:
1. Already own PPOR or have substantial equity
2. Are in highest income tax bracket
3. Have a fair amount of start-up capital
4. Willing to have only one or two properties for years before being able to afford No 3.
5. Being willing to dig into your pocket to pay the interest.
6. Am able to expose yourself to the risk increased interest payments.
7. An abilty to get large amounts of finance
8. Have 20-30 years to retirementI found that going for cf+ was better if:
1. You don’t own a PPOR
2. Wish to retire early
3. Don’t have much start-up capital
4. Have a conservative attitude to debt
5. Agree with diversification and spreading risks across several properties early on
6. Are a low or middle income earner (or even a retiree/superannuant)
7. Don’t want to divert money from other investments (which could even be growth-oriented shares) to fund the property
8. Are concerned about interest rate rises and your ability to meet them
9. Am eager to make an early start in PI but can’t afford anything decent in the city
10. Don’t want to take a too big a risk for your first IPThe types of properties that the Wakelins push are not necessarily cheap, especially in Sydney or Melb. However for the price of a substandard poorly-located property in a big city you could buy one or even two attractive properties in a large country town. They might only be 5-10 min walk from all facilities. So they meet all of Wakelin’s criteria except for being outside Syd/Melb. They they should be easily lettable if there is pop growth in the town. And they could well be cf positive as well.
Peter
On a related topic, I’ve just been reading a very interesting passage from one of Jan Somers books re financial advisers. Now I haven’t read this anywhere else, so it bears repeating.
Basically ‘financial advisers’ are chiefly involved in shares and managed funds. Jan points out that their professional education omits property. Thus even an ‘independent’ fee for service financial planner may shy away from property. I have not heard financial advisers on the radio ever disclose this very important limitation to their education. And with this gap amongst reputable financial planners, a gap is opened for the shysters to hop in for their cut!
Although banks regard property as the best form of security, properties are not regarded as ‘securities’. Almost the same word, different meanings. ‘securities’ are shares and the like, and exclude property! Thus they seem to be outside ASIC’s bailiwick (even though the I in their name means investments and property is an investment).
Of course RE agents can advise on property, but they are hardly independent. Then there are those who (for a fee) find property for you.
I only went to one financial advisor, and that was 7 years ago when I first established a portfolio.
Though I will discuss things with my accountant and readily seek advice from others on other matters (eg building inspectors), I too am wary about financial advisers. I run my affairs and think that after a lot of reading and thinking am now competent enough to make a sound plan and take the required. Time will tell if this is the case or not!
Peter
(pinched from Steve’s book and other places)
It’s not how much you earn, but how much you keep!
Alebarn: I ordered it first thing Mon morning, and by Wed lunchtime saw it wedged in my letterbox : )
First impression of the cover was why use a CBD full of -ve geared apartments (like other property books)? Surely a non-descript country house would have been better. But then I warmed to the cover photo, recognising it as Perth!
Only up to p117, but couldn’t put it down all last night and intend to finish reading tonight.
Peter
Politician’s Place Of Residence
But we’ve all learned that this is sometimes different to ‘where they live’, especially when it comes to claiming allowances or (not) enrolling to vote!
Peter
Though I haven’t put this into practice, the idea of buying for cashflow during a boom and buying for capital growth during a period of stagnation somehow appeals to me.
It also ensures comparatively high returns (as you’re never buying properties returning 3-4%).
Peter
Hi Youngie – maybe the problem is more the style of thinking, rather than the fact that you’re thinking (which IMHO is good)? Could you be ruminating on the negatives too much and letting these put you off?
Maybe spend 25% of your thinking time justifying all the positives of a particular area/property/deal. Talk to lots of people, visit the area and get as many stats as you can. Imagine if YOU were trying to sell this property/area to an investor.
Then spend another 25% thinking what could go wrong/why not buy it, etc. Use information gathered from the above.
Spend the next 25% on the consequences of it going wrong. A calculator and spreadsheet will be OK here.
Then spend the final 25% working out how you can overcome ill consequences, reduce risks, etc.
Balance the pros and cons and decide whether the area/property/deal is OK for you. If it is, do it! If not, find another area/property/deal that you can be comfortable with.
No choice will be 100% (you will always find conflicting stats, and a better offer afterwards etc), but if you’ve done sound research, and 80% is OK, you should be able to defend your educated decision within yourself and not regret anything!
Peter
I think Regina is onto something and it’s already happening.
It’s interesting to look at migration flows, especially into and out of Sydney. Sydney absorbs the lions share of international migrants while exhibiting a large out-migration (mainly of Australian born) to northern NSW and Qld.
These ex-Sydney migrants are on average incomes or less and may not have steady employment. Even if they don’t get round to buying a house up there, the rent will be a bit cheaper and the winters warmer! I think this explains why average incomes and labour participation rates in many of the growth areas are low. And that investors buying -ve geared properties up there won’t necessarily get high rents from them!
Though Sydney is an international city, made up of high-income managers and international businesspeople, it still needs a large servant class to do jobs ranging from dog walking to valet parking to house cleaning that time-poor people prefer to outsource. It is these people that experience the most housing stress. If they were in a country town (or even in Adelaide or Perth) they could reasonably expect to buy their home, whereas they can’t in Sydney.
It seems that the need for a high income is an affliction of all ‘international cities’ (London, Zurich, New York are similar). The lifestyle is great if you have the dough. But not if you don’t! You can’t blame people for moving to ‘more liveable’ cities where property prices are more reasonable.
If house prices get too out of whack with wages, you could conceiveably see a labour shortage in Sydney. Already some of the richer suburbs have very low unemployment levels, probably because the unemployed can’t afford to live there unless they shared a house.
Peter
Before doing anything, I’d be asking myself whether the capital growth is being driven by the fundamentals of population growth/household formation or due to transient demand from mainland investors.
If the latter, consider where your future supply of tenants will come from, and given their high unemployment rate and low average incomes, how they will pay your rent.
Yes some people have done very well out of Tassie, but it might be a bit harder now than 2 years ago before the magazines got wind of it.
Before taking the plunge it might be worthwhile to look at other high-yielding areas but with positive pop growth and prospects of doing well in the future.
Peter
To correct he previous – it’s ‘Dull Dull Dull’, not ‘Boring Boring Boring’! But the idea’s the same.
Peter
