Forum Replies Created
To quote ‘The Millionaire Mind’, ‘Me Me Me is Boring Boring Boring!’
Peter
For me investing is something only talked about on online forums, to a few friends and at the odd investment group.
But it’s becoming more pervasive with numerous flyers in the letterbox (since I moved I haven’t put up a ‘no junk mail’ sign). And as I was taking out the rubbish tonight who called out but a door to door salesman from the National Investment Institute!
He was doing all the units in this complex (average rent $130pw, 1/3 students, 1/3 retired, 1/3 working) and moving from door to door. When he was next door I opened my door for a little while (cold outside) and heard things like ‘mezzanine finance’, 20-30% returns on money and education seminars.
He introduced himself and seemed impressed when I not only knew of the NII but also HK. I mentioned the things talked about 4-corners and that I did my own due dilligence. He said that heaps of people don’t have time for this and tried to defend the differential valuations (as mentioned on 4C). He said NII was not like the Qld property promoters and taught people to do their own due diligence. I also mentioned the network of solicitors and bankers (also on 4C) and he said NII was purely an educational organisation and sold no property to anyone. Also asked the guy how many IPs he had and he said one, but four on the way, with an aim to own 15!
Now why would someone doorknock at 6:30pm a block of 1 bedroom flats that would mostly be tenants and/or lowish income earners? Surely you’d instead target time-poor people that already have equity in their own houses? Do they not target their marketing? Or are they desperate???
Peter
Being fairly conservative, my instinct would be to pay off debt first. That would look good to the banks and you could borrow more for the IPs.
I could see how some more agressive types might go for the IPs first. But given your cashflow situation it would have to be cf+ property, with you only paying the minimum amount on your loan and paying off your bad debt ASAP. You might even think about interest only for a while, using the saving to reduce bad debt first.
Or what about half way? Pay half the debt now, and use the rest for a deposit on 1 IP. Pay only the minimum off the IP until your bad debt is zero. Then when you have no bad debt, put all of what you were paying into your IP. Borrow against this to get the deposit for IP #2 down the track. Though the properties (if cf +) will pay for themselves, save regularly as well.
Peter
Re ‘Gap analysis’
Caloc thanks for the insight. That must be why (in the excerpt played on 4 corners) they demean where you are now and then try to get high expectations of future wealth, freedom, etc.
I suppose that’s why it doesn’t wash with me is that my gap is fairly small. My expectations are not particularly extravagent and (mainly due to my upbringing) have always had reasonable money & investment habits (as opposed to people with more lavish expectations, bad money habits and no savings/investments).
That’s not to say that I can’t do better, but I take exception to someone peddling dire predictions about my future if I don’t sign up for their course. It’s a bit like preachers warning of hell to non-believers.
Peter
Probably the most asked question on this group!
Yes you’re right that education is important. But instead of spending $16 000 in a single seminar, how about this alternative investment education budget?
$200: Pile of books on property investing and related topics
$100: membership of an investment group near you (eg Investornet in Melbourne)
$0: Browsing the net and archives of forums like Somersoft and this one. Also ask questions.
$0: Talking to banks/mortgage people re finance
$0: Attendance of auctions near you
$100: Phone calls to RE agents, etc
$100-500: Fares/Petrol for country trips to look at property, visit agents, etc.
$50-200: Buying reports of previous sales in areas of interest (eg Home Price Guide)You’ll have about $15 000 left. This is almost enough to put down a 20% deposit on a cheap country cashflow positive property. And by doing it, you’ll learn heaps and have an asset that pays you income!
As for HK, see previous dicussions re this. Other people may have different ideas, but just hearing his voice and manner of speech (on a recent 4 Corners) scares me and I wouldn’t go near him!
Peter
Iceman – can you still get cf+ properties in Perth?
Peter
That should of course read ‘Don’t go shopping on an *empty* stomach’!
Don’t go shopping on a full stomach.
More ideas at http://www.alphalink.com.au/~parkerp/essay22.htm
Peter
An interesting piece Brent. But it poses more questions than it answers, eg:
1. Why compare debt to income? At first sight a figure of 110% sounds alarming, especially when compared to 54% previously. But isn’t comparing debt with income comparing apples with oranges?
2. Some more figures would be helpful. The flip side of debt is equity. The difference between the two is net worth. What has happened to people’s net worth (diff between debt and equity) since 1993?
3. Debt servicing abilty it important. A debt of 100% of annual income sounds scary, but at 6% interest rates, it takes only a small amount out of your pay. Thus serviceability can be manageable, provided interest rates remain low and people keep their jobs.
4. What is the composition of this debt? If it’s mostly on depreciating items or to live above one’s means, then yes it could be a worry. Debt payments mean that you can’t maintain spending without incurring more debt. Therefore people need to cut back and the macroeconomic effect is a recession! Debt driven consumer binges are therefore not sustainable.
If the debt was incurred on a cf + property, your income has increased by enough to make up for this, so serviceabilty is actually improved and I have an asset to show for the debt. But if enough people get onto the property bandwagon, so investors dominate the market, property could become more volatile.
If investors get into shares again, and don’t buy IPs as much as they are now, property prices could fall (assuming stagnant demand from owner occupiers). We have not had this due to immigration, births and the declining household size, but this could happen in the future.
Investors (esp though who borrowed 90%+) could even face negative equity. Especially in things like tiny student accomodation, some inner-city apartments and country places with zero pop growth that are currently the flavour of the month for cf+ investors (eg Tasmania).
5. What is living within one’s means?
For years I gradually built up my investments and borrowed nothing. Then this year I bought an IP (a cheap cf + place with 9% rtn). Serviceabilty is fine as it’s cf +. Though I paid 25% deposit, my debt went from 0 to 200% of annual income. My debt to equity ratio shot up from 0 to 33%. I have a self-imposed limit of 50% (ie to borrow $100k, must have $200k assets) which will allow the purchase of IP #2 shortly.
By the standards of many on this board, I have taken an extremely conservative approach (you say timid, I say prudent!). I don’t know how my debt:equity ratio stacks up with the Aust average. But by the standards of that report, my level of debt (especially when compared to income) is very high!
Peter
Rich: well you are industrious. I agree re properties on the web. Particularly for the smaller towns (<30 000 pop). The bigger town REA seem to list their properties more often, but often they are out of date.
AD: I could have looked in more places, but my criteria was fairly particular, eg within 10 min walk from CBD and uni, built since 1985, brick construction, and low maintenance. Already having tenants was also desirable.
This really narrowed things down as many/most places are fibro and older than 1985. The newer places were more on the fringe of town, where I had decided not to buy.
Within my criteria there were units across the railway line from town. These was on the ‘better’ side of town, so prices were slightly higher.
But I know the area I bought in (the CBD side of the line) was also OK and was far more convenient (nearer uni and no walking over dark railway bridges on the walk into town). Thus I got a prime location and a place that should always be easy to rent.
The main downside of my approach is that I didn’t make multiple offers on various properties and if I had more time might have been able to pick up something for cheaper.
Though I know I did not pay a supercheap price, I know that I paid a fair price by looking up past sales in the area. Another good sign was one RE agent who told me that I approached said ‘you won’t get something in that price range in that area’.
The key question was whether the purchase of my selected property was to my benefit and advanced my investment objectives. With a 9% return and a good location the answer was clearly yes. Thus it wasn’t hard to make the decision.
BTW, I had a relative joining me for some of the time, took the weekend off (where all the agents close for 1.5 days) and spent the last part of my 7 days witnessing the bulding inspection (very educational) and organising pest control, so I clearly worked less hard than Richmond : )
Peter
Hi Richmond – a great story and I like your approach.
Recently I did a very similar interstate trip and found my allocated 7 days was only just enough. And that was for only for one property (tenanted with similar price/rents as yours).
A question: When you say you ‘looked’ at places, does that mean that (a) you considered them off the internet, (b) went round and did a kerbside look, or (c) got the agent to show you inside?
If (c) that’s amazing – how did you schedule so many appointments? Or did you ask the agent to ‘show everything’ in the one trip?
I looked at dozens on the web, probably about half-dozen kerbside but only two inside. Before I visited I worked out what street was most desirable/convenient, confirmed this on my visit, so didn’t look much further afield. Then I made my choice, influenced by its good location, general building amenity and quality, reasonable price and existing long-term tenants.
Peter
I don’t wish to make light of your predicament, but here’s hoping for a brighter future for you and the property!
I can’t claim to have done exhaustive research, but have wondered about this question myself.
The main issue for me as an investor is whether environmental issues threaten the long-term sustainability of an area’s major industry. If it does, then there could be population/vacancy issues and the area may not be good to invest in.
I’ve wondered about towns along the Murray River. They have huge problems with water quality, etc, but the towns there keep growing and property prices are quite high.
Then there are wheat/sheep farming areas where soil erosion and salt is a big problem – even damaging some buildings in town.
The greenhouse effect and rising sea levels don’t get as much press now as 10-15 years ago, and no one worries about it these days when they’re about to buy a property on the coast.
Peter
Hi Steve: The figures for the Mackay property are very similar to my IP in WA. They could have been better (10%, not 9%), but the property had a good long-term tenant and was in an excellent inner-town location, so I bought.
What I found most intriguing was the wording of the ad that was particularly pitched at the investor (giving rents and rate of return).
Most ads I see usually just give the price and say ‘ideal to move in or invest’ or similar. The rental levels are only occasionally mentioned, but it’s not too hard to get a rental list to get an idea. Maybe RE Agents are cottoning onto positive cashflow investors as well!
It’s interesting that most of your deals come from internet or newspaper ads (as was mine). My experience is that except in very small towns, not many advertised properties give 9 or 10% (at least in Vic, even in the Latrobe Valley).
It’s been suggested that rather than passively scanning the net or looking at papers, it’s better to strike up relationships with RE agents and ask about properties in their ‘bottom drawer’ that may not be up on window. I might adopt this approach (as well as scanning ads) for the second IP.
What do you think, or have you found that this does not give significantly better results than searching the ads?
Peter
R&J: Studies of happiness seem to show it is independent of wealth or material affluence. But it may be related to the control you feel you have over your life. Many people point out though that it’s better to be rich and sad than poor and sad!
But if you can use your wealth generation to increase the control you have over your life, and exercise the greater opportunities available, you *should* be happier!
In these sorts of discussions, there are several important interrelated concepts. These are (with my definitions):
Retire: Having sufficient income to live without working.
Self-employed: Ownership of your own business which provides sufficient income to live on. Thus you are in control.
Financial independence: Having sufficient income to live without working for someone else or in your own non-investment business. Note that financial independence is midway between retirement and self-employment. This is because you still need to do some work, even if you have property and fund managers. However you have great control over when and how much you work (eg spend time in seeking new opportunities).
Affluence: Refers to lifestyle and having an expensive car, projection TV, personal butlers, etc. If you are wealthy, you can afford a affluent lifestyle with little strain to the finances. However if you are not wealthy you must borrow to fund this lifestyle. Affluence requires the purchase of depreciating assets, so detracts from your wealth.
Wealth: Simplest definition is based on the amount of money you have vis a vis other people. However I would also relate it to the work you have to (or don’t have to) do, so it’s tied up with financial independence. To become wealthy you must buy assets that appreciate or provide income. Wealth growth can be accelerated if you reinvest at least a proportion of the surplus. That proportion that is not reinvested can give you an affluent lifestyle.
In my view the affluent/wealth distinction is the most important one there is. Wealth must precede affluence. If you seek affluence before wealth, financial ruin WILL result.
But a lot of people (most?) want affluence first. This can cause unhappiness and financial stress (as posessions do not necessarily increase long-term happiness but do harm long-term wealth growth).
I have gone into this in more detail at: http://www.alphalink.com.au/~parkerp/essay22.htm
I’ve changed some of my opinions since I wrote that piece, but not the parts relating to wealth and affluence.
Peter
I suppose we shouldn’t knock poor Harry too much!
He’s probably a migrant, determined to succeed, but poor in written English. He knows some concepts (though apparently not positive gearing), and a few words, but can’t put them together in a form that makes sense.
But he should have been aware of his weakness and hired someone literate in both property and English to do the website.
OTOH, maybe it’s a good thing that the site is so doggeral as it should set warning bells ringing in the minds of even the most gullible of investor.
Harry is easy to mock because he can’t write. Maybe it’s the flashy, slick-talking 110% borrowing presenters (who can write) we need to worry about more!
Peter
Most places more than 2hrs from a capital city and not near the coast should have places that meet your price requirement.
The yields may be cashflow positive, but whether they are enough to offset likely slower cap gain is a matter for you. For me 6-7% isn’t enough.
However if they’re near the 10% mark, they’ll be enough to rapidly (10yrs) pay back your loan, and thus gain equity rapidly even if values remain flat. In this case it’s the tenants money rather than capital growth that’s fuelling your wealth.
If you borrow 80%, you might be able to quadruple your wealth (allowing 5% for purchase costs) in under 10 years. If you can do it in less time, and there is some capital growth, it could work out very well indeed, provided people still want to live in the area and pay reasonable rents.
Peter
What a hoot! I haven’t seen that many RE/investment satire sites, but this (apparently real) one will do for now.
Clicking on ‘before you start’ revealed the following:
1. ‘Getting into Investment & Property requires the assistance of experienced professionals’
I’d rather trust my own judgement (informed by my own research, reading and discussion) over whoever’s responsible for that website any day.
2. It would be good to have an explanation of the novel concept of ‘access in-equity’ (wheelchair ramps spring to mind)!
3. ‘The financier is the last port of call’.
Before spending time on looking for property, I’d rather organise the finance beforehand, so I can act quicky when an opportunity comes up.
Also the requirements for what you need are not clear, so potential investors won’t be able to qualify themselves. And people on under $50k income and who don’t own their own home can get into IP, even if PGC doesn’t want them.
And what makes me shaky is that the principal claims to be able to see into the future! That’s not for me; I’d rather an investment strategy that will work in a wide range of economic conditions as the ‘experts’ often get forecasts wrong.
Peter
At this point I should plug my own Melbourne transport site, Meltrip. I set it up some time ago when the official Victrip site was no good at all!
Meltrip covers all of Melbourne. Of most interest to investors is the suburb index.
The URL is http://www.meltrip.cjb.net
Just go to the suburb you’re interested in and look up all the trains, trams and bus routes that run through it. Click on the route number and get the timetables.
You’ll find that some suburbs might initially look attractive (transport wise) as they are served by numerous bus routes. But when you go to click on the timetables you’ll might find only one bus an hour and no service after 7pm and on Sundays. Thus an IP’s proximity to a bus route is no guarantee of decent transport and it pays to check the timetables.
While you’re there, check the suburb’s fare zone for cost of trips to the city.
Also see the bus route index – this gives a brief rundown of destination served and running times/days without getting into detail.
But I reckon this detail (extending to esoteric things like bus routes) is one of the most fascinating aspects of due diligence there is. But that might be just me!
Peter
To answer my own question, yes there will be a new station between Warwick and Edgewater.
All you need to know is at http://www.newmetrorail.wa.gov.au/
Peter
