And isn’t there a new railway station going in between Warwick & Edgewater (Hepburn Heights area)?

Peter

One accountant I spoke to (will be using him this year for the first time, seemed enthusiastic about my cashflow postive strategy) quoted approx $140.

On accountants, I’ve just been reading ‘The Millionaire Mind’. Thomas Stanley finds that wealthy people not only use accountants for their tax, but also use them (and lawyers) to provide more strategic advice on the soundness of investments they’re thinking of making.

Peter

Hi Willi

I wonder what you think of the following:

1. Visit country town and spend a week there looking for properties and end up buying one
(in March). It settles in May, start receiving rental income before June 30.

Though the stay was one week its sole purpose was to buy property. Am I right in assuming that all this travel and accomodation could be claimed?

2. As for 1. but don’t sign purchase docs until July 1.

3. As for 1, but sign purchase docs in June, settle in July and get tenants later.

4. As for 1, but settle in June and get tenants on July 1.

Would 2, 3, 4 not be claimable, or is there some mechanism to claim previously unclaimed deductions incurred the previous year?

thanks, Peter

Oh and another thing, buy a brick veneer + iron place rather than double brick + tile.

There have been subsidence/cracking problems in some areas (speak to the council’s building dept) and the council people & engineers recommend brick veneer. Also there are parts of some streets in West Lamington area that are best avoided due to this.

Ring the council – the building dept is very helpful. I opted for a building inspection by an enginneer (Duncan Jack of GHD in Egan St). It was expensive ($500) but I believe it was worth it as this is my first IP and I watched it being done and learned some things that will be useful for future purchases.

Adeline is the housing commission area, but they are redeveloping it. Lamington/Hannans is supposed to be the best area, but is less convenient to town. I decided on central Kal (10 min or less walk from town).

Before I went to Kal I zeroed in on a particular (long but quiet) street as being most desirable from looking at street maps got off the web and from the tourist bureau.

I won’t tell you which street, but if you look at the map long enough, it will become apparent. This was in neither the poshest or poorest part of town, but was the best for walking accessibility to town and uni without having to cross railway bridges, busy streets, etc. Data from past sales showed it was affordable. A site visit confirmed it was OK, and I ended up finding a suitable place there.

I got some long-term pricing info from the WA Valuer Generals ($. This was based on a 1940s fibro house. It showed very stagnant prices over 10 years (apart from a mini boom a while ago) as well as a long-term tendencey for rents to decline. This is despite the population growth being steady (but not spectacular).

The declining rent was a concern, but I asked myself would the average tenant want to live in a 1940s house. I decided they wouldn’t (especially if more modern places are available) and decided to disregard this information as I was getting a newer place. Time will tell if I am wrong on this count.

Peter

My own view is that Kal could be a promising place for cashflow positive property with yields of 9% common. Prices are low, average wages are high and there are many renters.

You can get a small 2 or 3br brick/iron unit near town for $70 – 100k. Rent would be approx $120 – $180pw.

Have just been there myself and the vacancy rate is currently low (approx 2.5%). I also sat in a real estate agents office for a while and there were people coming in looking for rental property.

Do your due diligence first, but after you’ve done this, I recommend you talk to Alistair Lavender at Fyson Strachan & Co in Hannan St who should be able to help with finding a place. Tell him I sent you!

One other agent I spoke to said I’d not be able to get a place within my budget. What he really meant was he had nothing listed himself – the local weekly property guide had several properties that met my requirements.

Peter

That’s pretty much the same conclusion that Choice Magazine drew when they examined financial planners a few months back.

They found that many planners recommended investments that earned them the most commission, were too risky for the client’s needs or were unnecessary (faster repayment of the mortgage and elimination of consumer debts might have been a better approach).

The article is well worth reading and got quite a bit of media attention at the time.

I had a very similar experience at an auction, but did not bid (not having a spare million!).

It was a mortgagee auction of a block of 4 units. The owners ran out of money, and the units were only half fitted out (no floors, no baths, no switches, etc). Where things were done they were done poorly (eg you could stub your toe on very uneven floorboards, etc!). Also there were no courtyards or gardens and the view was bad (they were trying to cram as many units onto a narrow houseblock).

The building was unfinished for 2-3 years. Would you believe the four units sold for $1.2m, after starting at $1 million?! Even though this was 12km from the Melbourne CBD, surely this is a bad bad investment, especially with the costs of making it habitable.

Maybe someone was seeking big depreciation allowances, but I doubt they’d make much money on it.

The more rent you get and the less amount you buy the property for (or need to borrow) the better the cashflow. If you’re interested in cashflow positive property, use this criteria to eliminate 90% of the properties and locations you see advertised.

I’ve found that in Melbourne you’d be hard pressed to get $1 per week rent per $1k of property value (1 or 2 bedroom flats in poorer suburbs outer suburbs come closest). Inner suburbs give less yield than that (eg I’m paying $120/w rent for a 1br flat worth $160-170k)[].

But if you go to a country town you’ll find the rent/value ratio higher, somewhere near $150/w rent per $100k of property value being common.

The 11 sec rule sets an even higher target of $200/w rent per $100k value. You can find such places, but they’re not numerous, and you might have to look interstate[]. The benefit of this is you can pay the property off quickly (approx 10 years) from rental income without putting any of your own money[][].

Peter

A good technique is to list your fears.

For each fear:

a. define the risk/fear
b. list preventative measures
c. list your responses if it did happen

You will find that in many cases the consequences aren’t as bad as you fear, especially if you have a response to them.

My IP risks were as follows:

1. Interest rates could increase repayments, making property casflow negative
2. Problems finding tenants
3. Bad tenants
4. Property shows no capital growth
5. Loss of job
6. Something happens to the property

Responses and preventative measures might include careful property selection (to be in demand by tenants), adequate insurance, adequate margins (ie not buying too expensive), supplementing repayments from other savings (not desirable, but pay off loan quicker), etc.

Once you go through these you might find some risks are groundless[], others are slight annoyances only[], while some do need serious thought given to managing them[:0)].

I’m new to all this, so correct me if I’m wrong [], but I’d firstly get stats for sales in the area over the last year.

I got the sales report from homepriceguide.com.au which cost $50 per postcode.

This won’t guarantee a bargain, but it will stop me getting ripped off. If a property is way over what recent sales for similar properties have been, I’d want to ask why and get the price way down. I’d probably show the estate agent how I got my figure to prove I’m being fair and insist on it, or to demonstrate how I’m wrong.

If the figures are good (eg $180pw rent for a $100k offer price), and that price fair compared to my sales stats, I’d rather get in quick, buy at the asked price (or a couple $k under), rather than risk someone else getting the property for peanuts more.

Even if it was bought slightly too dear, a sound property returning excellent positive cashflow is better than none at all.

Does this all make sense, or am I too soft?

Peter