When were interest rates last at 5%? Certainly not 5-10 years ago. I think you’d have to go back to the 1950s & 60s to find those rates.

And even if you could have got those rates, back then banks were highly regulated and credit was tight (especially for investors).

The main factor that has made it harder to find positive cf in the last few years is that prices have risen more than rents.

Little to do with rising interest rates this time around.

However before that it would have been a concern. Properties bought around 1984-5 might have appreciated by 1989, but interest rates increasing from 13 to 17% could have made them negative cf.

Note though that inflation averaged 7-8% back then, so rent increases would have been easier than now and the capital owing would have devalued (in real terms) faster.

it would have made many positive properties bought in Nothing to do with interest rates.

>Just an opinion.

Always welcome, but even more so if backed by figures!

Regards, Peter

Sounds good.

When I subscribed, I was offered a bonus report (16 questions for all property investors).

But I can’t find anything on the website re the Ebook – is this mentioned in the newsletter?

Regards, Peter

Actually your investment sounds fine, provided you’ve done due diligence and are satisfied that the place has a future : )

If you put down $20k on a $100k cf+ property, by the time you pay it off you’ve quintupled your wealth (assuming the property at least grows in line with inflation, which is not assured). Sure that result might be modest over 30 years, but I can think of far worse investments and you’ve got a good income from it. And if you can find several lots of $20k and put it into multiple properties then you could do very well indeed, especially if some show growth as well.

Westan, my point was based on sales stats I obtained for Geraldton in WA (an attractive coastal city with a stable/slightly growing population of 20-30 000).

Here’s a few examples:

* 210 Evans St $68k 9/6/93 – $66k 20/12/02
* 242 Second St $76k 19/9/94 – $60k 24/3/03
* 14 Bennett St $65k 4/7/97 – $60k 25/2/03
* 33 Clematis St $88k 27/6/90 – $77k 9/5/03

This is selective as more properties showed increases (though not dramatic) but it underlies the point that property can go down.

It could be that the above sales were urgent so the prices were lower than what could have been fetched had the vendor held firm. Or they were overpriced at an earlier sale.

But review of ads in a 1991 newspaper found in late 2003 show even many asking prices and rents were little different than in 2003.

Given inflation that means a decline in real terms has taken place, and that this has been fairly widespread.

I agree with Austin Donnelly – not all property can grow (or even keep up against inflation). But it’s fair to say that most would hold its real value, especially if you buy at a good price.

I should add that these stats did not stop me buying there in 2003 as my area research showed potential for growth. Some of this appears to be happening, with the market tightening over the last 6-12mths.

Regards, Peter

PS: if you think the above prices are likely to be cf+ think again – Geraldton is a low rent town

Forecasting is a mugs game, but I’ll be one today!

My tip is that those markets likely to do worst in the next couple of years are those where there has been a mismatch between investor activity and future supply needs in an area.

For me two areas stand out as being ripe for a fall:

1. CBD apartments (vacancy and comparatively high rents expected)

This could right itself in time, with flats being eventually being filled (at lower rents) but I can’t see capital growth ever being as good as low-rise houses or units in good inner suburbs. Also the high strata and amenities fees of big apartments worry me.

2. Small rural towns with poor population and employment findamentals where many investors bought cashflow positive properties and there’s been high capital growth in the last few years solely due to an investor frenzy (eg Latrobe Valley, Tasmania and very small farming towns)

But rural areas relatively close to major cities will hold up (eg Drouin, Warragul) as will those that have sound industrial and population bases. Some coastal areas that were underpriced a few years ago will also hold up or even grow.

The next few years will also see diverging prospects between 1. cf+ investors who’ve done proper research on their towns and 2. cf+ investors who did no research but bought in tiny towns with no future on the strength of a high yield.

Regional centres and established suburbs should be alright – maybe level out for a while – as these markets are dominated by owner occupiers who tend to hold.

As for risk management, a lot of this was done with due diligence before purchase (buying the property that will be the last to fall vacant and the first to get tenants in a downturn), but maintaining (and putting more) funds in other investments (to provide growth prospects and a slush fund for emergencies) will be important.

Regards, Peter

On my diagram I put Lomas midway between McKnight and Somers.

This is because:
1. McKnight insists on positive cashflow before tax
2. Lomas insists on positive cashflow after tax (but negative before tax is OK)
3. Somers insists on neither but is always saying that ‘the recipe can be varied’ to suit circumstances.

However both Somers and Wakelin are insistent on 1. buying & holding and 2. buy at any time.

This is in contrast to older commentators like Austin Donnelly who say that time of purchase is most important. Fitzgerald takes a different tack by saying it’s OK to buy most times, but avoid the couple of years near the top of a boom.

Yes they do all have a strategy, but they are insistent on different things. McKnight/Lomas and Wakelin occupy different points between YIELD and GROWTH and peddle their line very firmly in their books.

In contast Somers is more ‘all things to all people’, saying that several approaches can work. She has strong stances on some things (notably buy and hold and timing is NOT important) but not yield vs growth. Anita Bell is another who doesn’t have a particularly strong position.

Wakelin is sloppy on cashflow, while McKnight is less fussy about property construction style and location provided cashflow is OK.

Jim McKnight’s Ordinary Millionaires book features Somers and says that many of the people profiled spoke well of her approach and ‘buying as much as you can afford to hold onto as soon as possible’.

Regards, Peter

Or why not before they buy their PPOR for that matter? []

I notice that your own investing philosophies favours cap growth whereas McKnight’s emphasise yield.

Your above point implicitly assumes that Somers and McKnight are diametrically opposed on the question of yield versus growth.

I have not found this to be the case as the diagram at the URL shows:

http://www.alphalink.com.au/~parkerp/invbook.htm

Even though Somers may sometimes be associated with heavy negative gearing and growth strategies, when you actually read her work, she is very even-handed between the merits of growth and yield.

Her article in the July/Aug 2003 Wealth Creator ends any doubt on her stance. For instance she cites examples of investors doing equally well by investing in Hobart (high yield) and Sydney (high growth).

Your own perspective seems to be much closer to Wakelin/Fitzgerald than Somers. No doubt this approach works and is perfectly appropriate for some people. But I find Wakelin extremely one-eyed, even though it is quite clear that her strategy is inappropriate for some (especially on lowish incomes or due to retire soon).

McKnight, though a strong advocate for positive cashflow, does see a place for growth type investments (not always property) whereas his opposite does not for yield investments.

My own personal view (prejudice?) is close to the Somers line in that both yield and growth oriented strategies can be made to work. Also that people have different incomes levels and ages and one of the other, somewhere in between or a mix usually works out to be the best choice for them.

Regards, Peter

NSW and Vic are not my areas of interest, so I have not extensively researched this.

But other people have reported finding such places (usually in very small towns) so they must still exist : )

Yields are greater outside the two larger states.

In these areas the issue is not so much ‘are there 10% plus properties’ but ‘am I happy with the risks that these properties entail?’

If not, there are things that can be done to lower risks.

In my case I opted for average yields around 9% and properties in large regional cities that either:

1. have low property prices compared to other cities
2. have high rents compared to other cities

And satisfactory vacancy rates, population growth etc.

Yes you do need to travel, but I have not tended to inspect huge numbers properties (not being a renovator).

I look at many on the internet, ask the agents about others, get the rents, holding costs, etc of the best of these and only inspect those where the asking price appears cheap relative to rent.

As for maintenance, I have tended to buy lower maintenance (eg brick & tile) properties built in the last 20 years. My bias towards larger regional centres also assists in finding property managers & tradespeople.

I have been operating according to a belief that 9% from highly tenantable, low-maintenance, easily managed, well-located properties in large regional centres is better than 10-11% from the opposite in smaller towns.

But I’m content to be a fairly passive investor thousands of kilometres from my properties. An active investor who can do more than me in countering the risks of smaller towns would do better than me due to the higher yields.

Regards, Peter

Though not very scientific, I can think of a few:

1. Check rental lists and see how long the same properties remain on there

2. Talk to property managers about the type of properties most in demand

3. Walk around suburbs known to have large numbers of rental houses and count the number that are vacant

4. Contact local council, welfare or regional development commission (these bodies would know if housing shortages are an issue)

5. Scan the local papers for tell-tale phrases like ‘housing crisis’ or ‘shortage of affordable rental housing in the area’, etc.

6. Sit in a REA office on Saturday morning and see how many people come in looking for houses to rent

There are heaps of stats for city areas but for country areas you need to do your own investigations as per above. These will not yield precise figures, but enough anecdotal evidence that things are tight might be good enough to make a decision.

‘Perfect’ markets with everything priced at the right value are only possible if all participants have access to information.

Where that information is unavailable or incomplete, the likelihood of market imperfection is higher. This can mean houses selling above or below their true value.

But if you have armed yourself with research & knowledge as Westan and others have done, imperfect markets can be the most profitable of all!

Regards, Peter

And also how he gets paid (probably by commission on the managed funds he sells)!

One of Jan Somers’ books talks about how property education is not always included in what financial planners learn and that they can be biased against property as there’s no commissions in it for them.

Regards, Peter

Those of us who have a balanced portfolio of which property is a major (but not the only) part do.

In this thread I think we witnessing the (re?)birth of the ‘defensive investor’?

My tip is that we will start hearing this phrase a lot more in the next couple of years.

So what would a defensive investor do?

My thoughts:

1. Reduce LVRs by making extra loan payments (even though this may be seen as less ‘tax-effective’.
2. Ensure everything is fully insured (incl landlords insurance)
3. Spend less than you earn and put savings aside (either loan payments, shares, managed funds, fixed interest, etc)
4. Less willingness to purchase heavily negatively geared properties
5. ‘Tenantablity’, ‘convenience’ ‘rental affordabilty’ and ‘yield’ being major factors to consider when purchasing
6. Maintain low to moderate LVRs
7. ALWAYS have a significant proprtion of the portfolio in areas like fixed interest, shares, etc.
8. Prefer P&I loans to interest only, but if interest only is selected make sure there are monthly contributions to a sinking fund to pay off the capital.
9. Have plans for a. Loss of tenant, b. Loss of job, c. Interest rates >12% etc.

Regarding funds stashed aside for emergencies, even three months worth of payments & costs strikes me as being too little. I’d go for 12 mths. But maybe I’m just being too defensive ; )

Regards, Peter