Forum Replies Created
Mumof3 – I’d pay off the loan and credit cards as quick as you can and then keep those payments up as your savings towards as deposit.
Anita Bell has some good books on this – eg ‘Starting Out and Starting Over’ or ‘Your Investment Property’ or ‘Your Mortgage’.
Peter
hey I went to school in Moora 1978 – 1982!
Big controversy is they’ve reneged on the promise to build a new hospital there, and putting the money to pay for cost overruns at Geraldton Hospital.
And tell me more about the Moora duplex – don’t see many Moora properties advertised on the web.
Peter
Ghoti wrote:
‘Wrenching this thread back towards property, do you see any way that your residential properties might promote, or at least enable, better nutrition and/or lifestyle?’
Though it’s conbtrolled by developers rather than property buyers, the street layout of subdivisions has a lot to answer for in encouraging sedentary lifestyles.
Developments with cul-de-sacs make walking less practical than suburbs with have grid street layouts. This, plus the closer spacing of facilities and better public transport, are the reasons why walking is much more widespread in inner suburbs than outer suburbs.
But most kids are raised in outer suburbs, and this is where they will pick up sedentary habits due to the necessity to drive everywhere.
This is reinforced in pretty much all aspects of urban design in outer suburbs.
For instance highways that do not have houses or shops fronting onto them reduce ‘informal supervision’ and are percieved as unsafe for pedestrians worried about muggings at night.
Also the tendency for shops to face towards parking lots (rather than the footpath) further discourages walking.
Large roundabouts ensure a constant stream of traffic, rather than bursts of traffic as with traffic lights. Roundabouts hinder pedestrian access and thus the ‘walkability’ of neigbourhoods.
Cul-de-sacs and loop streets, apart from discouraging walking, also make fast, frequent and well-patronised bus routes almost impossible to set up.
The reason for all this urban vandalism is that road engineers, obsessed with the throughput of cars, have controlled the planning process for about the last 40 years. Fortunately this is being countered by community groups and the ‘New Urbanism’ movement in the US, but not yet enough to change the face of many new subdivisions here.
Back to Ghoti’s point as to what we can do. Well we could (as all the books encourage) buy property that’s walking distance to town, shops and/or public transport. Thus at least we can give our tenants opportunties to lead active lives.
One of my more depressing theories is that almost everything we do (no matter how noble) has some unintended (and not necessarily good) side-effect.
If too many investors regard walkability and access as a consideration, then the price gradient between well-located properties and those less located will increase due to greater competition for them. Thus first buyers will be priced out of the best areas (as we’ve seen in the last boom where inner suburbs rose first and quickest).
The well-off will be able to walk to everything, whereas the battlers are forced out to the cul-de-sacs where the hourly bus service finishes at 7pm. Thus they will have to drive everywhere, and spend a huge proportion of their money on cars.
Because of this socially-mandated consumption, there is precious little left over for investment. The gaps between those who can accumulate capital and those who can’t or don’t will increase (note that differences in wealth are starker than differences in income, and (I suspect) differences in passive income are even greater.
About the only solution is if people give up on owning their PPOR. By renting they might be able to afford to live in a better serviced (and walkable) suburb that they can’t afford to buy in. They’d be less sedentary and transport costs could be lower, so it might be possible to invest more (including buying property for others like them to rent). As a tenant they’d also have the glee of contributing to some negative-gearer’s 3% rental yield!
Regards, Peter
I think the main point of the 11 second solution is that it requires no calculator – just a bit of simple mental arithmetic and you have an answer.
I can’t divide by 769 in my head, so I reach for the calculator. Once it’s in my hand, I might as well do a precise calculation.
Also to get a rough indication of what return you need for positive cf when interest rates are varying, maybe a formula of
Required Yield (%) = Int Rate (%) + 4%
would be OK.
The 4% margin is for other costs, repairs, contingency factors, etc. If you want decent profit, then it could be 5 or 6%.
Assuming you’re stranded without a calculator though (and have no way of dividing by 769), maybe stick with the 11 second solution formula and taking off 10 or 20% (easy to do mentally) to get the higher yields required.
Regards, Peter
Risky – I did my ringing around July/August and was there in early September.
When I was there a buyer had bought about 20 cheap houses <$70k, and I bumped into property investors in the tourist bureau and library.
So it seems the bottom end of the market started moving first, and the interest is now moving towards middle-priced properties.
Peter
Hi Blowie – that calculator is fun to play with, but I don’t think it accounts for inflation.
Though ‘millionaire’ has that magic ring about it, it does not imply financial independence. Neither (in 20 years time) will it imply much more wealth than average.
Let’s say we saved $20/day, which is a pretty good effort for someone on a low-middle income. You’d become a millionaire in 2040.
But assume inflation is 3% pa and apply the Rule of 72, and that $1m is worth less than $250k in today’s money. Not a trivial sum, but not a fortune either.
My main worry is that sometimes compound interest can be overstated (neglecting inflation) and people can be lulled into a false sense of security.
Regards, Peter
Peter M: For Geraldton I got a list of recent sales for $22 from http://www.dola.wa.gov.au/corporate.nsf
It’s called ‘Data evidence’. You can get it faxed for $14 or emailed for $22. The fax has 70 properties, the email version 110 sales.
Definitely money well spent!
Risky: Very interesting on sales moving quickly.
While I was phoning things seemed slow. You’d phone at 4:30 or 4:50pm and found they’d knocked off for the day!
My duplex half in Bluff Point was on the market for 2 mths for $82k before I got it for $78.5k in early September. I’m only getting 8.3% rtn, so it’s no great cash cow but other aspects like location and tenantability were appealing.
Just curious re the likely rental yields in Rangeway now. When I was looking a few months back, I was going on $90-100pw for a 2br villa and $120-140pw for a house, ie a return of around 9%. I probably wouldn’t accept 9% in an area like Rangeway, but it sounds as if even getting that would be a battle.
Also do you know if the big investors you mentioned were buy & hold or wrappers?
Regards, Peter
A good summary Scott. Though some locals simplified this to west of highway = OK, east of highway = not OK.
Beresford has a lot of flats (and I suspect) a low % ownership ratio. I’ve heard of problem flats there as well as Augustus St. But the location is superb relative to town, beach and the marina.
On cashflow, unless you got a good deal, I think you’d be battling to get 9% in Rangeway at the moment, so you will only just break even, or maybe not. The better areas seem nearer to 6% so are definitely -ve geared.
Re long-term cap growth, if you looked at it since 1970, Geraldton is a real laggard relative to Bunbury and Perth. I suspect it would have kept up with CPI but little more. The main reason for this is the almost zero growth in the 1991-2003 period and only slow growth 1970-1990.
I will stick my neck out though and guess that the stats will reveal some modest growth over 2003 and into 2004. After all where else in Australia can you buy a place near the coast in a regional city for cheaper?
Peter
Kay Henry – A 15% discount sounds a lot, but I’d be wary about paying HECS off quickly if you have little money and are keen to get into investing ASAP.
Yes HECS is a debt, but the interest rate is CPI only and (assuming you have an investment program) will soon rapidly fall as a proportion of net wealth, even with no voluntary repayments from you.
Imagine you had a $10k HECS debt and $10k in the bank.
You could pay off the HECS ($8.5k) and have $1.5k left for your everyday account. But you have no portfolio and no passive income.
Now if you were to not pay HECS and invest the $8.5k, you’d at least have a nice start to the portfolio. You’d use this money to buy shares, managed funds, think about a deposit on a property, etc. An $8.5k start beats an $0k start and you could regard it as a funny sort of leverage (the HECS loan having nothing to do with your financial investments).
I chose the latter approach and am very glad I did.
I did consider HECS inflation, but much more important in the early years was using all available cash as seed money for investments.
I found there are economies of scale, and $10-20k is considerably better than $2k to start a proper diversified portfolio.
Paying off your HECS can slow progress towards this threashold. Thus foregoing the 15% discount was a small price to pay IMHO.
But about 5 years later I had a term deposit maturing and was wondering whether to use it to pay off HECS. I did some calculations and there was very little in it (there might have been a $500 benefit over several years).
However by this time the portfolio was well-established and I could pay HECS without wrecking it. So I did. This improved my after-tax income, which I put straight into increased monthly investments (in non-cash areas).
In both cases I think I made the right decision. Deferring payment was unambiguously good as it meant I could start the portfolio years earlier, which provided experience.
The second decision was not as clear cut with only a slight possible benefit and was nowhere near as important as the first.
So in summary, HECS is ‘not-bad’ debt and I see no compelling reason to pay it off quickly. The main exception is if you have a lazy non-performing term deposit maturing, and you aren’t about to need it to pay a property deposit.
Early HECS payment cannot be a bad decision, but for some people (especially those with little money) it has opportunity costs that I think they should carefully weigh up.
Peter
Scott: Point Moore has a lot of leasehold places with some leases expiring soon. I have seen some places there advertised cheaply in the past, but this morning saw a park home there on sale for $80k – way overpriced IMHO.
Redwing: Your point re the best deals not being on the web has become more important in the last 6-12 months.
About 3-4 months ago there were a lot of cheap (<$70k) places advertised on the net. Now most are under offer. In the last couple of weeks the number of available places <$90k advertised seems to have fallen sharply, and most that remain are in lesser suburbs.
The main negative with Geraldton is crime in some areas. I have a newspaper article that claims Geraldton is ‘a city where children have declared war on their grandparents’.
Scott: Beresford is a nice handy suburb near city and beach, but I’ve had mixed reports about tenant problems in some parts of it. Also there seems to be a high number of rental properties there which limits yields and cg.
Though media sensationalism can apply to crime as much as property investment, there is at least a grain of truth – my research of crime rates shows that Geraldton is worse than places like Bunbury and somewhat better than Kalgoorlie (the latter has very high average incomes, but beggars are common).
For me though, this is outweighed by the postives – eg low prices relative to other coastal cities, new projects (hospital, port, university, marina), negligible capital growth for 10 years, and steady (though unspectacular) population growth.
It will be interesting to see how the average sale price stats turn out in the next 6-12 mths. The last period saw a decline, but this might have more to do with very high buying activity at the bottom end of the market.
Peter
Hi Scott – Rangeway & Spalding are cheap, but I steered away from them due to bad reputation and lettability concerns.
But if you still want to get something near the 10 sec solution, either these areas or a cheap flat in town would be the place to look. But I’ve been advised to avoid the flats opposite the Grammar school.
Mahomets is nice but I didn’t go there as yields were too low for me.
Bluff Point or some units closer in would be my pick as a compromise between yield and lettability/anenity/growth potential/etc. Or if you’re going for houses, Beachlands could be good (though again I didn’t visit there).
Peter
Hi Scott – can’t help re the seminars in Perth, but I’d buy half a dozen books on property and read them to get a good understanding of the basics.
Have you thought of investing in your old home town? A lot of people think it has a lot going for it. There’s been considerable interest from eastern states investors, but your local knowledge could put you at an advantage.
Average yields there are higher than any other place of comparable size (except Kalgoorlie) but you’ve got the advantage of a coastal location.
Peter
Redwing: Though I like Anita Bell’s books, the assumptions she makes (real house prices about half of today) are unrealistic for capital city residents.
Though many people would be able to use her methods to reduce loans down to 10 years, cutting it down to 3 or 4 is pretty well impossible. (my saving is typically 25-40% of income so it’s not due to over-spending on my part!)
Paying off the PPOR quickly is good, but I’d rather be paying off IPs moderately quickly but seeking to expand the portfolio quicker than Bell suggests.
She is however right to point out the benefits of an early extra payment. An early $5000 payment to a $70k mortgage can reduce the term from 30 to 25 years.
So if you happen to have a term deposit maturing, you now know what to do!!!
Peter
Hi Mini
‘just ask the RE agent who they use for builder’s reports locally?’
The suspicious side of me wonders about whether the guy they suggest is really independent or a ‘yes man’ getting undisclosed kickbacks!!!
I have contacted the local council building inspector to ask some ideas (when I’ve been asking about floods or bad soils) or rung around local building companies.
Peter
sis: would you be able to post a quick summary your risk management course?
Risk management was big when I was in the bureaucracy about 7-8 years ago.
The gist of it was to assess risk on the basis of:
1. Likelihood of it happening
2. Consequences of it happeningIf something was likely to happen and the consequences were dire, this was regarded as the most important risk, and if severe enough was a warning not to proceed. On the other hand, risks that are extremely unlikely or of very minor consequences could be noted but ignored.
There were also ways to avoid or mitigatge risk, including transfer it to someone else!!!
Much of this is applicable to IP but there’s also the need to balance it against returns.
Most of us probably do something like this without realising it or calling it ‘due diligence’.
Examples of actions I’ve taken include: 1. extensive research of towns, 2. LVR limit across portfolio, 3. minimum yield requirements, 4. careful selection of property (good location & low maintenance), etc.
But I could see that too much reliance on this could close one’s mind to innovation and force one to accept lower returns than others less constrained might.
Re interstate properties, I’ve always visited them before buying, but then it’s great to have family there!
Regards, Peter
According to FinSoft 4.2:
$150k @ 7% over 30 yrs = $998 per month
Increasing repayment 10% ($1100) drops term to 22.75 years and saves $59k interest
Increasing repayment 20% ($1200) drops term to 18.75 years and saves $90k interest
Increasing repayment 50% ($1500) drops term to 12.58 years and saves $133k interest
Doubling your repayment to $2000pm drops term to 8.25 yrs and saves $161k interest
Note that increasing repayments by just 20% gives over half the savings of increasing them by 100% at current interest rates.
I like the idea of paying a bit more, but if paying a lot more, I’d be concerned about:
1. you’re using todays dollars to save depreciated future dollars
2. there could be opportunity costs (ie properties not purchased)
3. Tax deductions are lessRegards, Peter
Karan, I make it a habit of getting spreadsheet reports on past sales in a city before I go there and buy.
I then delete all the columns I don’t need and arrange the data in several ways (by sale price, suburb, type of property, etc). I then go to an internet cafe and print what I want on their laser printer.
Then it’s time to spread the sheets over the floor, look at them, staple them together, highlight properties similar to what you want, work out average sale prices, etc. In conjunction with rental lists (free from REAs) you can get a rough idea of yields to expect.
The aim of all this is to get a feel for what is a bargain, good value or overpriced, especially if you visit recently sold properties. This will allow you to evaluate what agents tell you and help you draft your offer. Also you will be able to identify the cheap areas and the expensive areas (and better still finding a cheapish property in a ‘good’ suburb)!
The stats are not perfect, and a lot can change in a few months. But for the $30-50 I’ve paid, I consider it money well-spent.
Peter
I’d encourage everyone with an interest in this to look at the ALGA media release (URL given previously) as well as the newspaper articles (which only tell half the story).
This release has two lists, (1) places where employment growth outstrips population growth and (2) cities that though their performance may have been lacklustre have growth potential.
Note that the article that Geoff quoted mentioned only the second list.
Some have expressed concern about the prospects of areas that have had an influx of lowish income pensioners (eg movement from Sydney to SEQld).
The main concern from an investing standpoint is that low income pensioners don’t have the spending power to create many local jobs. But on the other hand I see nothing wrong with these areas if you’re seeking reliable income from long-term retired tenants rather than much capital growth.
I would suggest that the easiest way to identify low income retirement areas:
1. High aged population
2. Growing population
3. Low average incomes
4. Low participation rate in workforce
5. Employment growth is lower than population growth (opposite to ALGA report list)
6. Young people flocking to the city
7. Proportion of people who moved from Sydney!!!However these characteristics are not necessarily true of all places with a high aged population.
Mandurah could be an example. The ALGA report shows that it had a high employment growth relative to population. This is not consistent with an area where the pensioners have nothing to spend! Also the house price differential between Perth metro and Mandurah is not as stark as Sydney and Qld. Also Mandurah has commuter potential when the fast rail opens in 2007.
Peter
Hi Anubis – a couple of points:
1. I don’t think ‘oldies moving in and kids moving out’ was the main driver of growth in all cases. Otherwise WA Goldfields (40 degrees in summer, 300km from the beach and with a low aged population) wouldn’t be on the list.
2. Areas with oldies moving in and kids moving out would be heaps better than areas where no one is moving in! There will be young people needed to do the jobs necessary. Most would be low-end service jobs like lawnmowing, but there would also be some medical vacancies.
On the latter, governments should make Medicare provider numbers location-specific to force doctors to move beyond the wineries, golf courses and cafe strips to where they’re needed most.
Peter
