Forum Replies Created
I was in Geraldton in late August. The following is my explanation of why the median sale price dropped in that quarter.
Local agents told me that things were quiet until a few months ago. When I got there I was told that one investor from the eastern states had just bought about 20 houses in one go. The investors concentrated on cheap commission houses priced at $50-70k. They were in suburbs that many locals won’t live in. Yields would have been approx 8-9% on the asking price – Geraldton is not a high rent town and rents and prices had remained largely unchanged for at least 10 years.
The agent told me that this frenzy has basically cut out the low end of the market. In a city where houses take several months to sell, that intense buying activity would probably have been enough to depress average prices for that quarter.
Taking out this blip, my judgement is that prices have been either stable or slightly up, and not down.
There is a lot of work going on in town, including the marina project and port deepening. Two weeks ago I heard about an upgrade to the hospital. Then this week ABC News carried a report about Geraldton getting a dedicated university building. Therefore I remain optimistic about Geraldton (at least its
quality suburbs – wonder about the cheap areas though).Greenough: maybe OK for land speculators, but Geraldton has all the facilities and amenities. Greenough is a shire with no real town centre – it’s really part of greater Geraldton and the shire offices are located in Geraldton’s outskirts.
Peter
Hi C2: It sounds as if your parents were conscious of their success, knew the values and mindset that gave rise to this, and brought you up in such a manner that those values were transferred to you.
Values are probably the biggest gift that a parent could give, and I’m not sure how common it is for parents to think about subconscious values that they may be transferring to their children. But it sounds as if your parents did!
One way to examine the ‘silver spoon theory’ (which I think has some credence, but clearly not for all families) is to look at the proportion of millonaires who inherited most or all of their wealth.
If this proportion is high, then families are generally good at preserving and transmitting wealth down the generations. On the other hand, if most millionaires are self-made it indicates that inheritance is less a factor.
Page 7 of ‘The Millionaire Mind’ by Thomas Stanley says that 61% of (US) millionaires never recieved any inheritance. Less than 8% inherited 50% or more of their net wealth.
This does not quite imply that millionaire families of the past have had children who’ve frittered away their family fortune, though it is consistent with it.
However given that the early settlers & graziers have had more opportunities to buy cheap land (both agricultural and near cities) than did subsequent migrants, and would have had the benefit of 200 years of compounding wealth, you’d expect that the descendents of these early settlers would be rolling in money. Some may be, but many aren’t. Also a large proportion of Australia’s wealthy are migrants who started with little.
(The Millionaire Next Door goes to some length on this point in the US context)
To really answer whether families are an efficient means of maintaining and transferring wealth down the generations (thus debunking the silver spoon theory) would mean looking at Australia’s richest 200 families 30, 60, 90, 120 and 150 years ago and looking at where their descendents are today.
I confess that I would be somewhat gladdened if most turn out to be ordinary middle-class people as it implies more social mobility and less entrenched privilege.
Does anyone know of any Australian scholarship on this? It might make interesting reading!
Regards, Peter
Future$ wrote:
‘You’re right, kids ARE adaptable and I certainly see nothing wrong with children learning about investments etc from an early age.’
The most important would be the very simple parental utterances when shopping. The three that dominated my childhood were:
1. ‘we can’t afford that’
2. ‘we don’t need that’
3. ‘it was cheap so I bought it’These were all influential, though I’ve changed my attitude on some of them since.
In relation to ‘we can’t afford that’, the financial motivation books all tell you to change your thinking to ask ‘how can we afford it?’.
I still don’t like that because I’d rather firstly ask ‘is it really necessary?’. Steve gets at that in his ‘WEALTH’ appendix.
My criticisms of ‘it was cheap because I bought it’ is that if it doesn’t save time, money or deliver some other benefit then it’s no bargain, no matter how ‘cheap’. Also I’d rather have one of something that works well than a pile of 5 (bought cheaply no doubt) that don’t!
These days I think ‘value for money’ rather than ‘cheapness’.
Though this comes right out the bludging-smoking-sobstory-dole-recipient book (as sensationalised on TV), I was also exposed to parental criticism of what silly junk other people put into their shopping trolleys.
The hidden message was that ‘we were different’.
And we had to be to pay off the mortgage on the income being received.The main weakness was that all of the above continually repeated maxims concerned spending money (and by implication saving it) rather than making it or developing passive income.
In this it sometimes comes as a revelation, even when you have a relative who has done it (for example, start a business, buy the land, sell the business, keep the land, draw rent from the land). For ages you are aware of some individual things he’s done, but you miss the overall strategy or the idea of developing streams of passive income.
Regards, Peter
Hi Future$
Yet another thing to consider is the type of parental influences you want your kids to have.
If they come into the world once you are wealthy, they may not observe you scrimping and saving during their youth.
There is a risk of them: a. turning out spoilt brats who don’t move out until age 30, b. continually asking mum and dad for money, c. with a belief that money comes from trees, d. valuing immediate gratification over long-term investing, e. having less personal initiative, and f. going for ‘safe’ jobs rather than entrepeneurship.
There’s the old saying ‘from shirtsleeves to shirtsleeves in three generations’.
On the other hand if you have kids earlier (ie while you’re early on your wealth journey), and they have their early childhood years during a time when you’re secure enought to afford just the basics and not much else, and they’ll be old enough to remember how things were before you became wealthy.
From this maybe they’ll pick up more positive values from you, eg self-reliance, saving money, deferring gratification, spending wisely, taking measured risks, working towards a goal, appropriate use of debt, etc. No need for sermons and lectures – just simple observation should be enough.
And these will not be hollow – the child will have observed first hand the improvements that a positive mindset backed by action can bring. This is surely equally valuable to what’s learnt as school.
Though it can never be tested, my own view is that had my parents stayed together (and my childhood living standard been higher than it was) I might not have saved/invested as vigorously as I have and I’d have been worse off!
Regards, Peter
An interesting idea Andrew!
My wariness creeps in when ideas for new managed funds come late in a boom.
As a BT investor (in a fixed interest fund) I was bombarded with ads to join their new TIME managed share fund a few years ago. TIME stood for Telecommunications Information Media Entertainment, and you know what happened to IT shares in the ‘tech wreck’ shortly afterwards!
Nevertheless I warm to the idea of a high-yield commercial property trust or fund. No doubt they already exist, though I haven’t sought them out.
Even though we’ve had the better part of 10 years of steady economic growth, and I’m in a popular suburb where average house prices are approaching $500k, I still see shops that have been empty for 12 months or more. There’s no way that a house would lay vacant for that long, provided it was half-presentable.
Thus commercial property has higher vacancy risks, may require higher deposits, but have potential for higher returns. Low entry costs and spreading of vacancy risks make it ideal for a managed fund.
This fund would provide income, with some prospect of capital growth. The sort of investors interested would be mainly those who have residential property and want an easy way to go into commercial, and/or those who have their money in fixed-interest or bond-type investments for the income they provide.
Peter
C2 wrote:
‘No paper work is taken out of this area and read else where’
Such common sense, but never have I seen this written anywhere else ; )
But what a difference this one thing would make!
Even if you’re a messy type, this narrows down where you can ‘lose’ things. Instead of finding a needle in a haystack, you might only need to find it in a matchbox! My investment ‘office’ is a 2x2m area in the corner of the lounge. I especially like it near the front door as mail immediately finds its way to the ‘office’ rather than somewhere else.
If I was really good, I’d act on that mail immediately, answer, file or chuck it as apprpriate. Unless its a request for payment from the ATO, which can wait until next March (spending postponed is almost as good as spending avoided)!
A good book on all this stuff is ‘Getting Things Done’ by Edwin Bliss. ‘Seven Habits of Highly Effective People’ also has some pointers.
A common theme seems to be distinguishing between important and urgent, and making sure the urgent doesn’t crowd out the important. Also there is the principle of ‘doing it now’, ‘handling the paper once only’ and not keeping unnecessary paperwork.
Peter
Monkey wrote:
‘I think we are disadvantaged here in Perth a tad though with the vastness of travelling and lack of areas to focus on.’
Naaaah – I reckon that sounds like an excuse more than anything ; ) Maybe it’s the ‘grass is greener on the other side’ syndrome, but I envy you!
Just pity the poor Victorian or NS Welshman for whom it’s difficult (I didn’t say impossible) to get much over 6-7% in a town whose population isn’t dropping!
Twice this year I’ve travelled to WA to buy places of a quality and return that I couldn’t find in Vic. They don’t quite meet the 11 sec solution, but do fit into my investment strategy. They were affordable, low-maintenance, highly tenantable, convenient and in major regional centres.
You will still even occasionally see WA properties that meet the 11 sec solution advertised on the web. The closest to you being about 100km from Perth. It’s not common, but I’ve never seen any properties in Vic that meet the rule, despite the choice of a larger number of properties.
Think of the plague of investors in Vic/NSW seeking cf+. Think of the 50-100% capital growth in nearly every one-horse town within 3-4 hrs of Sydney & Melbourne. Contemplate the long-term future of some of these places. And there’s heaps more seminars telling you how to do it in the east. Not to mention property price reports and investment analysts, which are concentrated in the east.
Now think about parts of country WA. Some cities have had sustantial price increases, but others have seen little change for 10 years! Average rental yields are still higher (8% is a piece of cake).
Also consider the reduced competition; it is far more effort for the eastern states investor to fly west then drive to a country town than it does to find somewhere in their own state, so most won’t bother.
No doubt there will be examples of bargains everywhere, but currently I think residents in Qld and WA are currently the best positioned to get cf+ property. SA and Tas might have some good buys, but I”d be concerned about pop trends in those places.
Peter
Hi Anch – I wouldn’t have all my properties in a mining town, though the yields can make having some properties there attractive.
I would choose a large regional mining centre with a variety of companies, rather than a smaller one-company town. Also if there are other industries in the area (tourism, pastoralism) then that would be a bonus.
To further mitigate risk, I’d choose a place that even if vacancies rise will be the first to be re-let. I’m thinking of a fairly modern, brick low-maintenance unit or duplex that’s within staggering distance of town & pubs.
You can get capital gain in a mining town, but it might be only over 1-2 years. Then you might get 10 or more years of static values and rents, so you’re dead lucky if you get any CG.
Peter
Hi Bill: I must confess that you’ve lost me in places:
‘Over a period of time as you notice the numbers increasing and maybe appearing to peak…time to leave the Party.’
So more ‘to let’ ads mean more vacancies.
Which means that there’s fewer tenants, more first homebuyers, population decline or maybe a glut of new apartments. Or it could be seasonal.
‘It is simple and accurate as an increase in rental Deamand is a precurser to Lower R/E prices.’
If there are long rental lists (ie the ‘numbers increasing’) doesn’t this mean vacancies are higher? Thus rental demand is actually decreasing (not increasing).
‘I have used this simple concept since’93
and take it on board…it works.’So is what you’re trying to say is that if the vacancy rate is increasing (as determined by lengthening rental lists) it’s time to sell (or not buy)?
Cheers,
Peter
If interest rates reach 10%, almost all currently positive or neurtral properties would become negative.
But I would much rather be paying the small difference between 10% interest rates and the 8-9% yield on my regional city properties than between 10% and the 4% typical with a capital city property.
The tax back would be less, but then less money would have left my pocket in the first place [
]A 2% margin (plus other holding costs) would be only a small hardship that could be funded through modest reductions in other investments. But apart from that it would be ‘business as usual’.
However a 6% margin would be harder to cope with, especially if work income is average or less. If this difference is sustained or you lose your job, there might have to be asset sales – not good!
So I would say that negative gearing at the end of a boom where yields are historically low and interest rate hikes are in the offing is high risk.
Going for yield, especially if properties are low-maintenance, well-located and situated in regional cities with strong rental markets, population growth and/or high average incomes, would have to be lower risk.
Peter
Why not do some quick research on the town and if it’s OK, put in an offer on the property subject to building & pest inspections, etc? If you’re brave, maybe putting in a low offer that you know they won’t accept buy you a little more time to do DD?
Your question raises some interesting ideas on the order that we should do things.
I have done my due diligence in the following order (only move onto next step after previous one is OK):
1. Town (future prospects, vacancies, growth, etc)
2. Acceptable suburbs (amenity, convenience, affordability, quality etc)
3. Specific properties earn required yieldThe strength of this is that it provides some protection against getting something in a no-hope part of a declining town. As you know the town, you can use this info to help in subsequent purchases, ideally eventually owning clusters of properties in several towns. Once you know the area, the only extra due diligence required is on the property itself.
The main risk with the above order might mean that you are missing the highest returns as your search criteria are narrow.
What if we tried the opposite order:
1. Specific properties that earn required yield (11 sec solution etc)
2. Is it in an acceptable suburb (amenities, etc)?
3. Does the town have a good future?Thus we are starting with the best deals and eliminating those in the no-hope towns.
On reflection, I think this last approach might provide higher yields than the first one. But it is risky as it’s less fussy with towns. If you find a great deal, it’s tempting to rush in and put in an offer, even if 2 & 3 are not ideal. But if you have a good background knowledge about an area then you will avoid the worst mistakes.
any thoughts?
Peter
Hi Mini – very thought-provoking!
I don’t see anything wrong with having an out before something goes unconditional.
But shouldn’t the ‘out’ be on the grounds of something that’s stated in the contract (eg an unsatisfactory building inspection) rather than just anything made-up? But if you find out something bad about the property that materially affects its suitability and this wasn’t disclosed to you, then I’d agree it is probably ethical to be more ‘creative’ in finding ‘outs’.
Having a cat (who is unable to sign contracts) as a business partner could be considered to be a ‘white lie’ and a slight compromise of integrity if someone challenges you on ‘who is your business partner’. So could many parts of due diligence, eg ringing up estate agents pretending to be a prospective tenant to get facts about vacancies and rents! The boundaries between acting, resourcefulness, good research, lying and conveying an erroneous perception by saying nothing are interesting and not always clear-cut.
Many of the studies of successful people state the importance of integrity and truthfulness. This includes things like delivering on your promises (actually mentioned by RK in books such as RYRR) and dealing fairly with all people (eg things like win-win outcomes).
In this, I’m probably splitting hairs, but it’s in my mind right now as I’m fresh from (re)reading RK’s mention of the origin of ‘integrity’ which means ‘wholeness’ or similar!
Peter
PS: I suppose you could consider the business partner could be a cat after all. If you fail, he starves. Thus he has an vested interest in your investments working out.
Malcolm:
‘I never thought about buying some property in a country area.’
It’s worth some thought. But not just any country area. Do your research to make sure there’s tenant demand, low vacancies and the place is growing. Research is even more important for a country property than a metro one IMHO.
‘I just thought, because of the growing population of Australia and high Immigration rate these days; a city apartment would be the way to go.’
Population growth is good, but it’s only one aspect – consider vacancy rates and the number of similar towers being built. So vacancy is a risk. Also think of the big body corporates, so you have much less control over the property compared to if you got a stand-alone house or even a duplex.
A low-rise suburban property in a handy location might be OK, but I’d still be worried about yields, which are low at the moment.
‘I would like to find out more about positive gearing’
Explained well in Steve’s book. Note that some people look at before tax (eg Steve) and others are happy to accept a loss before tax but a profit after tax (eg Margaret Lomas).
Note that highly positively geared properties are often found in country areas and may not necessarily have high capital growth prospects.
‘when you say “high debt ratio”, what do you exactly mean?’
Debt ratio = total debts/total assets
Equity = total assets – total debtsIf you have $200k property and owe the bank $180k (meaning your net wealth is only $20k) your debt:asset ratio would be 90%. This is very highly geared. This will magnify both risks and returns. Especially if interest rates go up and the properties are negatively geared, you are taking a HUGE risk by borrowing so much compared to what you’ve got. But if things go well, you’ll make a mint, with little of your own money put in.
Conversely, if you have $200k of property, but you owe the bank only $20k, your debt:asset ratio would be 10% which is very low. This might be fine if you’re retired, but if you’re not, and you want to grow your portfolio, you could easily and responsibly borrow to do so.
Where you place yourself between these two extremes varies according to your aims and ability to accept risk, but for me I am comfortable with about 50% – ie if I had $200k of properties and other investments, I’d be able to sleep with a debt of around $100k.
Peter
PS: Just saw the accountant and found that I will need to pay more tax. That must mean the portfolio is making money!
Hi Malcolm – that $1100/fortnight is a great result and probably puts you in the top few percent of the population when it comes to saving [
]The next step from saving is investing. You need an investment strategy that helps you achieve your goals and has a risk that you’re happy with.
I like the idea of a portfolio that has property, shares, fixed interest & managed fund investments.
I’d give yourself 3-6 months to do research and then make a decision to buy a property. In that time you will have saved a bit more and will have plenty for a deposit plus some!
I’m not enthusiastic with negative gearing or inner-city flats right now. I’d go for a brick 2-3br villa, duplex or house in a growing country town. It would be cashflow positive before tax or close to it. Something not too expensive – maybe approx $75-100k renting for $120-160pw – but which is still nice to live in, conveniently located and low maintenance.
Then buy another in 3-6 mths time! And with your cashflow, another should soon be possible without too high a debt ratio.
Peter
Agree with everyone that Kiyosaki’s strength is developing the right mindset. His major contribution (through books & Cashflow) is to impress on us the importance of shifting your income to passive sources and away from your job.
But some of the detail is a bit dodgy. For instance he mentions something about making contracts ‘subject to approval of my business partner’. Then he says ‘what they don’t know is my business partner is my cat’!
This sort of stuff is an insult to the reader’s intelligence. And what does it say about ethics & integrity?
I recommend Kiyosaki, but not unless it’s read in conjuction with other books like ‘The Millionaire Next Door’ and ‘The Millionaire Mind’, which are my favourites.
Peter
Though it’s mainly young singles that now share houses, I suspect that economic necessity will increasingly force (mostly) widowed older people to share 4 X 2 houses in the suburbs.
Others might be forced to take in (not necessarily young) lodgers rather than sell up, as these give sustained cashflow.
With fewer kids, 4×2 houses will be less in demand and their rents will become affordable to oldies sharing them.
One problem is that many are in suburbs a long way from local shops. But if seveal share food delivery, that could work out OK.
I can also see community services setting up in one house and them serving a whole street of 4×2 share houses for those who need some help but are still independent enough not to need other accommodation.
Peter
Hi Fudge
Several things come to mind.
1. If you buy 4 properties at once, you may be out of the market for a while due to finance constraints. This has several consequences:
a. if there is a crash you’ll miss out on bargains
b. if a good deal comes up you might not be able to take advantage of it
c. all properties will be bought when you are comparatively new to investing. If you buy two now and two in 6-12 months, you might be able to get better returns on the later two as you’ve got better at finding opportunities.2. Paying properties off quickly diminsh the loan term and saves interest, but is only worthwhile up to a point. To reduce a 30 year loan to 15-20 years requires relatively small extra payments and saves lots of interest. But to drop a 10 year loan to 5 years saves little interest and requires massively higher payments. I could think of better uses for the money unless you’re in a hurry to pay the debt pronto.
3. To keep up contacts and to keep you looking and researching, maybe an approach of buying two properties now and one every 2-3 years might be better. Otherwise you might lose touch and have to start your research over again once your first 3-4 are paid off. Also if you buy at regular intervals, you will be buy in all markets. If you buy cheaper yield rural properties in booms and growth properties in busts, you might be able to enjoy an effect somewhat similar to ‘dollar cost averaging’ used by share buyers (buy fewer in boom, more in bust) and get higher average returns (in theory of course).
Peter
Hi Mini – heaps of ideas!
My purchases have all been when the vendor has been elsewhere, so I’ve only ever seen their agent, so it’s all been on dry stuff like yields, tenantability, location, etc.
But you’ve taught me that it’s the vendor selling, and that there’s a need to connect with them if you are going to get what you want. If the vendor (who is not necessarily a hard businenessman) doesn’t like you for some reason, maybe they’ll be less accomodating re your offer?
‘*note to self: must lower pitch of voice and speak less excitedly.* ‘
Or even go through old books, movies and use phrases that date you as coming from the 60s or earlier!
Peter
From Webster’s book of Common Phrases:
‘Dutch Auction: an auction in which the auctioneer starts with a high price and reduces it until someone puts in a bid’
Wonder how that would work with property?!
Peter
Interesting variations between what we do.
Everyone agrees with dressing down.
Acting naive might be fun to catch out shifty agents, but isn’t it better to convey a professional approach? But professional must equate to ‘hard nosed and knows the market’ rather than ‘lots of money from the big smoke’.
So no analysis software, but a calculator and some property checklists might do the trick.
On one hand I like the idea of stating up-front that I’m buying for an investment and if it’s too expensive (read doesn’t make money for me), I won’t buy.
But that is a dead giveaway that 1. you’re out of town and 2. have limited time. If you’re not careful there’s a risk they could be used against you.
Peter
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