Multiplying by 1.6 may guarantee it’s positive, but only if interest rates don’t go up much. This is a yield of somewhere near 7%. Better than average but not enough for some.

To me the ’11 second’ thing is just fancy jargon for a yield a bit over 10%. With this interest rates could rise a bit and you’d still be cashflow positive. Or you could put all your rent into your loan and pay it off in nearer to 10 rather than 30 years.

Peter

Hi Sooshie – I just happen to love reading []

I find I’m often racked by indecision, lethargy and think of reasons not to do things. I am also sometimes let opportunities slip by.

But when the evidence is overwhelming that the potential benefits far outweigh the risks, I can move quite quickly. The books/software mentioned above, along with my independent analysis have helped considerably.

I’ve been investing for about 8 years, but never in direct property. I did go to one of those free seminars a couple of years ago, but was turned off by the the big loans, negative gearing and slick presentation, which was directed at people with high incomes who already owned their home (ie not me!).

Then one night last December I woke in my sleep with a thought about cheap properties in country towns/cities. I couldn’t get the thought out of my head, so I turned on the light, wrote it down, then went back to bed. The plan was for ‘low priced, high yielding property that at least held its value’.

A country town would be OK, but I’d prefer it to have a growing population. All I’d do is put up a deposit and the rental income would pay the rest.

I approached the bank and got pre-approval for finance (after looking at offerings from other institutions), to make sure that what I was thinking could actually happen.

And so the book buying frenzy began! Checking estate agent websites for prices and rent showed that there was potential for this. I made up a spreadsheet to show that the figures worked out and started looking at this and other sites.

I went on trips around Melbourne (Preston, Sunshine, Noble Park) but the prices even in those areas were not conducive to positive c/f. Also I’d only be buying at the bottom end of the market, but at the end of a R/E boom.

I looked at some country areas in country Victoria. The yields were OK, but I had concerns about population growth in some centres.

Annual leave and a trip to Adelaide in March 2003 for another purpose had me wondering about WA (where I’ve spent most of my life). I did some research on the web and found there was positive c/f property available in a large regional centre which was experiencing steady pop growth. I monitored the web listings, got a listing of recent sales and prices and talked to people. Also before I left got a city map and shortlisted streets/areas of interest. Also told agents that I was coming.

I’d squeezed in a week in WA before Adelaide specifically to look around and buy a place. I located a suitable place with tenants, put down an offer and secured a place. Spoke to council and got engineers and pest inspections.

Now waiting for settlement!

If all goes to plan, everything will have been achieved in under 6 mths. Maybe this was too hasty, but I did heaps of research, found the figures were good, am not experiencing ‘buyers remorse’ and was not discouraged by the 4 Corners show.

However I can’t understand people that will buy properties unseen. What good is being right near the city when you can’t cross the road to get there, easily back out into your street or have to walk over dingy unsafe railway overpasses? The seven days allowed was about right, and I wouldn’t recommend that anyone spend less.

Peter

Here’s what I have in my library and my comments:

‘Streets Ahead’ has lots of good stuff in it, but bear in mind that it is biased heavily towards capital growth rather than cashflow.

For example, it compares one growth property with one cashflow property, when it would have been fairer to compare it with 2 or 3 (due to the often lower purchase price of the latter as well as the ability to pay the latter off quickly).

However it also advocates starting early. Unless you’re a medium-high income earner who already owns their PPOR and/or is willing to borrow lots and take big risks, starting early is easier said than done.

In contrast, starting with cashflow positive is heaps easier, due to their normally lower prices and thus smaller loans. It’s also better psychologically as you can pay the property off fairly quickly and even with one property can have 20-25% of your income passively derived, and are thus well on the way to financial independence without risking everything.

How to Create Income for Life (Lomas) is good and concentrates on cashflow positive property. There is only one key message not contained in other books, and that’s buy properties built after 1985 for the tax benefits. The software you can get if you buy the book is excellent, but the online cashflow positive property register wasn’t (expensive CBD apartment blocks and if the tax laws changed, you’d be stuffed)

Borrowing to Invest (Whittaker/Resnik) A good primer for beginners.

Books by Anita Bell (Your Mortgage and Your Investment Property). Many handy hints and ideas. Cheap paper means books are cheap to buy. Don’t like interest only loans.

I like the approach of saving interest and paying the property off quickly, but I think some of the very fast repayment time frames assume you’re a married couple earning $50k/year each living in your own home (ie not paying rent). If you’re single, renting and earning $30k/yr, 10 years is more realistic than three I think, at least for your first IP.

Various Robert K books – Rich Dad Poor Dad, etc. Very good at motivating, and especially in urging that you get a financial education.

Some of the specific ideas are a bit doubtful, but to be fair he does suggest that those worked for him and you should go away and think up some of your own.

I believe he is not 100% right when he says that your PPOR is a liability. Yes the cost of furnishing it is, but you’d have to do this if living in a rented house. If you own, you’re saving rent and getting an asset that will appreciate. Probably the worst thing though is that if you’re paying it off, it reduces your borrowing capacity to buy investments that pay (though you could redraw from it to get a deposit for an IP).

I would say that provided you don’t spend much on it, your PPOR is an asset, albeit in some areas a poor performing one compared to other investments you could make. In my case I did not buy my PPOR ($120pw rent, $160k value) and chose instead to get an IP ($160pw, $92k) as it more than pays the rent with a mortgage only about 50% the size.

I haven’t got any Jan Somers books, but these are also supposed to be good as well.

Peter

Thanks for clearing that up Paul. Though I found the way this stat was presented ambiguous (I assumed property earnings, whereas it was actually average weekly earnings).

A couple of points:

1. The US appears to be in a different stage of the economic cycle to Australia at the moment. This may affect comparative prices.

2. Wage averages in the US are misleading. The US has many shoe-shine-domestic-help people on the minimum wage (or less) as well as a disproportionate number of high income earners (who get paid much more than their equivalent in Australia).

It could be that the majority (70-80%) of the population receive below the mean national income. This would skew the stats – I would prefer if they looked at median incomes and median property prices.

3. Even accepting your figures, a property I’m buying is in an area with high average incomes, low property prices, and a steadily growing population.

The property is worth between 100 and 120 weeks of the average wage. This makes it underpriced, even compared to the US.

As I said, there is no one property market, only property markets, which behave differently. Caution is certainly necessary, but this does not necessarily preclude property purchases if you’ve done your homework and know what you’re getting is good value. As a measure of this, someone suggested comparing the cost of the property with how much it would cost to build today, which I think sounds reasonable.

Peter

Hi Paul – I’ll rephrase my answer, which I think more clearly answers your question.

Q. ‘surely a renter can see the difference between a $100k and $200k property for the same rent’

A. I would think they could too, though factors such as convenience, number of bedrooms, access to transport & parking would be more significant considerations than sale value.

Note that renters are normally wanting to move into a particular area. As AD said, different areas have different yields. Rents seem to be comparatively constant across Australia. Prices and therefore yields are less so.

It’s unlikely you will find a 4% property right next door to a 10% property. But you will find cities/towns with many 4% properties and others with 8-10% properties. AD has already pointed out the reasons for this.

Thus unless you strike lucky and buy super cheap (ie half-price), you will find comparatively little variation between yields in a particular area. As tenants have already decided their town/suburb, you will not have 4% yield properties competing with 10% properties. The situation you described will not arise.

In other words, unless you’ve got the bargain of the century, you will find that the % yield variations from town to town (6%) are more significant than those within towns (1-2%).

Big investors who have the inside running on cheap properties in expensive areas may differ, but for me, the first step was to find an area that has good average yields (ie 8%) and look for a keenly-priced property in this area. Even with the small variations between properties, you should be able to get something that returns 9-10%.

Peter

Though someone at 30 (contemplating retirement at 40) might want to go cashflow positive also.

Particularly if they also have a good portfolio of shares for some cap gain.

Some people measure their financial progress towards their goal by net wealth. ‘My wealth grew by $20 000 last year, so I did OK’. I did this when capital growth was my key objective.

Now I’m as much concerned about progress towards financial independence. If 10% of my income was passively derived last year, but (thanks to the purchase of a positive cashflow property) next year it will be 25%, I reckon that that’s pretty good progress as well.

It depends on what you want.

I would agree that a single income-selected property would be inferior to a single growth-selected property.

But if you have a property acquisition plan, it should be possible to buy two positive properties in the time it takes to pay off one negative property. And by paying them off quickly, you’re paying the same amount of interest to buy two positive properties as you are on one negative property.

Note that my example assumed that they cost the same ($100k). If not, then the ratio could be 3 or 4. And as it should be easy to go from 4 to 8 properties as it is to go from 1 to 2, ownership of multiple positive properties should be easier still.

Of course all this depends largely on future earnings. I’ve posed this question elsewhere. The answer to this is key to whether investing in low-growth properties is wise or not for the long-term.

Peter

One way is to restrain borrowing, maybe by having a debt to equity limit (say 50%). If you already have $100 000 in assets, you can borrow 100% on a a $100 000 property, so you owe a max of $100k on $200k assets. As you pay the property off your situation will improve rapidly. This is a fairly conservative approach and is based on limiting your borrowings. Unless there was a big crash (with your assets falling 50%), you should be safe.

As for talking to kids about money, I know they say you should do it, and not doing this has caused numerous feuds in families, but if they know you’re rich, they might not work hard/invest themselves if they know they have a big inheritance from your diligence. But if you have a big debt not backed by assets, clearly this should be revealed.

Peter

Isn’t he one of Robert K’s disciples?

Peter

The title should be simple, succinct and very general. It should tap into people’s aspirations. This could be based on current workplace worries, eg longer hours, unpaid working hours, less time with family, etc. There is also a yearning for people to take control of their life, which is a key determinant of happiness. The title should address these human aspirations and avoid technical terms such as ‘cashflow’, ‘positive gearing’ or even ‘real estate’ or ‘property’.

With the title focusing on broad yearnings to get people in, the subtitle should be more specific, to back up the basic approach (in this case cash-flow positive property). It should not contain numbers.

I suggest the following (subtitles beneath).

1. SACK YOUR BOSS!
Financial freedom through positive cashflow property

2. WHY I DON’T HAVE TO GO TO WORK
Pay yourself more than the boss does

3. THE SEVEN DAY WEEKEND (OR PERPETUAL LEISURE)
Financial freedom through cashflow positive property

4. I DON’T CARE IF I GET SACKED
Earn more than your boss ever paid

5. THE YES DAD
Financial freedom to stay at home

6. DADDY, ‘WHY DON’T YOU GO TO WORK ANYMORE?’
How I became financially free

7. UNEMPLOY YOURSELF…
and let your tenants make you rich

8. A JOB – NO THANKS! (OR WHY I DON’T WANT A JOB)
Be your own boss with investment property

9. WHY SHOULD I …
Taking control of your life with property that pays

10. (If you really want property in the title, how about)

PROPERTY THAT PAYS
An introduction to cashflow-positive property

The ‘read how I bought 130 properties in 3 years’ bit could be a sub-sub title, or additional comment put in a circle somewhere on the cover.

Peter