Real Estate Bubble Pops??

Scott,
I will answer your questions even though i am cynical about your reasons and some of this info has already been mentioned in this post and others.
Perhaps it will give some credence to the information i offer.

As i mentioned, i bought my first IP at age 19 in 1990 – a “renovator’s delight” in the form of a Victorian cottage in Brunswick.
Over the years, i have bought and sold property in South Yarra, Middle Park, St Kilda West, South Melbourne and Richmond.
In Queensland i have bought and sold a small block of 3 units in Coloundra (Sunshine Coast), Surfers Paradise and Labrador.
My latest Queensland purchase was an old block of 5 units with water views and only 30 metres to the ocean.
I intend to develop this property and provide basement parking, 2-3 shops on ground level, a cafe/restaurant and 6-8 boutique type apartments on top with water views.

I currently have the 5 units, another apartment in Surfers Paradise, the house in Brunswick and 2 other properties in South Yarra and St Kilda; and i just sold another South Yarra property at auction 2 weeks ago.

Yes, my property does add to my income – approximately $93k gross on property worth about $1.8m. My LVR is about 40%. Some properties are cash +ive and others are neg geared – they help balance each other out and provide me with a gross yield of about 5%.
My property is all well located and will achieve strong cap gains. I have never had a vacancy since 1990 (13 years) when i first began to invest because my properties are all in excellent locations.
As i mentioned earlier, people who rent usually work nearby and that’s why i always buy something that is in big cities, close to public transport, shops and other infrastructure like hospitals, libraries, parks etc.

Re: your post, i’d advise you to go I.O. and not P&I on your IP loans. Your cashflow will be greater, plus you can always pay some principal off seperately if you want to. As you may know, 99.99% of repayments on a P&I loan are comprised of interest, not any principal. It’s only towards the last 5-10 years of a P&I loan do you see any of your repayments reducing your principal. And of course, only the interest component of your repayments can be deducted from your taxable income.

PS: i find it amusing that you suggest “Investing in positive cash flow property is about staying ahead of the herd. Once the herd arrives it’s very hard to buy for postive returns!”
The herd has already arrived and that’s why cash flow +ive properties are in hick towns that show minimal growth. As i already mentioned, the only reason they’re getting a cap gain is because they’re coming off a low base and are considered cheap compared to cities on the east coast.

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

Hi,

My input is:

quote:

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Steve’s 6th Law Of Property Investing Success: Understand The Difference Between Fact And Opinion

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Maybe the real estate bubble will burst, and maybe it won’t, but until it does… the only thing we can go on is opinion.

Now I can quote facts (since REIA data began in the 1980’s) for every major market in Australia and can say that while there has been periods of negative growth, there has never been a collapse.

But to be fair, there has also not been a boom like we’ve ever seen before either.

Since we can’t invest tomorrow or yesterday, all we can do is invest today.

As such we all need to come up with our own opinion use it invest or stay out of the market as you see fit.

Sure, be guided by other people (like me), but don’t make the mistake of confusing my (or anyone elses) opinion for a fact.

[]

Steve McKnight

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Remember that success comes from doing things differently.
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Hi walkernick,
Yes i think you’re better off investing for cap gains than cashflow when you’re young.
However if you’re in a situation where you don’t have the cashflow to service the debt, you’d be better off with something cashflow +ive or neutrally geared.
The main thing is at least you’ve made the decision to invest in propery which i believe is the best asset class to invest in.
Congratulations on making the decision to invest at your age and don’t be sucked in to buying a fancy car or anything else that is going to take up your income.
As we all know, cars depreciate highly in value and it’s important that your debt is not bad debt.
Always remember to borrow for assets that appreciate in value (like property) and not depreciate (like cars). You can always buy the fancy car down the track.
If you’re worried about interest rates rising, maybe you could consider locking in something from 3-5 years. Interest rates are at an historic low, and it’s unlikely they will be coming down much further. If they do come down any further, it’s likely that it won’t be more than .5 – 1%.
From a tax point of view, your rental income will be taxed but hopefully it won’t be that much if it’s about $2k – $5k p.a.

As far as i can tell, the 11 second solution is a 10.4% gross yield.
If you have a property worth $x and the weekly rent of $x is “double” this figure, it always works out at 10.4%. Examples:

$262,000 = $524 pw = 10.4%
$185,000 = $370 pw = 10.4%
$148,000 = $296 pw = 10.4%
$130,000 = $260 pw = 10.4%
$67,500 = $135 pw = 10.4%

etc, etc, etc.

This is a very good yield for residential which is typically about 5%, and commercial is typically 10%.
If you see a yield like this on a residential, you can pretty much bet that you will have minimal cap growth as this is the tradeoff. It’s very hard to find a high yielding property that will also have strong cap gains – especially in the current market.
However, if the yield comes anywhere about 8%, i think it’s worth a closer look.

To calculate gross yield, divide the annual rent by the purchase price, and multiply by 100.
Example:
$9,426 (rent) divided by $127,500 and multiplied by 100 = 7.4%
Don’t pass up a good property just because it doesn’t qualify under the “11 second solution.”

You can also work out the “purchase” price of a property if you know it’s income. Divide the annual rent by the yield and it will tell you what the “purchase” price should be.
Example:
Weekly rent is $145.
Annual rent is $145 x 52 = $7,540.

$7,540 divided by 5% = $150,800
$7,540 divided by 6% = $125,666
$7,540 divided by 7% = $107,714
$7,540 divided by 8% = $94,250.

Of course you should have a good knowledge of what the typical yield is in that location to work out a ballpark price.

Hope some of this helps.
Quentin

PS: Yes, you can reduce the principal on I.O loans by making payments off it. Go into your bank with the money and say “i want to pay this money off my principal“.

Definately go for both and whilst it’s very hard to get it can be done. I agree with Quentin and am following a similar path with several houses in Perth and Queensland which I believe to be quality properties in good locations (close to beaches, rivers, city centres etc). One property for instance is in a waterfront complex and was bought for 112,000 and has now been valued (11 months later) at $165,000. In addition the rent is $200 p/w, which is a great bonus, but it is the captial gains that I am most happy about.
Sounds like everyone in this forum does loads of research and has strong ideas and if there approaches pay off then that’s fantastic but it pays to keep an open mind and listen to every point of view. It seems sad that Quentin was not taken too seriously until he revealed that he had an impressive looking portfolio.