Hi Guys,
There are numerous types of investments to make in property, some people are growth investors, some cashflow, others like me are a combo of both, others are flippers, wrappers or developers.
For most of the investors I see on the forum, the usual purchase is for a stand-alone single family unit or house, so given that, what is you list of criteria you use when looking for a prospective new I.P purchase such as this?
What are the "numbers" you look at and why? This would be a valuable thread for the newbies to use as many of them ask the question; "where do I start?" A consistent criteria to minimise risk and maximise success would be a good start.
I'll go first. I am a buy and hold investor and want long-term cap growth and good cashflow from day 1.
My criteria is:
1. Must be built after 1987 (preferrably 5-15 years old), to maximise Tax Returns and cashflow from "on-paper" deductions.
2. Must be able to "add value" through a reno, or subdivision to increase equity and rent return for rapid wealth building and cashflow. (new properties don't work for this strategy as a rule).
3. Can be a unit or house; whatever is in demand for that area for high occupancy. (units cannot be subdivided, but can be "value added").
4. Strong rental demand for the area to ensure steady occupancy and less vacancies.
5. Rent return at least 1% higher than current interest rates for better cashflow.
6. Must have strong prospects for employment in the local area for capital growth and larger pool of renters and/or buyers.
7. Must be in good streets with good street-scapes for buyer/renter appeal, cap growth and high occupancy.
8. Must be in close proximity to all amenities such as shopping malls, public transport, schools, commuter roads, parks, hospitals etc for cap growth and rental demand.
9. House price must be in the lower half of price range for the neighborhood. There is a much larger pool of buyers and renters are in the lower half, so this ensures ease of sell/rent in the future. The rent return percentages are usually higher in this price range as well.
10. Good local network of Property Management companies; I don't want to do it, and a good manager can improve your success with tenants.The combination of all these factors provides, for me; a safe and usually successful investment – basically set and forget with minimum hassles.
Marc,
I believe that you have the combinations correct. Buy and Hold is in my opinion the best stratergy.An example of one of my clients. Started Portfolio in 1995 and now has 10 units – total combined original purchase price of $2,273,000 – annual rent return $146,120.00 – annual shortfall $21,216. After 12 years, combined property value $3,700,000.00 which equals a gross profit of 1.5 million ( will probably double over next ten years). Current annual rent return of $159,640.
Not bad for a young bloke not yet 40.
I believe that too many people opt for a get rich quick scheme and just buy themselves another job with more worries.
My 2c worth
JonThanks for that Jon, but the sort of thing I was hoping for was the selection process and steps that client of yours used. He obviously has a good plan and sticks to it and has become very successful.
His shortfall is quite big; any idea how he funds that? For most people that is half their nett wage or maybe even more.Marc,
Yor are quite correct in saying that the shortfall seems rather large, that is beacuse the figure that I quoted is what it would have been from day one of purchase. I find this very difficult to explain but think of it this way. He purchased the first unit 12 years ago when the rent return was $120 a week. 12 years on and he now gets $280 a week for the same property with the same borrowing of $125,000 on interest only. Each year to 18 months he purchases another property as the first or subsequent properties values and rents have increased. To be exact, he no longer has a shortfall in fact he has a $5,000 income from his properties. There is more to this story than I can print here but suffice to say, any one can do exactly the same if they were like him and stuck to the original plan.I can also relate a story about a client who I sold a brand new investment unit in 1993 for $130,000 which rented for $130 a week. By mid 1994 we had a massive oversuply of units in the inner Brisbane area and there was virtually no demand, such was the situation that some of our Developer clients were left holding large numbers of finished units eating their heads of in holding costs so they decided to Auction them and take what they could. Average sale price of those units was $120,000.
As this was happening my Client came to me in a panic and wanted me to sell his $130,000 unit. I tried to talk him out of it and to just wang in but he saw doom and gloom and wanted out so in the end we sold it for $110,000 ($20,000 plus ins and outs loss). By the middle of 1995 not only were all of the oversuply sold the pricing had created a higher demand and there was no future stock because the Developers who had been burnt had not purchased any new land and had no DA's in council, hence we did not get any new stock till 1996. Price of new units $160,000. Moral of the story – don't panic if prices drop a little, they will increase soon after the hiccup.I guess that the other point on his side is that he has a well paid Govt job.
Jon
Marc, you have summed it up great there.
But i'm a bit confused about this one;L.A Aussie wrote:5. Rent return at least 1% higher than current interest rates for better cashflow.So, what I get from this is that you want a rental yield(return??) 1% better than interest rates. Ok, so say interest rates were 7.5%, you would want and 8.5% yield or $8.5K rent on a 100K property per annum.
Hmm, how do you acheive this?
You have said that you can increase the rent by renovating, thus also producing more equity.So this will push the rent up, but not the rental yield by much.So where do you invest.
I live in Sydney, I will be investing in Sydney, I don't think I am adventurous enough to venture out. Maybe after a few IP's I can venture out.Back to that interest/yield thing, in sydney I'm calculating yields of like between 3-5%, I don't know how your getting these 8.5% yields.
Kind Regards,
Christopher Fife.DraconisV wrote:Marc, you have summed it up great there.
But i'm a bit confused about this one;L.A Aussie wrote:5. Rent return at least 1% higher than current interest rates for better cashflow.So, what I get from this is that you want a rental yield(return??) 1% better than interest rates. Ok, so say interest rates were 7.5%, you would want and 8.5% yield or $8.5K rent on a 100K property per annum.
Hmm, how do you acheive this?
You have said that you can increase the rent by renovating, thus also producing more equity.So this will push the rent up, but not the rental yield by much.So where do you invest.
I live in Sydney, I will be investing in Sydney, I don't think I am adventurous enough to venture out. Maybe after a few IP's I can venture out.Back to that interest/yield thing, in sydney I'm calculating yields of like between 3-5%, I don't know how your getting these 8.5% yields.
Kind Regards,
Christopher Fife.Hi Chris,
I was referring to the rent return rate (yield) being 1% higher than the Loan interest rate. For example a $200k property with a weekly rent of $326.
At the moment, the yields around most of Aus, and certainly the Capital Cities, are woeful, and I won't buy in those places. Who says you have to buy in places like Sydney? The area is still over-priced in most cases and rent yields will be years in catching up. That means slow cap growth and bad rent returns for years; no thanks. The entry level is also too high generally in those areas, meaning the rent return is even worse; quite often the higher priced the property; the worse the rent returns are, and the hit to the hip-pocket is too high. I am not a slave to my I.P's and don't wish to be, but there are some who are happy to cop the neg gearing and hope for the cap growth. I've been there and done that and it's no fun – especially when the property doesn't go up in value after 3 years.
Of course, you can negotiate a property price down, and increase the rent to achieve the desired percentage, but it will most likely be in regional areas. A run-down property quite often has below market rent due to it's condition and there are quite often long-term tenants in these places who haven't had much of a rent increase during their stay which contributes to this scenario, so to purchase a property like this with 'vacant possession', do a quick re-paint and re-carpet etc, then put in new tenants at current market rates can achieve a sgnificant rent increase. It requires more D.D and knowing the area for values and market rents etc.
There have been numerous posts recently quoting good returns, so they are out there, but you have to look harder and further a-field. I'm afraid the days of buying "off the shelf" cfp's are gone, and we have to be more creative.
If you add the above scenario to a property that you can sub-divide and build on, you can sell the existing building after a reno, (or keep it for a time) and use the funds to pay down the loan on the new building, eventually owning the newer building almost outright, with good rent returns and excellent depreciation from the newer building and fixtures/fittings.
In fairness, you also have to be realistic and be prepared to adapt and evolve your investment strategy too. For example, if you are happy to accept 3.5% yield, then you won't even look for an 8.5% yield area. I only look for these areas, therefore I can find something near it without much effort. The hard part is satisfying the other criteria I set out in my first post. If I can't satisfy these criteria I don't buy. In the last 12 months I reckon I have looked at over 1,000 properties that didn't qualify – that's only 3 per day. This is done on-line, and I have bought sight-unseen before so don't have a problem doing that from over here.
I would rather not buy, than buy an investment that is going to under-perform, or worse, cause me stress and problems and not go up in value as well. Now that's bad.
There are plenty of people around who simply buy because their money is burning a hole in their pocket, who are told by agents and the media that "it's a 4% yield; that's a good return for the area". That's the statement of an un-educated investor.
So Chris, adjust your parameters and aim higher in rent yield and start looking further away.
Thanks Marc, that cleared it all up.
I do need to set my sights higher, and not settle for yields that low, I can do better. About the moving away thing, hmmm, How does everyone find information regarding there due diligence for an area. Like how can I search somewhere to determine if its good or not? I really need an education in this field of D.D.
Thanks,
Chris.Hey Chris,
You can either do a lot of driving, or a lot of surfing.
With the interenet, you can see an area instantly, and get a thumbnail sketch of the state of the market in that area by firstly looking at the selling prices of the type of properties you would like to buy, then looking at the avarage rent returns for that type of property. You can do both those things on realstate.com by looking ip "for sale" and then "for rent" in the same area/suburb.
If the rent returns look healthy,then the area warrants further investigation, and this is where the real work starts.
I look at the price of 3 x 2 houses as my first guide, then look at the rent returns they get. It doesn't have to be a 3 x 2 that you look for, but I find that this is a very common property and easier to judge against. In 5 mins I can tell if there is any point continuing with the area.
After I establish if the rent return is decent enough, (and usually it won't be exactly what I want – but it will be close) then the real D.D starts and I begin to apply the Criteria I mentioned earlier to narrow down the search.
You need to do things like look up the local council websites, ring several local agents (if there aren't many that may be a bad sign), check for recent sales history, ask about demographics – you can even pay for a report on such things on the RPData site or Residex. You can even get a basic suburb snapshot from realestate.com in some instances.By now I have been on the phone to agents regularly and they get to know you and they start to be more helpful and direct to you towards better deals. On this point; you need to tell them VERY specifically what your criteria is, otherwise they will annoy you with other properties that are unsuitable. Give them the guidelines and let them go.
There is a great section in Margaret Lomas's latest book "A Pocket Guide to Investing in Positive Cashflow Property'. The section is called "The 20 questions you must ask". This will help a lot.
Must be built after 1987 (preferrably 5-15 years old), to maximise Tax Returns and cashflow from "on-paper" deductions.
Thanks LA Aussie! I did some research and just found that you can actually claim Building Allowance of 2.5% of the construction cost – I never knew that! This property investing jazz is really sucking me in
One question though, when buying a property how does one find out the construction cost and when it was built?
Ken
kenzel wrote:Must be built after 1987 (preferrably 5-15 years old), to maximise Tax Returns and cashflow from "on-paper" deductions.Thanks LA Aussie! I did some research and just found that you can actually claim Building Allowance of 2.5% of the construction cost – I never knew that! This property investing jazz is really sucking me inOne question though, when buying a property how does one find out the construction cost and when it was built?
Ken
It sounds as though you are getting excited Ken. I remember the first time I heard about the 'special building write-off" I couldn't believe it. WOOHOO!! I think I said from memory.
It is a very overlooked aspect of property investing, and often not mentioned when people start to compare returns between property and other investment vehicles.
The 2.5% yearly deduction runs for 40 years from the date of construction (completion).
When I start to ring agents about the properties I select, one of the first questions I ask them is when the construction date of the building was. Most of the time they don't know, but they usually will try to find out. Agents who are experienced with dealing with investors will know the answer to that question. I then tell them not to show me anything older than the cut-off date with future properties that they may want to show me.
Sometimes it is written on the Certificate of Title, and if not, you can check with the local Council about the date.Thank you so much marc, your help is invaluable. Very helpful indeed.
I will check out that book too.L.A Aussie wrote:I look at the price of 3 x 2 houses as my first guide, then look at the rent returns they get. It doesn't have to be a 3 x 2 that you look for, but I find that this is a very common property and easier to judge against. In 5 mins I can tell if there is any point continuing with the area.This is the only thing i'm confused about, what are "3 x 2 houses"?
Marc, you now have me on a D.D. spree for a while, realestate.com will probably be set as my home page for a while now, hehehe( instead of propertyinvesting.com).
Also, what is the actual specific date that a property needs to be built after to qualify for this thing. e.g. july 1987, therefore anytime in july and thereafter you can claim.
Also, you know i'm the 6 months FHOG and reno type, so will a property built in this building write off period(after 1987) be that old that I will be able to do much???(I don't know if this question sounds right)
Thanks again,
Chris.Hey Chris,
A '3 x 2' is a 3 bed, 2 bathroom house.
Another good indicator to look at is a '2 x 1'. For me this means a unit, for some it is a 2 bed, 1 bathroom house, but I don't know of many investors buying this size house unless there is significant 'add value' potential by way of reno or subdivision.
For new investors with limited funds, a 2 x 1 unit is probably the easier property to go for and is always in demand, but the 'add value' options are also more limited.
I can't remember the exact date for the cut-off; I think it is in October. I just cut it off at 1988 to make it simple, but I normally look at something built a bit later anyway; in the '90's. These places easily qualify, and quite often need a spruce-up.
You will be surprised how bad some newer houses can look after a few years of tenants (and owners), and the good news is, the worse they look, the better they come up after a reno. There will be plenty you can do with renos; the only limit will be your imagination and budget. Keep an eye out for places with really bad gardens too. This is an area where the transformation can be dramatic.
Keep in mind that any exterior structual changes will need council approval if it is a house, and many units are controlled by Body Corps, and they forbid you to change anything without B.C approval. But inside there is more freedom.
Be careful that if you decide to knock out a wall that you are not doing it on a 'load-bearing' one.Thank you for that clarification Marc. I think I will stay to the "3 x 2", early 90's, sounds good.
Thanks,
Christopher Fife.L.A Aussie wrote:My criteria is:
1. Must be built after 1987 (preferrably 5-15 years old), to maximise Tax Returns and cashflow from "on-paper" deductions.
Of no interest to me.
2. Must be able to "add value" through a reno, or subdivision to increase equity and rent return for rapid wealth building and cashflow. (new properties don't work for this strategy as a rule).
Never spent more then $5,000 on a reno wont touch anything structural
3. Can be a unit or house; whatever is in demand for that area for high occupancy. (units cannot be subdivided, but can be "value added").
Never would buy a unit, no land content, not interested in depreciation so units are out, land capitalises
4. Strong rental demand for the area to ensure steady occupancy and less vacancies.
Metro buyer only max 30kms from CBDs
5. Rent return at least 1% higher than current interest rates for better cashflow.
Negatively gearing need to with the capital gains
6. Must have strong prospects for employment in the local area for capital growth and larger pool of renters and/or buyers.
Same as 30km radius
7. Must be in good streets with good street-scapes for buyer/renter appeal, cap growth and high occupancy.
Have purchase the worst house in the worst street and still had double digit growth and a tenant
8. Must be in close proximity to all amenities such as shopping malls, public transport, schools, commuter roads, parks, hospitals etc for cap growth and rental demand.
proximity again
9. House price must be in the lower half of price range for the neighborhood. There is a much larger pool of buyers and renters are in the lower half, so this ensures ease of sell/rent in the future. The rent return percentages are usually higher in this price range as well.
10. Good local network of Property Management companies; I don't want to do it, and a good manager can improve your success with tenants.
Buy and hold for a year and sell property managers are the tenants worry
The combination of all these factors provides, for me; a safe and usually successful investment – basically set and forget with minimum hassles.Don't mean to be negative but, i guess for me buying property is all of these things but i've never caught myself thinking or overthinking.
I never forget the bread and butter issues though and I understand them.
I must achieve a min $100,000 capital growth within 2 years and have often sold properties (investors sin). Greatest growth $70,000 1 month after purchasing and i will never spend more then $5,000.
Biggest regret not being able to purchase more properties due to a lack of cash flow. The pain soon receeds when you sell though and get rid of the banks all together.
At the end of my first year investing (starting from 0 only FHBG as deposit on $119,000 in 2002) I had a portfolio of $900,000 and 40% equity including my PPOR.
Good post O.I.E, thanks for that.
How many years have you been investing this way for now?
Have you ever had a property that didn't perform, i.e it didn't realise any cap growth in the 1-2 years that you hold them before selling? If so, how did it impact your cashflow (assuming it was a neg cashflow)?
So, are you a trader, or flipper; or do you do a bit of buy and hold as well?
If you continually buy then sell, what happens to your nett profit; do you re-invest all of it into the next project, or do you re-direct some of it into some other investment vehicle? What I'm getting at is how do you continue to keep accumulating wealth?
You didn't say what type of properties they were that you bought; I assume it would be houses because you said no units due to lack of land content, so is it a specific kind of house (eg; 3 x 2), does it have to have subdivision potential, etc.
So would you say a good chunk of your D.D would be trying to find properties for sale that are well under market price and needing a make-over? How do select your target properties?
Hi Marc,
Thanks for the tips. I am a new property investor and I want to play it safe. I am thinking of buying a 3×2 unit because they are cheaper than houses. I know that units do not have land but what do you think are the advantages of buying units apart from price?
Also, is it better to buy units with 10 or less units in the complex?
I saw a 3×2 unit in Carrum Downs, Vic with double garage, ducted heating, air con, court yard in complex of 20. It's 240K+ and its rent is$240, thus I will have to be negatively gearing. With your criteria of 1% rent yield, does this mean this area's rent is too low and burnden too high?Thanks heaps,
IniHey Ini,
Units can still be a good investment (we bought one for $105k in 2003 that has doubled in value) and when you are beginning investing and price/finance is an issue, then the cheaper option of units will still get your foot in the door. The neg side is the body corp fees and the inability to change a lot to add value, but you can still add some.
It is better to stick to smaller complexes of less than 20 (the one we have that has doubled is in a complex of 4), and go for individual garage parking if possible.Based on my criteria of the yield being 1% above the current rate, those units wouldn't qualify for me, but look at the over-all picture;
it is an area of growth in tha corridor between Frankston and Cranbourne,
it is in a smaller complex with good parking,
the unit sounds as thought it would be newer? (based on the double garage) so the depreciation aspect will be good.Have you done some research of the immediate area on prices of similar sold properties as a comparison? Is it in a good location for amenities? Can you add value through a cosmetic reno of some sort?
Assume you get it for $240k:
Add 6% for purchase costs = $254k approx (probably around $250k)
You put in a 20% deposit plus costs in cash, the Bank lends the rest = $62,400.
Interest rate on an I.O loan of, say; 7.5% on 80% borrowing ($192k) = $276 p/w
Factor in 20% of the rent being eaten up in holding costs, leaving a nett rent of $192 p/w .
Your shortfall = $84 p/w.If you are borrowing the whole amount plus costs, your shortfall is $174 p/w approx. A good depreciation allowance may bring that figure down by say, half approx. You are still up around the $90-$100 per week shortfall. Can you carry that neg cashflow?
Of course; these are the worst case figures; you may have a cheaper interest rate, you may have far less costs, you may buy it a lot cheaper, you may be able to increase the rent.
If you are putting in a reasonable cash deposit (as above), and there are good on-paper deductions, this property may be cfp after tax.
Hi Marc,
I like the criteria you outline to purchase a property, well thought out and logical.
Just a couple of quick questions….
1.Can you please provide more insight by letting me/us know what areas/suburbs you are are personally looking at (in Aust) which are close to the set out criteria??
2. Do you always follow these steps regardless of where the market is, or what you personal finances are like, for example – if you had a lump sum of cash and the market was in a boom would youa) dump the cash onto a high $$ property making it CF+ , which was close to cbd ,had good capital gain prospects ect OR
b) stick to original criteria and probably buy several which suit?In essence to you ever adjust your criteria to suit economic conditions?
Cheers,Hi Sean,
(good name – my son is Sean).
To answer the questions:
1. As you probably know, the rent returns Australia wide at present are not that great. Many people are finding good returns in rural areas, but the problem is cap growth may not be great. We haven't been looking seriously since moving to the USA; as we are currently in a deal we did before we left Aus and needed to consolidate for that, so we have just been reducing our investment debt. The settlement for our deal happens in about 10 days (supposed to happen Aug 1st but was delayed) so we will be looking again after we get back to Aus in May '08 – it will be a business not a property.
Having said all this, I think the better areas to look are still more regional, but the popluation size needs to be at least 10,000, and with some good strong employment history and future prospects. This will give the best combo of rent returns and cap growth.
I only know the Victorian markets at present, and I think that with the improvements in transport (roads) generally, this brings areas that are within 100kms of the major cities under the magnifying glass, whereas 10 or so years ago they were simply too far away. A good example is the town where we are currently living in the USA; Sant Rosa (population 150k). It is 60 miles from San Francisco, and is now part of the commute to the Bay area. House prices have doubled here in the last 4 years, and are still going up while San Fran has stalled.
So, I would be looking at decent sized towns within 100kms of the major cities, with good transport or plans for improvements in that area, good support for employment, shopping, schools etc. Cheaper price ranges within these areas will attract people who are happy to commute, but can't afford the cost of closer in. Areas like Frankston, Dandenong, Kilmore, Pakenham near Melbourne are good examples, but the cap growth in these areas of recent years has left the rent returns behind. No doubt there are better areas for growth and rent combined, but I haven't been looking.2. There are always micro-markets all over the country, no matter what the state of the general market is. The media will always give a broad view, and as such you would have heard the last 3 years since the end of '03 described as property slump. But both Perth and Darwin boomed, we have enjoyed very good cap growth with our portfolio during that time (not Perth or Darwin). So, no matter what the state of the market is, there will be somewhere that fits the criteria and will outperform the trend at the time.
Also, the slump in the markets is a good time to buy as there are few buyers, but people still need to sell for different reasons, and this is when you can pick up some bargains, so there is never a bad time to buy (I sound like an agent).
My decision to buy is always based on my financial position at the time. I am a cautious investor, and don't like to over-extend myself (been there, done that; can't sleep at night). We always work on about a 60% maximum LVR, so if a purchase will take us over that we don't do it. This always gives us a nice buffer of useable equity in the event of a catastophe that life might throw our way. At present we are at around 56% LVR, the new deal will take us up to around 58%, and that will do until we get back next year in May.
I never get lump sums of cash – tax returns are the only lumps we get, and these are pumped straight back into the investment loans to reduce the LVR, and improve the cashflow.
a) In a market that is booming and is offering low rent returns, it would make sense to throw a lump of cash into a good quality property to take advantage of the rising market and to hopefully turn a neg cashflow into a pos cashflow. Dumping money into a high dollar property will usually give you a bigger dollar return than a cheaper property, but it's all relative and the percentages are what I look at. Buying a more expensive property requires a higher entry level, but if the rent returns are lower this maybe over-extend you on the finances, there may be more vacancies as there are less tenants at the higher end – possibly more risk and emotional stress to make a bit more money than splitting the same money over 2 or more properties.
b) Buying 2 cheaper properties rather than one more expensive property is often better than as the cheaper properties usually deliver better rent returns. Not only that; you spread your risk of vacancies and market changes. Two properties in different areas might go up (or down) in value at different times and the likelihood of both being vacant at the same time is small. I would prefer to buy 2 x $200k properties than 1 x $400k property for these reasons.
The $400k property feels nicer; maybe a new, sexy townhouse etc, but that is an emotional purchase not an investment purchase.Lastly, I think you always need to adjust your strategy as you go to suit the conditions, but so far we haven't had to. The conditions for satisfying my criteria definitely are harder right now, but the conditions still exist to satisfy them; they are just harder to find. As you saw with Opportunity In Everything's post, he is only concerned with cap growth and is happy to carry a neg gearing until sale time. It works for him.
If I was following that startegy, it would be easier to narrow down the search area to just cap growth suburbs and I wouldn't care about the rent returns. I don't know O.I.E's finacial situation; whether he still works full time or not.
I have made more work for myself to locate the right properties in today's real estate climate, but the reward is that I can still keep buying property, still sleep at night and still play golf all day.http://members.optushome.com.au/~andrewkiss88/criteria.htm
Check it out….its worked for me…
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