Positive gearing based on Steve McKnights principle

Firstly,  Steve's book is totally out of date now. I have read it, and it's a great book, but times have changed a lot. The market is vastly different to when he did his stuff. Not to say that it can't still be done, but it's very difficult. These days, you need to create the pos cashflow through renos, adding value, subdividing etc.

You can, however, find properties that are POSITIVE CASHFLOW AFTER TAX. This is different. Read all of Margaret Lomas's books to learn the strategy. This is the strategy that we have used.

Secondly, agents rarely invest. Their incomes are very inconsistent, and most are purely salespeople. Most have no investing knowledge. You are correct; if it was that great, why doesn't the agent buy it? They can't afford it most likely. There are rules restricting them from buying properties that they are selling unless they disclose their interest in it, but it is a minor inconvenience and not the main reason for them not buying.

Thirdly, the rental return on a house has nothing to do with it's value and vice-versa. They are both market driven. Look at the last few years. The cap gain has totally outstripped the rents to the point where in most parts of Aus the rent returns are crap now if you are trying to buy.

But I expect the cap growth will slow down as the interest rates keep climbing, so the rents will catch up again, then the cap growth will surge again, then slow down, etc etc. It's a cycle.

Propertyboy,

we do live in a flawed world. Marc has made a number of good points, here are some more:

Real property is not like listed property (there is some correllation between the two but no-one has yet been able to determine beta)
Real property is not valued on an instantaneous basis based on full disclosure to the market (like shares) – there is a need to investigate and undertake due dilligence on any property purchase.
No two parcels of land are identical ie each is unique unlike any two shares in BHP or Westfield (each is valued the same and is indistinguishible from the next).
Reporting & completion of property transactions generally takes 2-3 months compared to the instantaneous reporting & tracking of equities.
Markets are more sophisticated than when Steve started investing, there are new major players in the market (super funds, globalisation of property assets etc) which have added to price competition for A grade assets, tax rulings keep changing and will indirectly impact on how each investor invests or divests.
Yield is not a static thing – yield fluctuates with some correlation to interest rates (more so for non-residential property).
The investment strategy should always be feasible regardless of the tax situation – never make investment decisions solely based on profitability after tax has been considered, do all your analysis pre-tax & pre-tax benefits (eg depreciation)

Hi again,

You might be interested to know that when I first started investing (5/99) I was much in the same boat as you are.

I had attended a seminar (in Sydney), heard about +ve cashflow properties, and then came back to Melbourne and started looking as hard as I could. I spent days looking, and there was no realestate.com.au I rang stacks of agents, pounded streets etc; and I couldn't find a single one in metro Melb.

I was close to giving up and thinking that you couldn't find these deals, and then I thought I would try Ballarat. Afterall, there was little to lose other than a day or two of pay.

Even up there, I looked through many houses before I finally came across one that would be +ve cashflow, and that was a good house in a bad area.

My point is that +ve cashflow property was never easy to find, but by looking in different areas and in different ways, a profit making opportunity emerged.

And hence, with the market changing, Ballarat property has gone up, so the area I once bought +ve cashflow deals no longer gives the same opportunity. Do we give up?  No. We change and adapt.

For instance, I recently purchased a +ve cashflow commercial property (that met the old 11 sec solution formula). At the moment I am looking at an unusual deal – big bucks ($1.5m+ purchase price), but something that you could chop up and maybe make a quick $500k.  This may sound high risk, but when you know how to analyse a deal from the inside-out, it is really quite straightforward.

So, to answer your question of 'where do I look', the best answer I can offer is to think about something that you want to make your niche and then look for deals that fit that criteria. Some go for renos, others subdivisions, others development, others buy and hold etc.

As for the property market, economics is important as it provides a model to understand behaviour, but people are random and all to often economics is used to justify what happened rather than to predict true value in advance. There is no logic to why some pockets of Melbourne rose 75% last year, and others were flat. Except of course, fear and greed driving prices up.

Not sure that will get you an A+ on your economics paper, but it is reality.

All the best,

The problem with economic theory is that is must deal in statistical generalities. It discusses the behaviour of the market like 'the market' is a conscious entity. However, it isn't, it's an agregation of the behaviour of innumerable individuals.

This will lead you astray when researching for investments. e.g the median 3BR house in smithville is yyy, and the median rental for 3 BR house in smithville is zzz. Therefore the yield is 6.44% (or whatever) and this is below the average bank interest rate of 8% bla bla bla….therefore CF-.  The median is not a real value, it's the centre of a range of values. SO IT DOES NOT FOLLOW THAT EVERY HOUSE IN THAT SUBURB WILL GET 6.44%

So the market is not a real buyer/seller, and the median yield is not a real yield. How is this a basis for investment then?

The answer is that we, as investors, buy specific properties, not general properties.

Touching on a point made by SNM, buying specific properties opens opportunities where the rent could be way above the median, due to some unique feature that exists or can be made to exist, and the sale price is well below the median, for some other reason. E.g. rent might be good because of location, a feature (eg self contained granny flat), or because a cheap improvement can be made (like A/C or a carport). price might be low because the garden is overgrown or painted in really bad colours, or because the guy has just left his wife and wants to sell it quick to get her out.

A combination of these found me a property 8 months ago in suburban Hobart at a 35%  discount to asking price. This made it CF+. I've found 3 more since in other places, so they are out there. It seemed to take forever to find the first one though…

When you first get into this game, it seems that the only way to find properties is to get on realestate.com.au and look up the prices, then look up the rents and do the calculation. You may have lists of suburbs with the yields that you've collected. It's a good start, but it is only the start. You need to spread your wings and get imaginative.

One more thing: Just because you haven't worked it out yet doesn't mean that other people haven't. I don't know exactly how lasers work, but seem to have one in my DVD player that works.

Daedalus

Medians will give you an idication of what was happening in the market based on the entire market in an area, not being selective of the type of property and only being a statistical analysis. Your own research will dig up the most recent sales, most comparable properties, non-related transactions etc which will provide the basis for your own investments.

If you analyse the sales data, then exclude those which don't apply to what you are researching you will end up with a different answer to the median price. Eg If there were 20 sales in an area, 8 were 3 bedroom new units, 6 were 3 bed older units and the balance were 2 bed units you would sift through the sales to determine which ones you would compare to the purchase that you are considering eg rule out all of the 3 bed units as you want a 2 bedder or strike out the new units & 2 bed units as you want an old 3 bed unit.

Property boy,

If the real estate agent buys the deals you are talking about then how does he get a commission to live on.
Most of them go for the instant gratification of % of sale rather than % of investment return.
Would you take an instant $5K sale or wait a year for a property returning $100 / week cash flow?

Real estate agents do buy properties for themselves and some of them are quite successful  property investors.

C2

This is my first time on this forum but this topic hit straight at a issues that I emailed Steve before signing up so Steve you are welcome to disregard.

Having only recently reading through Steve’s 0-130 book, it become quickly apparent to me that the market has quickly changed from the late 90’s. No problem with what was said in the book and it reinforced alot of what I thought about neg gearing etc but the 11 sec rule application may have to be modified (by the user) to account for the current market, particulaly in residential IP.

For the 11 sec rule to work, roughly you are looking at a 10%+ return on the property value, whereas rentals these days, in the SE NSW are more like 5% and that includes regional NSW ie townhouse Wagga, rental income each week 225-230, asking price $225-230,000 .

Now no doubt you can still be positively geared on some properties, however I believe now you would need to factor in tax effect to do so.

Or have I got it wrong? Any thoughts appreciated? Looking at buying my first IP this year but to positively geared in SE NSW (generally) you need to have about a 40-50% deposit so any advice is appreciated.

thanks