How did you get started?

Hi

The market has changed quite a lot since I started so I don't know how relevant that would be – except to say, there are always obstacles in every marketplace, and success can sometimes depend on discipline and your ability to problem-solve.

Some of the classic issues for first timers are:

– the cost of a first property mortgage (at $300K+) negatively geared with a 4% yield and 8%+ mortgage interest rates (ie 4% out of your own pocket).  With capital growth, how do you service the cash shortfall debt?
– if you buy in an outlying area or region for low entry level price and better yield, how do you anticipate whether there will be sufficient tenancy demand?
 – these are significant financial decisions which 'lock in' people for a number of years. 
– with uncertainty in interest rates (and the rises), how would you have fared if you adopted some of the more traditional wisdom of IO loans (so you can buy more property and you leveraged to the hilt at 90% + LVR) without a good risk management plan?

I developed a boardgame simulation tool so that the various strategies could be roadtested whether they be capital growth/low yield, positive cashflow, managing moving interest rates, negative gearing & tax effects, etc.  A number of my 'apprentices' (some of who are already investors in property)  decided after simulating various circumstances, they would have done things quite differently in starting out if they had their time over.

I also conducted an exercise for a group of first timers about 18 months ago where people in their 'local' areas did an exercise in researching and analysing a proposed purchase.  Looking at the scenario in hindsight today has some interesting results.  One of these people picked the area of the Logan shire in SE Queensland where the cost of a basic two bedroom residential unit was less than $110K and the rent was about $145pw.  When I looked at http://www.realestate.com.au recently there is now nothing less than $200K and rent is around $185pw for these properties.

In another instance, about 9 months ago, I suggested looking at the Elizabeth, SA area (about 15kms from Adelaide central) for 3 bedroom 'houses/maisonettes for around $110K and returning about $150pw.  Today Elizabeth has well and truly exceeded those initial expectations for cashflow and capital growth.

Despite these two instances, which could have been lucky guesses, what would you have done if these had been 'bad' choices?  Ok if they had not turned out, then carrying a small mortage for $100K would probably still be manageable.

So some of the lessons.
– Time is moving on.  The trick is to get into the game at what you can afford so once you are in, you can benefit from increasing prices.
– Also, it gives you some sort of 'credit' profile as an investor.
– What is the worst case scenario, if you 'picked' badly, and how can you stay in the game and keep servicing the mortgage.  Property investment is a very 'forgiving' investment and usually if you can stay in it long enough, your initial 'bad' investment can become good.  That's providing you were quite sensible and not overly high risk in the first place. 
– What is a mortgage you can carry comfortably if things don't go well?

Hope that's given you a few insights.

I bought in outer western sydney when I was 25 (in 2000), bought a cheap 3 bed townhouse, basically the cheapest thing in the suburb. 2 years later the boom had started which upped the value, so I used this place as equity to buy a place closer to the city.  I bought the cheapest, liveable property on the market rather than the maximum i could afford. While it did take a while to travel to work, I have built up equity over the years without struggling too much with a big mortgage.

this month's API has an article on this. I posted a response to a question like this on another forum a few months back and hubby and i have our case study in the mag (they got it a little wrong tho but it does prove you can move up the ladder with not a lot to start)