Questions…hope somebody can help, I’m very new to this!

Hi Sharon

I looked into the Defense Housing a few years ago…

As Catylist said the negatives are that they generally have a very high % charge for property management, which amongst other costs makes your property heavily negatively geared in the beginning.

On the positives, they do things like fresh paint, new carpet etc for no charge at the end of the contract term.

My overall thoughts are that if you are very risk adverse, and like the idea of a garanteed rent / property condition etc then Defense Housing would work for you.

If you are happy to deal with the occasional dodgy tennant, and take care of some basic repairs / property maintance yourself you can achieve much better investment returns elsewhere.

Matt

Hi Sharon

When you look at buy and hold property, from a very simplistic view point there are two main factors to consider.

Rental Yield

This is the rent you will receive each week as a percentage of the overall purchase price.

To use Steve's '11 second rule' if you take the current interest rate and add 1%, that will reveal the rental yield you require to have a cash flow neutral property.

So, although your specific weekly return is affected by other factors such as deposit, on-going property management costs etc etc on a very simplistic level, a 3.58 % rental yield is going to provide a fairly negatively geared property.

Capital Growth

This is the forecast growth of the property.

Eg. If the property is valued at $300,000 and is forecast to grow at 5% per year, the property is forecast to be worth the following;

Purchase – $300,000.00
Year 1 – $315,000.00
Year 2 – $330,750.00
Year 3 – 347,287.50
etc

So, to wrap it all up. Instead of looking at the Defense Housing and saying is 3.58% a good yield, I would be asking the following;

1) Is 3.58% rental yield + X % forecast capital growth a good overall investment?

2) If i answered yes to the above question, i would then ask what is my after tax cash flow going to be at the end of each week and can i afford to fund the property if it is negatively geared?

Matt

Ps. For comparison purposes, Residex produce a 'best rent' report for $295 that lists the Top 100 suburbs that have a median rental yield of 5% minimum and a forecast capital growth of 5% pa minimum…    

3.58%. haha. That's laughable. I wouldn't touch it.

I wouldn't even look at a property under 6% unless it had potential to value add.

Good explanation Matt!!!