There are some units i am looking at in the Melbourne suburbs that are likely to give a 4.5% yield and a 4% capital growth. Does this seem worth the investment or should i always look for deals that are likely to offer a larger capital growth then what the interest on cash in bank would be? One of my main drivers in investing in property is to take advantage of tax savings from negative gearing. Financing will be through my home equity, ie i will not be using any of my savings at any stage.
tiger_ra wrote:One of my main drivers in investing in property is to take advantage of tax savings from negative gearingThe ol’ spend a dollar to save 25 cents trick eh. Sounds like a plan.
The Freckle
yes but its in hopes of making $2 extra in the future!
HI Tiger,
Not sure where you get the 'likely to give 4% growth figure from" as growth is not predictable.
Median house prices in Melb went from $40,800 (Dec 1980) to $565,000 (Dec 2010) which equates to a long term growth rate of approx 9%/annum. Now this is not to say a similar result will be achieved in the next period of time. Source REIA.
The Melbourne market has done pretty well over the past three years or so and probably due to run out fo steam pretty soon. Certainly this has been the norm in markets such as Perth, Brisbane, Sydney, Darwin etc which have a drop off or extended flat period after a price surge during the last 10 years.
I don't see Melbourne being any different to these cities and fully expect Melb prices to stagnate at best.
So while negative gearing is a strategy employed by higher income earners the tax saving in the top bracket is still only ~50c in the $1. That is OK in a period of growth and if you are in the top tax bracket but not at other times IMO.
This then brings us to rental returns. Rents rise and fall on the basic supply and demand equation. Over the past 12 months Melb vacancy rate has gone from 3.3% (Dec 2010) to 4.4% (Dec 2011) so I expect the potential for rent increases in the short and medium term are somewhat limited IMO.
To summarise at 4% growth (predicted) and 4% rent return it could be sometime before you appreciate the benefits of property investment decisions in the Melb market.
My thoughts only!
tiger_ra wrote:yes but its in hopes of making $2 extra in the future!So we’ll definitely do our dough today and hope to make it up later.
You been reading Homer Simpson’s ‘How to Grow Rich by Loosing Money”…. go on you can tell us
The Freckle
Thanks Derek – wasn’t quite yet research enough to know where we were in the cycle.
Freckle – how else can we make money then !
Hi Tiger,
FWIW – here is a link to Herron Todd White's summary of where they see the respective market. You'll notice they have Melb listed as a declining market.
http://www.htw.com.au/Downloads/Files/231-January-Month-In-Review-Market-Indicators.pdf
You can make money working, everything else has a risk, then you have to ask yourself how much risk can you take. Don’t expect anyone to answer this question for you.
You can make a lot of money in the casino if you are happy to take the risk.
To see the capital growth you need a crystal ball, don’t believe in anything elsetiger_ra wrote:Freckle – how else can we make money then !How you make money and from where is the challenge we all face. Some are more successful than others and some just do their dough.
Negative gearing however is not the way to go. The objective is to make money not loose it so we can claw a lesser amount back from the ATO.
The Freckle
Hi tiger
During this time of less than startling capital gains it may be worth considering a niche strategy where you lock-in fixed capital gain on the property as well as receive positive monthly cash flow from it each month. This can be achieved by buying a property and on-selling it with vendor finance (VF).
Sure you do lose out on the long term capital gain on the property but the locked-in capital gain and the money in the pocket each month helps to overcome that issue
We have been doing it since 2003 and these VF properties now support both our buy and holds and our lifestyle.Cheers, Paul
Paul Dobson | Vendor Finance Institute
http://www.vendorfinanceinstitute.com.au
Email Me | Phone MeAn alternative way to finance your home.
If i can manage to buy at a ‘discount’ AND ‘value add’ (through renovations) targeting a 4.8% yield, would this seem to be a smart enough move or it is still a less than desirable time to buy considering we are in a flat market. I would still be in a negative geared situation….
Hi Tiger,
I really don't know enough about your situation (age, income, long term plans etc) to pass detailed comment but reading your comment above it would appear as if you are on the right track now BUT it also appears as if 'saving tax' is still your primary focus.
I would like to see you change the focus to 'making a profit' first and then if there are tax savings to be made that is a bonus. Investing to save tax should never be your priimary goal (Great Southern anyone?)
Food for thought?
tiger_ra, personally I dont think passive CG is going to be impressive over the next 5 years, so the only way to obtain good CG is to create it. Renovations, developments .. whatever.
4% CG isnt so great either when you can pop your money into other investments offering 4% minimum returns with no risk.
tiger_ra wrote:yes but its in hopes of making $2 extra in the future!Hope is not a strategy.
tiger_ra wrote:If i can manage to buy at a 'discount' AND 'value add' (through renovations) targeting a 4.8% yield, would this seem to be a smart enough move or it is still a less than desirable time to buy considering we are in a flat market. I would still be in a negative geared situation….Yes buying at discount and adding value are great ways to increase your equity without waiting for it to "maybe" happen. Why would you target 4.8% yield? That's like targetting getting 50% on a test. If you buy under market and add equity through a reno you would also increase the yield. Aim a little higher (at least 6%). Personally I wouldn't bother for under 7% unless it had development potential.
Reach for the stars- You may not get one but you won't end up with a handful of mud.
Tiger_ra,
Property is not a set of fixed figures and stated results. Its an ongoing supply and demand equation. So just because a median figure is generated to cover the suburb it doesnt state the individual performance of any particular property. It just gives you an insight into the current median expectations within that suburb or zone.
YOUR expectations on the property should be based on what your investigation into the needs and long term requirements of the area need. If the area has a high demand for unit housing .. then thats going to be an acceptable long term investment. If the area has a rushed need for development land .. BE CAREFUL. Lots of councils are looking now at acceptable development zones rather than ongoing multi story building across the suburb. This revalues the land component outside the zones. So within the zones the land is more expensive than outside the zones of future multi story development.
The same should be said about your figures on what you are prepared to accept as a return. The preamble is that if you pay for a property in a better area you should be expecting better capital growth. Thats a wonderfully conservative and naive format of investing. As an ongoing supply and demand equation .. property is also subject to trends. So what was a desirable suburb 20 years ago may not be the suburb of choice 20 years later. And vice versa. If its not liked and not wanted .. property will just trend along at a level on par or just above par. At which point including expenses .. you are actually losing money on the deal.
At a return level under the current interest rate .. you'll be paying the difference plus expenses out of your back pocket. Map the likely percieved movement in both rents .. and price for your property over an extended 5-10 year period. You may catch a boom .. you may stagnate or even take a minor loss in the market. But the map will provide you an insight as to how long the property is going to be an expense out of your wage earnings and by how much. Thats something you'll have to take account to work out how long and how willing you are to support your investment.
Negative gearing is there for when you have an excess income and wish to reduce your taxable income through claiming the costs and interest involved with a property as allowable deductions. So if you are on a high income or a brain surgeon this sort of thinking may make sense. Negative gearing is the gamble that your outlay in expense will be offset by future capital gains performance and ongoing property growth. This in itself may take time depending on when you invest in the property cycle. It also can be badly damaged by higher interest rates (again .. it all comes out of your pocket).
Negative gearing has a place and a purpose. And if you fit this situation then it might be for you.
I consider negative gearing is a tool rather than a strategy and therefore neither good or bad in itself but to be carefully weighed up as part of your investing. Blanket statements such as 'avoid negative gearing' or 'only buy positive cash-flow properties' are at best not helpful and at worst plain wrong in my opinion.
Derek wrote:Hi Tiger,I really don't know enough about your situation (age, income, long term plans etc) to pass detailed comment but reading your comment above it would appear as if you are on the right track now BUT it also appears as if 'saving tax' is still your primary focus.
I would like to see you change the focus to 'making a profit' first and then if there are tax savings to be made that is a bonus. Investing to save tax should never be your priimary goal (Great Southern anyone?)
Food for thought?
Very much agree that making a profit should be the top outcome.
With that in mind, I probably wouldn't invest in this particular deal
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