The challenge - high growth AND high rental yield

[Lily House]

I have read a lot lately about the benefits of positive cash flow. Usually there is a comment added that high rental yields does not have to mean low capital growth.

Would anyone out in forum land like to volunteer an area where there are good rental returns AND where they believe there will also be good capital growth.

Thanking you in anticipation......

Lily

[trump63]

Im not too sure, but there could be a few common characteristics or a formular of some sort which could help determine high growth coupled with high yields in a prospective area?
Please tell me if there is!

Trump63

[see_change]

There are suburbs that at times will give high yields on a long term and high capital growth over the short term. These short periods may be followed by long flat ( or periods of negative ) growth.


Picking these suburbs depends on timing in the cycle and they are not always going to be there.

Typically these areas are lower socioeconomic areas which tend to move later in the property cycle. They are also areas which many investors consider no go areas.

Mt Druitt in sydney offered high yields 3-4 years ago, and has more than doubled in value in the period since then. Logan is a comparable area in brisbane which has moved significantly over recent time and is offering good returns for those who bought in prior or early in the movement. Areas closer to the brisbane CBD offered good returns and growth to those who bought in earlier in the cycle.


There would be similar areas in all Capital cities and many country areas.

see change

[trump63]

I have my eye on the brizzy market and in a years time im going to purchase an IP some where around coorparoo (7km from CBD).
But due dilligence will help me know the yeilds/growth figures, i hope.
Its bloody hot up here Nth Qlnd.
:D :D :D :D

[Kristine..]

G'day Lily

By high yield, I presume you mean higher than inflation and / or current bank lending rates?

It is almost, but not impossible, to find a property that is truly cash flow positive ie if borrowing the gross purchase price including stamp duties, legals etc, where the rental income would cover all expenses.

It can happen, but often relies on depreciation benefits, calculated as if you earn at least the amount claimed for depreciation, at 47.5% tax bracket. In other words, to get the maximum benefit from, say, $15,000 depreciation, you would have to earn $75,000 per annum, or $15,000 above $60,000 when the top tax rates apply.

Capital growth occurs over time, and tends to average out at 9% per annum when taken backwards. To predict forwards is closer to fortune telling than calculated planning.

The median sales figures hide many factors.

eg my current project will probably sell for $75,000 more than I bought it for in May 2002. Wow! Yep, but I've put $73,495 into renovations and redevelopment. So the figures would give a false impression of growth, when really we are talking a different property in a different market, and not capital growth of the same property.

New projects now include one eleventh GST, making new properties appear to have 'jumped' when really they are simply more expensive.

OK, to consult my crystal ball:

I'd look at areas about 45 minutes from the CBD via any new or planned freeway extension, then evaluate those areas point by point.

Remember, it's your Internal Rate of Return, not just the absolute figures which are important.

So if you can buy in for $10,000, and top up the investment with, say, $5,000 per annum (shortfall in rent & outgoings), hold the property for three years, then after the tenant leaves spend your annual leave and $2,500 dollars on paint, floor and window coverings and gardening, then you sell the property for $45,000 more than you paid for it, deduct selling expenses and a bit of tax, you will have made approximately $27,500 net, which is more than 100% / 3 years (yes, yes, I know this isn't totally accurate but you get the drift).

(Naughty, naughty! Silly me. You don't want to sell, you want to refinance. and buy more!!! However, same principles apply)

From my point of view, the less money goes into a project the better. My money, that is. I'm always happy to pay interest, it's a genuine business expense. And the old saying of leaving the pennies alone and the pounds will take care of themselves, applies to your question, too.

Choose wisely, leave it alone, and the investment will look after itself. But remember, it is only the property with your name on it which will make you any money.

So do your research, but at the end of the day, there are people living everywhere (even West Heidelberg - actually West Ivanhoe is a good buy and undergoing gentrification at a rapid rate), make sure your rent is affordable for the area ($500 per week is not going to happen in West Heidelberg), maintain your properties, and be pleasantly surprised by the capital gain.

My Hot Tips?

Scoresby with views (7 years hold time)
Asvcot Vale unrenovated 1960s yellow brick (20 year)
anything in Richmond (forever)
the fringes of Seddon (could be slow - 15 years to reach potential)
West Ivanhoe (be prepared to invest the same dollars again in renovations)
parts of Fairfield between Upper Heidelberg Road and the Yarra
Thornbury, Preston and across to Coburg (strong student shared house market - habitable but not fancy, ignore the hydroponics in the wardrobes!

Cheers

Kristine

[alpina]

excellent post kristine :)

thanks,

julie

[trump63]

G,day Kristine,

I,ve spent a short time at Richmond but quite alot of cash at the various cafes and bars along the main strip there. From my limited experience of the place, 1 weekend, I have enough courage to say it would be an excellent addition to a portfolio.
Tell me Kristine, how has Richmond performed in the past?, and whats the medium price for a 2 - 4 bdrm doer upper?.. thats if there are any left.

Cheers..
Trump63

[Kristine..]

Trump

I can't give you this information off the cuff, but there are various websites which will give good profiles of an area.

The Age newspaper www.domain.com.au has excellent suburb snapshots, www.reiv.com.au gives good median increases in table format for almost all postcodes in the metropolitan area, and good 'ol www.realestate.com.au has current for sale listings plus rental search plus a sold properties section. You can also order an individual property history from this site, or simply look up the example (insert any property address) to get an idea of when the property was last sold, recent neighbourhood sales and recent comparable sales. Unless you pay for the history, you will get dates but not $ figures. Good for a quick 'n easy profile peek to get a general idea.

There is no substitute for cruising the streets. Look to see if money is being spent in the area. Are people improving their houses? What is the socio economic mix? Coffee on the footpath will give you a mini profile, but not an accurate one due to tourists. Call into the local ordinary shops and see who's doing the weekly shop. A good range of people denotes a healthy area.

However, when it's all said and done, you will still have a budget of time and money. It's not much good to buy something in need of repair for example if you've put all the money into the purchase plus are busy at work, with family etc and can't do the necessary improvements in order to maximise the property's rental potential.

Sheese?!!! Don't I remind you of Brian's mother in 'Life of Brian'?

'He's not the Messiah, he's just a very naughty boy!'

So although there will always be a Holy Grail of property, in the short term, why not just buy the next available, affordable property in your immediate neighbourhood. You live there, so it must be a good area!!

Cheers

Kristine

[PIppety]

Hi Trump,

Not sure how well you know Coorparoo and the surrounds but my preference in that area is Camp Hill.

I had always liked Coorparoo but there are too many units there now.

Just my 2c worth !

Cheers
PIppety

[Mark Laszczuk]

In relation to this thread, there was an extremely similar article in the new API by Margaret Lomas on this issue. Me suspects it may have been the reason for this thread, am I correct?
What did others think of that article? I thought there were some good points in it, but when you take into consideration that Ms. Lomas has only been investing for a short time, that maybe her assertion (is that the right word?) in the article that finding positive cashflow properties that also achieve consistent growth was reasonably easy a little spurious?
Of course it is possible to find such properties (just ask Mr. Croft!) but is it as easy as Margaret suggests in her article? I mean, it would have been pretty hard to have purchased a property in the last three or four years that didn't grow in value, regardless of how it was geared. Do others agree with this? Or maybe I'm completely off my rocker?

Mark
'no hat, some cattle'

[darren b]

I find it amazing that API magazine gives her so much space in each magazine, considering she has so few properties. In the earlyyears, that magazine had great stories on some serious players who had substantial portfolios. I see very few articles like that, just repetitive nonsense from Lomas. Someone with only 7 properties is not qualified to have so much say in probably the only descent magazine for property investors in australia.

[Sunstone]

Dear Darren,

Whilst I agree with what you are generally saying, Margaret Lomas is not the worst.

Firstly she is a great marketer and her level of public awareness and placement in API is testament to this.

Seven properties. Well at least that is more than the five she had when I caught up with her early last year.

(Remember Anita Bell went from four properties down to two. And one of the two I believe was her PPOR.)

Maybe you should convey these views to API itself. I did with conveying my opinion of Anita Bell to choice magazine (They were promoting her book on the choice magazine website). The publisher "Richard Smart" actually even came back to me.

The "squeaking" wheel sometimes gets oiled.

Cheers,

Sunstone.

[geoffw]

I find it amazing that API magazine gives her so much space in each magazine, considering she has so few propertiesPeter Spann, when asked about Margaret Lomas, said something like, "Do you have any idea of how many people that API magazine can get to write articles?

[XBenX]

Im a spoilt brat in my 40's and my parents have just died, I now have control of the family trust, I have purchased 452 (buy and hold) so far, I know nothing about property, I just have more money than everyone else, do I get to write in API because ive got so many properties?

Whilst I agreed that Lomas gets too much air/talk/space for someone who is essentially just in it to push the services of her companies just because someone has "only" 7 properties doesnt mean they arent qualified to give advice or write an informative article.

Just MHO

[Andrew]

From reading Lomas' books and article it looks like her "positive cashflow" properties are
usually holiday rentals, serviced apartments, etc. My reading of her suggests that she goes
for non-traditional markets when buying cashflow.

Not necessarily high growth prospects.

Although her articles discuss ordinary suburban property I highly suspect that Ms. Lomas'
"Postive Cashflow Register" (one of the services that her company The Destiny Group (http://www.edestiny.com.au/) sells)
is stacked with the types of property that visitors to this forum wouldn't touch, despite
being cashflow positive.

andy

[craigc]

Originally posted by Kristine..

It is almost, but not impossible, to find a property that is truly cash flow positive ie if borrowing the gross purchase price including stamp duties, legals etc, where the rental income would cover all expenses.


I have got to agree here. I have only one IP (just starting). It is now truly +ve, wasn't when I purchased it though, only 2 years ago. Due to great capital gains in the area, plus few rentals available although there is great demand for them, it now performs really well. I used to live in the area and always knew it had tremendous potential, just took a while for the punters to realise it ;)
Now I am in a different city in a different state and have been *actively* looking for a few months and still haven't come across anything truly +ve as described by Kristine above. That is, if I don't want it vacant for the bulk of the year.
So guys, when you are talking +ve cash flow properties, I assume you are including depreciation and that's fine I would include that in Kristines example above of truly +ve.
But are you *also* including the tax breaks you receive for interest paid etc etc. This is want I really want to get my head around.
I am currently a contractor and paying a bucket load of tax, so claiming interest and expenses is all good and some of the properties I have looked at would be marginally +ve with this taken into account. All well and good while I am in my current position but what happens in 6 mths time when I'm earning only 30% of what I am now (heaven forbid) ?
Ok, so I am still going to get those deductions but may well have to wait until after the end of financial year to realise those benefits which means until then servicability may become a problem.
Am I missing something really basic here ? Would appreciate your thoughts.
craigc

[Jas]

Firstly API lurk on this forum, and secondly, there aren't many people who have both the experince and the writing skill to write for the mag.

Lastly Lane gets to choose between making his deadline and getting unbaised writing for every issue.

Jas

[XBenX]

Just to point out, so it is not misunderstood - Im not a 40yo trust funded brat with 452 properties :)

[TOTS]

:) Lily, Christines answer is very good advice and I will congratulate her on it. Other sites like Frankston coud be bought at the start of 2002 for $105K by the end of 2002 the cheapest was $160K. Fit your requirements perfectly. Sites mentioned by Christine I back 100%, but make sure you look at your complete plan, as other options may bring the result you want while giving you better risk management.
Research any area that feel's right and confirm your gut feel. Look at all the options and look at the merrits of mixing the capital growth desire with the cash flow bennifits...
Live long and prosper.

[Glenn]

XBENX,

You have just been scrubbed from my party invitation list!!! :)

Glenn

[Kevmeister]

Originally posted by geoffw
Peter Spann, when asked about Margaret Lomas, said something like, "Do you have any idea of how many people that API magazine can get to write articles?

Do I take that in the positive or the negative? They can't get enough, therefore Margaret Lomas is better than nothing, or they have heaps of writers, and Margaret Lomas is one of the best?

And, I agree with XBenX here - it's what you know, not how many properties you have. This does not mean I agree or disagree with the Lomas article in API, just XBenX's general sentiment.

[geoffw]

Do I take that in the positive or the negative? They can't get enough, therefore Margaret Lomas is better than nothing, or they have heaps of writers, and Margaret Lomas is one of the best?If API peek in here, I'd better not answerAnd, I agree with XBenX here - it's what you know, not how many properties you have. This does not mean I agree or disagree with the Lomas article in API, just XBenX's general sentiment.Hehe, I'd expect that from someone with not many properties :D

But I do agree (I don't have many properties either)

[darren b]

Me thinks that Destiny must sponsor API magazine and thats why Lomas gets so much wasted article space. She has had the lead cover story for the last 4 editions. (true, I have every edition) Its a bit like money magazine who are sponsored by managed fund companies!!!I want to see stories buy real investors. I'll say it again, 7 properties is novice stuff. Its like Glenn McGrath writing a coaching manual on how to bat! I hope API reads these posts, but if someone has their email, I will complain for what its worth.

[Kevmeister]

Hehe, I'd expect that from someone with not many properties

Getting there ... getting there ... :-) And I've taken your comment in the light manner intended ;-)

[trump63]

Hi Pippety

I lived in a unit off bennets rd, Camp Hill. I liked it there. I think the views of the city skyline are great. I also noticed the local thai retaurant, the italian restaurant, the bottle store and the up-market beauty salon were thriving along Bennets rd. I dont think there are too many flats etc. in this part??
What do you reckon???

[trump63]

Hi Christine,

Yes, I have looked at various properties in my immediate area. But, I believe there are better gains to be had in other cities/towns around OZ. Why not at least try and get a 'piece of the action' - as Kiyosaki calls it. Isn't it rather vaunerable to put all your eggs in the same basket??!.

I have , by the way, spent a few months living in Frankston, and I sort of have the gut feeling that this is an up and comer, especially on the sea side. What do you think?.

Go Slack Bladder!!!!

[Mark Laszczuk]

Wow,
When I wrote the original post, I didn't think it would stir such emotion. My theory on why API has Margaret so prominently featured is because positive cashflow seems to be the buzz word(s) these days. Every man and his dog wants positive, positive, positive! And that's what sells magazines.
Margaret used to post at MSN, I think I'm the reason she no longer does. It says a lot about a person when they seem to relish the limelight so much (by writing huge articles and three books) but stop posting on a forum when someone asks some tough but valid questions.
She is aware of this forum (and will probably see this thread) but never posted here. My suspicion (this is strictly my opinion only) is that she wouldn't post here, because some forum members would be less than kind to her postings.
I mean, I own no properties, yet find it relatively easy to pick the inconsistencies in her articles, issue after issue. Although I will say that I thought the article in the most recent edition was more balanced than I thought it would be. It was still skewed in favour of positive, but what do you expect? Actually, come to think of it, why did they have her write the article? Getting Margaret to write an article about cashflow vs. growth is like asking an advisor who works for, say, the Commonwealth Bank whether they are independent. You're not really going to get a balanced view. But I guess with this subject, it's nigh on impossible to get a balanced view.
Another thing I found interesting is that she seems quite keen to distance herself from the property selling side of what she does. She claimed she does not sell/source the properties, an agent does this for her. Then someone who claimed to have purchased property from her mentioned something about her not disclosing commissions earned. As a financial advisor, she is actually breaking the law if this is true, as ASIC requires full disclosure to clients where a product is sold and a commission earned. I guess that's why she was trying to distance herself.

Mark
'no hat, some cattle'

[TOTS]

Thanks all for a very amusing and enlightened forum, you see through the vaneer of API and those that right within it. Grasshopper when you can take the pebble from my hand...
I like the banter, the logic but most of all the enquiring minds, don't lose it. Keep up the good work.
I am currently working with a number of clients who are keen to be kept informed, I will certainly tell them of you.
Thanks Stephen

[darren b]

100% agree with you Mark. She has to be a major sponsor of API magazine. I hope they read these posts so that they can get real investors writing for them soon.

[investor]

Hi everybody

I don't know of M. Lomas so I can't comment on her ability as a writer, but I can say that the example she used for CG was quite pathetic.

First of all the growth in inner city Sydney and Melbourne has been closer to 30% per year for the past 3 years than 12.5% and I have never heard of any agent charging more than 2% commission for a sale let alone 3.5%.

So consider a buy and sell in 3 years (which is what alot of shrewd investors have done) with these two percentages changed and you will get a totally different result.

Regards

Investor ;)

[brains]

Originally posted by TOTS
Thanks all for a very amusing and enlightened forum, you see through the vaneer of API and those that right within it. Grasshopper when you can take the pebble from my hand...
I like the banter, the logic but most of all the enquiring minds, don't lose it. Keep up the good work.
I am currently working with a number of clients who are keen to be kept informed, I will certainly tell them of you.
Thanks Stephen

TOTS.........youre so ......ummmm......ZEN