What/where can I buy for $150k??

[l00kin4]

I'm looking to purchase a property with my self-managed super fund and as this entity cannot borrow $150k is the limit. Although I can find reasonably yielding IPs in regional areas I'd prefer capital growth as the smsf will have no borrowing costs. Any suggestions?

[pjb89]

100kin4,

It might of benefit to the forumites if you can tell us where you are and where you are looking as you have not indicated where you are located.

Pedro

[l00kin4]

Fair cop. I can find IPs in regional NSW for this price with reasonable yield but little prospect of capital growth, which in superannuation is the name of the game.

[suggo]

wouldn't cash flow be better for a superannuation fund?

As I understand it, in the present climate of IP's we can expect to get about 15% return on our investment, this is the combo of capital gain and yeild, generally this works out that way..eg 10% capital gain and you can expect about 5% yeild, 10% yeild then 5% capitial gain. Ok, with that in mind and the fact that you can not borrow using the capital gain in the property due to the super laws, wouldn't you be better off getting a higher yeild lower capital gain IP so that you may actually reinvest the cashflow from it?

Correct me if I am wrong, possible I am missing something there!
:confused:

[l00kin4]

Thanks suggo, your argument is sound. My thinking is as follows - Overall objective of super up until the point where you can withdraw it is to build up the capital which can then provide an income stream.
Building up capital in the investment property over time will leave me with a property I can sell or retain depending on circumstances in 30 years or so.
This seems easier to me than having a nice yield that I then need to reinvest elsewhere- not in property for quite a while at least as it simply won't be enough to purchase a property. Also, in an smsf you are not allowed to borrow so must purchase outright or as tenants in common with yourself which presents a whole new set of complications. There's a separate thread on this topic.
My current compulsory superannuation contributions are going into a separate company fund- I cannot change this and do not wish to contribute extra amounts into the smsf at this time. I'd rather put any extra money in IPs. So the only way the capital in the smsf will build up is with high yield requiring reinvestment or with capital gain -I prefer option 2- less hassle I think but I'm happy to have my mind changed with better approaches.
I hope this makes sense.

[geoffw]

I'd be going for capital gain- this is my thinking.

I think it's better to get into a compounding situation with the original investment. If growth is 15%, and cashflow is nil (an extreme situation to illustrate), the amount will have doubled in five years ($300,000).

If cashflow was 15%, and growth was nil- and that cashflow was invested at 15%- the 15% is ONLY on the cash generated- not on the full value of the house, as in the cap growth situation. The fund will be worth about $275,000.

I may have got a few things incorrect on my spreadsheet- but I think the principle stands- $25,000 better off from cap growth in five years than just cashflow.

Thirty years was mentioned. On above scenarios- cap growth scnario is worth 8.5 million; cashflow worth $900,000.

Of course, if you invested the entire amount into a share fund which returned 15%pa, numbers would be similar.

[l00kin4]

Thanks geoffw. That compund growth is definitely what I'm looking for and as there is no borrowing, the out of pocket interest expense is not on the agenda, making a lower yiedling but better growth IP a more palatable option.
If I had confidence of finding a share fund returning 15% I'd be looking at it but as the market stands...

Back to the original question - can anybody suggest where I might look (as vague as you like) for such a property for ~$150k?

I think Sydney is pretty well out of the question but am happy to be proven wrong. Perth perhaps?

[Kevmeister]

geoffw:

I would also be going for capital gain, but don't agree with your numbers. You seem to have disregarded that on a "pure" income-only investment with no growth, the income is re-invested and also compounds. So 15% yield on 150K is $22,500 per annum, and this in turn starts to earn X% (I assumed 15%), in which case the final result would be basically identical. Invest $22,500 per annum for 30 years in a 15% managed fund, for example, and you end up with 8-9 million dollars, similar to the property growth.

My opinion is that if G+Y=15% in both cases (ie. irrespective of the growth component and the yield component, the sum is 15%), then the outcome will be the same, if the Yield component can be reinvested in something else also returning 15%.


One question: what rate is incurred by a super fund in terms of capital gains tax? Is it the same 15% that is paid on income? This could be a factor.

[l00kin4]

The CGT discount for complying smsf's is 33.33% (as opposed to 50% for individuals/trusts) so tax is 15% - 1/3 = 10%.

[bundy1964]

Something thing to think about ;)

What yeild is left after property holding costs, tax breaks and compliance costs is taxed at 15%.

Capital gain is taxed at 10% via lookin4's numbers.

As an example you get 5K yeild and 5K growth -

5k income less expencess say 1k gives you 4k profit taxed at 15%. $600 tax payable if my sums are right.

5k unrealised capital gain is due for 10% tax when sold. $500 CGT to be paid sometime in the future but for now it stays in the fund compounding your capital growth.

I think you can work out the long term answer as to gain v yeild:)

You do need some yeild to cover your holding costs though.

bundy ( a live for today yeild junkie ) :D

[Jacque]

OK Lookin,
Seeing as no-one has actually answered your original question, I'll have a go :) In my opinion, you can't go past cold hard statistics to discover where the cg and cashflow are. Do yourself a favour and invest in a report from Residex or even a few copies of API (you can buy back copies) and start reading!
'Tis better to teach a man to fish than feed him'- or something to that effect, anyway.

Happy Hunting!

[l00kin4]

Thanks Jacque. I have the Residex top 50 cg forecast for NSW houses and units- Carrington is the only place I can see where I can buy at anything like this price.

The return report for NSW I have bought too and am looking at it but was just looking for some ideas from the board before I fork out for other reports.

[voodoo]

Hi lookin4,
I dont know how the growth will be in these towns but for 150k have a look at...

Kempsey NSW, half hour from Port Macquarie and 1 hour from Coffs Harbour. they are also in the process of building a new max jail in Kempsey and check the areas well, as it has a few bad neighbourhoods and it also floods.

Grafton NSW, 45 minutes from Coffs Harbour, Not a bad city but also floods.

Casino NSW, between Grafton and Lismore, real cheap.

Kalangur and Strathpine QLD, looks cheap to me. has had growth in the last 12 months but still a lot around for 150k.

Hervey Bay QLD, have not been there myself but seriously thinking of taking a trip there to check it out, the surrounding suburbs look cheap enough and close to the beach.

As I said before I dont know what the growth or returns would be but there is plenty under 150k

regards

:)

[geoffw]

Queanbeyan (just near ACT) has lots under $150K- but they're all units- good cashflow (though not as good as two years ago), but probably not a good cap growth. Houses in the area are now in the $180K+ area.

You could check out allhomes- www.allhomes.com.au - to check out Canberra prices. They have a very good price history as well- very useful.

Is there any possibility of combining your SMSF with someone else's to be able to buy something good? I don't know the rules.

[sky]

have you considered new zealand?