Strategy for first IP

Hi Guys,

I've toyed with the idea of getting into property investment for a few years now but I've always found some excuse not to until fairly recently

I have a pre-approval for $270k + ($30k deposit) and I'm tossing up whether to get a unit in west ryde/meadowbank area or a house in the blue mountains (looking at Katoomba)

My strategy is as per Peter Spann's technique ie. do a cosmetic reno on the property (spending about 10% of the purchase price) and revalue after the first year, then draw down on the additional equity using a LOC to use as a deposit for a 2nd property etc...

I only earn $36800 per year (although I should be getting a pay review shortly!!) and I still live at home for now.

In light of what I want to do which area do you guys think would be more productive if any?! (My long term goal is to acquire 15 IP's in 10 years)

ps. I have to make a confession that I signed up for an HK course (yep all 16k of it *sigh*!) I am trying to get out now (very difficult process) because of the increased difficulty in servicing IP loans with that kind of debt hanging over my head...

Hi Nuthead,

If you earn $36k/year you will probably want to watch cashflow carefully.

15 IP's in 10 years : You will need a lot of growth so you can build up equity as fast as possible.

I would go the middle ground for your first IP and get an IP that may be negative geared initially with growth potential.

I would generally buy a house wherever possible because of the land content and usually lower holding costs (no body corporate fees) - land appreciates; buildings depreciate.

Don't be in a rush to get your first IP. Look at as many properties as possible and get comfortable doing the numbers and refining your plan. You don't want an IP that will use all of your excess cash and holds you up buying more properties.

Good luck

Thanks for the reply WillG,

Yeah cashflow will definately be a major consideration... I've tried to calculate how much it will cost me per week to own a house in the blue mountains

ie.
rent $200pw
cost of repayments on interest only loan of $270,000 @ 6 % = $16200
money back from taxman (in year 1) = $1615

(I assumed the building would be over 40yrs old so no bldg depreciation)

and it works out to be something like $80 a week or maybe a bit more if you factor in bldg and pest inspections and the cost of getting a depreciation schedule, vacancy periods etc etc... I admit my calculations are a bit rough!!

Anyway, assuming my calculations are reasonably accurate is $80 or $90 bucks a week considered expensive in order to hold this type of property?

If you can believe residex's growth projections (their median rent figures are way off for that area as far as I can see) then by the second year I would have enough equity to get another IP. (This is in theory of course! I understand that the curve for capital growth isn't linear...)

As serviceability is going to be an issue, would it be best to get something that would go cashflow +ve more quickly for the second property?

sorry about the loaded questions...

Hi Nuthead,

Good questions.

Q. Is $80 or $90 bucks a week considered expensive in order to hold this type of property?

The gross yield based on the figures you have given is 3.8%. A lot of investors on the forum won't touch a property if it is returning under 5%. An acceptable rental yield must be considered in conjunction with potential capital growth.

The property will be costing you about $4500 (before tax) per year to hold. Does the property have the potential to grow at least $4.5k in one year ? Could it grow by $9k per year in the current climate.

I have attached a spreadsheet with your numbers that may help you decide for yourself if it is a good deal.

If I were in your situation I would try to get a higher yielding property or a property where I could generate a higher yield with some cosmetic renovation. This will help your serviceability and allow you to buy IP#2 faster.

Cheers

Wow! thats an impressive spreadsheet you sent me there! sure beats my bodgy spreadsheet that I made up (no real time to check it out in detail here at work but I've sent it to my home email and I'll definately study it in more detail later tonight)

I don't really know if the property can increase in value by $9k per year in the current climate... I guess this is where due diligence comes into it! Residex predicts 14%p.a. growth (long term) but I guess I don't have enough experience/research to make a reasonable judgement call as to what is likely to happen in the short term (I consider short term 1 year)

Being my first IP I guess I accept the fact that I'm going to make a few mistakes but minimising them would be good!

In saying that would the best way to identify a property that will generate a higher yield with cosmetic renovations purely a matter of going to as many property inspections in the area as possible in order to get detailed knowledge of the vagaries of the market? I guess knowing cost effective renovation techniques will be a big help also...

once again thanks for all your help its much appreciated!

New tax rates from 1 July 03 ...

Looks like I'll have to update my spreadsheet with the new figures.

Also, this is one of my earlier spreadsheets that hasn't had the stamp duty rates updated. When I review my spreadsheet, I'll post it to the Information Resources forum (unless anyone wants to get in before me and update all the figures first - I'm V busy at the moment ... not too much spare time).

Pete

Originally posted by WillG
The gross yield based on the figures you have given is 3.8%. A lot of investors on the forum won't touch a property if it is returning under 5%. An acceptable rental yield must be considered in conjunction with potential capital growth.

The property will be costing you about $4500 (before tax) per year to hold. Does the property have the potential to grow at least $4.5k in one year ? Could it grow by $9k per year in the current climate.
.

Cheers

Click to expand...

nuthead

wrong place katoomba is a poor return... its already seen growth and $200 pw what is it most rents are more $170

3.8 is not a option esp when your paying 6%

Originally posted by Nuthead


I have a pre-approval for $270k + ($30k deposit) and I'm tossing up whether to get a unit in west ryde/meadowbank area or a house in the blue mountains (looking at Katoomba)

ps. I have to make a confession that I signed up for an HK course (yep all 16k of it *sigh*!) I am trying to get out now (very difficult process) because of the increased difficulty in servicing IP loans with that kind of debt hanging over my head...

Click to expand...

look at tempe

and as for the HK course thats 6 month of your wage....

Nuthead & Peter Noake,

I got the spreadsheet from the forum. Thanks Peter Noake for posting it in the first place.

I reckon you can't go wrong looking at lots of properties.
You will learn the following ...
* To identify quality fittings
* To identify dodgy renovations
* Get a better feel for the areas demographics
* To negotiate with RE agents
* To ask RE Agents good questions
* To get a feel for the market in the area

You can't learn a lot of these things from books

I reckon the Blue Mountains is a great place to invest if you dont mind negative gearing. Places like Wenty Falls, Blackheath and Woodford to name a few are going to have lots of growth in the next few years in my opinion.

But you might be better off looking for a higher rent yield AND growth to assist your future acquisitions. It can be done, you need to research harder tho.

Some regional QLD & NSW towns are still able to deliver pos. gearing and excellent grwoth at the moment, but not for much longer.

Frenzy, I always had the impression that Tempe was directly under the flight path... but I'll definately have a closer look at the area, thanks for that. Would Eastlakes also be a good area? the unit prices in those areas still look reasonably low given their proximity to the city... and that HK course is more like 75% of my after tax wages for a year!!! (after you add on the interest they charge!)

WillG, How many open for inspections would it take to get a reasonable feel for an area... is it necessary to go to every open for inspection in your given price range? I've spoken to a few real estate agents and some have offered 2-3% discounts off the asking price after I show them I've done a little research in the area although I'm not sure how much of a discount can be expected!

Brains, I'm still considering the Blue Mountains as an investment but the second property would probably have to be a wrap or something to help pay off the first until the rents increase enough to to make it neutral or postively geared.... in your opinion would this be a realistic (efficient) option?

Anyway thanks to everyone for all your help!

ps. have any forumites had any experience with trying to cancel an NII course once its started??

hi Nuthead,im pretty sure from memory that some forum members have been able to get their money back.

do a search and see what you can come up with.

good luck

Darren

Thanks for the reply Beech,

I searched through every single post on "Henry Kaye" last night and this morning (there are about 1000000 of them!!!) and I saw that some members got their money back when they left by the third day of the 4 day course or something... the problem is I think their conditions have changed because I didn't notice anything regarding that on any of their current material... also I met with the guy that signed me up and after stating my case he said that it was unlikely that they would let me quit! I'll definately ask them about the leaving by the third day thing though! HK is a headache...

At least the guy that signed you up said it was UNLIKELY,not NO CHANCE AT ALL.

keep pushing for a refund and see how you go:

Hi Nuthead,

I generally try look at about 4 houses per weekend(or more if my wife will let me) that are within my criteria. On average I find an OK deal every couple of months. I haven't found any 'great' deals for quite a while.

A 'OK' property in growth areas I look at has about a 5% yield.

It may take me 100 inspections to find a good deal.

good luck !

Thanks for that WillG,

Its a big help to know the process by which more experienced investors go about looking for and identifying good property. I've been trying to look at about 5 properties or so every weekend as well. Although at this stage I have doubts about being able to find something with a 5% return anywhere in Sydney or the Blue Mountains after the jump in prices experienced in the past 3 years or so... Haven't looked into property on the central coast and mid north coast yet though... so much to do so little time.

I'm going up to Katoomba to visit some RE agents on Sunday so I'll keep what you've told me in mind.

Does anyone know where to get data on rent price increases?

Domain.com.au in suburb snapshot gives you the growth over the last year.

see change

www.domain.com.au does it, not domaine.

Jas

I've checked the suburb snapshot in both realestate.com.au
and domain.com.au maybe I'm a bit retarded but I can't seem to find the figures on change in rent...

also does anyone know if rent increases are more stable than changes in property value? what are the main drivers of rental price... does it track CPI or something?

like I said before sorry about the loaded questions but I can't seem to find this type of info anywhere else!!

thanks guys

Hi Nuthead,

Try the latest edition of Australian Property Investor for changes in weekly median rents

Jamie