Is this Plan to becoming a millionaire workable?

I was wondeinrg if anyone can give me feedback and insight onto my path to being successfully free.

In another 12 months I will have about $500,000 of after-tax savings. My plan is to basically purchase a few average homes ($250k-300k) and rent them out. Given another 12mo there will probably be more properties on sale and at more 'realistic' prices. The bank has told me they can lend me up to $1mill.

Now the plan is to buy up to $1mill worth of properties and take out 30-year loans on each one. The repayment on these loans would total about $76k per year, however I assume the rent on these homes will make the loan repayments lower. But considering council rates, water supply, etc would bring it back up to around that figure. This is with the CURRENT interest rates, if interest peaked to 10% then it would be around $106k per year in loan repayments. (still managable).

Now is it true that houses generally grow at say 10-13% per year? If so, that means $1mill worth of debt would be gaining $100K CG value per year? BUT at the same time, rents will rise and over-time the loan repayments I pay each year will end up being less than how much I earn from rents, etc?

Furthermore since I have $500K in the bank, should I use this money as backup, considering it will only cost me $76K per year to service the loans. I could use the $500K as a bank reserve in case something happens, I would have 4 years of money reserves to fund the loan (e.g. in case of job, interest rate, government policy changes). OR I could technically borrow MORE.

$1MILL loan = $76k loan repayments+council rates after rent deducation
$2MILL loan = $152k loan repayments+council rates after rent deducation
$3MILL loan = $228k " "

In a nutshell, if I had say $3mill all put into properties, my asset base would grow at $300k per year?

Servicing a $3mill loan for $228K per year seems workable. Would you do this, please help me out.
 
Hi np2003
I think you may benefit by reading Jan Somers' book on investing in realestate before you do anything else.(you will find info on it on this web site)
You may find that good financial skills are just as important as finding the right property.
Kind regards
Simon
 
NP2003,

Talk to a good mortgage broker not a bank.

30 year loans are P&I not IO in AU. You may find this is less effective for you - though both approaches work (Brenda uses P&I for example).

Houses do NOT grow at 10-13% on average in this country. Long-term average is in single digits...declining the further away you move from metros for the most part. You can not simply buy any property & expect good CG - it involves lots of research & the more experience the better your returns will tend to be.

Why are you waiting until next year if you have significant savings in the bank already? There are still good areas out there, some are even in Australia ;) If you are banking on significant price drops before entering the market - well get in line with the other gunnas.

Personally I try to keep my savings well below the level you are seeking to reach. Savings at bank earns you bugger all ROI. Right now you should be looking at how you can leverage stocks & property in concert to leave you sufficient liquidity for a year's loan repayments (more than that I believe is overkill if you're young & have good employment prospects which I believe is your situation) - ensure you're getting a ROI of at LEAST 20% per annum (yes that level is easily achievable as is much higher though over 40% or so & you're probably working some high risk investments and should have a safety net with a lower ROI portion of your portfolio).

The important thing is to get out there & do your research - learn how to be an effective investor & you can throw away that day job that leaves you so stressed & miserable all the time.

Don't try to strike out into too many areas at once - that's the best way to lose all your money. Start wth either property or shares & spend at least a year learning the ropes before you even think about diversifying your portfolio.

Having personally seen your behaviour in this forum I also suggest you look seriously into anger management/personal counselling. It may sound a bit strange, but the enemy of good investors is uncontrolled emotions. You've got to be able to think clearly and weigh up the alternatives in an unemotional way. In a crisis clear thinking is even more important and everyone who owns property tends to have a few crisis stories.

BTW: I am recommending this having done counselling myself - it does provide some worthwhile insights into yourself and your own motivations/behaviours.

Many people in Australia tend to scorn counselling...but I tend to think of it as a partial replacement of the community structure humans lived in for millenia that the modern world has torn apart. These days it's much rarer for a community to lend support to an individual so you've got to go pay for your own :)

Cheers,

Aceyducey
 
np2003 said:
In another 12 months I will have about $500,000 of after-tax savings. My plan is to basically purchase a few average homes ($250k-300k) and rent them out. Given another 12mo there will probably be more properties on sale and at more 'realistic' prices. The bank has told me they can lend me up to $1mill.
np2003:

All investments are always going with risks. If your investment can be held for 10 years, it should be no problem with your plan - making 1 million on top of 500k. However, it is good to be aware of the market pattern - it goes in a form of cycle. Property investment is my favourite one and it makes me becoming a millionair within 3 years, very lucky, and thanks to the boom market.
However,
1. Property price is not up all the time and property investment is a long term game. Someone told me, 4 years ago, "never buy into Merryland as my friend having a house there for many years and never growth". Other people told me that "Parramatta is outer Sydney and no growth there for many years.". If history repeats itself, the property market might be due for flat or drop sooner or latter.
2. Being very careful where you are buying. In Sydney, 250K can't buy a good house even in MT Druit. If it dropped into more 'realistic' prices next year, I don't think the housing prices will come back soon - no capital gain for many years. All affordable areas, such as regional areas, will be mostly affected by the down market as they are owned mostly by investors who are chasing CG and Yields all the time. I recommend it is best to buy in Sydney for most normal investors.
3. It is wise that don't put all eggs into one braket unless you are still 10 years or more before retirement. Property investment is one kind of many investments. I check my super. It grows 7.4% last year. Why put all $500K into property investment if house prices are not going up while even normal fund has 7.4% growth.

Regards

TGP
 
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np2003

The houses that TGP is talking about in Mt Druitt for 250 were selling for over 100k around 1990, and for 60 K on occasions four years ago ( yep 98 - 60k )

if they've increased in price by four times in four years , my bet is they won't move that much in the next few years. After the last peak they went backwards for ten years.

If you're buying in sydney at the moment , you REALLY NEED TO KNOW YOUR MARKET VERY WELL. TGP seems to have a pretty good knowledge of his area of interest so will know a good buy when he sees it, but I'd bet that the majority of people buying in sydney at the moment will not make a profit in the next 2-3 years.

Having said that I thought the same two years ago ....

At this stage of the market I'd be reading as much as you can about property investing and looking at as many properties as possible

You will get to a point where you don't need to ask peoples opinion about what is a good plan , or a good buy.

See Change
 
I'm really struggling to understand you np2003, you seem to be alive with contradictions given your posting history...............
astroboy
 
np2003 said:
I was wondeinrg if anyone can give me feedback and insight onto my path to being successfully free.

In another 12 months I will have about $500,000 of after-tax savings. My plan is to basically purchase a few average homes ($250k-300k) and rent them out. Given another 12mo there will probably be more properties on sale and at more 'realistic' prices. The bank has told me they can lend me up to $1mill.

.
Where can you buy in such price range? How much you can rent them out?
I got 500k as well, I hope your plan will be succcessful.


Regards
Julian
 
Re "Now is it true that houses generally grow at say 10-13% per year?"

I would say yes, with the important point , that it would be a average over at least 10 years. Realize there are exceptions to every rule. I know of a number of properties which where purchased in Brisbane around 1990 ( end of a boom ) and sold for the same price in 2000 ( start of another boom ) . But if the vendors would have kept them for another year they would have doubled their money. This is not meant to scare a person , but it is to emphasise that growth can be spikey. Another suggestion is to look for desirable infrastructure projects . For example , Things that cut travel time to popular destinations - ie bridges , highways etc
 
Gill Bates said:
Re "Now is it true that houses generally grow at say 10-13% per year?"

I would say yes, with the important point , that it would be a average over at least 10 years.
Try looking at property prices over a longer period than over ten years - particularly over the last ten years.

Gill, You're doing the same thing as share market promoters do - picking a starting point at the bottom of the market & finishing point at the peak of a boom.

It's the same as measuring share price growth. If you pick a period from the depth of a bust to the peak of a boom the growth looks great. If instead you pick a period from the top of a boom to the bottom of a bust the picture is different.

If you look at Steve McKnight's book, he has done an analysis of the long-term increase in property prices across most AU capital cities. You'll find that 10-13% is much higher than what actually happened across the board.

Of course if you are very selective in your property you'll do better than the market - but saying the market does this is being extremely bullish in the face of evidence to the contrary.

Cheers,

Aceyducey
 
OK,

Located the chart in Steve McKnight's book 'From 0 to 130 properties in 3.5 years'....

It's on page 99 and is based on REIA and Reserve Bank data from 1982-2002.

---------------------------------------------------
City......Ave 20yr growth.....Property to double $
---------------------------------------------------
Adelaide.......7.44%...............9.68 years

Brisbane.......8.26%...............8.72 years
Canberra.......7.77%...............9.27 years
Darwin.........5.89%*.............12.22 years*
Hobart.........4.84%*.............14.89 years*
Melbourne......9.92%...............7.26 years
Perth..........7.54%...............9.55 years
Sydney........10.33%...............6.98 years
---------------------------------------------------
* Indicates for data available: Darwin Dec. 1986- Dec. 2002 ; Hobart Dec. 1991 - Dec. 2002

Cheers,

Aceyducey
 
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Furthermore since I have $500K in the bank, should I use this money as backup, considering it will only cost me $76K per year to service the loans. I could use the $500K as a bank reserve in case something happens, I would have 4 years of money reserves to fund the loan (e.g. in case of job, interest rate, government policy changes).

Little flaw here (which I'm suprised no-one else has pointed out).

Each time you buy, YOU have to pay deposit and closing costs.
Allow for typically 20% deposit and 8% closing costs.

Hence, if you spent the $1mil the bank will give you, they'll expect you to tip in around $280,000.

You may be able to reduce this with higher LVR's or other equity somewhere (you didn't say you had any though).

Good luck with your adventure !

Simon.
 
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