Bad economy good for investor with many IPs??

[random]

Bad economies are great for investors that's common sense. Buy low -sell high , that's what a good investor or trader does. Buy high and your asking for trouble unless you have a secret , gonna be so many wanna be's brought undone if our stuff slows much further because the silly buggers went out in peak boom prices and bought so called investment houses.
They're also good for the average person on the street because prices and costs drop and competition comes back into play.
My old boss use to say you really don't need a good economy and he was self made and filthy rich , but I never could quite understand his logic I must admit .

 

[Dazz]

People in lower socio areas don't all turn to crime when the chips are down.

Agreed.

They don't all up and leave their rental accommodation.

True.

If you are renting something at the 'affordable' end of the spectrum, where are you going to go to find cheaper accommodation? There is nowhere else to go. You are already in the cheap accommodation.

True.

Sure, singles living in units might get others in to share the costs, or go home to mum & dad, but if you are a family unit with 2-3 kids, you can't do that.

Generally speaking - yes, that is true.

Some may move out of the larger cities & towns and move to regionals, but there will be more people out there who are downgrading (through job losses) and looking for affordable rentals.

Agreed.

I know, that if every one of my tenants lost their jobs tomorrow, that they will stay right where they are.

You seem to have high confidence with this point. I have low confidence with this aspect, although my numbers in this category are nothing compared to yours. They'll up and leave from something around the $ 300 p.w. mark to something lower again. There is some real dross out there renting for not a lot.

In fact I already have some on welfare payments who pay their rent each and every week.

This is the bit that I do not share your confidence with. I find the rent is far too low on their priority list. It shouldn't be, as it provides stability to their lives.....I've tried many a time, but alas, mine at least choose to give their scant amount of money to electronic vendors, fast food vendors and alcohol vendors ahead of their Landlord.

It peeves me, I've sat down with them in hard times and tried to reason with them, but their overwhelming choices dictate their position in life, and continue to do so.

The bit that scares me away skater is the sheer volume of properties needed to carry on the same scale of things. One small inner city office block with a Govt Tenant would equate to 50 or 60 low end houses. Dealing with one consistent Govt dept vs say 55 struggling families, all with excuses and all with their own issues....it would do my head in.

Contrary to popular opinion, there is a high demand for rental accommodation in the lower socio areas despite the ecconomy. Welfare recipients get paid, rain, hail, good times and bad times. They have a stable steady income.

No doubt....but I have found that does not translate to a steady income stream. Their choices once the welfare money is in their hand seem to prohibit our cashflows.

Yes, some of these people aren't very nice, but hey, some people in the wealthier areas aren't very nice either.

Agreed, nice people are up and down the wealth spectrum, as are horrible people. Money just magnifies what they were like before they had money.

 

[skater]

Agreed.



True.



True.




Generally speaking - yes, that is true.




Agreed.




You seem to have high confidence with this point. I have low confidence with this aspect, although my numbers in this category are nothing compared to yours. They'll up and leave from something around the $ 300 p.w. mark to something lower again. There is some real dross out there renting for not a lot.

LOL! Out here there's not a lot available for under $300pw.


This is the bit that I do not share your confidence with. I find the rent is far too low on their priority list. It shouldn't be, as it provides stability to their lives.....I've tried many a time, but alas, mine at least choose to give their scant amount of money to electronic vendors, fast food vendors and alcohol vendors ahead of their Landlord.

Agreed, what I should have said is that they don't always pay their rent every week, however we end up getting it anyway because the charities & housing department prop them up when necessary.

It peeves me, I've sat down with them in hard times and tried to reason with them, but their overwhelming choices dictate their position in life, and continue to do so.

The bit that scares me away skater is the sheer volume of properties needed to carry on the same scale of things. One small inner city office block with a Govt Tenant would equate to 50 or 60 low end houses. Dealing with one consistent Govt dept vs say 55 struggling families, all with excuses and all with their own issues....it would do my head in.

Haha, yeah you do make a good point, but I don't share your confidence with this market. You appear to be great at negotiating with multinationals and the type that want to lease out your big sheds, but I don't think I could do that. Plus, the buy in cost is huge in comparison to mine. I'm coming off the back of a much smaller PAYG income than you I suspect.


Agreed, nice people are up and down the wealth spectrum, as are horrible people. Money just magnifies what they were like before they had money.

At the end of the day, if it works, then that's what counts. You never know, we might one day decide that we'll give Dazz's way a go and come get some tips from you. Until then, I guess we'll both continue to do what we do, you with your big sheds & offices & me with my small resi holdings.

 

[Aaron_C]

I know, that if every one of my tenants lost their jobs tomorrow, that they will stay right where they are. In fact I already have some on welfare payments who pay their rent each and every week.

Actually they would pay their grocery, cigarette and alcohol bills first with the welfare they receive. Then they may consider paying you (as the landlord) if they have anything leftover - which they probably won't. Your only security is that 1 month's bond which gets quickly eaten up by the time you can evict them. While you can't predict what every tenant is going to do in the future, I try to avoid having my portfolio in areas where this is more likely to happen than not.

 

[devo76]

Actually I have a tenant in a granny flat tat is by far my best tenant. Even looks after the grass on the main house if it gets a bit long and the tenants are a bit slack. He is on a disability pension and has the rent paid directly before he sees the money. Always a month in advance.
I wish they were all like him.

 

[devo76]

I live in a regional city with all my IPs in the employment hub for the area.The region has many satellite towns that are lifestyle areas. Most are a 1/2 45 min drive from my IPs.

A bonus I discovered last time things got tuff was that when people wanted to save money. Petrol, travel, second car, all these things started to look like a luxury and I noticed a significant increase in people moving from the coastal towns back into the hub closer to their work just to save some cash. This helped maintain rental demand in my area and actually increased it.
Buying near the employment gives me some safety that's for sure.
If the s#%t really hit the fan. Walking distance to the dole office might pay dividends also !!!!!!

 

[skater]

Actually they would pay their grocery, cigarette and alcohol bills first with the welfare they receive. Then they may consider paying you (as the landlord) if they have anything leftover - which they probably won't. Your only security is that 1 month's bond which gets quickly eaten up by the time you can evict them. While you can't predict what every tenant is going to do in the future, I try to avoid having my portfolio in areas where this is more likely to happen than not.

And I suppose you know this because of your vast experience with tenants in low socio areas?

Did you not read this in reply to Dazz above?

Agreed, what I should have said is that they don't always pay their rent every week, however we end up getting it anyway because the charities & housing department prop them up when necessary.

Add to this the Landlord Insurance that you would be totally stupid to do without.

Actually I have a tenant in a granny flat tat is by far my best tenant. Even looks after the grass on the main house if it gets a bit long and the tenants are a bit slack. He is on a disability pension and has the rent paid directly before he sees the money. Always a month in advance.
I wish they were all like him.

Yep, I had a single mum in one of mine for around 7 years before she got her allocated housing department property. The house was always immaculate and the rent was mostly paid on time. Occasionally she would be short, but it was always caught up again quickly.

I've got another at the moment. She struggles financially but whenever she's short and gets a lovely notice from the Agent, she pays a visit to either her mother or one of the charities and it's always paid up again by the following month.

Another of my tenants is a woman who only works part time & looking after her disabled father. Rent NEVER late and a long term tenant. Her son lives at the rear, also a long term tenant. He works and gets more than double what she brings home yet he's the one who is often late with the rent.

 

[Aaron_C]

And I suppose you know this because of your vast experience with tenants in low socio areas?

Did you not read this in reply to Dazz above?

They are low-socio areas for a reason. If you think that tenants who are mostly/wholly dependent on social welfare will make good tenants, then continue to think that. For what you charge for an entire property I get from renting out only one room within a large house. And if they leave - well I got a huge line of people willing to rent it out from me at the same price.

Highlighting one or two examples of good paying tenants in those areas is just a bad case of selection bias which does nothing to further your case. Regardless of where your property is, you can never know how your tenant is going to perform with absolute certainty. But as an investor, you have to make a decision based on the general demographic of the area itself.

As I've said many times, I prefer places where my tenants are not on struggle street, do not rely on welfare and do not consider my property as a 'last resort' if they lose their job. Nothing good will ever come out of being last on someone's preferred place to live.

 

[skater]

They are low-socio areas for a reason. If you think that tenants who are mostly/wholly dependent on social welfare will make good tenants, then continue to think that. For what you charge for an entire property I get from renting out only one room within a large house. And if they leave - well I got a huge line of people willing to rent it out from me at the same price.

Highlighting one or two examples of good paying tenants in those areas is just a bad case of selection bias which does nothing to further your case. Regardless of where your property is, you can never know how your tenant is going to perform with absolute certainty. But as an investor, you have to make a decision based on the general demographic of the area itself.

As I've said many times, I prefer places where my tenants are not on struggle street, do not rely on welfare and do not consider my property as a 'last resort' if they lose their job. Nothing good will ever come out of being last on someone's preferred place to live.

With all due respect Aaron, unless you have these type of properties you are not qualified to pass judgement. It's not like I only have one or two properties and am a newbie at this either, so I think I'm well aware of how things work in this regard.

As for the examples given, I could site more, but what use would that serve? More of the same is just more of the same. My properties are certainly NOT the last resort and I have a range of tenants living in them, some on quite decent incomes. They are all well maintained, clean properties and I always have a pick of who I will rent to. There is a vast difference between affordable homes & slums.

You might like expensive homes with small yields but that does not sit well with me. I much prefer a higher yield. Investing is not a one size fits all proposition and I am more than comfortable with my portfolio and how it performs.

 

[equitymate]

Being an armchair expert who has never left the North Shore in my life Through work I have been surprised on several occasions dealing with people from places like Mount Druitt or Blacktown at just how polite, clean cut and articulate they were. Shows like Houso's on SBS do reinforce stereo type though but reality is probably different and going forward not everyone is going to have a million bucks to spend on a house or a thousand bucks for weekly rent.

 

[Tehanu]

I've been sitting here reading this thread and I really have to chuckle at this post.

People in lower socio areas don't all turn to crime when the chips are down. They don't all up and leave their rental accommodation. If you are renting something at the 'affordable' end of the spectrum, where are you going to go to find cheaper accommodation? There is nowhere else to go. You are already in the cheap accommodation.

Sure, singles living in units might get others in to share the costs, or go home to mum & dad, but if you are a family unit with 2-3 kids, you can't do that. Some may move out of the larger cities & towns and move to regionals, but there will be more people out there who are downgrading (through job losses) and looking for affordable rentals.

I know, that if every one of my tenants lost their jobs tomorrow, that they will stay right where they are. In fact I already have some on welfare payments who pay their rent each and every week.

Contrary to popular opinion, there is a high demand for rental accommodation in the lower socio areas despite the ecconomy. Welfare recipients get paid, rain, hail, good times and bad times. They have a stable steady income. Some supplement this with part-time work, others regularly get help from the various charities when they run into trouble (Christmas, for instance). Yes, some of these people aren't very nice, but hey, some people in the wealthier areas aren't very nice either.

Actually if the Australian economy does go to hell, you can count on your welfare recipients paying less rent because of the government cutting their benefits.

In Ireland right now they are cutting governmental rental assistance.

http://www.rte.ie/news/2010/0610/rent.html

Maximum rent supplements limits are to be reduced by up to 36% for tenants who are entering into new leases or renewing leases.

However, the supplements for single people are to remain largely untouched.

Minister for Social Protection Eamon Ó Cuiv said the reductions were designed to reflect the reductions in the rental market and would ensure that landlords are not charging artificially high rents.

The rate for couples or one parent families with one child has dropped from between €568-€932 to between €400 and €930.

The rate for couples or one parent families with three children has been reduced from between €663-€1,110 to between €500-€1,100.

The Minister says the measure is expected to save up to €20m this year.

Last I heard, rent supplement is in the cross-hairs again.

The argument is, it won't hurt welfare recipients because rent supplement has been providing a floor to rent and welfare recipients have been told to go to their landlord and tell them to reduce the rent. Given that rents have been continually decreasing in Ireland they are probably right.

 

[sash]

Yep....the key is to be flexible with rent...and terms.

Plus properties were empty for 6-8 weeks before able to get a tenant.

It was common to have to offer the first 2 weeks free to attract a tenant.

Once you actually had a tenant, no rental increases for around 4-5 years.

And yes, we owned IPs during the early 90s.
Marg

I am not being defensive...just the facts. I think you are kidding yourself about commanding a premium....have friends who have noticed that rents above $500pw are having to refuce rents by 10%. The low end it is usually about $5-10pw.

Were you old enought to remember the last recession??

Sash, you are very defensive when it comes to your properties because of where they are located. I don't have to be defensive because my properties are located in areas that are universally considered 'blue chip'. In a bad year I might have to discount a little bit, but given the small amount of properties in that immediate area, I can always command a premium even in a ***** market, I just have to be realistic and meet the market. You can't.

Agree....but I think 25-50 basis points would not be far fetched. So the current 225-300 basis point margin would reduce to a 175-275 basis point margin. A Dec cut is really looking good!

edit: I apologise, I just read the article you posted in your original post... I doubt we see interest rates cut by 225bps and 150bps passed on, that's far too extreme IMO.

It shows the level of ignorance ....there are plenty of people who I worked with in large corporations who raise their families in places like Blacktown (i.e. Seven Hills, Glenwood, Stanhope Gardens) and Penrith (Jamiestown, Glenmore Park). As a matter of fact I have a Solution Architect (IT) who is paid 200k per annum who lives in Mount Annan in Campbelltown.

I've been sitting here reading this thread and I really have to chuckle at this post.

People in lower socio areas don't all turn to crime when the chips are down. They don't all up and leave their rental accommodation. If you are renting something at the 'affordable' end of the spectrum, where are you going to go to find cheaper accommodation? There is nowhere else to go. You are already in the cheap accommodation.

Yep....plenty of people with big hats no cattle on the North Shore and Eastern suburbs. They drive nice cars (leased of course)...dine in fancy restaurants and constantly whinge that their 150-200k salaries + bonus are not enought. Not the nicest bunch either. Perhaps they should look at their $1k per month car leases and $800pw rents!

Being an armchair expert who has never left the North Shore in my life Through work I have been surprised on several occasions dealing with people from places like Mount Druitt or Blacktown at just how polite, clean cut and articulate they were. Shows like Houso's on SBS do reinforce stereo type though but reality is probably different and going forward not everyone is going to have a million bucks to spend on a house or a thousand bucks for weekly rent.

 

[Aaron_C]

I am not being defensive...just the facts. I think you are kidding yourself about commanding a premium....have friends who have noticed that rents above $500pw are having to refuce rents by 10%. The low end it is usually about $5-10pw.

Were you old enought to remember the last recession??

That's funny sash - I seem to remember you posting before you were experiencing significantly higher vacancies across your portfolio. I've never (touchwood) had the same problem with the properties I have - if I ever advertise an empty spot I get 30 calls within 1 hour. Oh wait, I do have an empty property, but that's a development site with a derelict house on it, guess that doesn't count?

The golden rule of investing is to follow the rich, and my strategy follows this old adage. I actually think investing in low-socio economic areas can be good, but only from the point of view of undertaking a massive subdivision or a development project. This way you buy land for $2m per sqm and sell it for $300 per sqm - who cares where it's located?

However for normal, residential property purchases, I don't think it's a good idea. You don't have to agree with me, and I note many here don't. But that's just my opinion.

 

[sash]

Good luck to you.

Should you ever need someone to buy one of the Richmond properties for a filresale price let me know.

Actually.....you should read the profiles of people making money. Most have gotten to mutimillion portfolios by houses worth less than $350k

Again....CF prevents people from acquiring more.

No need to response....as we have to agree to disagree.

That's funny sash - I seem to remember you posting before you were experiencing significantly higher vacancies across your portfolio. I've never (touchwood) had the same problem with the properties I have - if I ever advertise an empty spot I get 30 calls within 1 hour. Oh wait, I do have an empty property, but that's a development site with a derelict house on it, guess that doesn't count?

The golden rule of investing is to follow the rich, and my strategy follows this old adage. I actually think investing in low-socio economic areas can be good, but only from the point of view of undertaking a massive subdivision or a development project. This way you buy land for $2m per sqm and sell it for $300 per sqm - who cares where it's located?

However for normal, residential property purchases, I don't think it's a good idea. You don't have to agree with me, and I note many here don't. But that's just my opinion.

 

[Deltaberry]

Good luck to you.

Should you ever need someone to buy one of the Richmond properties for a filresale price let me know.

Actually.....you should read the profiles of people making money. Most have gotten to mutimillion portfolios by houses worth less than $350k

Again....CF prevents people from acquiring more.

No need to response....as we have to agree to disagree.

That's because they're the people who bother to get an interview/profile with a magazine.

Every CBD building in a small city like Melbourne is itself a multi-million dollar portfolio on its own. You see these guys' profiles in whatever magazine? If you sold your portfolio and took the $2m equity you had and bought one of our smaller CBD shop - say the $2.5m ones - you'd get around $100k rent already... Pay interest on $500k of say $30k. $70k net rent. Nearly double the $40k. That's how people get rich I think.

 

[Indifference]

I have been doing some modeling on my portfolio...and funnily enough with all this doom and gloom around the Euro zone and a slowing China and its impact on Australia...I see a silver lining.

I also see a Silver lining.....both in property and in the literal sense.

It seems inevitable that interest rates are going to follow the economic trend, down. It also seems inevitable that as currencies begin to come under extreme pressure (just look at the EU) that the US dollar will strengthen before their economic debt woes catch the house on fire and the USD comes under extreme pressure itself. This doesn't leave many places for capital to find a safe haven. I definitely see a Silver lining...

I also think that an economic downturn will put pressure on house prices due to unemployment rising (even though interest rates will go down) & credit begins to tighten substantially. Even if official rates decrease, the retail rate is not likely to follow in step as global money markets will be extremely tight.

This will put all kinds of pressures on housing, with higher unemployment, banks facing liquidity problems, RBA dropping rates, Banks holding rates firm to offset higher borrowing cost (look all across the EU!) & our already comparatively high property prices..... I think Australia is in for a massive stress test, particularly the property markets and high CF, low leverage is the best preparation for such circumstances. So I agree Sash, but the gravy train might not be as fully loaded as first thought.

Noice isn't it???.....bring on GFC Mark II

Actually yes it is, and I am not worried about another GFC either as I began following the yellow brick road some time ago.

 

[MarkandTina]

One thing I learnt recently is that when your property manager rings up and asks you which of the prospective tenants you would prefer, choose the public servant

 

[sash]

There is a bloke called Warren Buffett....he seems to think that the first rule of money is not to lose money.

Also.....Deltaberry...remind how much you have made using your OWN money leveraged with OPM again??

That's because they're the people who bother to get an interview/profile with a magazine.

Every CBD building in a small city like Melbourne is itself a multi-million dollar portfolio on its own. You see these guys' profiles in whatever magazine? If you sold your portfolio and took the $2m equity you had and bought one of our smaller CBD shop - say the $2.5m ones - you'd get around $100k rent already... Pay interest on $500k of say $30k. $70k net rent. Nearly double the $40k. That's how people get rich I think.

 

[Deltaberry]

There is a bloke called Warren Buffett....he seems to think that the first rule of money is not to lose money.

Also.....Deltaberry...remind how much you have made using your OWN money leveraged with OPM again??

Not sure how you're losing money when you get higher net rental with the same amount of equity under my suggestion... I'm trying to be helpful.

Re personal wealth, I've said here a few years ago I don't go around telling people what my net worth is because it's vain and pointless. Though for the record, all my money is my own money, not that it makes me a better person, but just saying. Does one really constantly feel the need to cite their net worth on an internet forum...

And what's OPM?

 

[zed_kid]

Hey Sash,

I always like reading your posts because I think they represent a more realistic portfolio. Keep at it and keep us down to earth people in the loop.