400k to invest: Melbourne or Brisbane?

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From: James Hardy


QUESTION: 400k to invest.

Ideas needed on where we should invest.

Do we buy two IP units in Melbourne which would have to be away from inner city or go for one high value unit closer to the city.

Have found a small 2 bedroom unit in a classic block of 4 on a very good street in bayside suburb close to beach, shops and transport which will go for about 350K.

Only problem is it has low rental return $250 p/w but high capital growth. It was 130k about 5yrs ago.

OR Do we buy a quality 'Queenslander' inner city Brisbane?

So many choices and not sure which way to turn.

Regards

James Hardy
 
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Reply: 1
From: James Hardy
 
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Reply: 2
From: Always Learning


James,

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You say you have 400K to invest, how did you determine this figure? I would think that this figure is dependant on the yield of the property(ies) being purchased. The classic apartment for 350K at 250pw has a not too classy 3.7% yield (IMO it sucks), how many years of rental increases do you estimate it would be before that property would be cashflow positive? If you could buy IP properties with 7% yield or what about 10~11% yields, if so I would suggest you could borrow much more than 400K.

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As for capital gains, maybe the last 5 years have been great (150K->350K wow) but I think it would take a miracle to get the same % increase again over the next 5 years; 350K->816K considering a modest rental increases maybe from 250PW -> 350PW this results in tiny 2.2% yield on value or 5.5% yield on current purchase price (still negative gearing), $816K for a 2BR standard flat in bay side Melbourne? I just don't think it is reasonable to expect it could happen in the next 5 years. I suggest that the excellent capital gains have already been made ( in the medium term) and you will be spending many years watering a thirsty plant that wont yield any fruit for the foreseeable future.

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However what if you could purchase IP in a different market segment? in a different city, a market that maybe has had poor CG over the last 5 years, maybe it's "time has come". Should be be wise enough to purchase in that market you will be rewarded with good CG and good returns. I am sure this is very possible.

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Where is that market? Which city? Which areas? Which property type?...I would love to know! My current idea (actually I don't have a clue) is to target Gold Coast, Brissie and/or Hobart.

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Personally I kinda like Geoff Doidges http://www.financialsuccesssystems.com/ ( and others ) ideas of buying as close as possible to land value, renovating via a "cookie cutter" renovation programing to raise value (after reno, revalue and refinance, get your seed capital back, and then do it again) and boost rental yields. This is basically making your own CG, not waiting for it to happen. I suppose such ideas are simplistic, the actually doing it is the difficult bit.

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Reply: 2.1
From: Gail H


James,

Yes, be very careful about the herd mentality that develops when places like Melbourne have a huge boom. It just feels like it will keep going on forever. But Melbourne is on the crest of a wave. There is much evidence that it will plateau out for some time to come. Yes, I know everyone said that a year ago, and it didn't happen. But that only means that they are more likely to be right this time.

The property you are thinking about is negatively geared to a large extent. If prices do stagnate for a few years, you will just be going backwards. You are best to buy in Melbourne when interest rates are high and everyone is saying that prices haven't shifted in 3 years, so real estate is a crap investment.

Its hard to think of it now, but I can remember attending auctions in Melbourne 3 years ago, and there would be nobody there. My sister's 2 bedroom flat in Yarraville was passed in for $62,000. She couldn't give it away. Remember, the property market tends to be cyclical.

Read back issues of Australia Property Investment Magazines for suggestions of places to invest. Read Kiyosaki's new book (Retire Young, Retire Rich) for the observations on "contrarian investing". Think outside some of the more obvious choices (Sean O'Reilly became a millionaire by buying properties in Warragul).

Most of all, don't panic and rush in. As interest rates rise, the chances of getting a bargain really increase. I live in Melbourne, and own no IPs here (but in a few years time, I will start looking).

Good luck and keep posting

Gail (Sorry about the long post)
 
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Reply: 2.1.1
From: W W


If you have $400,000 to invest, buy some property in each state. Using $50,000 deposits you could buy 8 x $200,000 properties!

Or using low doc loans you could get about 13 wraps producing about $3000 positive income each per year = $39,000 per year. plus if lucky, you could get 13 of the FHOG as well = $91,000 which you could use as deposit on a high growth property.

Jsut some thoughts

Passive I
 
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Reply: 2.1.1.1
From: Gail H


I think James meant that the total price of the property had to be $400,000 (rather than having $400,000 in deposit money).

G
 
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Reply: 2.1.1.1.1
From: James Hardy


Yo! Thanks for all your input.

I've thinking the same about Melbourne and wondering 'what if' a 350K IP does double in price over 7-10 years, wages surely at the current rate of increase won't be able to keep up, and that is without the effect of the on going, never to end?! first home owners grant.

I take take on board your advice about not rushing in.

Also being new to all of this I calculated I would be able to buy a property of about 400k not that I have 400k I wish!!!

Thanks again, james
 
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Reply: 2.1.1.1.1.1
From: James Hardy


Gail,

You suggest that I wait to buy in Melbourne, which I'm willing to do, but what should I do in the mean time?

I'm at the point where I've got my money already to invest and rationalised loans and have heaps of disposable cash.

Should I give the share market a go until this over heated property market bottoms out or should I just stick every cent into my current home loan to build up EQ?

Not sure which way to turn at this point.

Regards James
 
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Reply: 2.1.1.1.1.1.1
From: Gail H


James,
Its tough James. I'm not a fan of shares, so I'm the wrong person to ask. Even stockbrokers are saying that Australian equities are only "fair" value at the moment (meaning they are probably over valued).

Read back issues of Australia Property Investment Magazine for suggestions of good places. I went for the Sunshine Coast based on what I'd read there and elsewhere. Next I'm looking at coastal areas south of Perth (Mandurah, Rockingham). In a couple of years time I'll look at Melb again (probably Inner West period home and do a reno). I'm also keeping an eye on the coastal suburbs North of Brisbane (Brighton etc.)

I think if its the right time to invest for you, then you will find somewhere suitable, and you should do something now. Somewhere that has growth left in it and hasn't been overly influenced by the recent boom. Such places are also more likely to produce a bargain (make some lowball offers and see what happens). In Melbourne, everything is hot at the moment. It is totally a seller's market. Melbourne is such a cyclical market, that timing tends to be more important.

I sympathise though. I'm a Melbourne resident, and only got my property investment wake-up call about 6 months ago. In other words, just when Melbourne had gone through one of the biggest booms in all times, and pundits are predicting that prices could plateau for 5 years or so. I have spent ages kicking myself and feeling frustrated. I'm angry that I didn't do anything earlier. Waiting another 5 years seems intolerable. So, I have become an interstate investor.

Good luck James
Gail
 
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