A plan and half an idea in Brisbane... little help please

[mcdeyess]

Hi all,

So here is a rundown of the situation. We are looking to buy two properties in Brisbane within the next 9 - 12 months. The first (prop2) will be in suburb X (more on this later). The second (prop3) in Newmarket, Wilston, Windsor area (rent for a few years before making PPOR). We already own a property in an outer North Brisbane suburb (prop1), not much CG so only a small amount of equity. Is doing OK for us negative geared.

Anyhow back to suburb X.
We are probably looking at the $250K mark and want something that will gain some equity in the short term and have reasonable returns (sounds ideal, but CG and yield can be hard to find together) I have largely been focusing on the Logan and Beenleigh area as I think that this has the most opportunity to meet my needs, either a townhouse or 3 bed house, needing some basic reno (paint, kitchen and bathroom - some floors). I do wonder however if I am better suited to buying closer to the city and renovating, the yield will be lower but the CG higher and this could be more helpful with buying prop3 (likely cost $450K+). I recently started looking a Mt Gravatt as a possibility for prop2.

My question is do people feel a cheaper house with possibly less CG but a higher yield will help in buying prop3 or will a more expensive house with more CG and a lower yield suit my outcomes? Opinions on suburb choices would also be appreciated for prop2 (i.e. Logan/beenleigh vs 10km from city). I personally believe Logan has a better CG in the short term than Ipswich and don't like the more regional locations (narrow minded I know). Prop3 is a lifestyle choice not investment based.

Our existing incomes are quite good, we save a minimum $350pw and have over $20K in savings.

I have a meeting planned with my accountant but am interested on the views of forum members.

Thanks in advance,
[email protected]

 

[Les]

G'day Mcdeyess,

Whew!! How long IS a piece of rope? Sorry, but it does sounds a bit that way. The underlying message through your post seems to indicate that Capital Growth would be more beneficial - but...

My question is do people feel a cheaper house with possibly less CG but a higher yield will help in buying prop3 or will a more expensive house with more CG and a lower yield suit my outcomes?

Best I can offer is - "What are you short of?" And that, of course, breaks down to "How do the numbers stack up?"

Now, as a newer poster, maybe you just don't know - and that's OK.

How familiar are you with "checking the numbers" McD? Is it an area you are comfortable with? You do seem to be able to put money aside (and that's always good). But, when investing, what the numbers say is of significant value, and will likely lead you to a conclusion you are happy with.

I note, too, that "prop3" is a want, and not a need. Which is good too. i.e. you don't "need" to buy prop3 if things are tight. But, of course, you might "want" to, if possible.

So, back to my original question - what are you short of? Do you need the income from a positive geared investment (for prop2) to be able to move on to prop3? Or, do you have "stacks in reserve" to purchase prop3 anyway?

Whichever way you answer those 3 questions will likely point the right way for you,

Regards,

 

[thefirstbruce]

Mc, welcome to SS.

not an easy answer to your question..... some of the variables:

P ( family income going up or down)
P (family consumption up or down)
P ( cg being high or low for each area)
P ( interest rates up or down and timing of such)
P (rental increase rate for each area)

My view is that cg's are the cream, serviceability the milk....especially with buy and hold, especially in the early days, and especially when average national DSRs are where they are.

Of course, a more prudent strategy is to consider how you might maximize cg and yield simultaneously......that's something I could help you with at a cheaper hourly rate than Peter Spann or Dymphna Boholt....

 

[mcdeyess]

Bruce and Les thanks for your responses, they are greatly appreciated. You have asked some excellent questions, I will try and answer to the best of my ability.

Firstly Les,
I am reasonably good with numbers and have become better with regards to property as part of my research. I have the basics like a budget that we stick to. My main financial property tool is a spreadsheet that takes input such as property cost including stamp duty, as well as other bank and govt charges, it compares this with expected loan repayments and anticipated rent (costing out management fees, repairs, rates, body corp, insurance etc). These figures together give me Gross return (easy), net return(estimate) and and anticipated weekly profit/loss in addition to how it will affect our tax position. Is this what you mean by knowing the numbers? is there anything I might not have taken into account. This is the spreadsheet I will use to access the viability of an IP.

You are correct prop3 is a want. Basically I want to live in prop3 and pay about the same in mortgage as I am in rent now (that is why it is an IP first to get the mortgage down, this will probably be a P&I) I don't have to have it but it is part of our goals. My partner and I want a PPOR and 4 IP's by 2009. We have 1 IP now. You are correct I could delay prop3 or even get another IP for less money.

We both have good jobs so at the moment serviceability isn't an issue, I think you are correct that CG is what we need. Equity to go towards the prop3 purchase. The problem is I see CG as a house closer to the city at $350k+ with yield(4.5%) on these isn't that good = reduced serviceability. If I buy a little further out for $180K with a higher yield (7%) say then my serviceability will still be good but I may not get the CG I need. This is my current bind, I am torn in which direction to go.

Your questions point to us being short of CG, do you feel that is an accurate assessment?

If you wanted to pronounce McDeyess it would sound like "Mc+Dice" it isn't any easy one to read

Bruce,

Your questions are a little puzzling too me. Your P questions are they variables you use to assess a potential area or are you asking with regards to my personal circumstances?

I agree that it is possible to get CG and yield but being an inexperienced investor though I will try for this (it is my aim) I am not confident of being successful the first time round.

Thanks again to you both for your response,
[email protected]

 

[WillG]

It sounds like your real goal is 4 IP's by 2009 which means you will have to buy 1 IP per year for the next years.

I would factor into your spreadsheet buying a new IP each year for the next 3 years to see what you can afford in terms of serviceability. You may want to try 1 IP with good growth and 2 IP's with good yields

You may want to set some limits on the max LVR you are happy to go to.

May I ask why you need 4 IP's by 2009 ? Is it some sort of competition or just a personal goal.

I don't tend to set exact goals such as yours. I rather set goals based on my LVR, servicability, current IP's in my portfolio and 'hot suburbs'. For example, if a bargain comes up and it can help me retire 5 years earlier then I would buy it.

Hope this helps !

 

[mcdeyess]

Valid point WillG.

I must admit we set this goal as both a personal (PPOR) and investment goal. I haven't done the exact sums for 4 IP's by 2009. I met with Geoff Doige from the Reno kings and he suggested that I make a goal for myself. I felt it was realistic.

I am meeting with my accountant soon to more formerly access the viability. I certainly know I can afford another 1, possibly 2 depending on my LVR and the cost of properties.

Since I am starting out I wanted to set an achievable goal, as I become more comfortable with what my LVR is and understanding the market I would certainly take opportunities as they arise like you say. Without setting a goal however I might just sit on 2 properties for 8 years.... that would be bad

Cheers,
[email protected]

 

[sue78]

To buy four IP's you would definately need CG so you can access the equity. If serviceability is less of an issue then I would concentrate on CG.

But ideally you can buy an IP with good CG and yield....that's the hard part.

If you aim for one IP per year then there's actually plenty of time to consider buying land and building 1 house per year.

We just finished building a house and the numbers are very good

Cost $290k inc land
Financed 80% using 20% equity
Valuation $400k - $420k
Rental $380 p/w

Pretty good instant CG for the current market.

 

[thefirstbruce]

Bruce,

Your questions are a little puzzling too me. Your P questions are they variables you use to assess a potential area or are you asking with regards to my personal circumstances?

I agree that it is possible to get CG and yield but being an inexperienced investor though I will try for this (it is my aim) I am not confident of being successful the first time round.
[email protected]

Mc, P is the abbreviation for Probability, so when put in front of a bracketed expression, means the Probability of bracketed expression occurring. What line of work are you in?

As for finding cg and yield in one deal, why stay in first gear when you have the keys to a Ferrari? Buying IPs with poor yields and average cg's is for everyone else. You are on Somersoft for education on how to match supply to demand more intelligently. You'll be doing yourself and others a favour by thinking and working smarter, not harder. Any Joe can go and buy a house and wait for passive cg's to make them some money....eventually. THere are enough Joes out there.... why compete against them?

It isn't impossible to get cg and yield at the same time. but may require your elbow grease or time or calculated risk.

i.e.
you could buy a block of land and build a speccie. That will buy you at least $20k of cg (after holding cost consideration) if you do your homework on the lot and the demand for rentals.

Land is in shorter supply than homes for sale in many areas. And demand for newer homes is higher than for older homes. Reflect on these points.

Consider the depreciation advantages of a new house.


Now, thinking a little smarter, consider the flexibility that building a duplex brings. If you have reasonable serviceability, then you are probably in a good position to build a duplex straight off the bat. Have you considered a 95% lend?

I'd recommend you talk to a couple of lenders, via a good broker or directly, then start looking for a reputable builder who is familiar with the building reg of target lga.

Start talking to people- council, builders, brokers, acct, solicitor. The more you talk, the less difficult it will seem to raise your sights...

 

[Les]

G'day McDeyess,

These figures together give me Gross return (easy), net return(estimate) and anticipated weekly profit/loss in addition to how it will affect our tax position. Is this what you mean by knowing the numbers? is there anything I might not have taken into account.

With any newer poster, we have NO IDEA just how much you may (or may not) know. Sounds to me like you have more than the usual grasp of these "numbers" things. So, I reckon you have things covered pretty well.

Re "do you need CG more than yield", I usually defer to my mate Rolf (Latham) who has mentioned to me that "If you have Equity, DSR is not a problem".

Now, what does that mean to you? (or to anybody else for that matter)
To me it means that "creating equity" (and/or buying equity) is probably going to be of more use than looking for yield. But, of course, that's me, as an avowed -ve gearer, pushing my barrow. It makes sense to me - but it doesn't necessarily make sense to others.

Also (and I just revisited this subject tonight on another thread) I had found EARLY ON in my investing that buying more, earlier, was more beneficial than buying "one per year" - assuming that the deals are good ("the numbers" told me this).

And, as others have said, having a good quantity of land is one of the major keys to success. It could mean that you buy a larger block that can be (later) sub-divided - or you buy in an area where the growth is "assured" because the property is in a growth area (within xxKm of a CBD, beach, whatever).

It's great to have a goal - go for it. I am hoping to achieve a major one of mine within the next 6 - 7 months (and I'll CERTAINLY let you all know when I achieve it),

Regards,

 

[redwing]

Re "do you need CG more than yield", I usually defer to my mate Rolf (Latham) who has mentioned to me that "If you have Equity, DSR is not a problem".

Now, what does that mean to you? (or to anybody else for that matter)
To me it means that "creating equity" (and/or buying equity) is probably going to be of more use than looking for yield. But, of course, that's me, as an avowed -ve gearer, pushing my barrow. It makes sense to me - but it doesn't necessarily make sense to others.

,

Hi Les,

Are you able to expand on this?

Are you talking about accessing the equity via a LOC here to get over the serviceability wall?

 

[mcdeyess]

Sweet thanks for the further feedback everyone.

Firstly Bruce,

With regards to your probablility questions. My partner and I have full time work with the Commonwealth govt (I am in IT), pay goes up only slightly as we are both on top increment. We have good job security but who wan't to work for the govt forever!!! Hence we are starting down the investing path.
Consumption - probably up a little due to a boy heading into teenage years
CG for area's - Beenleigh tipped to have some due to council spending and current affordability. Inner ring suburbs (10km) growth should be average for the next two years but as always they benifit from the next boom (a while away but I am looking at 10 years +)
I see quite a few more rises in rates and will budget for it
Rental increases are likely - I tend to keep away from the max in order to attract the best tennant (at or above market though). My current IP has an increase coming up.
With regards to yours and sue's point on buying land and building. I confess to not having considered or researching this too much. I was looking at buying a qlder on a large block with a few to make it a duplex. Once again this is where I don't have a lot of knowledge (developing/building) but you gotta jump in sometime. I think I am able to take this type of risk. My current IP I bought new as a house and land package so I am still enjoying good depreciation.
I am also interested in Redwings question.
Les I am pretty much convinced that it is Equity that I need, so I am looking for land value somewhere. That means I will look at buying closer to the city, keeping away from apartments/townhouses etc. I wish you all the best with your goals... can I ask what they are broadly in this forum? If too intrusive then I apologise.
Sue 78 what you have done is awesome. Something like that would be great for my next prop. Is it your first build, how hard did you find it? Is it a southern corridor property? How long did it take from start to finish?

Cheers,
[email protected]

 

[Les]

G'day Redwing,

Re "do you need CG more than yield", I usually defer to my mate Rolf (Latham) who has mentioned to me that "If you have Equity, DSR is not a problem"

Are you able to expand on this?

RW, probably the man himself could do it more adequately (or chose any of the other Brokers on this forum, especially if they are closer by - I'm sure they will all be able to draw on similar knowledge).

Anyway, my take on Rolf's words is that Equity is the key. Probably for a number of reasons (and some of these are my guesses - I haven't used them all):-

1. DSR limits are imposed by a lender (but may not be reflected in your reality) e.g. If you are on a $120k wage, the Banks will usually still impose a % limit on what they will lend - even if you don't eat 3 times as much for breakfast as someone on $40k !!

2. When starting out, you are at the mercy of the above parameter - but, as time goes on, and Equity grows, things can change. As you say, you can use Equity in existing property as the next Deposit/Costs (as long as you have Equity). But, with most lenders, this will STILL involve you satisfying their DSR limits for the extra loans.

3. If you have more significant Equity, your choices grow:-

o You can choose to use NoDoc loans (just sign a Stat Dec signing "I can afford repayments") - the DSR is then totally ignored, except within your own budgetting

o You could take a smaller loan from the Equity to invest in a higher returning investment (annuities, etc) which return a pre-defined amount of that equity you drew against as an Income stream. This extra Income can then support your wage to lift your DSR (I've also heard that the extra Income can be considered as 100% rather than the 30% - 35% that Banks determine you can "afford" from your wage). Try searching on "cashbond" - I'm sure there are one or two in the forum who have used these successfully - but you need Equity to start, and an expected Equity Gain for these to be viable (as I understand them - but I have not used them myself).

o Drawing against Equity allows YOU to apportion the cash in the most effective way - e.g. you could choose to spend the first 7% in paying the first year's Interest - this then leaves a lot more left over to fund more deposits, spend to improve properties/rents, cover sudden expenses, perhaps even cover portfolio's Interest if things got tough (these properties ARE going to rise in value, aren't they?)

o With one or two IP's (let's say 2) a $20pw rent increase each will give you ~$2000 more per year Income. But 2 x $250k houses only need to lift by 0.5% to allow you $2000 more Equity (assuming 80% lend). So, what if you've bought in an area expecting 6% growth or better? How much better is the result than the rent increase?

Redwing, some of these DON'T relate to the DSR thing - but they DO relate to why I think buying for Equity growth is better than Yield (Income). Might help others...

I reckon Rolf will probably chip in with 3 lines that will say more than what I've said in 30 - but then, he's the expert. And, of course, others out there will hopefully add to areas I have missed, or where I've got things wrong

Regards,

 

[alexlee]

I do wonder however if I am better suited to buying closer to the city and renovating, the yield will be lower but the CG higher and this could be more helpful with buying prop3 (likely cost $450K+). I recently started looking a Mt Gravatt as a possibility for prop2.

Mcdeyess, why are you planning to jump your budget significantly for IP3? While more inner city suburbs to tend to show more CG (not guaranteed, of course) they also tend to have lower yields. Depending on serviceability, some people may find it better to buy more lower priced but higher yielding properties (not talking country areas but outer suburbs, in Brisbane I'm thinking the Brisbane / GC corridor).

As a practical calc:
You buy 1 x $450k property in an inner suburb. Cap gains = 10% or $45k a year

You buy 2 x $250k properties in an outer suburb. Cap gains = 8% or $40k a year.

The difference isn't much. In the second option you can buy more gross property because your yield is higher (my own observation: about 5% yield in the inner suburbs but 6%+ in the outer suburbs).

Just something to think about. I'm a big fan of the 'buy cheap, buy a lot' strategy.
Alex

 

[alexlee]

Hi Les,

Are you able to expand on this?

Are you talking about accessing the equity via a LOC here to get over the serviceability wall?

Access equity so you don't have to save the deposit. As for serviceability, when you have the equity, 'creating' income is not an issue. Cash bonds can be used, LPTs, high yielding shares, property syndicates, corporate bonds, etc. will all create more income than the mortgage payment, resulting in higher serviceability.

In the same way, retirees with an expensive house with no income can still get loans.
Alex

 

[mcdeyess]

Thanks again all for your responses.
Alex the reason behind the big jump in price for prop 3 is that it will eventually be my ppor. I currently rent in the inner north and love the area. I also love qlder's. My partner and I can't afford to buy one straight up and live in it and still achieve our investment goals. So we will buy, rent it out for a few years, make some improvements and then move in. Essentially it is a lifestyle choice. I think it was Les who pointed out that I don't have to buy prop3 straight away, I could buy more investments first.
From the way the discussion has shaped it certainly seems that CG is what I need, I will attempt however as Bruce suggested to get both. I am a big fan of the "reno kings" particularly after I met Geoff Doige, he really impressed me.
There has been some interesting points raised about DSR that I will look into but generally I think this information will be more needed when I run out of serviceability.

Speaking of the reno kings has anyone used their Investigate property team to track down a deal?
I figure as a first timer spending $500 for their help to find me something that I can do a quick reno on for CG could give me the boost and helping hand I need.

Cheers,
[email protected]

 

[sue78]

I do think that Les is right in saying that it's more beneficial to buy a lot early on than one per year. It depends on how much spare time you have really and what your strategy is.

Our strategy is one per year because 1) I don't have any spare time and I even have to take my 13 mths old baby with me to site 2) that's our strategy and has worked well...infact, this is all I know how to do..buy land and build.

From settlement of land to the house being ready for rental takes aprox 7-8 mths for a typical 4br, double grg, 2 living area low set. This is the 4th property we've built in 4 years. It is located in Kuraby. Pretty close to Mt Gravatt. Personally, I don't see Mt Gravatt to be any better than Kuraby, Runcorn, Sunnybank or 8 Mile Plains as they are all the same distance from the city, close to Garden City and the 8 Mile Plains Express way. The houses in Mt Gravatt are just as pricey but not as nice as the newer houses in the 8 Mile Plains area.

I find buying a house, renovating etc too time consuming. I've tried that and gave up after about 3 mths of seaching for a property. I think the $500 or employing a buyer's agent is a good idea.

Goodluck....there are still a lot of opportunities in Brisbane.

 

[redwing]

Thanks Les,

I've heard a few brokers say "as long as you have equity DSR is not a problem" but then things become a bit more complicated as the process unfolds; I'm lucky in that we have a pretty good broker but every loan has been an uphill battle as we're not on a huge wage, so any insights such as these are great..

establishing a LOC has been a boon as has been reading Corsa's thread about best setting up accounts, something I hadn't given a lot of thought to, but as you get bigger you need to untangle the mess and clarify things come tax time.

 

[mcdeyess]

Hey I started a thread that has gone onto a second page... who would have thought!!!

Anyhow.
Alex,
Your figures look good buying two cheaper properties. However I wonder if the CG comparison is accurate? 10% at 5km may be over what would be achieved in the current market for a few years, so 8% further out doesn't look good either (ripple effect in mind). I think I will have to reasearch some historical data to see if this strategy is feasible. I have no doubt it would work over a 7 year period but I want reasonable CG within 2 years not 7.

Sue,
The idea you present is quite new to me. I confess to being totally ignorant of vacant land available within 10km of the Brisbane city. I assumed it was that scare that I just wouldn't be able to afford it. That is why I was looking to renovate something existing. I will certainly look into this further as a viable option. It would also be a great, though no doubt stressful experience to build from scratch. When looking at a block of land is it the council who provides details about the required gas, sewerage, water infrastructure being run near the property? I believe a block sloping down is better for this?

Cheers,
[email protected]

 

[sue78]

Hey I started a thread that has gone onto a second page... who would have thought!!!

When looking at a block of land is it the council who provides details about the required gas, sewerage, water infrastructure being run near the property? I believe a block sloping down is better for this?

Cheers,
[email protected]

Woo Hoo!! that's what so great about Somersoft forum...so many people eager to help.

Yeah, I think it is council. You will need to ask your solicitor to do a search on the block. I don't really know as I have previously bought land in new estates.

It's easier to search for land than a house because it is scarce. I can find a block with potantial on re.com.au within 1-2 hrs yet it will takes me literally mths to find a house.

 

[Les]

G'day again, McDeyess,

but I want reasonable CG within 2 years not 7

There could be a number of ways that this could happen (or be made to happen):-

If you want to stay with newer IP's, look for the areas that are almost sold out, then offer BELOW asking price to buy those last one or two that the developer is ITCHING to shift so they can move on.

Or, keep your eyes open for areas where people have dug a hole for themselves (we've had 3 rate rises, with perhaps another on the way - not huge, but they add up) and they need to sell quickly. Have your approvals in place to be able to move quickly, settle quickly - for a lower price of course. (Known as "fire sale").

Of course, the Reno Kings famous "cosmetic reno" can also do this very nicely - as long as you buy to suit this way !!! And, yeah, there are a number of inner city (within 3 - 4Km) areas that are still ripe for this.




Then there are all of those other thoughts from other posters:-
1. Buy land and build
2. Buy a house on large land and subdivide
3. Buy in areas that seem to be about to boom (is Beenleigh one? - could be - geographically it has everything going for it).

I might have missed some - but reread the thread - you'll pick them up.



And then there are the myriad other ways (will they suit you? I dunno - .... but YOU will!!!)

a. Buy something that is undersold in its current state - you then buy, CHANGE its state, and make a motza (e.g. take a motel site that is losing money and turn it into old people's accom, or student accommodation - as long as it is positioned appropriately). It might even become a strip mall of offices or shops with a bit spent on them. Of course, the numbers need to stack up - but that applies to ANY deal.
b. Buy units on a Company title and strata them
c. Buy in BOOM areas (could even be Mt Isa or Broken Hill) - be careful - but these can return yields of 25% or more - could that help? Could offset other negative geared losses on inner city Growth IP's. And can even have CG of their own as well as the high yield.
d. Buy two properties side by side then cash in on the double size block - maybe even do a DA and onsell, or rebuild the lot for yourself.
e. Commercial property


This is a very small sample of the hundreds of ways that we can succeed with IP's. The forum has a huge wealth of ideas within it. Use it, McD - and see just which way turns on a light for you.

And do keep us all up to date with how you're going too,

Regards,