Advice for Melbourne (First IP)

[maze]

Hi everyone. I've been looking to invest in property for a few months now but I'm having a bit of difficulty with where to start.

I've spoken to a mortgage broker who has advised me that I'm good to borrow up to $550k but I'm not too comfortable with that. $450k would be the upper limit of what I'm comfortable with.

Initially I was looking at apartments in the Prahran/Armadale/St Kilda area but then thought it'd be better to buy a house/unit.

I started looking at Ringwood and Mitcham areas but it seems they might be a bit over my budget too so now I'm currently looking at Sunshine/Albion. I've seen a few properties in that area with decent land size and within my budget.

Just wanted some advice on whether this would be the right way to go (looking more towards capital growth than rental yield) or if there are other areas which would be worth looking at.

My long term goal would be to own multiple properties but I feel thats a fair way down the track.

Thanks!

 

[Aaron_C]

Capital growth is far more important than rental yield for property investing.

 

[maze]

Thanks Aaron - that's my line of thought too. Which areas would be best to look at?

I'm also looking at this price range because I figure it'd be easier to buy multiple properties quicker rather than tying up all my money in one larger purchase.

 

[Peter_Tersteeg]

Realistically you're not going to find cashflow positive properties in Melbourne unless you can do something to improve the rental return after purchase. Even the small 1br apartments tend to be negative at purchase (based on financing the full purchase price and costs, plus covering ongoing holding costs).

That doesn't mean that Melbourne's a bad place to invest, but a focus on capital growth properties will probably have long term better results in Melbourne.

With your budget you're probably looking at apartments or villa units inside of the boundaries you've indicated. In the east you probably will have to go to Ringwood or beyond to buy a house. Personally I'm not keen on much beyond Sunshine in the West. There's a lot of cheap houses in that direction and they continually build more. This will continue to impact capital growth and cashflow.

I'd actually rethink the inner suburb apartments of Prahran/Armadale/St Kilda that you indicated. These are great locations for certain demographics. These areas are always in demand. Capital growth is above average as is rental growth.

 

[Jake Milne]

I'd actually rethink the inner suburb apartments of Prahran/Armadale/St Kilda that you indicated. These are great locations for certain demographics. These areas are always in demand. Capital growth is above average as is rental growth.

+1 to this. Often, one larger purchase (to an extent) will work better than several smaller ones due to your leverage position and entry/exit costs and other non-deductibles.

 

[Aaron_C]

I think one big purchase works out better, you get better quality stock.

 

[maze]

Thanks Jake and PT Bear! That's all great advice and stuff I didn't really think much about.

My reasoning for dropping those areas was that its already well established so I shouldn't expect much more capital growth. As in, good capital growth would be found in areas which are developing and as these areas are already well established, wouldn't the values just remain steady/grow little?

I apologise if this is all basic stuff but I'm just trying to get my head around everything!

 

[Jake Milne]

Hi Maze,

South Yara, Armadale and Toorak have been established suburbs since the 1800's and yet they continue to grow in value. Similar story for Windsor/Prahran and surrounding since the early 1900's.

The reasons behind continued growth in established areas are things like good infrastructure, lifestyle amenities and proximity to cbd. The desirability of these factors leads to demand. That demand continues to outweigh the amount of property as the stock levels are pretty much at capacity due to restrictions in housing density (which is why you should only buy in R1Z areas) and the area being locked in by surrounding suburbs.

With that said though, you can always build up when council allows it. Areas like South Yarra have a pro-active development framework that encourage gentrification of old stock into higher density buildings so try and steer clear of these pockets if you're able. A thorough understanding of the location you're looking to purchase in is critical.

Your point is valid but it relates more to trying to predict or speculate where the next growth pocket will be. You can "hot spot" by looking at disparity in economic factors such as weekly household income vs. mortgage repayments or government spending on infrastructure vs current nominal land values.

 

[maze]

Thanks Jake - really appreciate all the advice and information! I'll attend some auctions and inspections around these areas to get a better idea of what's out there.

 

[BayView]

Given that pos cashflow in Melb is so difficult to find at purchase as others have said, make sure that one of your selection criteria is a dwelling built after 1987 for maximum depreciation on your tax returns.

 

[Marmoura2001]

What about the northern subrubs that is still 5-10 k.m of the CBD? I mean something like northcote, thornbury...etc.

Are they hotspots for short to medium term capital gains ?
I think you can still get a bit of positive gearing on them as well.

Would be great to share your thoughts with me.my budget is below the $400k and don't know really which suburb to go for.

 

[Deltaberry]

Realistically you're not going to find cashflow positive properties in Melbourne unless you can do something to improve the rental return after purchase. Even the small 1br apartments tend to be negative at purchase (based on financing the full purchase price and costs, plus covering ongoing holding costs).

That doesn't mean that Melbourne's a bad place to invest, but a focus on capital growth properties will probably have long term better results in Melbourne.

With your budget you're probably looking at apartments or villa units inside of the boundaries you've indicated. In the east you probably will have to go to Ringwood or beyond to buy a house. Personally I'm not keen on much beyond Sunshine in the West. There's a lot of cheap houses in that direction and they continually build more. This will continue to impact capital growth and cashflow.

I'd actually rethink the inner suburb apartments of Prahran/Armadale/St Kilda that you indicated. These are great locations for certain demographics. These areas are always in demand. Capital growth is above average as is rental growth.

Would have to disagree on that, especially at current rates.

People can achieve cashflow positive on properties on properties $2m+, in prime spots, with land.

The cheaper you go, the more cashflow positive it should be.

 

[Jake Milne]

Would have to disagree on that, especially at current rates.

To use some examples.

Example 1
A ~$2m site I bought last year had a market rent appraisal of $2k per week. If I locked it in at 4.8% for 2-3 years, I'd be marginally cashflow positive at 100% financing.

Example 2
Another ~$3.3m commercial site I bought is renting out at around $200k pa. At 5.2% variable rate (what I'm paying), it would be significantly cashflow positive. Since it's commercial, there are no holding costs.

Point is, if people can achieve cashflow positive on properties with land and over $2m which are located within 1km of Melbourne Central, surely a 1-bedroom or 2-bedroom house/apartment would achieve it. Or maybe they're just really bad investments, which has actually always been my view.

The cheaper you go, the more cashflow positive it should be.

Although I appreciate your point, your examples are far from what a normal investor will purchase.

Most people won't buy Commercial until later in their property portfolio when yield is the focus and the same goes for spending $2mil on an investment... most people won't even spend that amount on their PPOR.

Generally speaking Melbourne's yields are low when compared to all other state capitals and gross yields are usually 2-3% for houses and 3-4% for units. Some have 4-5% returns but these are usually lower priced units that, once again forgoes a degree of CG.

So I agree with PT in that +CF is not the right focus for Melbourne.

 

[Deltaberry]

Sorry but the point was, you should be able to find even more cashflow positive deals at the $300k-600k range.

Cheap prices, higher yield. Low growth, high yield. Although that's a gross generalisation especially for experienced investors like some here who find high yield and high growth properties, it has a lot of truth to it especially for the broader market.

 

[dubjohnston]

Deltaberry. You need am much higher yield that the interest rate due to other costs (maintenance, management, etc). Although I don't know your depn position, I would be extremely surprised if in the 1st year the $2m example above was cashflow positive (all income less all expenses).

Also, for a $3m commercial property, you may have to put 30% in which is way too much for many. I think the curve is belled. Yes, very cheap places should yield well but so should a $3m commercial property. I would say the middle range ($500k-$1m) yields the least. Once you get higher than $1m for residential property, the yield would usually start dropping.

 

[strongy1986]

Don't want to dig up old graves but...

Delta your reasoning is flawed, you should know that the pool of buyers for these high value commercial properties is quite low. If everyone had the cash for these properties the yields would come back to your 4 and 5% marks as the properties value would rise

 

[Deltaberry]

People love to selectively read things and get all defensive.

Read: yields at the lower end should be even higher...

 

[strongy1986]

Not sure what there is to be defensive about?

That you think most residential investing is a poor investment?

 

[jackbak]

Given that pos cashflow in Melb is so difficult to find at purchase as others have said, make sure that one of your selection criteria is a dwelling built after 1987 for maximum depreciation on your tax returns.

I don't agree with this advice. If you limit your search criteria to only properties built post 1987 you are neglecting the majority of properties for sale. Many period homes have been proven appreciate at a greater rate than new houses so it would be foolish to ignore them. Personally, depreciation benefits would play no part in my decision to buy a property, a property's capital growth potential is far more important than tax incentives.

 

[Future Assist]

I'd defiantly go with house and land over a unit if your leaning more to capital growth over rental yield.
Easier to renovate also. Typically don't have any covenants on land/exterior for modifications or changes (unless in a complex).
I know of people who own units in an apartment block and are only allowed a certain light bulb to be used throughout the whole block... and need to be purchased (at a premium) through the body corp. ... oh yeah and there's body corp fees.

House and land #FTW

_______________________
James
Future Assist - SMSF Specialists