Advice on next purchase

[SiF]

Hello there,

New here, found your site through Google and looks like a good community.

Just wanting some advice with my current purchase and next purchase.

My situation:

Own 1 IP in Sydney - 1 bed apartment in Surry Hills. Bought for $350k is now worth 450-490ish

Have just purchased 2 houses in Finley, NSW and will be renovating them for the next few months.
Bought both for $130k - http://www.realestate.com.au/property-house-nsw-finley-111074427

Now I'm looking at some more that fit this brief:
$200k - $250k
80% LVR
7%+ gross yield (after reno)
10% - 80% of median
Renovation potential
Minimum population 5000+

The aim is creating some equity through renovation to fund the next purchase once the 6 month val is done.
Serviceability hopefully won’t stop lending as the properties will be close to neutral.
CG is not the focus here but would be a nice bonus.

Here are some that fit the brief:
http://www.domain.com.au/Property/For-Sale/House/VIC/Ballarat-North/?adid=2010078873
http://www.domain.com.au/Property/For-Sale/Apartment-Unit-Flat/WA/Halls-Head/?adid=2010196905
http://www.domain.com.au/Property/For-Sale/House/VIC/Long-Gully/?adid=2010111450
http://www.reiq.com/House/for-sale/sadliers-crossing/2373145.aspx
http://www.domain.com.au/Property/For-Sale/House/NSW/Cardiff/?adid=2010181867
http://www.domain.com.au/Property/For-Sale/House/SA/Hackham/?adid=2010139625
http://www.propertynow.com.au/realestate-residential-alfredton-63046.aspx

Please help me by commenting on the properties shortlisted above and/or any other advice that may be relevant.

 

[saiman]

overall i think you are on the right track but I will definetly be shooting for higher results than 7% return after reno in tiny regional towns like finley......

 

[Aaron_C]

In principle sounds fine.

 

[MsAli]

SiF, curious to know with these properties neutral and CG not being the focus, what are you trying to achieve out of these purchases?

 

[SiF]

overall i think you are on the right track but I will definetly be shooting for higher results than 7% return after reno in tiny regional towns like finley......

Hi saiman, what minimum would you look for?

 

[SiF]

SiF, curious to know with these properties neutral and CG not being the focus, what are you trying to achieve out of these purchases?

Just looking to accumulate at this stage. Hopefully the renovations will increase the rent enough to be positive CF before tax, if not after.

With that said as long as the properties aren't really costing anything to run and I can buy more with the equity increase over time I'd assume rents will grow and the properties will grow a little too so my overall wealth position will be better than now.

Any thoughts to this?

Also, any thoughts to the listed properties?

 

[saiman]

Hi saiman, what minimum would you look for?

depends on the risk and the level of work involved

point is 7% can be more than easily achievable in low risk metro areas particularly if your aim is to add value

 

[Jake D]

But can you buy into these low risk metro areas for $65k per property?

 

[saiman]

But can you buy into these low risk metro areas for $65k per property?

nope but in his 'brief' he says he has a budget of $200 - $250k

that's quite achievable

 

[MsAli]

Just looking to accumulate at this stage. Hopefully the renovations will increase the rent enough to be positive CF before tax, if not after.

With that said as long as the properties aren't really costing anything to run and I can buy more with the equity increase over time I'd assume rents will grow and the properties will grow a little too so my overall wealth position will be better than now.

Any thoughts to this?

It doesn't make sense to me. Hope isn't a great strategy. What are you getting out of buying neutral IP's in a town of 5000 with low capital growth.

Just curious...

 

[Terry_w]

Without capital growth there is no point.

Investing will tie up your deposits and will eat into serviceability - even if cashflow positive.

Consider the opportunity cost, ie where else could you have invested your money with a higher return?

 

[knightm]

Investing will tie up your deposits and will eat into serviceability - even if cashflow positive.

Agree about opportunity cost Terry but can u explain if +cf or even +geared how it will "eat into serviceability"? I would have thought if the returns are high enough then serviceability would improve with each purchase.

Deposits is another issue of course and one must generate more equity by value adding (and have a valuer agree with them) if they are to keep the deposits rolling into next deals.

 

[Peter_Tersteeg]

Agree about opportunity cost Terry but can u explain if +cf or even +geared how it will "eat into serviceability"? I would have thought if the returns are high enough then serviceability would improve with each purchase.

There's cashflow positive for the investor and there's cashflow positive from the banks point of view.

With interest rates currently around 5.5%, the investor might see positive cashflow if they can get a rental yield of about 8%. If they get a better yield, it increases their affordability.

Lenders have different criteria for affordability. It varies substantially, but to the lender, a property might only start to increase your affordability when the rental yield is 12% or even higher. A yield of 8% diminishes your affordability in the eyes of pretty much every lender out there.

People here often talk about the great deal they've just purchased with great returns, but even though they're making money on the rent, the bank doesn't see it that way. When it comes to borrowing money, the only opinion that matters is the banks.