buyer's remorse - should i invest in an IP or MF's?

[nomadic]

Hey all, yesterday i put in offer on a townhouse that needs a reno and found out today that it was accepted.

Good or bad? I'm not sure but i think i'm suffering from buyers remorse as i've done the calcs and i think it will cost me about $100 pw to hold. I think the remorse comes from investing in something -ive geared compared to investing in something +ive geared like MF's that put money in my pocket (assuming they continue to do well).

As for MF's, i'm looking at Platinum's Asia, CFS Aus Geared share fund and CFS resource fund - all have done well in the vicinity of 30% - 40% in the last year. I know it's no indication of future performance but i think it's still got some legs.

The plan is/was to do:
1) a reno and rent it out, OR
2) a reno and resell it (about $230k - $240k post reno)

The figures are:
purchase price = $185,388
stamp duty = $5,125
Reno = $12,000

Total loan = about $205k @ about 7%

B/C is $28 pw and rates are about $1,500pa. Expected value after reno is $235k and rent is about $240 - $260pw post reno.

I've attached a pic of recent sales in the block according to RP Data. The unit i'm looking at is #7. Ignore the low priced unit #6 which was apparently sold to a family member.

So my dilemma is do i get a low/no doc loan for the purchase and use an existing LOC of for the deposit and reno costs and hope for the best, or chuck the same amount ($205k) into a MF and get the cashflow (hopefully). The property is on the Gold Coast.

I know this is something i've got to decide for myself but any advice on my calculations is much appreciated.

 

[The Y-man]

$100 pw is on the highish side I think?
Also depends on your tax situation for now and into the near future.

Cheers,

The Y-man

 

[MichaelW]

nomadic,

Post purchase cognitive dissonance is an emotional hurdle that I personally have experienced on many occassions, whether it be a $2,000 fridge (which I got out of buying recently due to PPCD), or a $200,000 unit. The bigger the price tag the bigger the emotional burden of the PCCD.

At the end of the day, you need to go back to your strategy and check that this purchase is aligned with your stated objectives. Run the numbers again and just make sure that it stacks up. If it does then WELL DONE! Pat yourself on the back and move forward with the execution of your strategy. The "relative" strength of other asset categories at the moment is just a distraction from your core goals. Never forget the power of leverage that real estate as a vehicle can give you relative other asset categories.

OK, I might see if I can help shed a little light based on the brief numbers you've supplied:

Costs:
Purchase price $190,500~
Reno $12,000
TOTAL $202,500

If, post-reno, you can rent it for $240pw then this equates to a gross yield of 6.1%. I can't say whether this is an acceptable gross yield for where you are looking, but remember that your yields will improve over time as your capital borrowings remain static (assuming an interest only loan).

At the end of the day, you need to determine whether you think the capital gain from holding this property will more than offset your net negatively geared holding costs. If your cash holding costs are $100pw then you can claim a deduction on these and it becomes, lets say, $70 depending on your marginal tax rate. You can also claim depreciation which is a non-cash holding costs and thereby further reduce your actual cash outflows. Lets say we're down to $50pw.

At $50pw, the property needs to appreciate by $2,600pa to offset your cash holding costs and give you an IRR of 0%, anything above this is profit and is building your portfolio. Remember also the "leverage" you are employing. So, even if it goes up by just $5,000 then you've returned 5.8% on your $41,000 deposit (assuming 80% LVR on your $205,000 loan). i.e. That's a growth profit above cash expenses of $5,000-$2,600 = $2,400. $2,400 / $41,000 equals a 5.8% return on your capital employed.

And $5,000 is only a 2.4%pa growth on that purchase price. That's a very conservative growth projection, and your reno alone will return you well above that in the first year.

My advice would be to stay true to your strategy. I personally believe in the power of property to make ordinary people into very wealthy individuals, but it is not easy. If this property is consistent with your strategy then stay the path! Managed Funds might return you some decent numbers today, but they're off a lower leverage base, so in percentage terms of capital employed they're not as effective as property. Also, the cash implications of the positive income from shares offsets a lot of their benefits. Capital Gains are tax free unless you plan on selling to recoup your profits.

Keep us posted on the reno and how you get on.

All the best,
Michael.

 

[Rixter]

Nomadic, as MW has mentioned if you can reasonably afford to hold the property & it fits into your investment plan then why wouldnt you purchase!

Great advice Michael.

 

[Panic]

Nomadic,

As MW and Rixter said do with your strategy. But remember not to swim against the current.

Thx
V

 

[keithj]

You've done something

Good or bad? I'm not sure but i think i'm suffering from buyers remorse as i've done the calcs and i think it will cost me about $100 pw to hold. I think the remorse comes from investing in something -ive geared compared to investing in something +ive geared like MF's that put money in my pocket (assuming they continue to do well).

Nomadic,

You'll NEVER do the perfect deal - espec if it's your first deal ever. In 2 years you'll look back & be extremely glad you did this. After the 2nd or 5th deal, it'll be a lot easier. I'd suggest you go out & do a slightly better deal next time - even then you'll still feel a bit of buyers remorse - did I pay to much?, will there be a better deal around the corner?, could I have got vendor finance? etc.

It get's easier... the fact is, you've done something - 99% of people never get that far. Look forward to the next deal, don't look back.

Cheers,

KJ

 

[Simon]

It get's easier... the fact is, you've done something - 99% of people never get that far. Look forward to the next deal, don't look back.

Cheers,

KJ

That is it in a nutshell. This thing snowballs once it gets started. getting started is the hardest thing of all. We all have excuses and reasons why we shouldn't do something new.

The lucky guy who achieved everything he was after wasn't lucky. He just got moving on something.

Cheers,

 

[Able]

Nomadic,
Without going into a lot of analysis with the figures, i would be thinking along these lines:
1. Doing a buy-renovate-sell you will likely give away a fair portion of the value added with the buy and sell costs. In other words profit will be a lot less than the value added.
2. Value adding is still a very good strategy.
3. The capital gain on the property will likley out weigh your holding costs but you may have to be patient depending on where abouts in the cycle your area is.
4. You can do well with points 2 & 3 but you may need to be patient and give it quite a few years. Otherwise you may be giving away a lot of your profits with the buy and sell costs. The longer the hold period and the larger the capital gain, the less significant the buy and hold costs.

Regards
Alistair

 

[geoffw]

Nomadic

It may depend on where on the Gold Coast (though I couldn't say where is good and where is not).

I'm with Michael (though that dissonance term was over my head ). In the long term, it comes down to capital gain- and as he says, if the gain is greater than the $100 pw you would need to put in, you're ahead.

Property can be a patience game. The people with patience will end up taking the money of those without. As long as they've chosen well.

 

[nomadic]

You are all champs and i thank you for all the great advice (especially yours Michael and Keith).

Funny thing was my head was spinning all day with the thoughts that Keith described (did i pay too much? can i afford it? is there a better deal around the corner? etc) and i actually rang the agent to exercise my cooling off period. He said "no worries mate, we've got a back up contract at $5k more". No dramas.

So then i inspected 2 more reno'd units on the way home tonight, had a chat with the agent (a different one) and thought that i could make the numbers work... I had a quick check on the forum to see MW's advice, did my calcs again and figured i could do it as i think i under estimated the rental return post reno (thanks again for taking the time to post a great reply MW). You're also right Y-Man, i think i was a bit on the highish side at $100pw cost to hold.

So i rang the selling agent again and said i'm still in. I ran down and put down a $500 deposit and it's now mine and off the market... mwaaahaaahaaa

Although it hasn't gone unconditional yet, i put a clause in to gain early access prior to settlement so i can start the reno straight away - hopefully to get a tenant lined up to move in ASAP after settlement.

For those interested, i'll keep the forum updated on the reno with some piccies

Thanks again

 

[JamesGG]

Nomadic,

It get's easier... the fact is, you've done something - 99% of people never get that far. Look forward to the next deal, don't look back.

Cheers,

KJ

Hiya,

For what it's worth, I think it is great that you have chosen to make an active investment, that you control.

This in itself wins hands down over a managed fund any day.

Good luck with the reno - I am sure it will become the money-making machine that you are aiming for.

Cheers

James.

 

[MichaelW]

Nomadic,

Well done my friend! You will never ever ever look back now. You've looked into the eye of the fear monster and overcome it. The world is now your oyster.

Kudos coming your way.

Michael.

 

[The Y-man]

Nomadic,

As the others have said, the main thing is that YOU DID IT

Congratulations.

Cheers,

The Y-man

 

[MichaelW]

I'm with Michael (though that dissonance term was over my head ).

FWIW,

Wikipedia definition of Cognitive Dissonance

An example of cognitive dissonance is the phenomenon known as buyer's remorse, in which a consumer becomes conflicted, after the fact, with the issue of whether or not their decision to make a purchase was, indeed, a wise one.

And the Wikipedia detailed description of Buyers Remorse with the specific example of property detailed.

It is frequently associated with the purchase of high value items such as property, cars, etc.

Regards,
Michael.

 

[Lily House]

Congratulations Nomadic.
And yes please do keep us informed as to your reno and what you do with the unit post-reno. I will follow with great interest.
Lily

 

[lizzie]

i think there is always some regret when making a purchase - i find i always feel a little disappointed, mainly because once i make a purchase i am out of the purchasing market until i rebuild the equity up in my new property.

i love being in the market. i love looking and buying good deals. it is an addiction! every week i see deals that would work for me, and do feel a little remorse that i can't take advantage of them all ... don't worry nomadic - it is a normal feeling.

 

[tonyc00]

Buyers remorse

Many thanks for the diagnosis - I now know what why I'm miserable - "buyers remorse".

My story - I viewed a unit in Parramatta, done my research, and went to auction last Sat. I was prepared to bid up to $221k. Similar units in the block have sold for $250k.

There was one other bidder, and he stopped at $210k. I was persuaded that the reserve was $220k, so, like an idiot, I bought at $220k.

I knew it was a mortagee repossession so all week I've beaten myself up thinking that I should have made an offer of $211k.

Who knows if it would have been accepted - my logic tells me yes but equally I know I got a bargain.

"buyers remorse" - so true - but somehow I can't stop thinking that I stuffed up.

Tony

 

[geoffw]

Tony

What's $9K between friends? About $600 pa in interest? $12pw? All that lost sleep for $12.

Fast forward. 10 years time. It's worth $500K+.

You've still got it $30K below market. Congratulations! Very well done.

 

[Barracuda]

There was one other bidder, and he stopped at $210k. I was persuaded that the reserve was $220k, so, like an idiot, I bought at $220k.

Tony

It might have been that confident knock-out bid that stopped the opposition in their tracks.

Nice bidding!

 

[lizzie]

ah - and you learnt something from your experience. that is priceless.