Buying an IP - Calculations & What to Look For

[Router]

Hi all,

I feel like I'm almost ready to take the jump and buy my first IP, but I also feel like there are a lot of things I don't know. Because of this, I'm holding off until I feel like I've got a firm understanding of how to proceed. I have listed a "few" questions below and would greatly appreciate your responses.

When your buying an IP...

1. Do you find out the house/unit's price before buying, for depreciation reasons? If so, how much does this affect your decision to buy?
2. Do you find out which fittings still have a depreciable life left in them? If so, how much does this affect your decision to buy?
3. How detailed is your calculations in regards to working out how much your "costs" (maintenance, rates, management fees, etc) would be? Or, do you just have an standard amount, e.g 25% of gross rental income should cover all "costs"? (I say "should" because you never know just how much or how little maintenance would be required).
4. How detailed is your calculations for purchasing costs (e.g mortgage registration, conveyancing, stamp duty etc). Or, do you just have a standard amount - e.g 5% of the total purchase price will cover all purchasing costs.
5. How do you calculate how much CG you think the property will experience over x amount of years? Do you look at past statistics and come up with an appropriate number, or, do you buy without trying to calculate it as you feel it is a good investment and your confident it will grow?
6. What gross yield do you look for? It goes without saying, the higher the better, however, do you have a general ideal amount that applies to all properties of the same kind (e.g apartments would be X% field, whereas houses would be Y% yield)? Or, does it vary from property to property/suburb to suburb? I could imagine expected yields would differ greatly between inner city and rural, but if two properties were in the same general location but different suburbs, would your ideal yield differ between the two?

And I guess the most important question of all is, is there anything else one should consider which is not covered by the questions above?

For my first purchase I'd like to buy in Melbourne as I'd feel more comfortable having it in the same state as me. I haven't short-listed any suburbs yet as I'm still trying to wrap my head around the above questions. However, from the books I have read I'll be looking for the following (well, as many of them as I can get anyway ):

• Land scarcity.
• Close to the city.
• Close to public transport, shops, schools, etc.
• Low crime rate.
• Not on a main road.
• Low rental vacancy rates.
• Solid history of good CG.

Thanks everyone, I really appreciate your assistance.

 

[vaughan]

What you haven't mentioned yet is how you intend to make money from this investment, and how long you expect it to take. Without this strategy you're just buying a house and hoping it'll work out.

What you need is a calculation where you can put the numbers in for each property and work out whether it meets your investment strategy, and what the maximum buying price is for it to do so.

My opinion: forget depreciation at this stage. If an investment needs depreciation to make it work then it's a poor investment. Ditto with negative gearing.

Ultimately you want to work out EXACTLY what the costs are. This can be done pretty easily. The main costs are loan interest, insurance (building, landlord), strata fees if applicable, council and water rates, property management fees, land tax if applicable. Maybe add an allowance for repairs if you want. All of these can be worked out with just a few phone calls. These are your holding costs, they (along with income) are what makes the property cash-flow positive or negative.

Remember, if your long term plan is to "live off the passive income" you cannot have a portfolio full of negatively geared properties. If your plan is "hold the negatively geared properties until they grow then sell some off to pay the debt" then you need to be able to afford the holding costs for the time it takes for the capital growth to occur. How long this is depends on the prospects for growth, and NOBODY knows what that is.

You need to work out the income for the property, Usually this is the rent, easy to work out: get an estimate from the real estate agent. It will be a bit optimistic so check it against currently advertised prices on the web. Do not forget to factor vacancy into the calculation of income.

Your buying costs are the purchase price, stamp duty, legal fees. In the past I've used 5% as a guide line and it's a reasonable estimate. If you want to be a bit more conservative, use 7%. The other main buying cost is repairs, renovations and cleaning. Don't forget these.

Lastly there are selling costs -- agent fees and commissions, capital gains tax. Factor these into your exit strategy.

As for capital growth: you'll have to work out yourself the prospects of any area's growth in the future, and how much your investment strategy relies on capital growth to succeed. Be prepared for negative growth as well.

 

[travelbug]

Hi all,

I feel like I'm almost ready to take the jump and buy my first IP, but I also feel like there are a lot of things I don't know. Because of this, I'm holding off until I feel like I've got a firm understanding of how to proceed. I have listed a "few" questions below and would greatly appreciate your responses.

When your buying an IP...

1. Do you find out the house/unit's price before buying, for depreciation reasons? If so, how much does this affect your decision to buy?
   You need to know the price obviously but not for depreciation reasons. Depreciation should not be a reason to buy a property (although new builds market this as their main selling hook).
2. Do you find out which fittings still have a depreciable life left in them? If so, how much does this affect your decision to buy?
   NO! sas above. Depreciation is the icing on the cake, it's not THE cake.
3. How detailed is your calculations in regards to working out how much your "costs" (maintenance, rates, management fees, etc) would be? Or, do you just have an standard amount, e.g 25% of gross rental income should cover all "costs"? (I say "should" because you never know just how much or how little maintenance would be required).
   I like to work out the costs but if it's THAT critical I wouldn't be looking to buy it. Exception is strtata. You NEED to know what strata costs are.
4. How detailed is your calculations for purchasing costs (e.g mortgage registration, conveyancing, stamp duty etc). Or, do you just have a standard amount - e.g 5% of the total purchase price will cover all purchasing costs.
   You need top know this to see if you have the money (deposit, legals, stamp duty. Pretty easy, just add it up.
   
5. How do you calculate how much CG you think the property will experience over x amount of years? Do you look at past statistics and come up with an appropriate number, or, do you buy without trying to calculate it as you feel it is a good investment and your confident it will grow?
   Unless you have a crystal ball you can't calculate that (It hasn't happened yet). If you MUST have a certain amounbt of capital growth to make money maybe rethink your stragety (sounds like a negative gearing strategy).
6. What gross yield do you look for? It goes without saying, the higher the better, however, do you have a general ideal amount that applies to all properties of the same kind (e.g apartments would be X% field, whereas houses would be Y% yield)? Or, does it vary from property to property/suburb to suburb? I could imagine expected yields would differ greatly between inner city and rural, but if two properties were in the same general location but different suburbs, would your ideal yield differ between the two?

Yield for me depends on how much money I've made on other areas. EG if I've made large equity in the buy I'll forgo a little yield. But I'm greedy I want yield and equity when I buy.

And I guess the most important question of all is, is there anything else one should consider which is not covered by the questions above?
Yep. First work out what your strategy is. What do you want to gain by buyingh property? cash flow, CG?

For my first purchase I'd like to buy in Melbourne as I'd feel more comfortable having it in the same state as me. I haven't short-listed any suburbs yet as I'm still trying to wrap my head around the above questions. However, from the books I have read I'll be looking for the following (well, as many of them as I can get anyway ):

Sounds like you are over analysing and not actually DOING anything. You've got it around the wrong way. Get out there and LOOK. THEN you'll learn whgat may or may not work.

• Land scarcity.
• Close to the city.
• Close to public transport, shops, schools, etc.
• Low crime rate.
• Not on a main road.
• Low rental vacancy rates.
• Solid history of good CG.

Good list. Now get out there.
Thanks everyone, I really appreciate your assistance.

Go to some open homes next weekend. Seriously!!