Cash/Equity - help pls

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From: J D


Hey everyone,

Being a real beginner in IP's any help would be much appreciated...

I am in the fortunate position of coming into cash of 250K and I want to know which is better to do....

The options are:

1. Purchase an IP for 200~220K and use the equity and rental income in the property to buy another 3 IP's of approx the same value( I figure a loan of 600K interest only)

2. Spread the cash over 4 properties putting a 50K in each.

Does it really matter how it is done? either way the cash is equity?
I figure in option 1 at least I own the first IP outright.

any thoughts....??

thanks, JD
 
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Reply: 1
From: Gail H


Congratulations - an enviable position indeed.

I think option 2 sounds better, as you will reap the capital growth on multiple properties (presuming there is any - depending where you are, you may be advised to wait for a little while as we're just about to come off the high growth end of a cycle).

You also may want to spread the available deposit amongst even more properties (say 6, although not all acquired at once) depending on your market, your ability to service the debt, and your risk tolerance.

Good luck

Gail
 
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Reply: 1.1.1
From: RM .


Jeremy,

I have followed your previous posts with great interest as it appears that you have this property investment game well and truly by the horns....

So when I hear someone say they have $250K to invest as deposits on investment properties and I hear you say spread that deposit capacity across "8-9 properties", I can't help but sit up and take notice!

This level implies an approximate deposit including purchasing costs of $27K to $31K per property.

With this sort of buying capacity and the inherent risks with loan serviceability, I would hazard a guess and say that you would be implying high yield, positively geared properties rather than high growth negatively geared? If that is the case, then I would also imagine that you are implying regional properties or outer suburban properties?

Sydney being your market, how far out from the CBD would you need to venture to achieve the required result?

If you are talking non-Sydney properties then how would a potential newbie purchaser be able to achieve sufficient levels of due diligence in order to achieve the required results without being exposed to much risk?

How would you suggest a newbie investor achieve those aims without the risk?

Without specifically targeting an area, what geographies would you target to achieve that aim?

I would be extremely keen to hear your comments as I would imagine that your response would be along the lines of what you could achieve.

Thanks
RM.
 
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Reply: 1.1.1.1
From: Jeremy Laws


In a nutshell, and thanks for the compliment, you are aiming for an overall neutral cash position. I would look at something like 1-2 terraces in Darlo, Paddo or Redfern (even Mascot/Waterloo/Zetland). Something like that, and something you can improve greatly without too much hard work (possibly add a room in the roof at most). These properties would at a guess be costing you about $1-200 a week each - total loss around $400/week. So you then need to buy enough positive geared properties to cover that loss. Say comfortably 5-6 properties that _make_ you $50/week each. If you are quick you can find them still in Cessnock/ Newcastle area. If not go to Bathurst, Tas, or Darwin! Point is your asset is protected in hi growth 'blue chip' properties which will in time outstrip your lesser ones. You NEED the lesser ones to cover the costs now though, so they are integral to your purchasing power. I like a snooker analogy, potting red - black - red - black - red - black. In this case 2-3 reds per 'black' property! Gets fun when your 'blacks' start to go up first - then you go out with your equity and buy lots more 'reds'! And so on and so forth!

PS Hopefully thats as clear as mud now!

PPS THe market being what it is now you may find that the terraces are at the top and the cheap things are about 50-70% of the way up. They (cheapies) will therefore give you about 30%growth first. Don't be misled though, they will end their run and be stagnant for a couple of years while the 'good' ones are about to jump......

Totally confused?????
 
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Reply: 1.1.1.1.1
From: A Jones


Jeremy,

I read your post with great interest. I like the red/black/red analogy.

I have owned a terrace in Redfern since '93. It's my principal place of residence...though I don't live there now(I rent elsewhere).

Redfern has changed a lot over the last a 9 years. Good capital gains...over 30% p.a. for me. Rental returns are not very good (I recently dropped the rent by $50/week to find tenants). Property worth $450k now rents for $350/week.

Overall income is tight for me as I have recently started my own business. I figure a few cash flow +ve properties could help the equation.

I may follow your advice and have a look at Bathurst/Cessnock/Newcastle.

Cheers Ajax
 
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Reply: 1.1.1.1.2
From: RM .


Jeremy,

Thanks for responding.

You said, "I would look at something like 1-2 terraces in Darlo, Paddo or Redfern. Something like that, and something you can improve greatly without too much hard work. These properties would at a guess be costing you about $1-200 a week each - total loss around $400/week."

That is a loss of nearly $21K per annum. I guess you would expect at least that increase in capital growth per year for the two properties though?

Sydney is not my market nor my state so I would hazard that the areas you are talking about are inner circle? (0-10kms from the CBD?)

As I understand it, the specific "red" area, from what you are saying is not the issue. Any area where you are going to be heavily negatively geared but achieve large capital growth is the first part of the strategy. This would seem easy enough to do. Buy in any inner area that has a history of good growth, do a little bit of renovating and manage to service the loan requirements? Correct?

So you now have 2 high growth properties that over time will appreciate but you are out of pocket $400 per week.

This is where it gets tricky. You start looking for cashflow positive properties to offset that $400 per week loss. The target now is to find properties that put that cash back in your pocket and break even. Correct? So you need 4 or more props returning $50 to $100 per week.

Problem is that now you need to broaden the net in terms suburbs, locations, states and the amount of realistic due diligence you can do! How does someone starting out achieve that? Or does it not matter to an extent? That is, so long as the potential "black" property will rent and give back the $50 or more per week, you have met the requirements?

What about the time lag. Each week is costing you $400 but buying the "blacks" is likely to take a lot longer considering you need to find 4 (or more) of them, haggle, buy, settle and eventually and hopefully rent out. What if you find one of them is a dog and doesn’t end up putting cash back in your pocket? Now you end up with two “reds” bleeding you and also a “black” that has turned red. What about the time lag? 52 Weeks at $400 per week starts to eat into serviceability fairly quickly.

How do the lenders look at this strategy when it comes time to borrow more money to buy the “blacks” Do they “sorry, but you are overcommitted on your “reds”.

I know I am perhaps being a little simplistic….. Maybe you can explain a little more.

Thanks in advance.
RM.
 
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Reply: 1.1.1.1.2.1
From: Jeremy Laws


RM,
HAH - never thought of it like that - reds are the cheap ones, blacks are the expensive! In snooker a red is worth one point and a black is worth seven. Accounting of course is different! You learn something every day!

Buy the cheap ones frist, if you are worried about the time lag. I don't like haggling really. If a property is good - and making $50wk is going to sell it fairly quickly, pay the price and get it over with. One of the reasons I hate written offers is they take so damn long! To give you an idea I once bought 6 properties in one afternoon over the phone that all made more than $50 week. That was in the Newcastle area (Sydney) less than 9 months ago. It is not hard to find the area that makes you money, once you have you should IMHO act quickly.

You are not being over simplistic, just over cautious. You will always be able to find a million reasons not to buy. For example. One of the little hovels I bought last June had a small water leak. Plumber went in and its a major problem. $4-5k to fix it. No worries really - I put in a whole new bathroom for about 5-6k I will be able to rent it out after this lease is up for about $20 wk more (work out the return on that 6k!) and I bought the place next door at the same time. I paid $50k for the first place and I bought the place next door (same type) for $137k. Quite a capital gain in 9 months - rent is _almost_ irrelevant! I also think you would find it quite challenging to dig up a property that you couldn't rent!
 
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Reply: 1.1.1.1.2.1.1
From: Always Learning


I am interested in purchasing outside of my market. How would you go about buying properties in Hobart or the larger country towns? What is the process you would use for due diligence? Have you/do you purchase IP's just by the numbers?
 
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Reply: 1.1.1.1.2.1.1.1
From: J D


Great info everyone....

Thank-you,
JD
 
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Reply: 1.1.1.1.2.1.1.1.1
From: Jeremy Laws


Same as for anywhere else. You get a feel for what people are telling you. I prefer to talk to property managers as they have a better understanding (usually) about what is going on. The net has made it a lot easier, and cheaper!
 
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Reply: 1.1.1.1.2.1.1.1.1.1
From: Always Learning


Nice tip about talking with the property managers.
<p>
Have you or would you ever purchased site-unseen?
<p>
 
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Reply: 1.1.1.1.2.1.1.1.1.1.1.1
From: RM .


Jeremy,

Thanks for your previous responses.

Overly cautious, me? I guess I am now. Prior to finding this site I would have just gone out and bought on "whether I liked it or not".

Now, having discovered all the "secrets" from experts like yourself and others, I look at the property, ask the agent what the realistic rental would be and then try to hazard a guess on what likely depreciation there may be left.

I guess I have learnt from this site that if the numbers don't stack up, don't buy unless you want to buy a negative cashflow and a permanent job for life!!

I can go out and buy a few "reds" (the expensive ones....) and could quite comfortably service them without relying on any "blacks" (the cashflow ones) but then how many additional years would I be adding to my job?

I have looked and the few props that I have found that were within a whisker of having positive cashflow and were likely to get some capital growth were snapped up in days. (Due diligence band 16kms to 20kms from CBD)

Even properties I have looked up on the net 35-40km's from the Melb CBD have not shown positive cashflow. Am I looking in the wrong areas? Possibly? How far can a newbie stretch due diligence till one gets to a point where one loses the ability to judge value and rental returns?

I take your point about talking to property managers. Maybe this is another direction to explore? I think I also like a previous post of yours where you said to someone "Just go out and buy something, anything". Maybe this is what a newbie should do and then look back at the pros and cons and use this experience to do or not do the same.

Thanks,
RM.
 
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Reply: 1.1.1.1.2.1.1.1.1.1.1.1.1
From: Paul Zagoridis


Hi RM

While many of us deride negative gearing, don't think that it is an invalid strategy. I make it black and white in order to counter-balance the marketers out there who try to make negative gearing look easy and risk free.

Negative cashflow shouldn't lead to a permanent job for life. Only if taken to its illogical conclusion.

I have personal experience with negative cashflow and recommend against it popularity for two reasons. Firstly it is riskier than it appears. Secondly if the masses wake up and demand a better deal, the real estate market will show even better returns.

Finally don't let our enthusiasm for great deals blind you to the good deals. We rarely brag about the "ok" deals we do. They happen and are the cornerstone to wealth creation. Don't aim for the quick killing. A slow and steady journey is safer and more educational.

Paul Zag
Dreamspinner
The Oz Film Biz site is archived at...
http://wealthesteem.dyndns.org/
 
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