Chicken ?

[Void]

Hello everyone,

I was rather close to buying my first IP near Frankston (south of Melbourne) - close to the new Eastlink - and I still think the location is quite nice. But with the current subprime / global credit crunch, I'm really considering to chicken out of the whole deal.

I know, the first IP is probably the toughest to decide, but to buy-in now and to wait for a year to see my IP buying built (as it's an off-the plan property) while the world around it tries to cope with the current mess... I think I won't be able to enjoy the ride.

Now - is my 'fear' something normal for a first-IP-buyer, or do also experienced property investors get cold / shaky (chicken) feet during such times ?

Cheers,

Void

 

[Rixter]

Its the starting that stops most people due to fear.

Psychologically its the fear of losing.

Fear is overcome by gaining knowledge & having the courage to apply that knowledge over a period of time. The result is experience.

The poor and middle class play the game not to lose, whilst the rich and wealthy play the game to win.

Notice the difference?

One's focusing on winning and ones focusing on losing.

You get what you focus on the majority of the time.

Heres a tip for you - Success is 80% mindset and 20% strategy.

If you play the wait and see game there will never be the perfect time to invest because your mind will always be focusing on why you cant invest instead of why you need to invest.

Hope this helps!

 

[sailor]

Totally agree with everything Rixter said. Staight plain good advice. If you've done your homework and research a fair amount of properties in the area...then your figures should stack up that this is a good buy. If your figures don't stack up...then go IP-shopping again.

 

[MarkB]

I freely admit that I don't know anything about Frankston, but buying an OTP property that is still a year away from completion at a time of rising interest rates and a credit crunch for IP #1?!

I admire your cojones.

M

 

[Jontxu]

Herd mentality

Hi Void, the “global credit crunch” will see you getting more rent for your IP as a lot of people defer buying and investing in times like this. If the property you are going to purchase makes sense today, it will makes sense tomorrow, next week, next month, next year…

Happy Investing
Jon Salvador
www.headinghome.com.au
For investors … from investors

 

[The Y-man]

but to buy-in now and to wait for a year to see my IP buying built (as it's an off-the plan property) while the world around it tries to cope with the current mess... I think I won't be able to enjoy the ride.

That may not be the only issue you find..... but then I am probably biased

As I see it, the combination of:

1. first IP
2. OTP
3. Interstate

is more risk than I would personally be willing to take....


Cheers,

The Y-man

 

[Monopoly]

Fear is the most crippling of emotions; it will stop you dead in your tracks, regardless of whether it is the right move or not.

The best way to overcome it, is to either push through ignorantly dismissing any possible consequences, or alternatively arming yourself with knowledge, thereby making an "informed" choice. In short, DOING YOUR HOMEWORK.

There is much information about Frankston and it's surrounding pockets. There are literally threads full of info, stats, opinions and posts on the suburbs along the Mornington Pen; you would be wise to start off by reading some of these; I believe there are one or two posters who MAY actually know what they're talking about, having invested thousands of $$$ in the very area you are too "chicken" to get into.

Cheers,
Jo

 

[alexlee]

Your situation is not just about getting cold feet in a shaky market. e.g. if you were considering a property that's already built, with a bank val that supports the purchase price, and with some conservative estimates you believe you can hold the property, that would be a different situation. If you buy an established property and the market falls, it's not a big deal if you can make the payments.

If the market falls before your apartment is finished, you might have problems getting finance.

May I ask why you decided on OTP for your first one?
Alex

 

[GoAnna!]

OTP

Pros

Ability to hold growth product through growth period at close to zero costs (buy tomorrow's value at todys prices)

High depreciation on new building improving cash flow position

Low maintaince for a number of years

Attractive to tenants


Cons

Taking gamble on realestate and interest rate market at time of settlement

Can't be 100% certain of the product you are buying until you see it built

Competition for tenants at time of settlement


Worse cash scenario is that the product is disappointing, values drop and cost of finance increases by setlement. You have to put in extra funds to make financing possible.

Best case product is better tha you could have envisaged, rents have increased, property values have increased and finance costs fallen by settlement

 

[Monopoly]

Update....

Sorry, I should have added that there is much information on OTP purchases also. Although I don't recommend it as a first investment, not all OTPs are no-go-zones!!! Again, as I said above, do your homework before you buy into anything, established or otherwise, local or interstate, in any area!!!

 

[alexlee]

OTP

Pros

High depreciation on new building improving cash flow position

Low maintaince for a number of years

Attractive to tenants

Surely these are pros for NEW property, not OTP. I would say the above applies to any properties that are new (or just new-ish).
Alex

 

[MarkB]

Worse cash scenario is that the product is disappointing, values drop and cost of finance increases by setlement. You have to put in extra funds to make financing possible.

Add to that list, "the developer goes bust" as can happen at the best of times let alone when credit gets tight.

D/D needs to be done on both the area (Frankston), and the developer. Is the developer experienced and do they have a track record of successful projects? What has the quality of their past projects been like? How financially stable are they?

Some, not all, developers rely on high interest (high risk) financing and, afaik, it isn't getting any easier to raise or renew.

Although I don't recommend [OTPs] as a first investment, not all OTPs are no-go-zones!!!

Agreed.

M

 

[GoAnna!]

Surely these are pros for NEW property, not OTP. I would say the above applies to any properties that are new (or just new-ish).
Alex

That's true Alex but I was looking at the pros and cons of OTP (and I sure there was stuff I overlooked) not OTP versus new built or OTP versus established or new versus old.

Not very attracted to buying new at full market value myself unless I expected a growth wave to come through the area very soon.....even then why not established? New tends to depreciate very quickly as the shine wears off. I would need to have a very good reason to buy new. OTP done well allows you to hold at next to no cost while you enjoy capital growth.

 

[GoAnna!]

Add to that list, "the developer goes bust" as can happen at the best of times let alone when credit gets tight.

D/D needs to be done on both the area (Frankston), and the developer. Is the developer experienced and do they have a track record of successful projects? What has the quality of their past projects been like? How financially stable are they? M

Thanks Mark left a biggie off there!. And if they do go bust you'll be happier if they only hold a despoit bond rather than your cash!

 

[lizzie]

personally, for a first, i'd buy something already established - that i can look at, touch, get a feel for and know exactly where i stand and what i'm getting (value, rent, condition etc) when i sign the dotted line. but that is personal opinion, and each to their own. however, with otp you have no costs until completed and a great chance to make some capital growth in a rising market - but don't forget the downsides already pointed out.

if you really like the area, and have done your homework, have you shopped around for something already existing? why did you choose otp?

and try not to stress too much. we've all made a first purchase and can, unfondly, recall the angst and sleepless nights - have we done the right thing, have we bought the right property? your first purchase will be a huge learning curve when, often, you will feel like your brain is about to implode. we have all experienced it. the second gets easier, the third even easier, by the time you're up to number 10 it's a piece of cake. just make sure you take the learning and continue with your path.

also - the big money is made by buying when everyone else is selling. property is very forgiving - think of all those who bought in the docklands (melb), the prices dropped, they panic and sold for losses (or couldn't finance) ... but ... for those that managed to hold for that short couple of crunch years they're laughing now.

 

[casper007]

I agree with others comments on OTP ... as long as you do your DD on it you can sleep at night.

As for the state of the financial / stock market ... people will still need somewhere to sleep. Tougher getting a loan = more people renting = higher return for investors.

There are 70,000+ people moving to Melbourne per year and if Eastlink will make living in Frankston attractive ... then people will want to rent there.

I think your only decision needs to be the question of OTP or established. maybe you can compromise and buy a unit in a group of two or three which is only a couple of months from completion.

Waiting until the whole market feels safe about investing ... well many people did that in Perth 6 months ago (after missing the bulk of the returns in the 2 years they waited) ... unfortunately some of them have now paid too much ...

To use a sufing term ... catch the wave early and ride it for as long as it is safe ... catch it late and you risk being dumped. My view is Melbourne is a fairly new wave

 

[geoffw]

Add to that list, "the developer goes bust" as can happen at the best of times let alone when credit gets tight.

And I know at least one forumite has lost money this way- paying cash for a 50% discount (in a syndicate) for an OTP, with the whole thing going bad.

 

[Void]

Wow, thanks everyone for the responses ! It's very interesting to see that also the seasoned investors have different opinions on this

In regards to D/D - I think I've done an 'ok' job by researching the area and growth potential, the developer, the finance, the risks of OTPs and so on - but then, I'm sure I've missed a few crucial aspects due to the lack of experience.
I've also read most if not all the articles here on SS that discuss the Frankston area - and still think my chosen area (Carrum Downs) has quite some nice potential.

I've chosen OTP more due to a coincidence than anything else. A mate of mine who has several IPs was looking into buying an OTP and I more or less jumped onto his bandwagon. I even flew down (as I'm from Sydney) to have a look at the suburb and tried to get a 'feeling' of how everything is down there. (yeah I know some experienced investors probably flinch now, but as it's my first IP, I wanted to have a look where I put my money).
The appealing points that have convinced me to go for OTP and not shop around for established ones (there are not that many in this area anyway) are the high depreciation and the (hopefully) less maintenance costs.

I'm not overly concerned that the developer goes bankrupt - it's a fairly established company and I'll only put down a deposit bond.

I guess the biggest risk is that the banks won't value the IP at the price I'll sign the contract for. I anticipated to pay only a 5% deposit and get an IO loan for the rest (with an offset against it), but I've got some cash reserves I can dip into if I have to. For my cost calculations I've estimated a 9% interest rate so I have some leeway - at least at the moment - but I could sustain 10% too.

Cheers,

Void

 

[alexlee]

I guess the biggest risk is that the banks won't value the IP at the price I'll sign the contract for. I anticipated to pay only a 5% deposit and get an IO loan for the rest (with an offset against it), but I've got some cash reserves I can dip into if I have to. For my cost calculations I've estimated a 9% interest rate so I have some leeway - at least at the moment - but I could sustain 10% too.

How much cash reserves do you have? Could you still proceed with the purchase if the valuation comes in at, say, 10% below your contract price? If that happens you'll have to put down another 10% of your contract price in cash.
Alex

 

[Void]

How much cash reserves do you have? Could you still proceed with the purchase if the valuation comes in at, say, 10% below your contract price? If that happens you'll have to put down another 10% of your contract price in cash.
Alex

Alex,

yeah I could sustain even a 25% drop. So the risk of me defaulting due to not having enough cash / loan in a year is pretty slim - but then, I'll have a lot more grey hair (still possible) until the IP becomes profitable if it drops that much.

- Void