Do the numbers stack up?

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From: Lesley .


My partner and I are just about to take the leap and purchase our first IP. As you can all imagine, the first time is always the worst (most nerve racking) and we really don't want to make a mistake. Our strategy is to gain some passive-income-producing assets for the long term. Three properties have grabbed our attention: (First two in Brissie, last one on Gold Coast)
1. Purchase price 170K, 3 bed, 2 bath, lug townhouse in complex of about 60 in Cleveland, mainly investors. 100% (or close to) tenancy rates within complex, close to everything. Currently rented out at $205 per week. Property is approx 3.5 yrs old. I believe fairly good capital growth area, but may be a bit far from the city (30km) for an investment? What about the age and opportunity for depreciation?
2. Duplex in Manly. New (complex still being completed), 3 bed, 2 bath, lug, complete with depreciation schedule. Mainly owner occupied complex (really tasteful). Purchase price 195K. Although no records of tenancy rates, I believe there will be no problem with tenancy due to the location and proximity to facilities. Probably will rent at $210+ per week. I believe very good capital growth area. 16km from city.
3. New 2nd floor 1 bed unit in a low rise (3 floors) apartment block on the Gold Coast (Labrador). 1 X U/C parking space only. 1 block from beach, aircon, fully furnished. Located behind two 9 storey apartment blocks. Close to absolutely everything. Mainly investor complex of approx 78. Purchase price 172K including furniture. No record of tenancy rates, but guaranteed (HA!!) $200 per week rental. No idea of capital growth as it's not our turf.
Considering our strategy, can someone out there tell me if any of these are worth it and what else should we be looking out for/considering when assessing IP's. The return on all of these are only around the 6% mark. How the hell do some of you get that 8% that's often talked about?!!!
 
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Reply: 1
From: Jeremy Laws


8% is not that good for cashflow properties, 12% is excellent, and is very achievable! My guess would be that on rental return your 6% would nett at around 2-4% in any case:( Any of your suggestions are good, honest basic investments. Boring run of the mill is good until you get your feet wet and know what you are doing and wanting. Buy all of them, none will lose you money. In fact if you factor in capital growth your 6% would probably be more like 70-80%pa cash on cash, but its really just a game of numbers and how to present them.

My movie of the moment is Wall Street, and there are some great quotes in it, two which I could apply to your properties here. No disrespect intended at all as you are learning heaps, but :--
"Not bad Bud, but they are dogs with fleas - surprise me, its my birthday...."
"The most valuable commodity I know is information, I trade it." (- in property of course we have the net, makes it easier to do leg work!)
 
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Reply: 1.1
From: Lesley .


Thanks, Jeremy. No offence taken. But how do you get that magical 12%?
 
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Reply: 1.1.1
From: Tibor Bode


Hi Lesley,

How familiar are yon with the areas? The gross yields 1. 6.27%, 2. 5.6%, 3. 6.05 (I would be very very sceptical about guarantees as they worth as much as the company behind them and if the deal is so good why guarantee is needed?) in the current environment (rising interest rates and a potentially aggressive Reserve Bank can put a quick end to the growth dreams and provide a negative gearing nightmare) do not seem very hot. If your income is very secure and can afford to loose money on them until they become cash flow positive, and you have done your homework the deals should be fine. All these areas already had good runs and future runs in the short term are NOT guaranteed, but can be hoped only. Obviously, it will be up to your individual strategy, but if you are in Brisbane, why not look at the Logan area? There you will find cash flow positive properties (do not buy anything under 10%), and there also be some growth. Not so good as in the areas you have mentioned, albeit in the short term will outperform them, but there if you select well you will not loose money. Actually if you do a bit of reno, you actually can increase the rent and add equity and will have better gain as well.
Another quick point I would mention, do you know how many properties would you like to have in 10 or even 15 years time? If more than one, then you might want to consider to setup a trust. This is Dale's area and if you contact him, I am sure he will help in this regard. It is better to think about now than after 5 or 6 properties you decide that it should be a good idea. Then it is far too expensive to transfer them over. This is something also to consider.

Tibor
 
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Reply: 1.1.1.1
From: Gail H


Hi,
Just a couple of thoughts. I don't like the thought of such an expensive townhouse so far out of town. If I was paying that much so far out of town, I would want my own dirt. The chances of that townhouse going up in value don't seem too high. The property may not cost you much to hold, but you may just stand completely still for a number of years.

I wouldn't touch a furnished appartment on the goldcoast. Its simply too hard to tell if you're paying too much. The banks hate them, and you will need to chip in more of your own money. Capital growth may be non-existent and I would never rely on a rental guarantee. The price seems too high to me.

Units in South East Qld are a little dangerous. Potenial oversupply and stagnant or even negative capital growth. Be careful.

I'm not sure if this helps. In any event, for your first IP the possibility of capital growth should be pretty high on your agenda in my view (but just my view). Since the market has just gone through a hot stage, waiting a little probably won't hurt. I don't want to stop you with analysis paralysis, but are you sure you have done enough reading and research?

Gail
 
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Reply: 1.1.1.1.1
From: Les .



G'day Lesley,

And top marks to you for asking before doing. My first question to you would be to ask you what it was about these that prompted your comment:- "Three properties have grabbed our attention"

As all 3 are unit/townhouse, and most are new-ish, can I assume that Tax Deductions were part of your motivation in choosing these?

My personal preference would have me by-passing all 3 - here's why:-

1. As you said, the returns are only 6%, and since they are new-ish, there is probably little you could do to change this readily.

2. There are far better deals "out there" - e.g. I recently missed out on one in Alex Hills (2 storey, 7 bdr, 2 bath, 4 car - list price $169k). It was on the Internet (LJH, I think). Now, I didn't get to see it, and it has now been sold - BUT:- given that it might readily be converted to a dual income, rental returns would likely be >$350 per week. (Ave 3bdr in Alex fetches $180-190 at the moment, and 4bdr nearer $220). Even given that $20k might have to be spent, and even if full price paid, what is it's return? Answer - a LOT better than 6%!!!

3. A single house has YOU in control, rather than having to "check everything out" with Body Corps. when you want to do something.

4. With a house, you own ALL of the land (the APPRECIATING part of your investment).

5. My current plan is to buy another house with a "Capital Growth leap" built into the deal - the "leap" will come from some or all of:-

a. Buying at a discount
b. Renovation potential
c. Structure change to create value (see example above).
d. Suburb "yet to move" in Brisbane's long over-due growth.


Let's see what others come up with. And do come back with more questions if you wish,

Regards,


Les


- "Eschew Obfuscation" - ;^)
 
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Reply: 2
From: Dan D


Hi Lesley,

I live in Manly and have been looking at purchasing an IP in the Wynnum, Manly, Lota area.

I don't pretend to be an expert in IP selection as I've only got into this field in the last 6 weeks, and have been learning heaps on this forum in the process.

So here just a few personal observations.
If you look in the local newspaper's accommodation section, you will find 45 units, houses and townhouses available for rent ( according to last week's edition of the Wynnum Herald). This number has been fairly consistent in the last few weeks. In brief, there is what looks to me to be a large pool of vacancies for a relatively small area 14 km away from the city.

The other thing I'd do is contact each RE agent's property manager and find out how many properties they have currently vacant and for how long these have been on the market.

Given that there seems to be plenty of available rental stock, I"d also need to know what types of property are in hottest demand.

Right now I"m a bit off the IP in this area until I have some rental vacancy rates figures at hand to judge if we are not being oversupplied and then we are stuck with a property that will take weeks or longer before it is rented.

I'd step cautiously.

Dan
 
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Reply: 2.1
From: Lesley .


Thanks, guys. Another bit of information overload, but I guess I'd rather have too much than too little. To respond to you all as follows: (Warning! stupid question zone)
Tibor: Our strategy is to acquire approx 10+ properties over the next 12 years (if possible!) in order to minimise tax, create a passive income in the long (or maybe not-so-long term. I guess I also want to be wealthy (is that a sin?)in my retirement. I know that my super is not going to be worth much after the govt gets its hands on it. Logan area has been mentioned before, so I might spend some time on this. Please can you explain the concept of cash flow positive? (does this mean than income>expenses, if so don't you pay tax on that surplus?)and where does negative gearing fit into all of this? Also, what do you mean when you say don't buy anything under 10%? I also plan to attend Dale's meeting next week with the Freestylers. I can't wait. I hope to ask some (many!) questions regarding trusts etc. Thanks,
Gail: You just confirmed my girlie intuition regarding the expensiive townhouse so far out as well as the furnished apartment on the GC. Would the Residex site be the best place to get info on potential capital growth areas? Thanks.
Les: I feel a bit stupid when I look back and read that these properties "grabbed our attention" I have to admit they have been the first three we have looked at (but don't tell anyone!)
Dan: Thanks, Point taken

Yes folks, I need to do a lot more reading and self-education, but the only thing is that the more I read, the more questions I have! Tell me, is it a bad thing to purchase an older property which does not have as much depreciation opportunity as a new property? Someone told me that we should be buying NEW to maximise our tax return. Looks like I will be picking your brains for a while yet...
Also, can someone tell me why, when I log in to the forum, I don't have any "new" messages"? (ie new messages are not marked as new)

Thanks again...
Lesley
 
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Reply: 2.1.1
From: Les .



G'day again, Lesley,

(Great name you have there ;^)

Let's look at your questions one by one:-

Lesley>> Yes folks, I need to do a lot more reading and self-education, but the only thing is that the more I read, the more questions I have!

Les> I reckon that's pretty normal with any new subject. Personally, I feel worst when I know so little that I can't even formulate a reasonable question. At times like that, I KNOW I'm a learner. But these times pass, and we progress.


Lesley>> Tell me, is it a bad thing to purchase an older property which does not have as much depreciation opportunity as a new property?

Les>> In my book, NO (or, not necessarily - it depends on the deal). But consider this:-
1. If you buy new, how can you be SURE you are getting a good deal? Builders, developers, etc. need to make a profit to survive. How do you know whether the deal they are doing for you is good, or an over-priced rip-off? Unfortunately, when people are concentrating more on Tax deductions, then a higher price can be seen to be an advantage - thus, the "due diligence" may be less diligent than it should be.

2. If you buy 2nd-hand, there are several ways of getting a "good deal". First, you can buy at a discount (one of the "3 D's" will help this - divorced, death, or desperate"). Second, you already know "the area" as it is already there! So, you can avoid potential "bad" areas, and only buy in "good" areas. Third, you may be able to add value - hard to do with a new property - and turn a 6% rental return into a 9 - 10%.
Usually, in doing some/all of these, a capital growth jump occurs for you. And, if you have renovated to add value, then you have increased your Tax deductions right there, anyway.


Lesley>> Someone told me that we should be buying NEW to maximise our tax return.

Les>> Was "someone" likely to gain anything from your decision? Or were they simply an interested (or dis-interested?) bystander? i.e was it a relative? or a builder/developer that told you? Whoever it was, do they have your admiration regarding their property investing expertise? If they can demonstrate how this would be so good, using ACTUAL figures, then you should consider what they are saying. But then, go find others, who are buying up older homes, and see what THEY can tell you (how about Geoff Doidge for example - he can tell you A LOT about older homes, and what they can do for you). Michael Croft, The Wife, etc.

What I would suggest is to "run the numbers" to see which way is UP for you.

Personally, I've never, ever bought a new property, (or a new car, for that matter) - but that suits ME. What works for you? I guess you are on your way toward finding out - good luck with your search,

Regards,



Les


- "Eschew Obfuscation" - ;^)
 
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Reply: 2.1.1.1
From: Tibor Bode


Hi Lesley,

Cash flow positive, I think you got it, but actually you PAY tax on the income. Don't worry the depreciation at least in the first couple of years will eat it and if the property is pro 85 then you will have several years for building allowances. To me cash flow positive means just that. depreciation is the cream, so I do not take it into consideration when I buy something (meaning rules can be changed, no matter how unlikely and the deal still has to stack up).
Anyway, after a while the point to have a serious tax problem as you make so much money
(loved to be in it). This is (as well as others) where the trust will help, Dale is excellent. Les also made some excellent points that worth to consider. I personally also do NOT like to buy new (I like to keep the profit for myself and add value), but the potential drawbacks are, lower depreciation, more maintenance cost, it is not "new" (meaning certain tenants will ignore it). Obviously a reno can help with the above issues.
Maybe silly me, but have you tried to Refresh
after Mark Read was used to get the latest postings?

Anyway, good luck with your hunting.

Tibor
 
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Reply: 2.1.1.2
From: Igs Kanny


Les,

by Alex Hills, do you mean Alexandra Hills?

I'm not familiar with Queensland at all. I'm now collecting everything on QLD "good" areas.

Igs
 
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Reply: 2.1.1.2.1
From: Lesley .


Yes, Igs. I do mean Alexandra Hills. Do you mind sharing any of your info on good Qld area?
 
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Reply: 2.2
From: Lesley .


Question for Dan D. You mentioned that you were looking at IP's in the Wynnum, Manly Lota area. Have you got an accountant who you could recommend?

Thanks, Lesley
 
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Reply: 2.1.1.2.1.1
From: Igs Kanny


Les,

I don't mind sharing at all actually. But As I said I don't know much about QLD as yet, definitely no more that people here have already said. I just write down what the guys say and then do the residex report for the area. I haven't done many so far. They all look OK to me because they are all cheap compared to Sydney. I see a house at the Alex Hills on the realestate.com.au for $250K on the 900sq.m piece of land and thinking, wow, wrap me up two of these please. So, not much to share so far.
Igs
 
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Reply: 2.2.1
From: Dan D


Hi Lesley,

Sorry, I cannot recommend an accountant in the local area. Mine is in Sydney! That's through fluke circumstances. I don't yet know if he is willing and able to deal with my IP once I catch it. I do hope so as I can relate to the friendly bugger that he is.

One more piece of intelligence I have gathered today.

I spoke with three property managers in Wynnum and Manly. They all concurred on the rental prices being in the range of $185 - $220 ( some are higher, but these are in Manly. Not Manly West, important distinction for those who are new to the area - it is an crucial one to keep in mind). They also said that generally a property will be vacant for about 2 weeks maximum before it is rented again.

Busiest times are in Jan/Feb.

Now, I don't know if 2 weeks vacancy is good or bad, or how to interpret this. I hope somebody 'in the know' on this board will fill us in on that.

Dan.
 
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Reply: 2.2.1.1
From: Lesley .


I'm finding it pretty hard to find a good accountant in Brisbane, Make me wonder if there are any out there at all. Also, interesting rental numbers. Thanks, Dan....
 
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