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From: Mike .


Starting from Scratch - too many choices - this is a big one - bring a picnic lunch.
From: DSS - Desperately Seeking Solutions
Date: 3/3/00
Time: 3:57:47 PM

Hi everyone, I am new to the forum but have read almost all of it over the past week and am very excited to have come across it. I have read Jan's "Building Wealth..." (18 mths ago), + "Rich Dad...." & "Cashflow Q..(this year)" pls I have been getting Australian Prop. Investor for the past 12 months.

All this has had my head spinning with possible opportunities, and has given me a very positive outlook for the future - but - I am in what may potentially be an enviable position (judging from what I have read before me + all the books)and am finding the options too difficult to digest. Please help or at least tell me "what you'd do" if you were in my boots.

I am a single mum, early 40's, tall, blonde, gorgeous (no you don't need that stuff) gross JOB income $45k, 2 kids (15 & 11), renting $200p/w, no shares or other investments except a small amount in super, and have $300+ to invest. I live in Sydney but would consider buying IP's anywhere.

As recommended by Robert Kiyosaki, I would like to have the additional income source of my own business(s) and would like to start with something along the lines of property development (starting very small of course - just cheap fixer-uppers & resell, moving up to multiple residential developments). This is not just a source of investing for me, it's been my passion since I was 12 and would rather do this for a living that what I'm doing now. To do this, of course I would start a company. Then I thought I could buy my first IP (or a few) in the company name or perhaps a subsidiary and continue renting where I am (until the lease runs out - it's extremely cheap for the area). At some stage down the track I would rent one of the IP's from my company. In a nutshell, that's one of the ideas I am toying with. But timing and structure still needs working out.

I have not discussed this with a FP or Accountant yet because I don't know who to go to. There are too many FP's and A's out there who aren't aware of all the possibilities (I have spoken to a few on other related topics), I would love it someone out there in Forum Land to recommend a really good one - preferably in the City to North Shore/Northern Beaches area.

Another idea is this, I have come across a property development about to start construction. It's 4 very nice (wouldn't call them luxury) townhouses on the lower north shore. They expect to sell them for about 600,000 each. If they would take say 1.8m for the lot, (just roughly guestimating - don't take this all too literally) at this stage of the project, they could be resold on or before completion or, kept and rented for at least $700 each. I'm thinking $270,000 (or 15%) down and IO loan for the rest. With even a 10% vacancy rate, the rent would more than cover the loan repayments and probably most other initial and ongoing expenses. I guess it's kind of like putting all my eggs in one basket but kind of not at the same time.

Questions: 1. would this also be beneficial from the point of view that all 4 units are being purchased with the 'one' sale? Both initial cost wise and loan wise? 2. Are there any benefits/drawbacks in holding/owning the whole block? 3. If there are benefits to be had here, could the same apply to purchasing an older style block and updating it a little. 4. What about commercial properties - I'm told they are a better proposition especially from a tenancy point of view. If they stop paying the rent, you can change the locks and kick them out. 5. Am I totally off the planet.

Of course there are thousands of different roads to take but I am completely overwhelmed by them all. Not only that but the calculations and maths you all have shared seem to just spin around in my head and I can't quite grasp it. I'm not fantastic with numbers so need some reliable guidance. Oh Help!!!!!

I want to get out of the "Rat Race" as soon as possible (by the way I have played RK's Cashflow, once - it's great) and spend more time with my kids.

Les, you have had so many brilliant things to add to this forum, I would so value your input.

With regard to good books, another one to add to the list is Steven Covey's "7 Habits of Highly Effective People" - fantastic - truly life changing but certainly not a quick fix / feel good book. Have also read Men from Mars etc. I feel so at home with all you people.

cheers, have a great weekend all DSS
 
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Les

Reply: 1
From: Mike .


Re: Starting from Scratch - That was a HUGE picnic lunch!!
From: Les
Date: 3/3/00
Time: 8:07:32 PM

G'day DSS,

With just a quick look at the basic numbers, it's pretty obvious your maths is not too bad at all!!! I suspect from the context that the $300+ really means $300k+ - and, Yes, that DOES put you in quite an enviable position.

I am certainly not going to try to answer too much without taking a bit of time to digest all of this, so expect a bit more of an answer from me later in the weekend.

Meantime, I wanted to add that I have had the opportunity to play Cashflow a few times. I like the "lesson" inherent in it - it is quite obviously slanted in favour of the best things happening, and so becomes "larger than life" - but it probably needs to be to allow the game to finish within a few hours. But I did get a lot from it. I like the idea of learning while having fun (which is a Kiyosaki "hot button"). And it punishes those who try to get too cute too quick (most times - sometimes they get lucky). What was your experience with it?

Now, what's for dessert? ;^) Les
 
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Les

Reply: 1.1
From: Mike .


Re: Starting from Scratch - After digesting the lunch ....
From: Les
Date: 3/3/00
Time: 10:42:21 PM

G'day DSS,

Well, I digested the picnic lunch far quicker than I expected - so here goes with some of your questions. And, you already know this, but I'll add it for new forumites, I'm NOT any kind of adviser - just a bloke with a point of view.

DSS: "Another idea is this, I have come across a property development about to start construction....(then a bunch of figures)...."

Les: Great thought on the surface - but a closer look at the numbers (even at the BARGAIN price you might buy them for) I believe you would be just a little light on the lender's LVR%. Also, with Mortgage Insurance (loan greater than 80%) of between $12k - $15k it would run you out of cash pretty quickly. So, I would shelve that one for a few years if I were you, and start a little slower.

DSS - 2. Benefits/disadvantages of buying the whole block?

Les: Could be advantageous in several ways - you provide your own competition (no other landlords under-cutting your rents) and you ARE the Body Corporate when you own the whole lot (in a manner of speaking). Also, in buying "the lot" you can likely negotiate a better price than when buying one (vendor doesn't have to keep advertising, etc). Can't think of too many disadvantages ...

DSS - 3. If there are benefits to be had here, could the same apply to purchasing an older style block and updating it a little.

Les: Your situation could probably handle a block maybe up to $1m (it's a guess based on the "no-go" situation with a $1.8m purchase). If you can ferret out a book titled "Investing in Real Estate on a Budget" by Alan J Falkson, I found it FASCINATING reading. He has filled it with snippets of information, largely based on buying pre-existing property then CHANGING its parameters to provide great opportunities for an investor. His story is Perth based - but the tenets would hold true for most any place. In a nutshell, he buys and adds value, sometimes sells - mostly in the Kiyosaki/Monopoly fashion "Buy four green houses, then trade them in on a hotel!!"

DSS - 4. What about commercial properties - I'm told they are a better proposition especially from a tenancy point of view. If they stop paying the rent, you can change the locks and kick them out.

Les: I can't comment from personal experience - I've read that returns can be better (but that is commensurate with the risk!!!)

DSS - 5. Am I totally off the planet.

Les: Let me guess - Venus? I've heard they are tall, blonde, fair to gaze upon - and speak a different language from Martians ;^)

I think Alan Falkson's style might appeal to you - some of his ideas had that "extra-terrestrial" flavour - a very inspiring read. One of the VERY important points he made was this "It's better to buy one or two properties per year than to 'fill up' too soon - when gearing highly, do it slowly and wisely. Gearing in good times can boost profits 'out of sight' but a negative cashflow of $5000 per year can become a MONSTER if you own TEN such properties as Interest rates rise".

Let's see what gems my friends can add - I'm sure there are several out there that have already done what you are looking to do. And welcome to the forum, too - it's a good place to visit, isn't it? Drop in any time for a chat - you just never know what you may learn in a forum like this (extra-terrestrials, Martians and Venusians - what next? ;^)

Regards, Les
 
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DSS

Reply: 1.1.1
From: Mike .


Re: Starting from Scratch - Dessert
From: DSS
Date: 3/8/00
Time: 3:15:35 PM

Thanks Les for the feedback. Maybe I would be biting off a little too much for the first bite. I find opportunities like that very exciting and if all the homework is done and it still looks good (but with maybe an extra 5% deposit which would cost half as much as the mortgage insurance) wouldn't it be worth doing? Even for a first timer in my position?

With what I have already told you about myself and my situation, I wonder if you (or anyone reading this) could suggest a good place to start.

What about these scenarios:

1. Buy my own home P&I, for about $450K with $120 mortgage. Using equity in this, purchase 2 or 3 other/smaller IP's (preferably in one block), all with IO loans.

2. Continue to rent indefinitely - but within 12 months rent will escalate to 400p/w minimum. In the meantime use all of $300k+ to purchase 3 or 4 IP's with IO loans.

3. Buy 4 IP's through my business, the first (I would rent as a home for me and the kids to live in) for about $450k plus 3 smaller properties at about $300k each all with IO's @ say 7% fixed for staggered years. Question: does commercial property attract different loan requirements?

4. While paying cheap rent, use the $300k+ to get in and out of a couple of cheap 'renovator's delights for some quick capital growth then do one of the above (or below).

5. While paying cheap rent, do a combination of 4. (above) and buy first and maybe second IP.

6. Buy a block of land (somewhere) and develop it with medium density block of units - the idea is to sell most of them off the plan before building commences. (staggeringly, the same scenario as the cover story of current API mag.)

7. Buy smaller block, say on the Central Coast near Tuggerah (newish busy area with big shopping complex and very close to the train station) and develop with duplex or townhouses. Land approx $150k + development approx $400 = $550k Sell for total $750k. Not sure how to structure the finance on this one.

As you can see, there are lots of options open and no doubt hundreds more, but these few keep buzzing around in my head and I don't know which way to go. I anyone could offer advice or a better alternative I'd be all ears (a great look for a Venetian) and very appreciative.

Andrew if you're reading this, I'd love your input too.

thanks, DSS
 
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Les

Reply: 1.1.1.1
From: Mike .


Re: Starting from Scratch - Dessert
From: Les
Date: 3/8/00
Time: 11:15:32 PM

G'day DSS,

Re the first proposal (the 4 new units) - I believe most lenders want Mortgage Insurance if the total loan exceeds $0.5 million, even if you put 20% or better into the equation. I would suspect it may diminish at some point, but I have not done/researched this (I'm only starting, so my loans have come nowhere near that mark).

Also, although the "anticipated" mortgage of 7.2% indicates you could "do" this, most lenders also allow for a hike in rates of 2% - it is THIS figure that tells me you would be too optimistic, even with a 20% deposit.

Maybe the [email protected] poster (Kim?) can advise further on this - but I would be starting out just a little more cautiously.

Re your other questions - let me take a little more time to consider them - I'll get back.

Meantime, I hope others who have done what you are proposing can give you some guidance.

Regards, Les
 
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Gee Cee

Reply: 2
From: Mike .


Re: Starting from Scratch - It don't take long to eat up $300k too many choices - this is a big one ...
From: Gee Cee
Date: 3/25/00
Time: 6:38:54 AM

Dear DSS 25/03/00 I have just read over your post and will try and answer a bit at a time.

You say that you have $300k available. Is this in cash and if so where is it invested at present.

You also comment that you have a wage of $45k which realistically is not much to live on after tax if you have 2 children and am living in Sydney.

My view is that your project @ anywhere near $ 1.8m or anything near that amount for a starter property is like trying to run a marathon before you can walk.

At a price of $1.8m you would be up for a enormous amount of stamp duty. Add to this the holding costs such as interest, land & water rates and all the other little extras that just come with these types of properties.

As well there would be agents commissions, advertising and legal costs.

You could very quickly find your $300k eaten up and yourself looking for a bankruptcy court.

I am sounding very pessimistic but I like to put things into perspective. I have done a number of unit refurbishment projects that have not been anywhere near the $1.8m costings. When expenses and % rates move, there are delays or other problems it can become very hard to sleep at night.

Don't get me wrong; property investing and trading is great. But you need to start smallish, learn all the time and be aware there are a lot of mistakes to make. I will come back later

Regards, Gee Cee
 
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