Getting Started

[WebBoard]

From: Mike .


Starter's Advice
From: Shakes
Date: 6/9/00
Time: 12:04:52 AM

Dear Investors,

This one's aimed at Wonderful Will, Les, Pierre, Simon R, Andrew G, and all the other regulars and irregulars on this fantastic site that I've been reading with joy over the last month or so. Your comments and breadth of experience is invaluable to someone like me.

You see, you're looking at a novice investor who's standing on the brink of getting into the IP world. Long-term, and the more the merrier!

I commend all your successes and experience and the availability of a site like this to share facts, fiction, dos and don'ts. It is an invaluable resource!

I've been good so far I think. I've done some reading (all of Jan's books, Fitzgerald, Donnelly, Renton, Australian Property Investor magazine, etc), received information from Defence Housing Australia (DHA), attended some investment seminars, and even done a short course in Financial Planning. I've also started getting into Australian Bureau of Statistics (ABS) stuff.

My approach has been studied, careful, and patient, with an emphasis on learning, researching, and 'getting things right'. But at the same time I'm excited, impatient, and can't wait to get the first IP under me belt so I can buy me second, then third, etc.

So on to the purpose of this communication....

I've carefully learned all the principles of IPs and wealth creation and am fully convinced that this is the financial path for me. So living in Melbourne (20km out) I s'pose I formed the idea of buying the first IP locally (within the same/nearby suburb) along the lines of familiarity, closeness, and more land for your dollar - the latter based on Fitzgerald's opinions.

Then I got talking to the tutor of the short course I attended who said only within a 7-10km radius of the city was any good, and he was talking from experience (3 IPs in Inner Melbourne).

The DHA stuff I wasn't overly impressed with and particularly in light of some of the comments made on this site.

Continuing my research, I then came across the Investors Club in the Australian Property Investor (API) magazine. I attended a local meeting and was initially surprised and suspicious of their focus on Brisbane and Perth. First of all I s'pose my main attention was on Melbourne. I had thought outside of Victoria, but only as far as Sydney, and that only a pipe dream due to the high cost of property. But I liked the basic principles the club were telling me and by the end of the meeting it all made sense - in line with my research. Based on my reading (Jan's books) it didn't matter if you bought a house or a unit, the most important thing was to get the location sort of right (employment, shops, transport, universities, growth, lifestyle, etc) and definitely get the financials sorted.

I did some research (ABS) on Brisbane and Perth and found things to be true ie. substantial projected future population growth. I also worked out that South Australia and Tassy were no good, Victoria (Melbourne) had oversupply and relatively small growth, and Sydney was Sydney - cost!

So, following my research and training to date I'm pretty much convinced that the Investors Club and Brisbane are the way to go for our first IP. Don't know the place at all and would like our hands held, at least for the first one.

The interstate location doesn't even bother me. In fact I'd like to think our future strategy also covers IPs in Perth, Melbourne, and Sydney ie. not all our eggs in one basket?

So everybody, here's your turn. I would appreciate immensely anybody's thoughts, opinions, and advice to a fledgling IPer.

We're probably talking about a first IP of $200,000.

Obviously we're looking for capital growth but please bear in mind we're in it for the long haul - 20 years plus.

So, how right have I got things?

How's my IP logic stacking up?

Am I being a bit too naive?

What's your opinions of the Investors Club?

If you had your time(s) again, anything you'd do differently?

Any tips or essential advice?

House or unit?

I know that at the end of the day it's a personal decision/opinion, and there's no right or wrong answer, just different degrees of best and worst for the individual in question. But sometimes for the novice investor it's hard to know what to do especially when you're faced with conflicting and contrasting reading, research, and opinions and also as I want to start off on the right foot.

So I'd like to thank everyone for their time in reading or responding to this. Just the opportunity to be able to get this out of my system has provided some reward.

All comments are welcome, so don't be shy Will!

Regards, Shakes

 

[WebBoard]

Pierre

Reply: 1
From: Mike .


Re: Starter's Advice
From: Pierre
Date: 6/9/00
Time: 9:24:06 AM

Shakes,

Welcome to my world of just a few months ago. I too had been deliberating, researching, (and procrastinating) for the best part 18 months, and have only recently taken the first real step of the journey - buying my first property. Like all journeys, one must be prepared before setting off. Remember the Seven Ps - 'Prior preparation and planning prevents piss poor performance.' It looks like you are ready to move, so my first bit of advice is to take that step - don't keep putting off for fear of not getting everything right - because you probably won't get EVERYTHING right. I 've traded shares before, and it's the same thing. Sometimes I did all my research, selected what I thought was a winner only to have them fall despite all the figures looking good! Pretty annoying, but it happens. You can minimise your risk through preparation - and that's what you should endeavour to do.

Enough of the 'Body by Jake' motivational bit, onto your questions. Most of your answers are already in the forum somewhere. You just need to go looking for them. There are some very wise and experienced investors here, but I can guarantee they have got that way with at least a few hiccups and bad decisions. The reason they are still here is through recognising their mistakes and learning from them.

As I have mentioned, you look on track so far. Your research into growth areas of the next couple of years seems to be consistent with much of the research I have done, and matches that of many an expert opinion and report. My first house was in Brisbane (Wynnum), and I will be looking at Perth in December. Sydney looks like it has peaked, and Melbourne has had even higher levels of growth - also having peaked. Nonetheless, you may find the right property in Melbourne if you want to invest there.

How far from the CBD? I've been advised anywhere from 7, 10, 12 to 15km. I s'pose it depends on the city and some other factors. So long as the area has good access to schools, transport, shops and entertainment, the difference between 10km and 15km really isn't much.

Investment Clubs / Companies. Andrew G is most wise in advising to be very careful when dealing with Investment Companies. Most are shocking, some are better, few (if any) are good.

DHA - properties are overpriced, and generally not in great areas. Trust me on this, I'm in the Air Force, and have chosen not to live in Defence Housing due to the areas. Instead, I bought my own home in a much better area, and have had over $100,000 capital growth in less than two years! You won't get that with a property in Raymond Terrace, Townsville, Palmerston or Ipswich. For some people, DHA properties are great because they offer very stable and predictable cash flow, but ... it's your choice. Always re-read and re-re-read your Somers, Fitzgerald, Kiyosaki books to bring you back on track.

As you know, I did end up buying through an Investment Company. That was a choice based on a number of factors, and one I am very happy with. But, even right up 'till the moment we chose the property, I always had a number of other options. I had already selected 20 potential properties in Wynnum that I found on the internet, and had I not found the property my wife and I eventually bought, would have declined Custodian's offers and I would have probably purchased another property in the same area. As it is, I got a pretty good price ($171,000 for a new 3BR, 2 Bath, 2LUG, 805m block), and went with that.

But, the right property wasn't the only thing for me. You correctly identify that finance is another important (Jan's most important) factor. I'll re-cap what you need to look for in finance:

* Full disclosure of valuation used * Hard copy provided * Valuation accepted from independent valuer * Valuations accepted on comparative sales * Revaluations accepted within 6 months * Lengthy IO periods (5 years plus 5 year option or 10 years) * No cross collateralising * Minimum 80% of rental income included * Rental income deducted from commitment, not added to income * Competitive rates

Just a quick story on finance. I posted a couple of bits earlier in the "LOC Vs Offset Accounts" thread earlier, and picked up a piece off info off Owen that has helped me lots. I have only just recently restructured my residential load with the NAB, and their initial valuation on my house was $290000. This was going to allow me to borrow $34000 as a deposit and costs for my first IP, requiring me to borrow 90% of the IP cost. Total borrowings against my residence were 80%. The $34000 was a LOC which I didn't really need - all I needed was an IO no-frills loan.

I contacted my loans officer again, and asked him to restructure my loan so that I borrow the $34000 as IO. He said that minimum borrowings were $50000 for IO, and that I could borrow the 50K with the IP as additional security. I told him that there was no way I would do that. He then offered to have my residence revalued again by the bank valuer (at no cost), and said he would ask the valuer to look at the $320000 - $340000 mark. He would then lend me the $50000 as required, and my LVR would still remain below 80% (therefore no mortgage insurance).

If this is approved (he says it will), then I only need to borrow about 78% of the value of my IP. Immediately, I have 22% equity in my IP, not 10% as was the case with my initial structure. Finally, I contacted my other mortgage broker (the one arranging finance for the IP), and told him I thought the valuation on my IP (171K) was too low, and that I wanted him to seek a higher valuation. If this can be done, I will have even more equity in my first IP. The upshot of all this is that I will be able to get into my second IP much sooner, and will not have to pay LMI on either my residential loan or the IP loan.

So, the lesson here is the importance of the valuation, and the structure of the finance. I have potentially (subject to approvals) created money from thin air.

Anyway, back to you ....

Definitely buy a house on a decent sized block. You'll get much greater capital gains and consistent rental growth. The land appreciates, the building depreciates (that's why the Government let's us claim a 2.5% depreciation on buildings build after Sept 1987). As far as the rents are concerned, just consider two blocks of units in the same location. One block is 20 years old, the other is brand new. In all other respects, the units are the same - 2 bedroom, balcony, one bathroom, single car space etc. Guess which unit will have the higher rent? And in ten years' time, the new units will be old, and the rents will be lower in comparison to the next new block next door. Now compare rents on houses. There is very little difference in the rent on a new house compared to the rent on an old house. You can renovate the old house, and people love then. If you renovate an old unit, you still have a nice unit in a crappy old block, and will still struggle to pull in decent rents.

Summary. If you think you are ready, do it. Stick to your rules of selecting a property, don't break your rules for the sake of convenience or emotion. Be confident with your decisions. Structure your finances well (seek professional advice from a broker who specialises in finance for IPs), and employ competent property managers.

Enjoy, learn and share your experiences.

Pierre

 

[WebBoard]

Jane P

Reply: 1.1
From: Mike .


Re: Starter's Advice
From: Jane P
Date: 6/9/00

Wow Pierre That was a mouthful (so to speak). I'm just wondering if you can clarify a few points for me as I'm confused by some of the terminology. Namely to do with points on looking at finance: You're suggesting interest only for 5 years? What do you mean by "cross-collateralising"? Minimum 80% of rental income included? and Rental income deducted form commitment (ie loan?).

My email address is [email protected] and would appreciate a chat or even a phone call. Where are you locate?

Cheers, Jane P

 

[WebBoard]

Pierre

Reply: 1.1.1
From: Mike .


Re: Starter's Advice
From: Pierre
Date: 6/9/00
Time: 3:30:05 PM

*IO loans

For the best cashflow, it is recommended that you take out IO loans, and rely on capital growth to improve your equity position in your investment. Most lenders will only lend to a maximum term of 5 years on Interest Only loans. If you negotiate longer IO periods, you have a longer period that you can calculate cashflow. As well, you don't need to re-apply for finance every five years.


* Cross collateralising

This is where a lender secures a single debt over two or more securities (properties). What normally happens is the banks tend to be very conservative, and where you may have been able to obtain finance at 90% of the valuation for each property, they may limit you to say 80 or 85% of the combined total values. The banks may also knock off a few thousand dollars from the combined value of your security just because they feel like it. As well, if you tie up all your security with one lender under one loan, you are pretty much at their mercy. At the very least, always try to separate your residential loan from your investment finance.


80% Rent Included in income.

When lenders calculate the amount of money they will lend you, they work on (among other things), your Debt Servicing Ratio (DSR). This is simply your ability to service the debt, and takes into consideration you income and outgoings. Most banks only count 60% of the projected rental income in their DSR calculations. The more rent is counted, the more they are likely to lend you. You also need to know how they count the income. There are two methods:

1. Add rent to income 2. Subtract rent from debt

Consider this:

Income = $50000 Outgoings = $20000 Rent (that they accept) = $10000

Using the first method, your income becomes $60000, and your outgoings remain $20000. Therefore, your DSR is 3:1. For every $1 commitment you have, you have $3 to service it.

Using the second method, your income remains at $50000, and your commitment falls to $10000. Therefore, your DSR is 5:1. The bank will see this as less risky for them, and will like you more, therefore, lend you more.

Pierre

 

[WebBoard]

Les

Reply: 1.1.1.1
From: Mike .


Re: Starter's Advice
From: Les
Date: 6/10/00
Time: 3:50:40 PM

G'day Shakes,

If going Brisbane, keep in mind that bayside is 20 - 25Km from the CBD. In Brisbane's case, I don't believe that the bayside should be excluded (because of distance) - in many ways it is very desirable e.g.

1. bay breezes keep homes cooler in Summer,

2. if working in the City you drive to work with the sun behind you instead of in your eyes (same when coming home)

3. prices are still reasonable, even though some areas have surged (Wynnum)

4. can still buy 700 - 800 sq.m. property without surgically removing an arm.

5. Changes to the arterial access are at least planned, if not already beginning (don't forget, I'm not currently resident in Brisbane).

6. Train reaches most of those suburbs (not sure of more Southern bayside suburbs...???)

Also, I read that Brisbane has the highest percentage of houses (85%) of any major Aussie city. That, plus the larger land content, will keep me into houses for the next wee while. Of course, the other (major) factor into the future is the "baby boomers" - what style of accommodation will THEY want to live in at retirement (possibly NOT a house???). Near a beach? Access for boats? Near golf course? Shops? Smaller property? Perhaps less lawn and more socialising? Lowset rather than hi-set? (Probably)

That's for the future - certainly buy well-positioned property with appeal (I personally DON'T like the 400sq.m. blocks with a 3br house shoe-horned onto them - and I AM a "baby boomer"). Give me a house with a bit of character every time, and a bit of room to rattle around, where it's cool, attractive, handy to most things, and on ground level (the house, that is - a raised block is fine).

Many others have posted some top ideas - as Pierre says, check the other entries that relate and pick YOUR preferences, then go for it!! And (was it said by Will in a previous note?) don't EVER be a "desperate buyer". I, too, finished about a year of preparation (and was getting impatient!!) before buying my first IP. It can all seem too long, but in hindsight I learned so much in that year - it was well worth it. It has given me a new purpose, enthusiasm, and future. I wish the same for you (if you haven't yet felt this, it won't be long ....) Good luck.

Regards, Les

 

[WebBoard]

Pierre

Reply: 1.1.1.1.1
From: Mike .


Re: Starter's Advice
From: Pierre (Reply #2)
Date: 6/10/00
Time: 2:05:05 PM

Here's another POV on investing through Investor Clubs posted by Ian last month. He has some very valid points to consider.


***** G'day Les, Andrew S, & All. I can only offer what I wrote on 12/24/99...any "SPAM" is unintentional. I agree Les that yes, I may very well have been able to acquire a similar 3x2 Unit (new) for about the same $$...maybe less. However, for "ME" it was the other resources and bells and whistles offered as part of the service that led me to try them out ie: reduced settlements fee, property mgmt fee, insurance, mortgage brokerage (thorough gentleman) and so on. The other thing is that although I was very familiar with Perth...I was buying from 1800km north, Karratha! So most of the work was taken out of my hands...my preferred option at the time!! I must qualify things by acknowledging that Investor Clubs may not be everyone's cup of tea but I really can't find a negative word to put forward about the experience. For someone new and not necessarily "certain" about breaking into the world of IPs, I would suggest the concept as perhaps a base to start learning...then try "DIY" next time. I think it is vital we acknowledge that some of us may not be as aggressive, assertive or especially...."confident" in the world of finances as some others. This is borne out when reading the forum entries...such a broad spectrum of experience. Les, like most, I continue to be impressed by your impartiality and diplomacy; keep up the good work!...ps...did you get to read any of Stephen Biddulph?? Cheers everyone...Ian. ******

As Ian states, there are potentially a number of advantages in dealing through an Investment firm. Just be sure to do your homework on the company, question EVERYTHING, and confirm EVERYTHING with independent advice. Use the experience to learn the ropes, and then try it yourself for the next property.

Pierre

 

[WebBoard]

Will

Reply: 1.1.1.1.1.1
From: Mike .


Re: Starter's Advice
From: Will-do you want to be an average investor
Date: 6/10/00
Time: 11:34:04 PM

Hi YUP Its me again.

Where is that apple cart for me to upset. Yes Ian, Yes Pierre, it does sound very logical and very reasonable to get average returns...ok look I give up! Kiyosaki (Quadrants) was right, some people (like you???) are happy to be average investors. Now that's ok if that's where you want to be. Then what's it to do with me. Tell me to shut up and let you get on with your 7% purchases.

So you go and get your 7% returns and your rental guarantees and your lack of capital gain and your decreasing tax deductions while you can.

Hey, while you are at it , take the advice to "never ever sell" because if you did, you might discover that the "assumptions" of your "average" capital gain of your new unit /townhouse on which your dreams were built is somewhat less than assumed.

Oh well! never mind you are not alone! we are all in the same boat, just wait another 20 years and we ( the promoters ) will be "outa here". Ok we got it wrong we are not perfect but..............if you never ever ever ever sell ......................you'll never never ever know..............get it?............ Why do I bother?

Will

 

[WebBoard]

Pierre

Reply: 1.1.1.1.1.1.1
From: Mike .


Re: Starter's Advice
From: Pierre
Date: 6/11/00
Time: 9:40:14 AM

Don't give up on us Will. I think it is important for people to start off with their eyes wide open. I'm just a starter myself and want to be around making money for years to come. Of course there are lots of ways of making more money quicker - Geoff's Saturday morning inspires me no end - but if I stuff it up from the start, I'll a.) lose confidence and interest and b.) probably lose too much money.

I have learnt from bitter experience trading shares. A few years ago I dove into speculative shares and options thinking I was 10 foot tall and bullet-proof. I did very little research and lost loads of money. I don't want to do that again, so I'm easing into the property world.

I have stated a couple of times that for me, and possible for others, I see advantages in taking it easy, and getting some good guidance for the first property. I intend to venture out on my own for my next property in 6-9 months, and will continue to try and learn as much as I can about seeking positive cashflow, seeking bargains, 100% finance, buying bigger, etc.

Don't forget, the title of the post was "Starter's Advice", not "Professional Investor's More Advanced Tips". As Geoff said of his Saturday morning adventure, he has 28 year's experience. The only thing I've got 28 years experience in is breathing. Some of us have a long way to go.

I have learnt so much from people like you, your nemesis (Andrew G), Geoff and others, and would love to learn more.

Stick with us, keep the brick bat swinging, and help a few of us get to where we should be going.

Pierre

 

[WebBoard]

Will

Reply: 1.1.1.1.1.1.1.1
From: Mike .


Re: Starter's Advice-to pierre you are so darned reasonable
From: will - Don't be average
Date: 6/11/00
Time: 11:34:18 AM

Aww Pierre-now I feel bad. I probably insult you and you write back being so reasonable.

I know you will make it to the next level because you can handle rejection.

I too lost a fortune in shares and it was the best thing that ever happened.

I went into property and made a lot of mistakes (learning experiences) and moved on from there. In a spooky coincidence to my comment about "average" investors.

I woke up wondering whether I had been too tough on you...picked up my new copy of Rich Dad's Guide to Investing" by Kiyosaki and turned over the cover and there it was...on the first page.

A Father's advice on Investing

Years ago, I asked my rich dad,

"What advice would you give to the average investor?"


His reply was,

"Don't be average"

Spooky eh.

It goes on to talk about the 90/10 Rule of Money

...book explains how some of the investors in the 10% have gained 90% of the wealth and how you might be able to do the same.

The property marketers are the 10% with 90% of the wealth and the "average" investors (their clients) are the 90% with 10% of the wealth.

Guys... leave the 90% average group to those who don't read, who don't invest in stand alone property, who don't have control, who don't have to think, who chase the latest tax deduction, who don't want risk, who are puppets and don't even know the strings are attached!! Leave and join the 10% who have control, who are searchers, who question and query and take action, who take their advice from people who have done what they want to do and not from people who are selling a dream.

Pierre you are on your way, increase you level of risk (balanced with research) so you leave the laps of the marketers and make your own way... you are in good hands on this forum..

This way to the 10% investor group

will