Getting Started

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From: Mike .


Advice please!!
From: Donna S, Melbourne, Vic.
Date: 01 Oct 2000
Time: 11:06:01

Hi! I have been looking with great interest through this wonderful website, and have also recently stumbled across the Rich Dad website, which is also very enlightening.

I wonder if someone may help me through some difficult decision making regarding an IP (the one and only that i have). All of the experts i have consulted with - my Tax accountant, and a property investment consultancy tell me to off load this house and channel the money into something more expensive.

The house was purchased 10 yrs ago in a newly established estate (Hoppers Crossing). It was fairly cheap at just over $100K. Now, 10 years later it is valued (by local council) at a whopping big $122K!! I did not purchase the property as an investment - it was to be the marital home, which is now ex-marital, and up until recently, tenanted with very troublesome tenants. There have been periods of non-payment of rent, damage, and general neglect. I am in process of now cleaning up (they were evicted after very convoluted Tribunal hearings, and unfortunate mishandling by agent).

All said, from my readings, it seems as though I may be best to keep the property and have another go, with hopefully better tenants. The rental return is quite good, when you get it ($800 pcm). However, my concerns are over the lack of capital growth, and the ongoing expenses of maintaining it. I owe $80K on the mortgage, which i hope to pay soon (next few yrs). The plan (may be crazy) was to pay it off quick, live there, and then invest in more properties elsewhere. I am currently renting on the cheap, and only own the one mortgage.

Does anyone have some good advice for me? Am I heading on the path to ruin? Should I heed the advice of my accountant and sell up now and invest in something more expensive, closer to the city, etc etc etc??? I would really appreciate any thoughts you more experienced property investors may be able to offer.

Thanks heaps, Donna.

 

[WebBoard]

Steve McKnight

Reply: 1
From: Mike .


Re: Advice please!!
From: Steve McKnight
Date: 01 Oct 2000
Time: 12:01:33

Hi

Looking at your figures it is unlikely that the $800 pcm will cover the associated expenses of ownership - including management fees and loan repayments.

You'll find there are much better investments that will make you money rather than your present situation where you need to work harder to subsidise the cash flow loss each month.

I'm not a supporter of negative gearing in any form as I can't see how losing actual money on the promise of potential gains is sensible.

If you do sell, try to avoid spending the gains you make on "consumable" items. Lock it away as your nest egg to fund future investments.

Email me at [email protected] if you have any queries.

Bye, Steve McKnight

 

[WebBoard]

Les

Reply: 1.1
From: Mike .


Re: Advice please!!
From: Les
Date: 01 Oct 2000
Time: 14:24:19

G'day Donna,

Steve has made some valid points - and I know he's the man to show you a better way (get on his newsletter and you'll start to see this). You might have caught his posting on the Rich Dad forum - "How I got out of the ratrace in 11 months" - did you see it?

The extra thoughts I had re your situation are these:-

Before doing anything, check out the situation re your current IP and its mortgage. e.g. since you are now separated, what size mortgage would lenders lend you if you were starting out again???? It will depend on your current earnings. Also check to see if the current mortgage is "transferable" to another property.

Once you know these, then see if selling up will be more beneficial than hanging on.

Since others (accountant, adviser) are saying "Buy something more expensive" I guess you will be able to borrow more, so are not dependent on keeping this one. And selling this should release around $35k which can then become the deposit (and costs) of buying another.

I tend to agree with Steve - there ARE better deals out there - you could maybe afford 2 lower priced properties (then if you are "down" a tenant, you don't lose 100% of your rental income).

Welcome aboard, too - I hope the ideas help

Regards, Les

 

[WebBoard]

Rick

Reply: 1.1.1
From: Mike .


Re: Advice please!!
From: Rick
Date: 01 Oct 2000
Time: 17:32:07

Les, Where can I find "How I got out of the ratrace in 11 months". I looked but couldn't find it.

Cheers, Rick

 

[WebBoard]

Donna

Reply: 1.1.1.1
From: Mike .


Re: SM's Out of Ratrace
From: Donna
Date: 01 Oct 2000
Time: 21:38:58

Hi, if you search the RDforum on the words "11 months", it does come up. Cheers Donna. ps sorry if this posts twice.

 

[WebBoard]

Robert

Reply: 1.1.1.1.1
From: Mike .


Re: Advice please!!
From: Robert
Date: 01 Oct 2000
Time: 15:37:49

G'day Donna

Just to add my thoughts onto Les's and Steve's.

I think you may need to hit your advisors up with a few questions, ie: how many properties do they own, do they neg gear etc....

The reason for this is, myself, I find it stupid (near negligent) that they would advise to buy something more "expensive". Just because you buy something at a higher value does not mean that you will get either better tenants, better ROI or better Capital Gains. Accountants are rather big for neg gearing on property. There is no need to do this if you look at the problem in a different way. (And you've made that step by posting the problem on this site)

Before you look at selling your property investigate with the local council to see if there is anything going to be done in the area that will increase the value of the property in the near to middle distant future (new shopping centre, train station, rezoning of land into medium density etc...).

Does the rent cover your mortgage IF yes, why sell, IF NO what can you do to make it cover your mortgage. Think beyond the square first before selling. Would adding a new bedroom to the building improve the rent (though make sure that the increase in rent will also cover for any capital works spent on the property).

So please investigate all ways around fixing your situation before you choose to get out.

Another thought is you could take out the equity in this property to purchase another one already. So why sell???

Make sure the second one is positively geared. (How many properties can you afford if you need to pay $25 a week into it - how many properties can you afford if they give you $25 a week).

Making money in property is all in the purchase.

Well they were my 2c worth. Robert

 

[WebBoard]

Donna S

Reply: 1.1.1.1.1.1
From: Mike .


Re: Advice please!!
From: Donna S
Date: 01 Oct 2000
Time: 16:34:55

Thanks to Les, Steve, and Robert, for your thoughts on my situation. I will see what the next 12 months brings.

The rent covers the mortgage repayments (which were fixed a while ago, before the rises). However, last financial year, keeping the IP cost me about $50 per wk according to my accountant. I am not in a really bad position, which will allow me to take a "wait 'n see" approach. I will take on board all of your very welcome advice, and go and talk to the bank about possibilities of borrowing for a second IP.

It does appear that the art of making a good investment is in the purchase. How do you find the ones below market value?

Thanks again, Donna.

 

[WebBoard]

Robert

Reply: 1.1.1.1.1.1.1
From: Mike .


Re: Advice please!!
From: Robert
Date: 01 Oct 2000
Time: 16:43:36

Another question?

Donna are you paying Principle and Interest or Interest Only. If you are paying P&I you can lower your per week expenditure on your property. If it's just for an investment why need to pay it off....

Robert

 

[WebBoard]

Brent H

Reply: 1.1.1.1.1.1.1.1
From: Mike .


Re: Advice please!!
From: Brent H
Date: 02 Oct 2000
Time: 01:58:06

Hi Robert,

I agree totally with what you say. I've been looking into property investment around Melbourne and some of the most affordable and least desirable areas appear to be the best to invest in. They often have higher median price rises and often have higher rental to value ratios than what many more expensive properties do.

Some stats:- Hoppers Crossing: 1999 Median Price- $135,000 1995 Median Price - 123,000 95-99 Median Growth Rate - 4.28% '95-'96 was very low at -24%, but the next year ('96-'97), it jumped to 31% Notes: Grown in value (to 1999) less than 1.1 times 1995 value.

Some more stats:- Laverton: 1999 Median Price- $124,000 1995 Median Price - $67,000 95-99 Median Growth Rate - 16.85% Notes: Continually performing at or around 16% based on 5 years figures. (although did reach 7.5% and 26.8%) Nearly doubled in price since 1995 (Grew 1.85 times 1995 median price to 1999)

And some more:- Spotswood: 1999 Median Price- $188,500 1995 Median Price - $102,500 95-99 Median Growth Rate - 16.65% Notes: Continually performing at or around 16% based on 5 years figures. (Although did reach 10.5% and 25.5%) Nearly doubled in price since 1995 (Grew 1.84 times 1995 median price to 1999)

Sorry, I don't have any rental figures for those three. Either way, I know which growth rates I'd prefer to be getting.

Brent [email protected]

P.S.- I'm trying to convince the REIV to let me distribute my spreadsheets on my web-site. They do all the median property figures for you. I'll let you know when/if I can release them. Any good solicitors out there want to help me with this?

 

[WebBoard]

Donna

Reply: 1.1.1.1.1.1.1.1.1
From: Mike .


Re: Advice please!!
From: Donna
Date: 02 Oct 2000
Time: 06:50:06

Hi Brent, thanks for the stats. I am totally depressed!! What I find confusing is why just across the road from my Hoppers Stopper, property prices they are asking for are thru the roof. The new estates at Board Walk (Point Cook postcode) are really, really, expensive, not to mention the Greg Norman estate with the lake etc.

My house is in a nice estate, with underground electricity, V. close to W'bee Plaza, school, child care, bus etc etc. Perhaps it is about to boom (maybe). Could you please tell me Brent, how you accessed the stats from the REI ?? I have looked in the past and didn't find this information.

Cheers, Donna.

 

[WebBoard]

marina

Reply: 1.1.1.1.1.1.1.1.1.1
From: Mike .


Re: Advice please!!
From: marina
Date: 02 Oct 2000
Time: 23:29:46

Hi Donna, I know where Hoppers , Werribee , Melton are. I come from Melbourne and am familiar with these suburbs. My point of view is these are beautiful suburbs to LIVE IN but from an investors point of view they do not make you money.

When I buy my IPS I look at Location. That means within 10 kms of the city,close to transport,restaurants,schools and lifestyle.Hoppers crossing is so far away, as someone said "it is out in the sticks" The problem is that there is so much Land available and very little capital growth and this is actually losing you money.

Do you know the Waterford Green Estate opposite Highpoint west shopping centre? I bought an investment apartment there in January for $197K and 9 months later it is valued at $240K. What do you think about this capital growth? It is pretty fantastic and this extra equity is my deposit for another IP.

I look for very strong capital growth and neutral properties. If I were in your shoes and I did not want it as a residential property for myself I would definitely sell it and invest it in a stronger growth area.

 

[WebBoard]

Brent H

Reply: 1.1.1.1.1.1.1.1.1.1.1
From: Mike .


Re: Advice please!!
From: Brent H
Date: 02 Oct 2000
Time: 14:13:03

Hi Donna,

Just firstly, Median Prices are just an indicator as to how the market is going and aren't totally accurate. They just take property transaction figures, get rid of the highest ones, get rid of the lowest ones and use the one in the middle. To Gary's point, yes, a lot of expensive housing being bought in an area could have an impact, however there would have to a lot of expensive houses sold.

I accessed the stats just by e-mailing the REIV with my postal details. They sent 5 years worth of stats out within a week, although they were almost all in different formats. I would love to give you this spreadsheet I've created, but for some reason the REIV doesn't like the idea of having figures distributed from anywhere else than their web-site (which is pretty poor when it comes to stats). I'm trying to get my spreadsheets onto the web-site at the moment, but it's a long and hard process convincing them. The person I speak with is Shirley Ma - her e-mail address is [email protected] Tell her I sent you and you want the files I have.

Steve does have a point about keeping the property and making it go cashflow positive. It seems property tends to grow in waves. Just have a look at how it has grown in inner city areas. One suburb takes off, then the next one is soon to follow. (From what I've learned, this happens in 7-11 year cycles). I am by no means an expert - just a beginner, but keeping the property, avoiding capital gains tax and having it become an asset instead of a liability sounds very reasonable. One point though, perhaps Hoppers Crossing isn't rising because people would prefer to live in a similar estate but in new houses rather than 10 year old houses. Anyway, I don't know the area and I'm no expert, but it's something to look at.

Cheers, Brent

[email protected]

 

[WebBoard]

Donna S

Reply: 1.1.1.1.1.1.1.1.1.1.1.1
From: Mike .


Re: Advice please!!
From: Donna S
Date: 02 Oct 2000
Time: 15:38:21

Thanks Brent, I will follow up on those stats. Also you have a good point about people wanting to live in newer houses, and they just keep on building 'em out there! I am hoping that there will be a bit of a flow across effect from the Point Cook estates to help boost the prices in the area. There is lots to think about and lots of good stuff on this forum, thanks guys! Donna.

 

[WebBoard]

Aben

Reply: 1.1.1.1.1.1.1.1.1.1.1.1.1
From: Mike .


Re: Advice please!!
From: Aben
Date: 02 Oct 2000
Time: 21:17:40

Hi All,

Just wanted to share a thought about the stats. Brent H. made mention of there having to be lots of properties sold at a higher price to have a major effect on the median price. I'm thinking that if an areas market is stagnant it wont take much do manipulate the figure. EG if the true market value is about 100k and 5 sell in year.....and a "no deposit, free legal, free T.V., free goldfish" marketer sells 5 in a year at 150k...... the average jumps around 25%. BOOM....BUY,BUY,BUY!!

These sorts of anomalies are everywhere. Be careful everyone. Of course the marketers will use these stats in the colour brochure that you get at the "investment opportunity" sausage sizzle that they so generously host.

Buying my own snags, Aben

P.S. Just before Sanctuary Cove on the Gold Coast,Q was built the developers bought up lots of land in the area, cheap. Built the Cove, then sold the land and made.... just enough to put food on the diamond and ivory table.

 

[WebBoard]

Gary

Reply: 1.1.1.1.1.1.1.1.1.1.1.1.1.1
From: Mike .


Re: Advice please!!
From: Gary
Date: 02 Oct 2000
Time: 10:10:08

Don't get too reliant on median prices - they aren't always a reliable indication of actual price increases. The increase in median prices might just be a reflection of a lot of more expensive houses being built in the area, which may or may not drag up the prices of established nearby houses. A median price rise in an area doesn't mean that every house in the area will go up by that amount, although people selling housing will try to tell it does. Mind you, I have never heard of the areas you are taking about and have no idea what sort of suburbs they are.

Gary

 

[WebBoard]

Steve McKnight

Reply: 1.1.1.1.1.1.1.1.1.1.1.1.1.1.1
From: Mike .


Re: Advice please!!
From: Steve McKnight
Date: 02 Oct 2000
Time: 09:37:44

Whoa!

Additional information not previously released here! If property prices around where you live have gone through the roof then I agree that it's a better idea to do everything you can to keep the property - but only if you can make it cashflow positive. Maybe redraw the equity (to date) on the loan and use it to earn a higher % return (looking for income returns) so that the existing income AND the new net investment income turn the property around.

Remember that by selling you will have to pay CGT on the gain...so redrawing may in fact defer that tax while still giving you access to some money.

But WARNING! Get some tax advice from an accountant before proceeding.

As for Laverton properties. I was talking to the guy from the housing commission who said to be properties they were (just) selling for $50,000 three years ago now go for around $180,000.

There's gold in them there hills!

Bye, Steve

 

[WebBoard]

The Wife

Reply: 1.1.1.1.1.1.1.1.1.1.1.1.1.1.1.1
From: Mike .


Re: Advice please!!
From: The Wife
Date: 03 Oct 2000
Time: 09:21:45

This is a late posting, sorry...IMHO I think, Hoppers and Laverton are yet to go thru a boom, bout another 2 years to go I reckon.