Getting the ball rolling ...

[miztah_p]

Hi all,

Have recently been reading a fair bit of this forum and thought I would get involved. Before I start, a big thank you to all the posters on SS, you guys have made this a great informative tool. However, I have often been a victim of over analysis (previously with shares) and now need to get active. Given the cooling property markets and the reading I have done so far, I feel that it is an ideal time to get involved in the property market and hope to do so in the third quarter of this year. I also feel that property suits me personally as a primary investment vehicle moreso than shares.

I currently do not own no property whatsoever and am looking to purchase my first IP. Given my current earnings I am looking to keep to <250k range (although I have contacted ac ouple of brokers for an initial consult to determine my borrowing power and loan options). I currently rent with friends and am in my second year of FT work.

A few things I have picked up from SS, which I believe will be important going forward (and which I have incorporated in my own investment plan which is written in pencil I might add):

Buffer - 3-6 months worth of IO payments on IP(s)

Never Buy Jointly - issues with borrowing capacity - bank attributes the full joint loan but only attributes half the asset.

Always Get An Offset A/C - rather than committing to the principal of the loan - gives more flexibility and funds able to be withdrawn

Apply for IO Loans Preferably >90% LVR - get as much borrowing as possible so can use minimum depsoit thereby allowing for more funds to put towards the buffer (in the offset A/C). IO allows for less funds being committed to IP loan and better cashflow prospects and ability to commit more funds to secure another IP.

Buy 3 Cheaper Properties Rather Than 1 Expensive Property - should one be vacant, 2 others will stillearn rent to put towards interest payments.

Aim to Positive Gear - irregardless of tax benefits, negative gearing just means you are losing money. Options (increase rent, cosmetic reno, furnish property, refinance, subdivide etc etc).

Refrain from Selling Properties Where Possible - CGT consequences - probably better to draw down and invest further in income or further growth assets - overall depends on tax situation.

Now for the all important Plan/Goals which is as general as general can be (and which I have tried to cater to my own risk profile and goals).

GOAL - stop working - retire ASAP!

Plan - Accumulate IPs (Refinance and use equity to re-invest in further IPs) - Increase equity - Draw down equity and invest in income producing assets (shares, commerical property, managed funds etc) to aid in serviceability of loans and provide an income stream so I can focus on my investments rather than work FT (moving quadrants -Rich Dad)

Now for the first step.

I have been looking at the following areas given my budget:

Frankston, Dandenong, Corio, Norlane, Footscray, Ballarat, Bendigo

I have a slight affinity for the SE suburbs after living there and have been concentrating my efforts on Frankston + Frankston North (both have vacancy rates of approx 3.1%, highest of all the listed areas above based on SQM, but decent CG over the last 10 years). Also they have been earmarked for progress/development given the link between the Melbourne and Mornington Peninsula.

I would be looking at a standard 1980s 2+1+1 unit (typically 1of8 or 1of12 - not sure of the land component) and they seem to be, from my online searches, approx 230k.

I know it's abit of a long post, but I just wanted to put it all out there to see what everyone thought and if I am on the right track. Opinions and advice more than welcome.

Thank you in advance.

 

[Aaron_C]

Buy 3 Cheaper Properties Rather Than 1 Expensive Property - should one be vacant, 2 others will stillearn rent to put towards interest payments.

Can't say I really agree with this. I find the more you spend the better quality you get. But that's just me.

 

[JWR]

I disagree respectfully Aaron

The houses you buy all hinge on how well you buy them.

No use buying 3 overpriced cheapies as opposed to 1 higher priced bargain.

Generally though, I think 3 is better than one because of the rental yield will often be higher and also the diversity factor.

This is especially important when you are starting out because if you buy one property that doesn't go up you cannot leverage off it for the next one. If you buy 3 and one does really well, one does OK and one does nothing you can still leverage off the one that does well for the next one.

I think your strategy sounds good but maybe look outside Melb as it will be hard to find + cash investments if you restrict yourself.

 

[miztah_p]

Thanks for the input so far Aaron and JWC.

I note the diversification issue as well as the better quality argument.

Re:
"I think your strategy sounds good but maybe look outside Melb as it will be hard to find + cash investments if you restrict yourself."

What areas would you suggest JWR? I have been looking at Ballarat and Bendigo as they are regional centres but have not done enough research as yet.

 

[JWR]

If you'd looked there you would notice yields of 6%ish so not + cash.

You need closer to 10% yield which is outside VIC generally.

Look at Morwell/Mildura if you must buy in VIC

Then look everywhere else in Aus and see what you find.

Lower price doesn't always = worse quality.

 

[jingo]

Have you thought of looking interstate? Sydney for example? According to my reading recently, many property commentators are saying that it has a strong rental market and is poised for growth.

Regards Jason.

 

[Rolf Latham]

I disagree respectfully Aaron

The houses you buy all hinge on how well you buy them.

No use buying 3 overpriced cheapies as opposed to 1 higher priced bargain.

Generally though, I think 3 is better than one because of the rental yield will often be higher and also the diversity factor.

This is especially important when you are starting out because if you buy one property that doesn't go up you cannot leverage off it for the next one. If you buy 3 and one does really well, one does OK and one does nothing you can still leverage off the one that does well for the next one.

I think your strategy sounds good but maybe look outside Melb as it will be hard to find + cash investments if you restrict yourself.

pros and cons as always

in reality what we are proposing here looks like this

Buy one 300 property with a 270 k k lend. Very likley to be neg geared

or

Buy 3 places worth 300 k with a 270 k lend.



Very very very different profiles in terms of capital appreciation based on history.


Id argue, based on averages, the chance of being able to leap frog off the single 300 k property will be much higher than the 3 100 k places



ta
rolf

 

[devank]

3 x 150K - Renters can pay the rent even if they don't have a job. Risk is a bit spread. 3 x Rates and water bills. 3 x dealings.

1 x 450K - They is a chance of rental default if the renter looses their job. only one X Rates, water bills and dealings.

In few years time (assuming your income improves) your definition of the cheaper property may change

 

[Aaron_C]

The people who rent a $150,000 property are probably going to have much more difficulty paying your rent / looking after your property. People who are on Centrelink benefits and/or have no job. Less risk? 3 x trouble more like it.

 

[Belu]

Aaron - rent can be taken out of centrelink payments before they are distributed, which means the government is effectively paying the rent.

I would consider a regional area. When looking at the mid $2's you can pick up a brand new 2 bed unit in places like Bendigo for that. Have a great yield (circa 5%), a low vacancy rate (circa <1%) and great depreciation from the new build. This could be as much as $7-10k for the first few years.

Remember not all negative gearing is bad, depreciation is a cost that isnt a cash-flow, so you arnt losing money, but get to write it off on tax.

If you have any questions on Bendigo let me know - I am opening (tomorrow) a real estate business there so should be able to assist

Cheers

Ben

 

[Peter_Tersteeg]

Looking at the original post, all of the points have merit, but as Aaron pointed out, not every point is correct for everyone. Whilst the points may be an apporpirate strategy for some investors, they may not be apporpriate for all investors.

Buffer
I can't argue with having 3-6 months cash available. In a crisis, cash is king. It might be difficult to acheive in some circumstances, but always a good goal to have.

Never buy jointly
The statement can makes sense for two people buying a property or two then doing things on their own, but there's little argument for people not to buy jointly if they're married or their ongoing strategy will be to buy everything jointly in the future. Buying with two incomes usually increases affordability, not reduces it.

There are also loan products available which can be used for a joint purchases without comprimising the individuals borrowing power.

Offset account
Again, good to have. Offset accounts are a very useful place to park your own savings. In most cases you only need one unless you've got multiple legal entities saving money, such as a trust or business.

Apply for IO Loans Preferably >90% LVR
The argument here is that by minimising deposits you can afford to buy more property. A fair point if you're planning to build a portfolio quickly. At some point, this can become unsustainable and at some point most investors will look towards 80% LVRs or even lower.

Buy 3 Cheaper Properties Rather Than 1 Expensive Property
Definite pros and cons here. 3 properties is often less risky, but buying one property can often have far greater reward in terms of capital and rental growth.

Aim to Positive Gear
Again, not much risk if you can positive gear but don't discount a deal just because it's negative geared. Many people have made a fortune by negative gearing.

Refrain from Selling Properties Where Possible
Many of the most savvy and successful investors I know have sold many properties. Selling is perfectly viable to either reduce risk, realise a profit or execute an exit strategy. The strategy around many properties may be to hold it until it realises a certain profit, then get out.

All of the points above are good points, but aren't absolutes. People need to understand their own circumstances and their investments, then build a strategy to best suit. Understanding the pros and cons of each point above and how it can be adapted either way will help provide a better longer term investment strategy.

Buying half a dozen cashflow positive properties collectively worth $1M is unlikely to put you in a position to retire but you probably won't go broke. If each generates $200/mth positive cashflow, you'll have trouble retiring on $1200/mth. Capital growth may be good at times, but these properties can also go backwards very quickly. You need to buy a lot of these properties to be able to retire. Whilst this might look 'safe', it's also a very intensive long term strategy.

Buying 2 properties negative geared worth $1M can be risky if you can't afford the shortfalls at some point. These properties do historically have better capital growth and better rental growth over the long term, which may put you in a better position retire. 2 properties aren't likely to be sufficient to retire on, but 4 properties with a average rental and captial growth of 7% over 30 years makes for a very comfortable retirement. It's also a very easy strategy to execute as long as you've got the resources in the initial stages.

As I initially stated, I don't disagree with the original post, but simply taking it as the 'correct' strategy is close minded.

 

[miztah_p]

Thanks everyone for your input.

Belu - I have looked at Bendigo abit and note that it does offer a balanace between rental yields and CG. Similar to Frankston and Dandenong which I mentioned earlier but a much lower vacancy rate.

PT_Bear - Thanks for the detailed reply. I understand that there is no one strategy fits all. Realistically, I would probably settle for average yields and more capital growth which would moreso allow me to tap into equity to go further while hoping to increase the CF position of the property in the following years. Living of just CF+ properties with no CG growth would probably not suit my long-term goals, a combination of both is what I may end up. Regardless, I think it's time to get started on this investment journey

Re: 3x cheaper properties and 1x expensive property, some very good points were made which I noted. I think given my current situation starting of with the one cheaper <250k is the only option I have atm

Thanks guys.

PS I have to take a closer look at props in Sydney too but has anyone got other suggestions for suburbs with CG prospects in VIC with say an average yield (approx 5% gross)) suitable for sub 250k?

 

[jaycee]

Aaron - rent can be taken out of centrelink payments before they are distributed, which means the government is effectively paying the rent.

I would consider a regional area. When looking at the mid $2's you can pick up a brand new 2 bed unit in places like Bendigo for that. Have a great yield (circa 5%), a low vacancy rate (circa <1%) and great depreciation from the new build. This could be as much as $7-10k for the first few years.

Remember not all negative gearing is bad, depreciation is a cost that isnt a cash-flow, so you arnt losing money, but get to write it off on tax.

If you have any questions on Bendigo let me know - I am opening (tomorrow) a real estate business there so should be able to assist

Cheers

Ben

Can it really ? Or do these tenants have the same option as the rest of us to pay via weekly/fortnightly "direct debit" type arrangement.

 

[Belu]

since you don't own a property do you qualify for the FHOG? $26,500 until 30 June for new builds in regional Victoria is a very big incentive.

 

[Belu]

Can it really ? Or do these tenants have the same option as the rest of us to pay via weekly/fortnightly "direct debit" type arrangement.

It most certainly can. The rent can come out of the centrelink payment before distribution to the tenant. It involves a few more steps on the agencies side but is definitely do-able.

 

[jaycee]

It most certainly can. The rent can come out of the centrelink payment before distribution to the tenant. It involves a few more steps on the agencies side but is definitely do-able.

So there's the option of doing this... cool

My previous tenant didn't think it was necessary....luckily I had landlord insurance fort when it turned out it was

 

[Belu]

Been signing up for a lot of things over the last few weeks but am quite sure it is a CRN (Customer Reference Number) that you need from Centrelink and use the Centrepay service:

http://www.centrelink.gov.au/internet/internet.nsf/services/centrepay.htm#which

 

[jaycee]

Been signing up for a lot of things over the last few weeks but am quite sure it is a CRN (Customer Reference Number) that you need from Centrelink and use the Centrepay service:

http://www.centrelink.gov.au/internet/internet.nsf/services/centrepay.htm#which

"Centrepay is a voluntary bill paying service"

So it's available if the tenants suggests it I guess...

But I imagine it would be a difficult (questionably legal ?) conversation to have with the prospect tenant and say "cause you're on a pension, I will only take you on if you sign this (?)

 

[devank]

Probably the tenants can cancel the payment arrangement any time. One of my tenant did a runner and reversed the last “direct debit” through their bank!

 

[Belu]

Yes tenants can turn it off - BUT it means if you are on the Centrepay system and you dont get a payment it isnt a "whoops forgot" it is a direct and deliberate act by the tenant as they do have to cancel it.