Green in the Perth market

Hello fellas,

Newly registered on this board which I've been looking for a coupla weeks I would like to introduce myself and get as much feedback as I can from fellow wise Perth investors on my situation.

I'm 27 and very keen to start a port-folio in Perth.
I'm lucky enough to have made great savings over the past 3 years working in the resources industry consisting of a bit less than 180k at this stage (I really don't intend to show off, it's purely to give you a better picture of my financial situation).
Thing is: "lot of cash, no assets".
Hence I'm now on the perfect first investment property hunt.

From what I can gather so far from the internet (somersoft), meeting with pros (momentum wealth consultant and financial advisor from my company), one aggressive strategy could be:
- Get 1 or 2 big blocks (750+sqm) of old state estate within 15km from CBD.
- Develop one (in building 3 units) when able and keep rents coming for the 2nd one.
- Repeat when able for the second big block.
Are Balga, Kewdale, Inaloo good suburbs to start with?
Am I better off buying one blue chip property close to CBD instead of looking at developing risky options in the above suburbs?
Do you guys estimate that it would be beneficial to fix the mortgage rate for the first say 3 years at the moment?
Big question is: what would you do if you were in my situation?
I'd be happy to hear from ya as I feel slightly reluctant to give 20k to a buyer's agent!
Cheers.
 
Big question is: what would you do if you were in my situation?

Learn more about property investment, probably starting with reading old and new threads on this forum.

Seriously though, if you consider yourself "green", then going straight into property development is probably quite risky. What made you think development?

Otherwise, welcome to the forum!
 
Thanks thatbum.
What made me think of development is by corresponding with a financial adviser who has been recommended to me.
Apparently he has 15y+ experience in investment.
Developing/subdivision seem to be the way of building a large port-folio and make some money out of real estate I've been told.
On the one hand, it might be risky however being young leaves plenty of time to recover from bankruptcy if any.
On the other hand, if I buy 2 sites to develop, hopefully the rents coming to one site should balance to some extent the subdivision process on the other one.
I will have to get the numbers right though.
Cheers.
 
Jaylo,

This is a post that describes my chosen Investment Strategy that involves Villas & Townhouses. It maybe of interest to you...

The capital growth averaging (CGA) strategy I employ utilises a regular purchasing cycle similar to what Dollar Cost Averaging is to the sharemarket. The major underlying principle to its success is it relies on your "time in" the market, NOT "timing" the market, and never never sell. So in other words it does not matter whether you buy at the top of a boom or at the bottom, just so long as you purchase good quality, well located property in high density areas ( metro area capital cities), at or below fair market value, on a regular basis.

We've basically been purchasing an IP per year and to date we've built a multi $million property portfolio spread across Australia.

We've been purchasing new or near new property over older style property for several reasons, the main ones being (in no particular order) -

1/ To maximise my Non-Cash deductions
2/ To minimise my maintenance & repair costs
3/ More modern & Attractive to tenants - thereby minimising potential vacancy rates
4/ Ask a higher rent - thereby Maximising yields

Without getting into the "which is better debate, houses or Units??", I prefer to purchase Townhouses & Villas with courtyards of 30% or greater land area thereby eliminating multi story units / high rise apartments with balcony's, for several reasons. The mains ones being (in no particular order) -

1/ lower maintenance & upkeep for the tenant
2/ lower purchase or entry level into a Higher capital growth suburb area
3/ rapidly growing marketplace (starting both now & into the future) wanting these type properties. This is due the largest group of people to ever be born (being the Baby boomers and Empty nesters) starting to come into their retirement years. They will be wanting to downsize for the following main reasons - lifestyle & economic.
4/ greater tax advantages & effectiveness thus maximises cash flow.
5/ able to hold more individual properties spread across your portfolio - thereby minimising area over exposure risks by not holding all your eggs in only a few baskets, so to speak

I look to buy in areas with a historic Cap growth of 7%pa and/or are under gentrification. I look to where the Govt, Commercial, Retail, private sectors are injecting money. This ultimately beautifies the area and people like the looks so move in creating demand.

I have found this works well if you are looking for short to medium term capital growth so as to leverage against and build your portfolio faster.

Getting back to CGA, as the name suggests it averages out the capital growth achieved on individual properties with your portfolio throughout an entire property cycle, taking into account that property doubles in value every 7 - 10 years. Thats 7%pa compounding.

The easiest way to explain what Im meaning by this is to provide a basic example taking into account that all your portfolio cash flow will be serviced via Wages in the acquisition stage, Rental income, the Tax man, an LOC and/or Cashbond structure, and any other forms of income you have available.

For ease of calculation lets say we buy a property for $250k, so in 10 years its now worth $500k. Now lets say we do that each year for the next 7-10 years. Now you can quit the rat race.

So in year 11 ( 10 years since your 1st Ip) you have 250K equity in IP1 you can draw out (up to 80%) Tax free to fund your lifestyle or invest with. In year 12 you do exactly the same but instead of drawing it from IP1 you draw it from IP2. In year 13 you do the same to IP3, in year 14 to IP4, etc etc etc. You systematically go right through your portfolio year by year until you have redrawn from each property up to year 20.

So what do you do after you get year 20 I hear you say ?? hmmm..well thats where it all falls into a deep hole - You have to go get a JOB - nope only joking!

You simply go back to that first IP you purchased as its been 10 years since you drew upon it first time around and its now doubled in value ($1M) yet again - so you complete the entire cycle once again. In fact chances are you never drew each property up 80% lvr max , so not only have you got entire property cycle of growth to spend you still have what you left in it first time round that compounded big time. Now you wealth is compounding faster than you can spend it! What a problem to have

Getting back to what I said in my opening paragraph about it does not matter where you buy within a property cycle just so long as you do buy, This is because you will not be wanting to draw upon it until 10 years later after its achieved a complete cycle of growth.

Well that?s the Basic Big Picture of CGA. Once set up & structured correctly it?s a self perpetuating source of tax free income indexed for life!

For further information please follow the links to these "We've Done it" and "We've Done it Again" threads I started some time back.

If you require any clarifications just ask.
 
Welcome.

Similar path to myself.
You could start off small with a simple retain and build subdivision or duplex/triplex to get your head around the process etc. you will either need cash or equity to develop so plan ahead. This may mean buying one to develop then moving onto the next.

Learn and Consider lmi and high gearing to build your asset base up quicker.

Make sure you have an end goal to work towards so you can insure each purchase is a step closer to that goal.

Learn the markets, the numbers and the feasibility stage of any development.

Read everything on this forum and learn. if you feel comfortable using a buyers agent for your first purchase so you can learn the process then by all means consider this option. Just make sure they are clued up on development zoning/rezoning and all other considerations.

And take your time, make sure you understand everything before you jump in.

Hope this helps

Cheers
 
Development is not without risk which is why it's returns can be higher than other forms of residential investing.

Why the 3 suburbs that you listed? At the moment the market for development stock in Perth is very hot and possibly too hot for many things to stack up money wise. You want to be able to find 20% or more in your feasibility.

I don't want to burst your bubble but 180k might not be enough. It's an awesome amount that you've saved so kudos for that but I'll work it backwards for you.

Let say 180k would get you 1.8m if you could get a 90% lend - no guarantees on that - you'd need to speak to a broker. A single storey triplex development in Innaloo would cost you about $800k plus 1m if you go 3 x 2 storey or $750k if you go single storey. So you have just spent all of your money if you build 3 townhouses OR you have approx $300k left of serviceability for block number 2 - which isn't enough.

While you are constructing a development you have to be able to fund all the mortgage payments on it. They increase in chunks during build as the builder is paid. So you will have the original house/land mortgage plus the construction loan.

If you have 2 blocks then it would be rare for the second development site to get rent which covers its mortgage as they are priced at a premium for the development ability. So you would also need to cover the shortfall on that too.

Resource industry pay helps with this but if you lose your job then you will be trying to pay a 1.8m mortgage. Insurance will be a must!

So if you want to do 2 then you will need to go cheaper than Innaloo or do 1 then use the money from that to do a second.

I love developing but if you read my threads (and that by Blacky) you will see that there are ups and downs and it's not simple :)
 
What Westminster said.
Plus- do you really want to develop, or would it suit you better to purchase a property where all the hard work has been done?
- do you know how much you can borrow?
- how much would you feel comfortable borrowing?
- do you want to develop immediately?
- do you have other goals/five year plan, etc
 
Thanks for the feedbacks, very much appreciated, great forum.

- Rixter,

I already flagged that particular post as I saw it on many threads before.
The strategy is very interesting and totally makes sense to me as far as property selection goes however as to the draw out on equity strategy I was wondering if we will still see property equity doubling every decade for the one to come.
I read in different magazines that we should expect some limited growth compared to the last decade so I try to prepare myself mentally not to expect the same pattern.

- HD_ACE, westminster,

I will question the 2 at once strategy with the financial advisor.
It seems like I might focus on one development site first as I may be a bit tight to get more financing at this stage.

Why the 3 suburbs that you listed?
I've been advised to focus on old estate housing with some land potential within 15kms of Perth CBD.
Balga, Westminster, Rivervale, Kewdale.
Not too far from CBD, airport, river, beach.
Suburbs that will be gentrified hopefully.
I need to confirm zoning and planning for each though.

I love developing but if you read my threads (and that by Blacky)
Will do.

What Westminster said.
Plus- do you really want to develop, or would it suit you better to purchase a property where all the hard work has been done?
That comes back to my initial thoughts of investment: buying a blue chip property or a furnished apartment inside CBD (will always see CG and rental demand) or a nice new/near new 3-4 bedroom house in a suburb within 10km of CBD.
At this stage I am still unsure of what strategy to adopt but I'm open to any suggestion.

- do you know how much you can borrow?
I have had a crack at various online simulators from the big banks but I'd rather wait for advice from a financial advisor with a comprehensive view on my current financial situation.
- how much would you feel comfortable borrowing?
As much as I can as long as the broker knows my financial situation.
I'm happy with 90% LVR, LMI and income insurance (not sure how much it is) as well.
I'd rather keep as much cash as I can though so some fine tuning will be needed.

- do you want to develop immediately?
No, I'd need to wait for sufficient funding to develop.
- do you have other goals/five year plan, etc
Just those catch phrases:
"1 property a year"
"200k passive income in 15years"
Would be nice but more realistically, I just want to buy my first IP by the middle of next year.
Also, do you know a good Perth buyer's agent in the 10-12k range?
20k is just too much.

Anyway starting to be obsessed with investment now, must be the way to go I assume.

Cheers.
 
Damn you guys... I missed my station reading this post!

180K deposit would let you buy about 1 mil property.

Say you put down 10% deposit. You will have other expenses (stamp duty, legal, inspections... etc) coming to 5%. So you need 15% for any purchase. That means you can go up to 1.2 mil mortgage. Take away the LMI & little bit of buffer. You will fall below 1 mil mark.
 
On the one hand, it might be risky however being young leaves plenty of time to recover from bankruptcy if any.
.

Might want to rethink your strategy. Make sure you leave some room to move so this doesn't occur. Losing significant amounts is always a risk but I would have a second look at the investment if bankruptcy was a possibility.
 
Done.

You will fall below 1 mil mark.
Middle next year should be right hopefully.

Losing significant amounts is always a risk but I would have a second look at the investment if bankruptcy was a possibility.
Well noted. Income insurance would do the trick hopefully, not sure how much is it though, maybe 500 dollars a year?

westminster, can't wait to see your Gwelup development outcome.
 
Done.


Middle next year should be right hopefully.


Well noted. Income insurance would do the trick hopefully, not sure how much is it though, maybe 500 dollars a year?

westminster, can't wait to see your Gwelup development outcome.

If you work in resources you probably earn a fair wage.
Budget $4000 - $8000 pa for income insurance to $200k. And expect to jump through LOTS of hoops. Medicals, blood tests, mental health history, workers comp history. everything.
Don't be put off though. it is essential in light of your proposal.
 
I've been advised to focus on old estate housing with some land potential within 15kms of Perth CBD.
Balga, Westminster, Rivervale, Kewdale.
Not too far from CBD, airport, river, beach.
Suburbs that will be gentrified hopefully.
I need to confirm zoning and planning for each though.
.

They are the traditional stock so a good place to start looking. I have done a triplex in Westminster which I knew going in would not be a very profitable exercise but I wanted to realise the value of the block and get the rental yield from it. 18mths on and its now looking much better in terms of the 1.1m I spent on it with a value around 1.4 but still nothing to be overly proud of. It does have a lovely yield around 8% though.

Much of what is for sale at the moment will not stack up on a feasibility at the moment and people will be having fingers crossed that values will go up during DA and construction time. I don't like the fingers crossed method - I prefer to have the number stack up from Day 1 - and also factor in the possible downturn of housing values by 10%.
 
If you work in resources you probably earn a fair wage.
Budget $4000 - $8000 pa for income insurance to $200k. And expect to jump through LOTS of hoops. Medicals, blood tests, mental health history, workers comp history. everything.
Don't be put off though. it is essential in light of your proposal.
Indeed income insurance is essential in light of my proposal as well as potential downtime in my job from 2018 apparently:
http://www.smh.com.au/business/comm...urces-sectors-jobs-crisis-20131215-2zfbd.html
Hopefully resources industry construction workforce will be replaced by production workforce in similar quantities to service the rental market in Perth however from my limited experience I doubt that you need as many people in production as in construction but I may be wrong.
I know that production rosters are more like 8/6, 2/1 so a stock close to the airport would still be a good value to invest in as workers might want to decrease travel time/taxi fares on such rosters with frequent trips.
 
Much of what is for sale at the moment will not stack up on a feasibility at the moment and people will be having fingers crossed that values will go up during DA and construction time. I don't like the fingers crossed method - I prefer to have the number stack up from Day 1 - and also factor in the possible downturn of housing values by 10%.
Yes that's fair enough assuming you want to develop from Day 1 however I won't have enough funding at this stage to go through development, I might have to wait 2-5 years from purchase to develop my first site.
I will try to focus on buying a couple of sites first and hold on them.
So apparently Westminster wouldn't be a suitable location for my second site, how about Kewdale?
 
Yes that's fair enough assuming you want to develop from Day 1 however I won't have enough funding at this stage to go through development, I might have to wait 2-5 years from purchase to develop my first site.
I will try to focus on buying a couple of sites first and hold on them.
So apparently Westminster wouldn't be a suitable location for my second site, how about Kewdale?

Sorry I'm not saying there is anything wrong with Westminster but it pays to be careful.
If you are happy to hold for awhile then I would be tempted to go more blue chip and closer to the city - Victoria Park, Lathlain, Carlisle etc.
 
Sorry I'm not saying there is anything wrong with Westminster but it pays to be careful.
If you are happy to hold for awhile then I would be tempted to go more blue chip and closer to the city - Victoria Park, Lathlain, Carlisle etc.
Righto re Westminster.
What would motivate you to go blue chip?
Is it in light with your current development experience or with the construction workforce expected downturn in 2018?
 
Indeed income insurance is essential in light of my proposal as well as potential downtime in my job from 2018 apparently:
http://www.smh.com.au/business/comm...urces-sectors-jobs-crisis-20131215-2zfbd.html
Hopefully resources industry construction workforce will be replaced by production workforce in similar quantities to service the rental market in Perth however from my limited experience I doubt that you need as many people in production as in construction but I may be wrong.
I know that production rosters are more like 8/6, 2/1 so a stock close to the airport would still be a good value to invest in as workers might want to decrease travel time/taxi fares on such rosters with frequent trips.

And yes production needs a lot less staff than construction
 
Quick questions:

1.

- I will be looking on the net but if you guys have good examples of IP purchase price estimator spreadsheets including stamp duty, insurances costs, development costs (construction, demolition), etc., feel free to share.
That would be a good starting point to estimate the potential equity on published properties.

- I will be looking at cash flow estimator spreadsheets too to assess -/+gearing, rental income, contingency, etc.

2.

I plan to take a I/O loan with offset account for my first IP, and maybe fixing the rate for the first 3 years.
I was wondering where should I put my savings once I get my loan:

- Am I better off leaving them in my savings account which gives me 4.31% (RAMS online banking) at the moment even if I get taxed on them or just put them in my offset account to decrease repayments thus reduce tax deductibility?

Cheers.
 
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