BOO said:
I thought it was amazing that years ago she was able to identify and purchase in areas in WA that locals would not touch, like Bunbury, Geraldton which at the time provided positive cash flow and also achieved great CG.
I think sometimes she's been a bit creative in her definition of positive cashflow.
Even in 2003, a yield of 7% would have been difficult (not impossible) to obtain in Bunbury and 9% in Geraldton. Those who succeeded (eg Karina) bought in the ex-commission areas. Karina avoided these, but many ex-commission houses are asbestos.
Given council rates and WA PM costs, these are unlikely to be positive cashflow (at least initially), especially with the odd repair thrown in.
Since these houses were built in the 1950s-70s they would not have got building depreciation which is a key plank of Lomas' approach. The same could be said for maisonettes and houses around Elizabeth (Which Lomas has also been promoting).
These places were all good buys, but they require one to break Lomas' rules and accept something that wasn't quite positive cashflow. Or you could have got a newer place, and had just 5% yield (even in 2003) but claimed depreciation. But this is no different to the outer suburbs of most of the capitals so going interstate to get this doesn't make sense either.
If you were as uncompromising for yield as Lomas (and particularly) McKnight Mk 1 were, you would have just sat on the sidelines and waited forlornly for the magic CF+ to come along.
But you wouldn't have bought anything. And the $100 000 in foregone capital gain (from a single IP) would have hurt much more than the paltry $2000 pa after tax cashflow loss that a slightly -ve geared Geraldton IP would have typically incurred.
I decided Geraldton was good buying about 3 years ago. But I considered that a property in a quality suburb there was a capital gain game, not a cashflow game (as Geraldton was being promoted). That its yield (originally 8.3%, now 8.7%) was similar to what many 'cashflow' buyers would be happy with was a bonus that made it much more attractive and a low risk hold for me.
My method was as follows:
1. Look at the areas with the highest yields
2. Remove all the small towns (pop <20 000) from the list
After that, there's wasn't much left.
You've got a mining town (with the highest yield) and then the coastal towns.
After being satisfied that the mining town was safe enough, one can buy something there.
But it's better not to have everything there, so you look at the next town on the list, even if its yield is nearer to 8% rather than 10%.
Then you get places like Bunbury and Geraldton. At the time Bunbury was cheaper than Busselton or Margaret River, so it seemed due for a rise. But average yields there were still only 5-6% so its holding costs would have been three times that of a Geraldton property yielding 8% (as Bunbury prices were higher than Geraldton's).
Also Geraldton was the cheapest of any coastal city in Australia and there were huge projects being built. The apparently declining population that would have dissuaded some investors was due to a urban boundary anomaly that not many grasped. In fact the whole region was actually growing steadily, had been doing so for 100+ years, so in my view was a safe place to invest.
All the above was plainly apparent in 2003 to anyone who cared to do the research.
Peter
