How to build a 10 property portfolio in 3 – 5 years realistically on $50,000pa.
- Thread starter Nathan
- Start date
Hi Murph,
Just to explain how the bank goes around this.
Lets round some numbers for the ease of the exercise. I use to work on 5% deposits and pay LMI when I started, today I use 20% deposits. If I work on a 10% deposit, and a theoretic house for $200,000 and with worth $250,000. Before any of the nay sayers get in, I am stating it is an example and anyone can go back through some of the properties I have purchased over the time such as Muswellbrook I settled on in Feb, did a reno there and revalued $250k on a $105k purchase and $30k reno, That is extreme good buying and house was a dump needing major reno. Or coule be like a western Sydney house which was purchased late last yr for $205k no work and comes up $260k range.
As for the extraction of the funds,
PPrice $200,000
After paint/carpet $250,000
Rent $300pw (there abouts)
This could be a house in western Sydney or a unit 13kms from Sydney CBD or a $50k regional job.
Property purchased for $200,000 and a 90% loan so $180,000 from the bank $20,000 from Sarah. Sarah goes back to the bank with her evidence and shows the bank how well she bought the proeprty and asks for a top up loan based on $250,000 valuation. Apart from doing serviceability check at the bank they order a valuation. Pending on the bank and the location I have seen scenarios where valuers can value from the initial $200,000 upto $300,000 but usually they are ok, and I always suggest to look @ other options on lenders if the val doesnt stick up and you have evidence to support it does. (I will explain further on that at the end)
The bank values it @ $250,000 and says ok Sarah the $50,000 top up loan is approved and we will give you 90% of this being $46,000. and you have a new loan facility which is connected to that residence. - I prefer top up over LOC.
Now, these numbers can change you may get some funds out, you may get all funds out, you may get more funds than you initially used to purchase the property.
If we look at an example, I purchased a 2 bed villa a few years back for $137,000 in Sydney and the bank lent on it. I went back 6 months later and said the cheapest 1 bed unit in area is $169,000 I have a 2 bed villa here, I want a reval @ $180,000. The bank went and ordered a valuation and it came back @ $130,000... WTF? This lender was over exposed in the area so they bought all their vals in low. I took it to another bank and asked for $200,000 assuming that it would come in lower. The val came back at $195,000 and I argued it and got it raised to $205,000 (banks can raise the val by around $10,000 in house).
I have had vals come up great and come up poor. It is all about how active you are to make sure you are a success.
Hope this helps.
Nathan.
Just to explain how the bank goes around this.
Lets round some numbers for the ease of the exercise. I use to work on 5% deposits and pay LMI when I started, today I use 20% deposits. If I work on a 10% deposit, and a theoretic house for $200,000 and with worth $250,000. Before any of the nay sayers get in, I am stating it is an example and anyone can go back through some of the properties I have purchased over the time such as Muswellbrook I settled on in Feb, did a reno there and revalued $250k on a $105k purchase and $30k reno, That is extreme good buying and house was a dump needing major reno. Or coule be like a western Sydney house which was purchased late last yr for $205k no work and comes up $260k range.
As for the extraction of the funds,
PPrice $200,000
After paint/carpet $250,000
Rent $300pw (there abouts)
This could be a house in western Sydney or a unit 13kms from Sydney CBD or a $50k regional job.
Property purchased for $200,000 and a 90% loan so $180,000 from the bank $20,000 from Sarah. Sarah goes back to the bank with her evidence and shows the bank how well she bought the proeprty and asks for a top up loan based on $250,000 valuation. Apart from doing serviceability check at the bank they order a valuation. Pending on the bank and the location I have seen scenarios where valuers can value from the initial $200,000 upto $300,000 but usually they are ok, and I always suggest to look @ other options on lenders if the val doesnt stick up and you have evidence to support it does. (I will explain further on that at the end)
The bank values it @ $250,000 and says ok Sarah the $50,000 top up loan is approved and we will give you 90% of this being $46,000. and you have a new loan facility which is connected to that residence. - I prefer top up over LOC.
Now, these numbers can change you may get some funds out, you may get all funds out, you may get more funds than you initially used to purchase the property.
If we look at an example, I purchased a 2 bed villa a few years back for $137,000 in Sydney and the bank lent on it. I went back 6 months later and said the cheapest 1 bed unit in area is $169,000 I have a 2 bed villa here, I want a reval @ $180,000. The bank went and ordered a valuation and it came back @ $130,000... WTF? This lender was over exposed in the area so they bought all their vals in low. I took it to another bank and asked for $200,000 assuming that it would come in lower. The val came back at $195,000 and I argued it and got it raised to $205,000 (banks can raise the val by around $10,000 in house).
I have had vals come up great and come up poor. It is all about how active you are to make sure you are a success.
Hope this helps.
Nathan.
Its funny how your always going on about how much money your making through property (which no one can really verify for sure) yet you always seem to have something to sell..........
Something to think about in my opinion.
Something to think about in my opinion.
Now that is interesting. I assume you have to refinance with that bank? So it works like this:
PurchasePrice: $137,000
Bank valuation: $205,000
And you can get 90% or $61,200 to spend on.... anything? But choose to spend on another house...
Nice
Yep so a 90% or 80% whatever your LVR is with the bank/lending institution.
It is important you speak to your bank/broker about the options. If yu dont find the answer you want keep looking out there, I have used many brokers and banks and today use the ones which work for me.
In a detailed situation my initial loan was 80% of the $137,000 therefore $109,600 and became $164,000 therefore equity in account of $54,400.
Everyones numbers are different, its just important to understand how yours work better yet make them work for you.
Reality check....about 50% of non-purchase vals come in under borrower estimates. In QLD ATM one in five would be out by 15% or more.
They are rarely changed.
Just sayin'
Nathan, with your renovations are you specing the reno's these to break through the ceiling value in the area or simply matching other comparables.
This is the bit I get stuck on.
Is the reval straight after the purchase is settled, or straight after the reno as per your system?
From my observation, when a comparable property in the immediate area sells for less than the other ones for sale around it, the valuers look at the cheaper sold property and immediately downgrade the value of the similar properties to match it.
They then add the qualifying statement of "the market has cooled, as you can see by recent comparable sales; one up the road sold for $40k less last week."
It immediately drags the values of the comparables down. Seen it happen a few times. The effect is even worse in blocks of units which are identical to the cheaply sold one upstairs.
Of course; in a rising market if you buy then do the cosmetic reno the value goes up, but usually only around the same price as the cost of the paint job, bathroom and kitchen.
I'll agree that they are more rentable and more saleable after the reno, but not necessarily more valuable than the cost of the renos.
I guess the litmus test is when the comparable renovated properties which are for sale are a big whack above the burnt out shell which you can get cheaper (as you should), and after yer $5k reno you can miraculously get the value up to the you-beaut renoed version around the corner, which was a decent house to begin with.
And finally, the market has to rising, and buying the burnt-out shell for a song even then is very tough to do. You can buy it for a song when there are no buyers, but then you eventually have a renoed property with...no buyers.
How does it work then?
Just to confirm that these properties are equal comparables.
For example two properties shown on Today Tonight recently of mine were purchased for $130,000 and $140,000 when I purchased them a few years ago. They were purchased 12 months prior from previous buyers for $300,000 each. The month I settled my first one in that block another sale transacted in same block same size for $210,000 which is a decent comparable for true value at the time.
I dont do renos to all my properties actually only a few cop reonos.
For example two properties shown on Today Tonight recently of mine were purchased for $130,000 and $140,000 when I purchased them a few years ago. They were purchased 12 months prior from previous buyers for $300,000 each. The month I settled my first one in that block another sale transacted in same block same size for $210,000 which is a decent comparable for true value at the time.
I dont do renos to all my properties actually only a few cop reonos.
It doesn't really take that long to do enough research to work out whether something is a good deal or not.
I went to one of those weekend halleluia-brother free seminars a few years back with multiple speakers and came home motivated to buy a cash-flow positive property. Hubby is from regional NSW and I noted the towns he had lived in. I typed the towns into realestate.com.au. Looked at prices for a few days to work out the "worth" of properties there and then looked in the rental section to determine rental yield. After about 9 hours of doing this, the deals just started popping out at me. Found a few properties going to auction the next week, with opens 2 days away. So packed up for a country drive to the opens and bid over the phone at auction 2 days later.
so within 2 weeks of getting serious about buying an investment property, I'd bought 2 properties totalling 210K, made around 70K in instant equity and cash-flow positive.
I have been told I was lucky. I think you create luck by being in the market.
I went to one of those weekend halleluia-brother free seminars a few years back with multiple speakers and came home motivated to buy a cash-flow positive property. Hubby is from regional NSW and I noted the towns he had lived in. I typed the towns into realestate.com.au. Looked at prices for a few days to work out the "worth" of properties there and then looked in the rental section to determine rental yield. After about 9 hours of doing this, the deals just started popping out at me. Found a few properties going to auction the next week, with opens 2 days away. So packed up for a country drive to the opens and bid over the phone at auction 2 days later.
so within 2 weeks of getting serious about buying an investment property, I'd bought 2 properties totalling 210K, made around 70K in instant equity and cash-flow positive.
I have been told I was lucky. I think you create luck by being in the market.
I'm always a bit sceptical about it being that easy to buy under market value. The only reasons that I could see for a seller being willing to take a haircut are that they need a quick sale, or there are underlying problems with the property.
Nathan's recent purchase in Willmott strikes me as falling into that category. The property suffered from vandalism, and is in what sounds like a rough neighbourhood.
I can't see a house that's on the market at $220K, and sells for $200K to $210K actually being worth $260K with a fresh lick of paint, as the B Invested example shows. Because if it was, why's the owner taking such a loss.
Still, if Nathan can pull this off on a regular basis then good luck to him.
My second issue is that I don't see house prices and rents rising ahead of income over the long term. If wages are rising at 3% to 4% and accommodation at twice this, then there will come a point when people simply cannot afford to pay more. Over the long term (and taking into account several studies that have tracked this) property tends to track wages.
I'd have a concern about this scheme in that it involves taking on a lot of debt, and this level of leverage could work against the investor if the market sours.
Nathan's recent purchase in Willmott strikes me as falling into that category. The property suffered from vandalism, and is in what sounds like a rough neighbourhood.
I can't see a house that's on the market at $220K, and sells for $200K to $210K actually being worth $260K with a fresh lick of paint, as the B Invested example shows. Because if it was, why's the owner taking such a loss.
Still, if Nathan can pull this off on a regular basis then good luck to him.
My second issue is that I don't see house prices and rents rising ahead of income over the long term. If wages are rising at 3% to 4% and accommodation at twice this, then there will come a point when people simply cannot afford to pay more. Over the long term (and taking into account several studies that have tracked this) property tends to track wages.
I'd have a concern about this scheme in that it involves taking on a lot of debt, and this level of leverage could work against the investor if the market sours.
I was talking to an auctioneer about this recently (this is in a non-auction outer Melbourne suburb - regional areas would likely be similar).
The property being discussed attracted only a slightly higher than usual yield. However it sold at auction for exactly the same price as a nearby concrete ex-commission house an hour prior, despite it (i). being on a much larger (subdividable) block, (ii) the house being 50% bigger, newer and brick and (iii) it being in a better street with more owner occupiers. So it was obviously a fairly good buy (though not in the same league as the higher yielding places in similar suburbs others have bought).
He asked me what determines the sale price of a property.
I said it was demand / competition from buyers.
He replied it was the vendor's circumstances.
Eg if the owner really had to sell (maybe financial difficulties) he'd likely accept an unconditional but low auction price, especially if it's sufficient to cover his mortgage (plus a bit more) so he can walk away. No house, no debts and hopefully a bit of money to start afresh.
I only thought of this later, but no matter how low the vendor's reserve if there's multiple bidders then competition from buyers would be the determinant - not the vendor's circumstances. So the auctioneer is only partly right. But I think he'd be more correct if he said 'reserve price', with the rest up to buyers competition.
So it looks as if maximum buying value can be found by:
1. Buying at auctions in non-auction areas (eg outer first homebuyer or regional areas)
2. Buying in less popular (but still well-served) areas to lessen competition
3. If there is significant bidding competition (ie more than a couple of bids at low rises), drop out and let the other person have it
4. Repeat until you find something
As for the question about owners taking a loss (ie not doing simple things to add value like tidying and painting - though a $40k gain for simple painting sounds a bit high) I think the answer is not all have the luxury of being as calcuating as we are - especially if there are other life circumstances (eg family issues, health, job change) that take more priority than maximising money. Investors might consider that irrational, but it's their life and we might behave the same if we were in their shoes.
The other thing I wondered about Nathan's Shalvey example is how high the rents are. Here in Melbourne a similar house in a cheap area would rent not for $320pw but nearer to $250-260pw. I'm assuming that bottom end wages are similar (as are Centrelink payments) so I'm curious how Sydney's poorer areas can sustain high rents - especially given that Melbourne's population growth and demand is currently higher (or are there severe supply issues in Sydney?).
It is true, the house was vandalised, however you need to consider that the housing department let them sit for over 12 months empty before they decide to sell them. They then go to auction, and from there, if they are passed in, some of them will sit there a bit longer still. This home had the back fence removed and it backs onto a laneway. Easy discreet access for anyone wishing to do damage to it, and yet, it only had some minor damage. Not too bad!
That sounds good in theory, but what actually happens is that you get a progression to the outter suburbs. They might not be able to afford to live in Parramatta, but they can out west.
You are both right.
In areas where auctions are not the normal way of selling, many people are wary of them, so you don't get a lot of competition. Unless the market is red hot and people think they are going to get a bargain. That's when I sit back and watch the side-show.
Then, it is a case of biding your time. At some stage you will get a vendor that HAS to sell AND there is no competition. Voila! A good price.
I think Nathan will agree, that none of this is easy. It can take a lot of research.
If all it needs is a bit of paint, yard cleared, minor maintenance,we know as investors it doesn't really cost that much. Someone who justs wants the house sold,is working away, marital breakdown..they just want it gone.
If all it needs is a bit of paint, yard cleared, minor maintenance,we know as investors it doesn't really cost that much. Someone who justs wants the house sold,is working away, marital breakdown..they just want it gone.
Spot on! There can be plenty of reasons why people do things which we consider "irrational". You see people selling on "Selling Houses Australia" all the time who don't tidy up their house, even when the agent tells them that their mess is detracting $100K from the sale price. Or who simply won't remove their horribly old-fashioned furniture, because "I like it and it's my home and I have to live here", or because they "don't have anywhere to store their own furniture", and when the words "storage shed" are mentioned, baulk at the few hundred it would cost.
It astonishes me how many reasons people will throw away heaps of potential income by an unwillingness to do a bit of work, or put up with a bit of inconvenience.Somebody will sell a $600K house for $500K rather than tidy up and bring in new furniture, yet if you asked them to pay $100K for the privilege of having their own furniture, rather than hire furniture, for 3 months, they'd look at you as though you were insane - of course they won't pay $100K, they'll live with the hire furniture!
But lost potential income is valued much lower than increased potential expense; it's an interesting phenomenon. It's been studied extensively in behavioural economics, such as in Dan Ariely's example of how to motivate people to take their medicine. You offer people $1 per day to take their medicine, and the number of people taking it is virtually unchanged. But if you give them $30 at the start of the month, and charge a $1 penalty every day they miss their dose, compliance increases substantially. He discusses this and many other phenomena in his interesting talk The Upside of Irrationality. People don't treat $1=$1, and if you're clever, you can profit from people's perceptions of the different values of various $.
skater, i completely agree with you!
however, this is just my personal view but I almost see it like as buying in the US.
if you cant see it, or havent been there, or cant regularlaly access it, this could potentially be a recipe for disaster, even at the buying process, you would have to rely on photos and BS'ing agents,
its like buying a 2nd hand car unseen.........thats my take on it
All very good points everyone.
As investors, it is like sports people, or business people, or movie stars or anyone to get the best results you need to put in effort and energy to make it happen.
Tiger woods doesnt just go down to the golf range once a month to chip balls, I bet he would have had crazy times where he would be up @ 3am chipping balls and getting his swing down pattern. For us as investors if we want to maximise our results we must do things such as research and know what is good value. I dont believe it is a hard way to make money, it is easy as, but thats because I pick out markets, research them and know what is and isnt of value. I dont know everything, I dont kow everymarket but I do know if I were in QLD, VIC, WA, SA, NT, TAS, ACT, I would find some markets closer to me to generate the same results. The good thing about proeprty is you can build it around your lifestyle. I remember I had goals of age 25 driving around australia randomly going places. I did this property investing also, I stay at rendom places, meet random people, and buy random houses it isnt my main investing philosiphy but yet I have fun doing it and making money also
Nath.
As investors, it is like sports people, or business people, or movie stars or anyone to get the best results you need to put in effort and energy to make it happen.
Tiger woods doesnt just go down to the golf range once a month to chip balls, I bet he would have had crazy times where he would be up @ 3am chipping balls and getting his swing down pattern. For us as investors if we want to maximise our results we must do things such as research and know what is good value. I dont believe it is a hard way to make money, it is easy as, but thats because I pick out markets, research them and know what is and isnt of value. I dont know everything, I dont kow everymarket but I do know if I were in QLD, VIC, WA, SA, NT, TAS, ACT, I would find some markets closer to me to generate the same results. The good thing about proeprty is you can build it around your lifestyle. I remember I had goals of age 25 driving around australia randomly going places. I did this property investing also, I stay at rendom places, meet random people, and buy random houses it isnt my main investing philosiphy but yet I have fun doing it and making money also
Nath.
nathan, just a quick question
with the properties that require a simple reno eg paint, carpet, taps, knobs etc. etc.
do you buy the property, wait to settle and then line up the tradies to do it all pronto, or do you rent it out for a while, as I would say that it would be hard to do it once tenants have moved in and also if its vacant, $200 per week down the drain!
with the properties that require a simple reno eg paint, carpet, taps, knobs etc. etc.
do you buy the property, wait to settle and then line up the tradies to do it all pronto, or do you rent it out for a while, as I would say that it would be hard to do it once tenants have moved in and also if its vacant, $200 per week down the drain!
I was looking at a property in docklands in the past few weeks, its been advertised at 1.275 million, apparently a bank repossesion, a few weeks later, it dropped down to 1.1 mill, took a look at it, was very nice,
found out that it got sold for $915k! so someone got themself a bargain
and one level below that, with a 10% smaller space, with slightly worse views, apparently sold a few days later for $980k!
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