how would you spend $900k of borrowed money?

[john doe]

Hi all,

My brother in law is planning to buy property in Sydney (where he lives). He can borrow a LOC of $150k based on the equity in his home. His bank has told him they will lend him a further $750k to buy property with (both he and his wife are dentists with good cash flow). Therefore, he has $900k in total of borrowed funds to play with.

His plan is to buy one house in Sydney's inner west up to the value of $900k (ie, the most expensive house in can afford), and to hang on to it long term. It will be negatively geared (yields in Sydney 4% or less)

I was thinking that if it was me I might buy one house in Sydney's inner suburbs with say $550k, and then use the rest to buy a unit, also in Sydney's inner suburbs.

Does anyone else out there have any other ideas? Maybe a few years ago you could have gotten a block of flats in Sydney for ~$900k, but I don't think so anymore.

Cheers

John

 

[Grego]

Why not 2 to 4 units and spread the risk/capital appreciation around a bit. Probably better cash flow as well?

 

[john doe]

Hi Grego,

Yeh, I asked my brother in law that and he reckons that it's land in sydney which is the key to long term capital growth, not units. And I've got to admit, he does have a point.

But I agree with you, it's best to spread around the risk/capital appreciation. Hence, my suggestion to him of one house and one unit.

John

 

[Grego]

I bought ny first ppor in 87 for $86K don't own it anymore (bummer)
It was 2bed unit in Maroubra & one in the block sold the other day for $357K. Not much land content but dam good appreciation all the same.
Also the higher priced properties are more volatile to dips in the housing market, which is probably not a big deal if he is buying it for the long term, but worth considering all the same
Cheers
Greg

 

[agent007]

Hi john doe,

I would like to have the same problem your brother has



I would say tat under the same situation I would buy either 2 duplexes (both halfs) or 2 Town houses (next to each other). These 2 properties would be standing alone (no other town houses or duplexes just they 2 and detached houses around.).

This will give him the advantage of owning the block of land and good cash flow. Also, is the need arises, he could sell 1 half or in the long term future to do a redevelopment of the block... who knows what would be the future but, land would be a scarce comodity for sure.

Good luck,

James.

 

[Sam_H]

John

I think maybe you should try and point out to your brother the risks of not diversifying

What happens if they are w/o a tennant for say 4 weeks?
My calcs say an I/O loan monthly payment would be around $4800 (using 6.5% on $900k)
This is a lot of money to be loosing!

Also at that end of the property market I suggest that 4% yield would be doing v well ?


I don't want to get into a apartment v house argument, but I really think that its a little narrow minded to think that apartments are going to appreciate less quickly than houses.
(dep on location of course!!)

I'd be advising an inner city terrace (surry hills/erskinville..say $500k) and also an apartment ($400k)

Cheers


Sam

 

[Bmok]

Hi John,

Why not suggest to your brother-in-law to do what a lot of other Southerners are doing - go North and buy 3 NEW properties in SE Qld. If he gets the right spot, he'll get good growth which will allow him to springboard into #4, 5 etc.

He will also need to be aware of Land Tax so he should have a couple of different entities for his purchases.

Cheers,
Bmok

 

[Rolf Latham]

Give it to me :O)

An age old argument, diversify OR all eggs in one basket -

The answer has probably more to do with the emotional attitude to money and percpetions of risk than it does with reality of returns or growth.

I know of someone on this forum that made a 600 k purchase returning 15 % rent that was worth 850 k on settlement.

There is no right or wrong, its what every one is comfortable to do. For some its a huge single property in a burb they know well, for others its 25 units in a regional city.

Ta

rolf

 

[john doe]

Hi everyone,

Thanks for the replies. I'm going to print this out and show it to my brother in law for some food for thought. SOme great suggestions.

Cheers

John

 

[Glenn]

Hi John Doe,

Your brother in law is correct in stating that land value increase will be engine room of his property wealth. However, stating that units don't have any land value is a little misleading. Think of it this way:

If you owned a 1 bedroom flat in a group of 10 on 1,000sqm on the main drag at Bondi and a 10 bedroom house on 1,000sqm of land 50 k's west of Cobar which one do you think would have better land value, stronger capital growth and higher rental demand??

As an example...Lets just say that out of a total value of say $200,000 for both, the Bondi flat is 75% land value/25% building value and the Cobar house is 25% land value/75% building value. Then say land values increased 10% across the board. The Bondi flat would then increase to $215,000 but the Cobar house only increases to $205,000.

The replacement cost of the new building will increase at roughly the same pace as inflation, but obviously the value of any building at any point in time will be less in real terms than the day it was built due to deterioration (that's what depreciation benefits are for).

Glenn

 

[Rickardo]

I would personally buy 2-3 properties in good locations. He may make excellent capital growth on the 1 property if he gets it right, but if he buys 2-3 the risks are a lot lower.

If he doesn't pick research and pick that single property very well he runs the risk of not achieving the capital gains he is predicting, and as previously mentioned what happens if he has a vacancy? If he had a few properties a vacancy wouldn't hurt the cash flow as much. This is starting to sound like a diversification preaching session But i truly believe diversifying is such a good way to lower risk without sacrificing too much return.

 

[bbruham]

Here's my two bobs worth.
Spend all the money on one property.
North Curl Curl. Good houses, on large blocks of land and you CAN'T go wrong. Prices are $800- $900k.
I purchased a large house there last fortnight for $710k(very lucky), The place is divided into two, each having three bedrooms, living area etc. No sharing any amenities, both have garages, laundries. Built high on a hill and has only district views(no water). Rent $750 week total.
Most of the blocks can be sub-divided when(if) your ready.
It's not Manly but it's the next best thing.

bbruham.

 

[john doe]

Hi everyone,

thanks for the further replies. Interesting.

John

 

[investor]

Originally posted by Sam_H

I'd be advising an inner city terrace (surry hills/erskinville..say $500k) and also an apartment ($400k)
Sam

I agree however with some good research he may be able to pick up 2 terraces in the Chippendale/newtown/erskinville/darlinghurst/surry hills area or one in the Paddington/Woollahra suburbs.
All good growth areas. Also they should be unrenovated of course, as they are dentists they could easily come up with the extra 30K each to renovate.
All of a sudden within afew weeks they could be owning property to the value of 1.2M-1.4M with a renovation in these suburbs. Parking is important.


Regards

Investor

 

[john doe]

Hi investor,

I actually don't think you could get 2 unrenovated terraces with good parking in those suburbs you listed. I've been looking around those areas myself and terraces are really around the $550k range in all of them. Even unrenovated, you're still looking at high 400s, low 500s.

But I like to be proven wrong by surburbs being cheaper to buy into than I thought in the first place.

John

 

[XBenX]

I dont really keep an eye on these areas - but I also know these suburbs are on investors watch lists - he generally has a freakishly good knowledge of what is going on in these markets.

Did I just say freakishly