Investing in Real Estate on a Budget

From: Aaron Dwyer


Hi all

I'm trying to track down a fantastic book by Alan Falkson published by Elephas. Title "Investing in Real Estate on a Budget".

I highly recommend it to all.

Does any one know where I can find it.

My copy that I use as my bible has seen better days. I need a new one.

Thanks
--
Aaron Dwyer
Freestyler Novice
~ You don't steal in slow motion
 
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Reply: 1
From: Alan Hill


Aaron,

I have a copy and I know what you mean.

May not have been on the Best Sellers List but it does have some interesting little ideas in it........

I believe the original 'distributors' were:

The Firs
PO Box 209
Scarborough
Western Australia

Tel: (09) 370 1461

Try contacting them......who knows, maybe he's doing an update?


:)
 
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Reply: 1.1
From: Michael Yardney


I also have a copy of the book on my shelf.
It published some innovative ideas in its time. Mainly buy renovate and sell strategies that were adopted from Mark Haroldsen's American book "The Courage to be Rich" Now that's a real classic all budding investors should read!

You will have difficulty finding copies of the book you are looking for because Alan Faulkston and his publishing company FIRS went bankrupt quite a few years ago. Interesting for a buy and sell real estate expert!!.
Anyway, many of the concepts were rather simplistic and won't work today because of the higher stamp duty and tax rates.
Does any one else have any other classics they would suggest?
Michael Yardney
Metropole Properties
 
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Reply: 1.1.1
From: Aaron Dwyer


Bankrupt! Ouch!

From the content of the book and his previous business knowledge that he mentions throughout the book I would never have imagined that to happen.

At least he'd found his winning formula that he could use to build himself up again.

The book might be 12 years old now but sifting through the chaff there are still some great concepts the novice property investor can take on board.

Ciao
--
Aaron Dwyer
Freestyler Novice
~ To know and not to do, is really not to know at all.
 
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Reply: 1.1.1.1
From: Michael Yardney


Aaron
It should not surprise you that Alan Faulkston went bankrupt.
Many newer investors, who have not held property through a downturn, and one comes every 7 to 10 years, do not realise that some /many property investors and speculators go broke.
This is a lesson that the new "gurus"don't teach.
In the early 90's it tended to happen to investors who negatively geared and counted on continuing capital growth, which did not occur for a few years.
Others lost money in property development because they didn't know what they didn't know and lost their pants.
There are some very famous names and one or 2 of the current gurus who went broke. I won't name them because it doesn't really matte,most have learned the lesson of the need for strong cashflow.
Most investors who held property in the early 90's saw the capital value of their properties fall by up to 40%. I know I did and if I did not have strong cashflows, I could easily have been one of the statistics.
Michael Yardney
Metropole Properties
 
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Reply: 1.1.1.1.1
From: KJL .


Michael

If the question doesn't seem too obvious, can you elaborate a bit on 'strong cashflows' and how you can protect yourself?

KJL
 
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Sim

Administrator
Reply: 1.1.1.1.1.1
From: Sim' Hampel


On 4/11/02 3:57:00 PM, KJ L wrote:
>
>If the question doesn't seem
>too obvious, can you elaborate
>a bit on 'strong cashflows'
>and how you can protect
>yourself?

Try this for a strategy:

1. Spend less than you earn (includes having your property portfolio make you money not lose you money).
2. Manage your debt levels so that a sudden increase in interest rates does not cost you more than you can afford to pay.

Do the sums. If interest rates hit 10%, can you afford to keep your entire portfolio ? Can you guarantee that for the life of your loan that interest rates will never go above 10% ?

 
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Reply: 1.1.1.1.1.1.1
From: Duncan M


Sim,

Interesting thoughts..

I did a quick spreadsheet, taking my portfolio's current rental income and
inflating it each year by 3.5%, the bottom line was, high interest rates in
a few years time dont scare me :)

The interesting part of the exercise was playing with a projection of the
rates over the next 10 yrs, even with a couple of years of very high rates
(at 17%!) my returns aren't hugely affected over a 10yr period, provided I
can capitalize some interest as necessary.. Great little exercise to do, add
in a few columns for new acquisitions to maintain an LVR of 80% to really
get yourself fired up..

I guess my thoughts are, by hook or by crook, just hang on to the properties
and grab as many as I can along the way :)


Regards

Duncan
 
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Reply: 1.1.1.1.1.1.2
From: KJL .


Thanks Sim. Apart from PPOR my loans are fixed, so the answer to 'can I keep the entire portfolio' is yes. So even if interest rates hit about 14% (which is when my PPOR starts hurting), then rents still cover mortgages.

As for the residual life of the loans, is there any way anyone can guarantee what the highest interest rates will be? Is there any way that can ever be more than an educated gamble?

My question was aimed at whether, as M.Y.'s been around for a while, there might be other factors he knows of for those of us that 'don't know what we don't know' - eg does a downturn mean you can't get tenants? or something along those lines.

KJL
 
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Reply: 1.1.1.1.1.1.2.1
From: Rolf Schaefer


Wow, that must one hell of an IP. If I do my figures right it looks as follows:

Purchase price (for example) $100K, LVR 95%, Interest 14%, yearly cost for loan $13K (I/O) to cover this you need at least a rent of $255 pw, this does not take into consideration any other costs (LMI, landlord insurances, maintenance, management, rates, etc) or benefits (depreciation, negative gearing, etc) that come along with owning an IP.
Can someone more experienced pls verify my figures and correct me if I am wrong. Also pls let me know where to find like this.
Thanks
Rolf
 
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Sim

Administrator
Reply: 1.1.1.1.1.1.1.1
From: Sim' Hampel


On 4/11/02 5:03:29 PM, Duncan M wrote:
>Sim,
>
>Interesting thoughts..
>
>I did a quick spreadsheet,
>taking my portfolio's current
>rental income and
>inflating it each year by
>3.5%, the bottom line was,
>high interest rates in
>a few years time dont scare me
>:)

I'm more interested in WHY they don't scare you Dunc ? What is it about your numbers (or your strategies for dealing with the high rates) that let you feel confident that you can cover it.

I don't think many people truely understand the exposure they have to interest rates... basic lack of understanding of the nature of finance and such. I think if some people did these kinds of sums you are doing Dunc, they would be rather scared at the results.

>The interesting part of the
>exercise was playing with a
>projection of the
>rates over the next 10 yrs,
>even with a couple of years of
>very high rates
>(at 17%!) my returns aren't
>hugely affected over a 10yr
>period, provided I
>can capitalize some interest
>as necessary..

Great strategy... so you have a mechanism in place now to be able to deal with this ? Or a plan to easily put such a mechanism in place ? What is your actual safety mechanism - how will it work ? WILL it work at the time you need it ? How confident are you you can survive a 5 year period of 15%+ rates ? (very confident by the sounds of it) ?

This is great Dunc... it's obvious you have spent some time thinking about how you will deal with such situations... so I would suggest that you more than many people would have a fighting chance of surviving it, even with the high levels of IP debt you carry.

>Great little
>exercise to do, add
>in a few columns for new
>acquisitions to maintain an
>LVR of 80% to really
>get yourself fired up..

Having the confidence to be able to deal with these adverse conditions (as opposed to simply sticking your head in the sand and hoping for the best like most people) can really help drive you forward !

>I guess my thoughts are, by
>hook or by crook, just hang on
>to the properties
>and grab as many as I can
>along the way :)

So what are the hooks and crooks that will let you hang on to the properties ?

 
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Sim

Administrator
Reply: 1.1.1.1.1.1.2.2
From: Sim' Hampel


On 4/11/02 5:06:00 PM, KJ L wrote:
>Thanks Sim. Apart from PPOR my
>loans are fixed, so the answer
>to 'can I keep the entire
>portfolio' is yes. So even if
>interest rates hit about 14%
>(which is when my PPOR starts
>hurting), then rents still
>cover mortgages.

Umm... how long is the loan fixed for ? 5 years from now ? So over the next 5 years... when rates have (hypothetically) gone steadily up, and then your loans all revert to variable rate at 14% or more, will you be able to hold them then ?

>As for the residual life of
>the loans, is there any way
>anyone can guarantee what the
>highest interest rates will
>be? Is there any way that can
>ever be more than an educated
>gamble?

Back in the mid 80s, my parents managed to score themselves a "capped" rate loan... the most it would ever go to was 13% (I think), but if rates dropped below that, their rate dropped too. This was great for them during the period when rates were in the upper teens. And when rates came back down they got the advantages where many people were stuck on fixed rates that were now looking very expensive. I don't remember seeing any loan product like this around in recent history. Pity.

I don't think you can guarantee your maximum exposure without something like a 25 year fixed loan. Good luck finding one of them !

There is one way I guess... don't carry any debt ! I wouldn't think this strategy would be widely accepted though ;-)

 
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Reply: 1.1.1.1.1.1.2.2.1
From: Les .



G'day all,

And "Thank you" to all contributors for fuelling this discussion - I'm sure the opinions expressed will provide much of interest to the forum.

Here are some thoughts re points already made (and I certainly welcome any dissent..)

Point 1:
First off, I believe we need to "cap" the likely expected Interest rate growth over 5 years. My money says 5% is this maximum. And more likely to be around 4%. In 1984 - 89, they jumped from 11.5% to 17%, but, in 1983, they were already at 12% - and in 1982 they were 13% - so over SEVEN years, they only rose 3.5%.

Also, with Interest Rates so low, the RBA doesn't have to hike rates as highly to affect the economy. (Note: at 6%, a 1% rise costs 16.66% more on your mortgage, but if rates are already at 10%, a 1% rise will cost you only 10% more). I know, I know, you do pay more dollars for a 1% rise at 10%, even though it is only a 10% increase on what you are already paying.... It gets confusing - should I have left this out???

If we can agree that 5% is the MAXIMUM rate rise over 5 years, then this caps Rates at 11.5% in 2007.

Point 2:
The equity you hold will significantly affect your ability to "hold on" - if you've bought well, thus keeping your equity higher, this leaves you with a much better chance of "renegotiating" your situation. e.g. Duncan's suggestion of capitalising Interest, or use of Cashbonds to harvest equity and provide cashflow.

The point is to "hold on" - it doesn't have to be forever.

Point 3:
I've heard that as Interest Rates rise, so too do values, and rent - thus more income and equity. Debatable??? Tell me what you think on this.

Point 4:
Your portfolio "mix" will also have a marked effect - if you hold units where everyone else holds units (refer Sydney since New Year...) this will negatively affect your cashflow, compounding the Interest Rate rises.

Point 5:
Your Gearing - lenders tend to push (bully?) people toward a maximum LVR of 75% - 80%. Does this kind of level ensure (?) "safety" if Rates rose 5% in 5 years? Or is Jan's (longterm) figure of 50% LVR the only safe haven?

Especially when starting out, we probably tend to gear highly (too highly???) - this obviously could be dangerous in a rising Interest Rate environment. Maybe the Banks are "doing us a favour" by trying to limit the loans to us (????) - ??? - Nah !!!!
Well, maybe indirectly ...... By limiting THEIR risk, they also tend to cap OUR risk - don't they??


Again, great post, people - gets one thinking.... Let's have some more debate on this one - the investor we "save" could be ourself.

Regards,

Les


- "Eschew Obfuscation" - ;^)
 
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Reply: 1.1.1.1.1.1.2.2.1.1
From: Tibor Bode


Hi everyone,

Great contributions on this subject. I guess depending on your "age" (how long you are investing in IPS) the strategy will vary. I am is one of those who is maxed out (bought 5 IPs in 10 months) but might have found the right broker - thanks to Rolf - but using the startegy to borrow in the current environment to the tilt and buy cash flow positive (including ALL expenses) properties fix interest rate only for 2 to 3 years (Residex does not expect to have a major increase until 2008 and the world economy does not seem to warrant it is the short term either) and go on the basis that if a portfolio increases just by 5% a year on 1 million is 50K equity, on 2 mill is 100K equity increase at least PER ANNUM!! Also remembering back to the eighties (yes I have paid 19% interest as well) property values and rent increased in line of inflation (frequently exceeding).
Also another point regarding to the risk factor. The boomers are going into retirement modestarting in another 3 to 4 years time. Governments around the world do not have enough money to house, feed and medicate them once the limited super runs out. I guess, this has also will effect the equation, that is how much the government can do. Can you imagine suddenly people forced to sell their homes in a vastly declining market who can not be part of the work force any more?? I think while this is possible, highly improbable. At the same time I'd like to state, that once I have the "base", will ensure that several cash flow positive IPs will be P&I to reduce the debt and minimise the potential - not necessarily real - risk.
Sorry about going on about it, but reading so many excellent comment on this forum, I felt to try to contribute to it.

Tibor
 
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Reply: 1.1.1.1.1.1.1.1.1
From: Duncan M


Sim, a few more figures:

At around 9%, we're still break even.
At around 17% we're way out of pocket, $50-$60K pa.

But, our growth, even at a modest percentage outstrips the potential loss.
If I had to lose $120K equity over a 2 year period I would be very
dissappointed but not really upset as I know I'm going to have the
properties when the Federal Government releases the Second Home Owners Grant
and rates fall back to 6-8% and then I'll really benefit.


>I'm more interested in WHY they don't scare you Dunc ? What is it about
your numbers (or your strategies for dealing with the high rates) that let
you feel >confident that you can cover it.

1. High disposable income,
2. A wife who doesnt currently work, but could get a job tomorrow if we
needed her to
3. Family started, no more kids on the way (I can feel the snip coming
already, gulp!)
4. Cash reserves totalling around 3-4 months of expenses
5. Multiple career options if IT went REALLY bad :)
6. An LVR thats never over 80%.
7. Loads of serviceability
8. Income Protection Insurance
9. Critical Illness Insurance
10. Emergency LOC set aside.


>>can capitalize some interest
>>as necessary..

>Great strategy... so you have a mechanism in place now to be able to deal
with this ?
>Or a plan to easily put such a mechanism in place ? What is your actual

I have a LOC set aside (Pt 10 above) that could cover around 10-12months of
interest payments.. It's a waste of equity, but I sleep better at night.
Then I'd scrape Credit Cards or whatever credit I could lay my hands on to
both hold onto and acquire more property.


>So what are the hooks and crooks that will let you hang on to the
properties ?

A lot of the above. And a few more ideas if we had sustained 17%+ rates:

1. Turn existing portfolio into a Lease/Option portfolio to increase returns
(diffcult in a high rate market)
2. Profit share with tenants to guarantee long leases at a better than
average rent
3. Work two jobs :)
4. Write more software.
5. Move out of our PPOR into one of our units and rent out our PPOR
6. Become a more active investor, trade etc..

Rates are the highest risk, thats why the Brad Sugars idea of a Wealth Wheel
is so attractive not only for serviceability but for rate risk management,
4-5 positive geared properties and 1 potential growth star.

The risk is the price of success, those of who are prepared to risk
ourselves to a rate hike, but with a plan and a recognition that the risk is
real (but can be managed) are the ones who are going to own the most
property when the next sustained period of great growth begins (or continues
:))

In Big Kev's immortal words "I'm Excited!".. Imagine what will happen if we
DONT see rates climb and we have the next 10yrs at <10% and have at least
one more great growth period??



Long Live Excel...



Duncan.





-----Original Message-----
From: propertyforum Listmanager
[mailto:listmanager@bne003w.webcentral.com.au]
Sent: None
Subject: RE: Investing in Real Estate on a Budget


From: "Sim' Hampel" <sim@hampel.com.au>

On 4/11/02 5:03:29 PM, Duncan M wrote:
>Sim,
>
>Interesting thoughts..
>
>I did a quick spreadsheet,
>taking my portfolio's current
>rental income and
>inflating it each year by
>3.5%, the bottom line was,
>high interest rates in
>a few years time dont scare me
>:)

I'm more interested in WHY they don't scare you Dunc ? What is it about your
numbers (or your strategies for dealing with the high rates) that let you
feel confident that you can cover it.

I don't think many people truely understand the exposure they have to
interest rates... basic lack of understanding of the nature of finance and
such. I think if some people did these kinds of sums you are doing Dunc,
they would be rather scared at the results.

>The interesting part of the
>exercise was playing with a
>projection of the
>rates over the next 10 yrs,
>even with a couple of years of
>very high rates
>(at 17%!) my returns aren't
>hugely affected over a 10yr
>period, provided I
>can capitalize some interest
>as necessary..

Great strategy... so you have a mechanism in place now to be able to deal
with this ? Or a plan to easily put such a mechanism in place ? What is your
actual safety mechanism - how will it work ? WILL it work at the time you
need it ? How confident are you you can survive a 5 year period of 15%+
rates ? (very confident by the sounds of it) ?

This is great Dunc... it's obvious you have spent some time thinking about
how you will deal with such situations... so I would suggest that you more
than many people would have a fighting chance of surviving it, even with the
high levels of IP debt you carry.

>Great little
>exercise to do, add
>in a few columns for new
>acquisitions to maintain an
>LVR of 80% to really
>get yourself fired up..

Having the confidence to be able to deal with these adverse conditions (as
opposed to simply sticking your head in the sand and hoping for the best
like most people) can really help drive you forward !

>I guess my thoughts are, by
>hook or by crook, just hang on
>to the properties
>and grab as many as I can
>along the way :)

So what are the hooks and crooks that will let you hang on to the properties
?




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Reply: 1.1.1.1.1.1.2.2.1.1.1
From: The Wife


I think the leveraging is fine, if its all balanced by paying down some debt on selective properties.

TW
 
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Reply: 1.1.1.1.1.1.2.2.1.1.1.1
From: Duncan M


> I think the leveraging is fine, if its all balanced by paying down some
debt on selective properties.

TW, It seems to me my paltry ability to reduce IP debt is next to worthless,
should I be concerned that I have no focus on reducing IP debt at all?

How do you determine the 'selective properties' and is the opportunity cost
of letting equity lie fallow more than offset by the security you feel it
brings you?

Regards,

Duncan.


-----Original Message-----
From: propertyforum Listmanager
[mailto:listmanager@bne003w.webcentral.com.au]
Sent: None
Subject: Investing in Real Estate on a Budget


From: "The Wife" <the_wife@freestyler.net.au>

I think the leveraging is fine, if its all balanced by paying down some
debt on selective properties.

TW



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Reply: 1.1.1.1.1.1.2.2.1.1.1.1.1
From: Marina .


Hi,

My question is should we even be talking and concerning ourselves with 17% interest rates.

Les and Mike have stated and explained why they will not go over 10%.

Other people are preparing for a 17% interest rate somewhere down the track.

What do other people think.?

Is it possible for a 17% interest rate to occur.?

Marina.
 
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Reply: 1.1.1.1.1.1.2.2.1.1.1.1.1.1
From: Duncan M


>My question is should we even be talking and concerning ourselves with 17%
interest rates.

It's a risk. Risks MUST be actively sought out and strategies identified to
mitigate the risk.

>Les and Mike have stated and explained why they will not go over 10%.

So you trust their foresight without question?

> Is it possible for a 17% interest rate to occur.?

Has it happened in the past?

Duncan.
 
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Reply: 1.1.1.1.1.1.2.2.1.1.2
From: KJL .


Sim - I acknowledge that there comes a point in interest rate rises when, unless you have no debt, you are unable to pay. I was aiming to elicit any strategies which might manage the risk we expose ourselves to by gearing - especially in the early years of a portfolio when gearing can be quite high.

E.g. do some of the more experienced investors who've been through cycles have a suggested safe level, or, in times of rising rates do rents also rise to offset the increased burden, or any other methods or suggestions. Fixing is, as you've identified, of use for a limited time, being until the fixed rate period lapses.

Personally, I don't want to be hugely rich or hold myself out as a guru and get pictured with my Lamborghini ('though it would be nice!) I just realise that super won't cut it, but at the same time I don't want to be talked of as one of those who "lost it all in the property investment crash of 2007" or whenever (I can just imagine Eric's posts as I write....)

I agree with Les and think this thread has got some useful material, but it's hidden in a post made a few days ago within a thread whose name doesn't do it justice (no offence intended, Aaron). Perhaps we should start it as a new topic and get greater exposure to the risk management issue, and hopefully more suggestions?

KJL
 
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