Investing in Townhouses?

[Nattl3s]

I've seen quite a bit of chat about never buying townhouses that have swimming pools or gyms because bc fees are high.

Is it fair to say that THs with high BC fees also tend to cost significantly less thus resulting in a 'zero sum game' when total major expenses (mortgage+bc) are added up and compared to other THs ?

I don't think they would cost less. Most people don't think about BC fees when buying.
Need to add remote control gates to list of things to avoid if possible. IP #1 has a set of gates that break down every year and costs $$$$ to fix.
Cheer, nat

 

[Rixter]

Is it fair to say that THs with high BC fees also tend to cost significantly less thus resulting in a 'zero sum game' when total major expenses (mortgage+bc) are added up and compared to other THs ?

Definitely not for us..... we have purchased quite a few since 2000 all over Australia and they've doubled & tripled both in value & rental yield in that time.

 

[Rixter]

IP #1 has a set of gates that break down every year and costs $$$$ to fix.
Cheer, nat

If they are breaking down every year one needs to ask why? inferior cheap product and/or poor management is my guess. We have gates in some of ours, apart from routine maintenance same as the rest of complex, no repairs at all.

But as with all things though even the best quality items have life expectancy. Maybe your gates have reached that point and a patch/band-aide is a reason behind repetitive repairs? If so, this is definitely a poor management issue.

 

[stumpie]

If they are breaking down every year one needs to ask why? inferior cheap product and/or poor management is my guess. We have gates in some of ours, apart from routine maintenance same as the rest of complex, no repairs at all.

But as with all things though even the best quality items have life expectancy. Maybe your gates have reached that point and a patch/band-aide is a reason behind repetitive repairs? If so, this is definitely a poor management issue.

hi Rick

Townhouses in Qld are fond of having swimming pools and onsite managers do you buy into these complexes or have you stayed away from these products?

 

[Rixter]

hi Rick

Townhouses in Qld are fond of having swimming pools and onsite managers do you buy into these complexes or have you stayed away from these products?

Yes, we have some townhouses/villas in those type complexes... I think it's a fantastic idea have a PM living onsite 24/7 to keep an eye on whats going on. Far superior to an off site PM.

 

[pash81]

Hi,

Just wondering, is it a good idea to buy a fully renovated unit in a old building?

Any recommendations about the area for buying a unit/townhouse/house northside of brisbane? Budget around 400k

Thanks,

 

[Rixter]

Hi,

Just wondering, is it a good idea to buy a fully renovated unit in a old building?

Any recommendations about the area for buying a unit/townhouse/house northside of brisbane? Budget around 400k

Thanks,

Hi Pash, welcome to SS.

What and where to buy is dependent upon your chosen investment strategy.

You see property is merely the vehicle. Your strategy is how you intend driving that vehicle.

Unfortunately the mistake I see newbies and sometimes not so newbies is that they are property focused instead of strategy focused which is like putting the cart before the horse.

Property investing is not about property itself, rather about your strategy and the way you intend to use that chosen property to get to where you are wanting to go. No good buying a small shopping car if you intend driving interstate on a family holiday.

What strategy/s are best for you is determined by where you are wanting to go, the time frame you want to get there in and how hands on along the way you want to be - all based around your personal risk profile.

I hope this provides some food for thought.

What is your chosen property investment strategy?

 

[pash81]

Thanks Rixter. As I am quite new to PI, i can't tell you much about my investment strategy (as i myself don't know much yet). But one thing I can tell is that I am planning to hold on my properties long term, like more than 10 years, unless something unforeseen happens. Me and my wife can afford to buy one IP each year but the problem is what and where to buy? Units, town houses and apartments looks quite tempting if you look at the rental yield but not so sure about capital gains.

 

[pash81]

When people look at the rental yield on the town houses then do you take into account the body corporate fees? For example if a town house is selling for $350k with a rental return of $350 per week and the BC fees are $50 per week then what will be the gross rental yield?

 

[stumpie]

When people look at the rental yield on the town houses then do you take into account the body corporate fees? For example if a town house is selling for $350k with a rental return of $350 per week and the BC fees are $50 per week then what will be the gross rental yield?

pash

the gross rental returns will remain the same i.e. 350x52 divide by the purchase cost however the net yield will be much lower when you take into account the BC fees e.g. net yield = gross rent - rates - land tax - PM fees - BC fees - insurances etc then divide by purchase cost

 

[Dan_p]

Don't forget the quarterly strata levy doubling and tripling over that 10 year period too.

Big difference in money terms between strata tripling and rent tripling, I think you still come out on top right?

Strata at one of mine is $2000 per year and rent is $19,760, difference 17,760

Triple both and you get

Strata $6000, rent $59,280, difference $53,280

Thats a $35,000 win

 

[Dan_p]

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.

Hi Rixter,

I am in the early stages of doing something similar to you however I am finding cashflow a bit of a problem.

You say buy one property every year for 10 years.

Can I ask how you did this? Did you have a mortgage on your ppor or are we talking about you have paid that off?

I guess my question makes sense if I give you my scenario and maybe you can offer me some advise on how to move forward.

I bought two units and both have gone up more than $100k in five years, but that hasn't made them any easier to hold as rents have been going up, but only slowly, they are both close to neutral after 5-7 years. I have bought a townhouse 18 months ago and that too has gone up in value in that short time, but rent hasn't and is unlikely to go up for a while, now this property costs me about $4k to $5k after a tax return.

I have also built a home which is mortgaged and that sets us back a bit. If not for the ppor than I reckon we could maybe hold another 3-4 townhouses at this rate, but not much more.

So I guess my question is are you using your personal income to fund the first 10 properties to hold them and find the deposit each year?

 

[Rixter]

Hi Rixter,

I am in the early stages of doing something similar to you however I am finding cashflow a bit of a problem.

You say buy one property every year for 10 years.

Can I ask how you did this? Did you have a mortgage on your ppor or are we talking about you have paid that off?

I guess my question makes sense if I give you my scenario and maybe you can offer me some advise on how to move forward.

I bought two units and both have gone up more than $100k in five years, but that hasn't made them any easier to hold as rents have been going up, but only slowly, they are both close to neutral after 5-7 years. I have bought a townhouse 18 months ago and that too has gone up in value in that short time, but rent hasn't and is unlikely to go up for a while, now this property costs me about $4k to $5k after a tax return.

I have also built a home which is mortgaged and that sets us back a bit. If not for the ppor than I reckon we could maybe hold another 3-4 townhouses at this rate, but not much more.

So I guess my question is are you using your personal income to fund the first 10 properties to hold them and find the deposit each year?

Hi Dan and Nan,

In the beginning we used to cross collateralize our first few IP's against the PPOR, borrowing 106% of the IP purchase prices.

This 106% being 100% purchase price, 5% purchasing legals & costs, and 1% surplus drawings which was my cash flow piggy bank should I be taking vacant possession at settlement and/or any unexpected repairs/maintenace.

From memory, when we started out actively back in 2000, we had approx $40k ish equity in our PPOR at the time.

I targeted areas with the view of them providing me very good short to mid term capital growth in order to leverage against and build a portfolio asap.

I looked to where the Govt, Commercial/Retail, and private sectors where injecting money. Areas with govt redevelopment authorities having been formed to over see massive regentrification. This beautifies and up lifts an area and becomes attractive so people start moving in. Once you see those sectors coming into an area and spending BIG Dollars you can fairly well be assured of growth.

These big multi-national companies spend $millions on market research prior to entering an area. If those researched didnt indicate strong enough demand for their products/services they would not be moving into the area either,

After a couple years when those IP's grew in value so that the IP loans had become <80% LVR, I approached the bank and they released the extra security I used at the time of purchase to secure the loan.

The loans then became uncross collateralized and stand alone self secured. ie 1 loan secured by 1 IP.

Since then we've used LOC's secured against our upgraded PPOR & existing IP's for the 20% IP deposits plus costs and borrow the remaining 80% secured against the new IP purchases themselves.

From a DSR perspective, we used payg income, rental income, taxman savings & Cash bonds to increase serviceability. Also back when they were around, we did loans that were pure equity lends (aka No Doc) and as such didn't have to provide any income, assets or liabilities to the lenders.

Hope this helps to answers your query.

 

[pash81]

Rixter, may i ask that how do you borrow 106% of the purchase price? Dont the banks value the property and give you only maximum 95% loan?

Also another question, how much do you negotiate while buying the properties? I mean when you put an offer do you have any rule of thumb as to how much less it is than the asking price? recently I have actively started looking at IPs but after looking at real estate for few days and reading online forums my head is spinning as to what and where to buy.

Thanks in advance for your replies.

 

[Dan_p]

Hi Dan and Nan,

In the beginning we used to cross collateralize our first few IP's against the PPOR, borrowing 106% of the IP purchase prices.

This 106% being 100% purchase price, 5% purchasing legals & costs, and 1% surplus drawings which was my cash flow piggy bank should I be taking vacant possession at settlement and/or any unexpected repairs/maintenace.

From memory, when we started out actively back in 2000, we had approx $40k ish equity in our PPOR at the time.

I targeted areas with the view of them providing me very good short to mid term capital growth in order to leverage against and build a portfolio asap.

I looked to where the Govt, Commercial/Retail, and private sectors where injecting money. Areas with govt redevelopment authorities having been formed to over see massive regentrification. This beautifies and up lifts an area and becomes attractive so people start moving in. Once you see those sectors coming into an area and spending BIG Dollars you can fairly well be assured of growth.

These big multi-national companies spend $millions on market research prior to entering an area. If those researched didnt indicate strong enough demand for their products/services they would not be moving into the area either,

After a couple years when those IP's grew in value so that the IP loans had become <80% LVR, I approached the bank and they released the extra security I used at the time of purchase to secure the loan.

The loans then became uncross collateralized and stand alone self secured. ie 1 loan secured by 1 IP.

Since then we used a LOC secured against our upgraded PPOR for the 20% IP deposits plus costs and borrow the remaining 80% secured against the new IP purchases themselves.

From a DSR perspective, we used payg income, rental income, taxman savings & Cash bonds to increase serviceability. Also back when they were around, we did loans that were pure equity lends (aka No Doc) and as such didn't have to provide any income, assets or liabilities to the lenders.

Hope this helps to answers your query.

It looks a bit harder to replicate what you have done in my situation, while still having a large mortgage for ppor and lending is a bit tighter.

On a higher income it would be easier to absorb negative cashflow on 5 or so properties and reap the rewards down the track, but this is a lot harder with the home mortgage. Just means it will take a couple of years for each new buy rather than each year.

I gather the properties you are buying are generally cashflow negative at the start? as you are buying quality rather than quantity.

Its great that you share your ideas and experiences.

Can I ask, did you have the vision back when you had your first couple of rentals that you have now? ie when you had ip2 did you realistically believe you would keep buying one a year for 10 years? and then some...

 

[Rixter]

Rixter, may i ask that how do you borrow 106% of the purchase price? Dont the banks value the property and give you only maximum 95% loan?

We borrow 106% of the purchase price with an LVR of 80% max so at to not incur loan mortgage insurance. Because we cross collateralised those first few IP's with our PPOR as long as we didnt exceed 80% of our total property holdings held as security by the bank they allowed us to do it.

Also another question, how much do you negotiate while buying the properties? I mean when you put an offer do you have any rule of thumb as to how much less it is than the asking price?

Obviously one looks to pay as least as possible however if all else fails I'm prepared to pay a fair market price because my strategy is long term hold.

At the end of the day, keeping in mind my big picture, does it really matter if one even does pay 10-15k too much on a property worth 400k(subject to the usual due diligence) if in 10 years time its then valued at 800k- I dont think so. It's well and truly faded into insignificance.

recently I have actively started looking at IPs but after looking at real estate for few days and reading online forums my head is spinning as to what and where to buy.

Thanks in advance for your replies.

See my post above about not having a predetermined investment strategy which defines your purchasing criteria of what & where to buy. Thus your confusion, frustration & paralysis analysis. I believe its the biggest mistake people make.

 

[Rixter]

Can I ask, did you have the vision back when you had your first couple of rentals that you have now? ie when you had ip2 did you realistically believe you would keep buying one a year for 10 years? and then some...

The basic big picture plan remains the same. Just because you plan things in theory doesnt mean they play out to plan in practice. There are unplanned obstacles that pop up along the way that you dont foresee when starting out due to lack of experience, ones unconscious incompetents levels and external circumstances outside of our control.

It's like driving along at night with the headlights on full beam. You can only see what's immediately showing up in those headlight and cant see beyond into the darkness until you travel into it.

Its the same with investment planning. As long as what you see pop up in front of you in the headlights does not stop you from traveling forward to your planned destination you will eventually get there. Sure we may have to slow down or take a minor detour along the way but dont lose focus on why you're there in the first instance.

It hasn't been a steady uninhibited journey for us either. Some years we purchased no properties and other years we've purchased two.

I hope this helps.

 

[Dan_p]

The basic big picture plan remains the same. Just because you plan things in theory doesnt mean they play out to plan in practice. There are unplanned obstacles that pop up along the way that you dont foresee when starting out due to lack of experience, ones unconscious incompetents levels and external circumstances outside of our control.

It's like driving along at night with the headlights on full beam. You can only see what's immediately showing up in those headlight and cant see beyond into the darkness until you travel into it.

Its the same with investment planning. As long as what you see pop up in front of you in the headlights does not stop you from traveling forward to your planned destination you will eventually get there. Sure we may have to slow down or take a minor detour along the way but dont lose focus on why you're there in the first instance.

It hasn't been a steady uninhibited journey for us either. Some years we purchased no properties and other years we've purchased two.

I hope this helps.

Thanks for your responses. We have our plan in place, we are halfway there, 8 is the goal by 2020. We will look at the goal once we reach that benchmark.

 

[fluffy]

It's like driving along at night with the headlights on full beam. You can only see what's immediately showing up in those headlight and cant see beyond into the darkness until you travel into it.

Its the same with investment planning. As long as what you see pop up in front of you in the headlights does not stop you from traveling forward to your planned destination you will eventually get there. Sure we may have to slow down or take a minor detour along the way but dont lose focus on why you're there in the first instance.

Beautiful words !

 

[pash81]

Thanks Rixter.

But the problem is how do you make sure what is the fair value of the properties?

I think buying one IP per year is not that hard from a cash flow perspective if both husband and wife are working.

ATM I can afford $2k per month to spend on IPs so I am desperately looking to buy one.