Major Dilemma - Please help.

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From: Peter Davidson


I am about to purchase my first investment property in Melbourne outer suburbs, approximately 16km out of the city and is about 30 years old. My dilemma is that should I buy this property(330K). It's currently leased out at $260 p/w. I have a $55K deposit and I earn $75K and my wife earns $50K per year, before tax.

Should I put all my efforts into 1 expensive house or buy a cheaper house further out from the city. Capital growth and rent won't be as good, but it also allows me to save up more to put into another house later on.

I suppose I'm going for Capital growth more than anything, but a good rent would also be nice.

Please help as I'm new to this and I'm not very good with numbers. What is my best path?

Thanks for your advise.
 
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Reply: 1
From: Jerry Maguire


hi peter
ask yourself what you really want...
a property that will double in value from 330K to 660K in 10 yrs so that u can use the extra equity to buy more properties even though the rent might not be as good or
a cheaper property for say 200K and in 10 yrs time it might only be worth 280K and the rent might be good but the growth is u know what i mean...
i'm sure some of the guys here might not agree with me and might have a different way of thinking but i'm a person that go for capital growth and not the other way around
i'm willing to put it in writing as a g'tee for the place that i known that will have capital growth for u if i'm selling u a property but i'm not in this case
the person that is buying in the green square i'm willing to do that if u e-mail me on eelyrrej@optushome.com.au
we can have a chat about it

take your pick
 
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Reply: 2
From: Glenn Mott


Hi Peter,

It may be worth you doing some investigating of your own by reading the last
6 months worth of posts on this forum.

Having $50,000 ready to go is great, especially considering that you will
need around $12,000 for stamp duty and another $3,000 for costs involved in
getting this property into your name, leaving $35,000. With vacancy rising,
a small buffer of say, 10 weeks rent could be kept aside..another $2,500. A
$35,000 deposit on this property means the property will still cost you
around $140 per week in negative cashflow (around $30 per week after tax).
If you are happy to pay this out each week, you will be rewarded with your
capital gain one day....but how long do you expect this to take? 2 years, 4
years, 10 years??? Some people have become very wealthy through buying the
right negatively geared property, and I applaud their skill in identifying
value....I just hope you don't fall out the back door in the process.

I have sent you an email to your hotmail account showing you the cashflows
involved.

Regards

Glenn Mott




-----Original Message-----
From: propertyforum Listmanager
[mailto:listmanager@bne003w.webcentral.com.au]
Sent: Wednesday, 14 August 2002 8:51 AM
Subject: Major Dilemma - Please help.


From: "Peter Davidson" <peterd@hotmail.com>

I am about to purchase my first investment property in Melbourne outer
suburbs, approximately 16km out of the city and is about 30 years old. My
dilemma is that should I buy this property(330K). It's currently leased out
at $260 p/w. I have a $55K deposit and I earn $75K and my wife earns $50K
per year, before tax.

Should I put all my efforts into 1 expensive house or buy a cheaper house
further out from the city. Capital growth and rent won't be as good, but it
also allows me to save up more to put into another house later on.

I suppose I'm going for Capital growth more than anything, but a good rent
would also be nice.

Please help as I'm new to this and I'm not very good with numbers. What is
my best path?

Thanks for your advise.




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Reply: 3
From: Rick Kirk


Hi Peter,

I'll answer this based on my own thoughts. Please don't take anything I say as gospel.

Opinions are like armpits, everybody has a couple and most of them stink :)

To be honest there is little point throwing figures at you if your understanding of the numbers is limited. I commend you on wanting to get out there and get yourself a property but I'd also urge you to learn more about what you're doing before jumping in.

My advice to you (although asking in here is definitely a good place to start), would be to get yourself off to an accountant (that has property investors on the books) and ask them to do the numbers for you, if you don't understand what they're saying then find another accountant that speaks your language.

There are a great many factors that need to be considered when purchasing a property, far too many to go into here.

The topic you chose, "Major Dilemma" makes me think you are not comfortable with the situation. If this is the case then it is probably best avoided. Comfort in investing comes from education and experience. It is your choice to learn from experience or educate yourself first, then learn from experience. The first of which can be a harrowing experience.

I'd recommend you go and spend some of your hard earned cash on as many books as you can get your hands on including:

Rich Dad Poor Dad series by Robert Kiyosaki.
All of Jan Sommers books.
Any Dolf De Roos books you can find.
The richest man in babylon.
Money secrets of the rich by John Burley.
The millionaire next door.

and anything else you can find about real estate investing.

Once you understand the concepts in these books you will understand the figures and be able to clearly define whether or not a particular investment is good for you.

Please understand that I'm not trying to put you off, the numbers you quoted may not be attractive to some, but may be to others, it depends entirely on what you wish to achieve from your investment. Not knowing what you wish to achieve is most likely the cause of your uncertainty.

It's also not only about the numbers. There are other factors (specific to real estate) that you need to consider.

As I said, this is just my view, others may say "jump in both feet".

Good luck with whatever you choose!

Cheers,
Rick.
 
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Reply: 3.1
From: Glenn Mott


Nice reply Rick, there is lots of good advice there

Regards

Glenn Mott


-----Original Message-----
From: propertyforum Listmanager
[mailto:listmanager@bne003w.webcentral.com.au]
Sent: Wednesday, 14 August 2002 10:19 AM
Subject: Major Dilemma - Please help.


From: "Richard Kirk" <rick.kirk@atosorigin.com>

Hi Peter,

I'll answer this based on my own thoughts. Please don't take anything I say
as gospel.

Opinions are like armpits, everybody has a couple and most of them stink :)

To be honest there is little point throwing figures at you if your
understanding of the numbers is limited. I commend you on wanting to get
out there and get yourself a property but I'd also urge you to learn more
about what you're doing before jumping in.

My advice to you (although asking in here is definitely a good place to
start), would be to get yourself off to an accountant (that has property
investors on the books) and ask them to do the numbers for you, if you don't
understand what they're saying then find another accountant that speaks your
language.

There are a great many factors that need to be considered when purchasing a
property, far too many to go into here.

The topic you chose, "Major Dilemma" makes me think you are not comfortable
with the situation. If this is the case then it is probably best avoided.
Comfort in investing comes from education and experience. It is your choice
to learn from experience or educate yourself first, then learn from
experience. The first of which can be a harrowing experience.

I'd recommend you go and spend some of your hard earned cash on as many
books as you can get your hands on including:

Rich Dad Poor Dad series by Robert Kiyosaki.
All of Jan Sommers books.
Any Dolf De Roos books you can find.
The richest man in babylon.
Money secrets of the rich by John Burley.
The millionaire next door.

and anything else you can find about real estate investing.

Once you understand the concepts in these books you will understand the
figures and be able to clearly define whether or not a particular investment
is good for you.

Please understand that I'm not trying to put you off, the numbers you quoted
may not be attractive to some, but may be to others, it depends entirely on
what you wish to achieve from your investment. Not knowing what you wish to
achieve is most likely the cause of your uncertainty.

It's also not only about the numbers. There are other factors (specific to
real estate) that you need to consider.

As I said, this is just my view, others may say "jump in both feet".

Good luck with whatever you choose!

Cheers,
Rick.



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Reply: 3.1.1
From: Les .



G'day Peter,

You said "I am about to purchase my first investment property in Melbourne outer suburbs, approximately 16km out of the city and is about 30 years old. My dilemma is that should I buy this property(330K). It's currently leased out at $260 p/w. I have a $55K deposit and I earn $75K and my wife earns $50K per year, before tax."

Les>> It doesn't sound like you would have any problems in affording this property - so that is not an issue. But the rental return is lower than what I like ....
That should not affect you - it comes down to what YOU want !!!

"Should I put all my efforts into 1 expensive house or buy a cheaper house further out from the city. Capital growth and rent won't be as good, but it also allows me to save up more to put into another house later on."

Les>> This is a two-edged sword, Peter - keep in mind that any savings you make will be after Tax - but, if that suits your style, why not?? e.g. if you bought a cheaper place, what would its "numbers" show? Would it be cashflow positive? By how much? per week... per year... How long would it take you to "save up" for the next one?

"I suppose I'm going for Capital growth more than anything, but a good rent would also be nice."

Les>> Yeah, why not? It can happen, but it probably comes down to "How do you identify the type of property that does this for you?" Peter, let me ask another question of you. How long have you researched this prospect of "purchasing my first investment property"? From my own perspective, I deliberately held off for nearly a year while I read a lot, attended seminars, and generally became 'comfortable' with IP investing. Even after that, knowing what I know NOW, I would have chosen differently. There is no substitute for "doing it" - you learn most from that - but as Rick (I think) said it can be more expensive. I tend toward learning as much as possible before jumping in, so would recommend taking a month or two to read up (as Rick recommended). But, as you know well, you can read all the books on Swimming, but you will never REALLY know what it's like until you actually DO IT !! But the preparatory reading can give you some idea of what to expect.

Please help as I'm new to this and I'm not very good with numbers. What is my best path?

Les>> If in doubt, don't !! I think you would do well to meet up with others who are already doing IP investing. The forum has a number of leads (check Meeting Place, for one) - go and meet up with people who are ahead of you in the game, then listen to what they say.

And good luck, Peter.

Regards,


Les


- "Eschew Obfuscation" - ;^)
 
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Reply: 4
From: Always Learning


Dear Darren
<p>
Hear's my smelly armpit's worth:

Going with the Lemmings: What about something cheaper, closer into the city?
<p>
I found this property, if you purchased it at a reasonable price or something similar, I think I would be a good long term keeper (depending on your long term goals, and given the current market state, you need to be thinking l o n g term)

http://www.realestate.com.au/cgi-bin/rsearch?a=o&id=1270776
<p>
I understand rental for this may be around $200PW. That's a return of just under 5% (hmm, not so good, but not so bad for inner Melbourne)
Your 50K would pay down a more debt, making the property less of a burden each month.
<p>
I personally know a little about this property, it was meticulously renovated a few years back by meticulous people That being said, I have absolutely no interest it this property, I raise it only as a talking point
<p>
Other than that, turn the TV off and spend your time reading reading reading, talking talking talking, learning, learning, learning, preparing, preparing, preparing, dare I say thinking on paper!. Maybe the Melbourne apartment building boom will bust soon and there will be some bargains around in that sector?
<p>
Start with Jan's books read with in a serious intent, read Dolf deRoos with a glass of light red and take away pizza (when you want a fun motivational read without the burden of reality). "The 7 Steps to Wealth" by John Fitsgerald(?) is also a good one, it fits in mid way between Jan and Dolf.
<p>

<hr width="50%" color="pink">
<ul>

<li> Unless you change how you are, you'll always have what you've got.
<li> To have more than you've got, become more than you are.

</ul>
 
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Reply: 5
From: Dale Gatherum-Goss


Hi Peter

I'm afraid that there is never a "right" way to invest in property. Instead, there will be a way that sits more comfortably with your investing style than others. This is a common question and one that holds sooooo many people back from taking that first magical step forward . . .

I always ask, "what are you trying to achieve with your investing?" That is, why are you investing?

Are you doing so increase your weekly income?
Are you doing so to increase your long term wealth?

At the end of the day, unless you are very skillful in hunting out a bargain; intend to invest using wraps or lease options; or some other exotic style of investing then your first property is likely to fall into one of the above two categories.

In that case, focus on your intention and then ask yourself this simple question:

"Does this property help me achieve my goals?"

If it does, buy it with confidence. If it does not, walk away and keep looking for a property that does help you achieve your goals.

Good luck and I hope that this helps in some small way

Dale
 
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Reply: 5.1
From: Alan Hill


Peter,

I tend to agree with Dale, but especially with your first IP, there is another very important benefit besides Capital Growth and Rent Return to consider.......and that is......EXPERIENCE!

DON'T belt yourself up if your not achieving 20% Capital Growth or 10% Rental Yields.....and don't let this stop you from STARTING to buy and the resultant learning that will come from this initial step.

Personally, I'd much rather see a first time IP investor have a 'neutral' return on their property in the first few years than sit around and do nothing. You'll learn so much from your first property and I'll guarantee you'll be all the wiser when you go to buy the second, third etc. If you had to put a $ value on what you'll learn, I can assure you it will be a very high figure.

There's a lot to get your head around for the first property including financing, structures, property management, tax, insurances and the list goes on and on.

Some look at this long list, read some of the deals that some of our more experienced forumites are doing and say "well, when I can do ALL that 100%, THEN I'll buy a place!"
In my humble opinion....if you wait for that then most won't ever do anything.

Learn as much as you can, read this Forum, read books, talk to experienced investors and then act!

I guess what I'm saying is I don't advocate you making big LOSSES to gain this experience :) but with a bit of prudent learning time, a neutral return in the first year or so should be your worst case scenario. Regardless of what 'profit' you make in those early stages you will gain massive EXPERIENCE for your own personal future investment path.

I remember reading some years ago about an extremely wealthy entrepreneur who was spending many millions of dollars opening his latest in a long series of 'shops'. His first shop had cost him about $1000. A reporter was asking him whether, because of the scale of this latest development, he felt more worried about this one than previous developments.
His answer was that the purchase of his first 'shop' caused him more anxiety than any since and a big part of the experience he has today was gained from that first shop. He went on to add that this latest development, by far the biggest and most expensive, was the easiest.

Good luck Pete......I'm sure you'll do well.



:)
 
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Reply: 5.1.1
From: Peter Davidson


Thank you all for your advise. It is very much appreciated and it's good to see people helping people. I'm now on track...I think.
 
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Reply: 6
From: DEAN OXWELL


Hello, I am new to this forum thing and IP's.
Whilst I have no advice for Peter, I am posed with a similar problem and concerns over the purchase of my 1st IP.
I have my principal residence; value $625k; equity $370k; loan $289k.
I am the sole breadwinner at $105k/annum with a wife, 3.5 yr old and a torpedo in the tube.
I have the finance side tied up as my uncle is a mobile lending manager with CBA and believe I have a good and flexible deal.
I think I know where I want to buy and what styles I'm interested in.
I'm looking at the long term thing, ie. 20-30yrs and have a pie in the sky dream of having approx. 50 properties in my portfolio by retirement (nothing like dreaming I guess).
I am confused by the returns quoted in the forums ie. 10% etc. Is this the same as the IRR or the real IRR as is described in the PIAFpu and if not how is this info ascertained?
Also, I am confused with when one could start looking for that 2nd or 3rd IP. How does one know when the "figures" are right? What happens when the equity = the IO loan?
I'm not that good with numbers either and have difficulty understanding the financial concepts.
I work away at sea for 5 weeks at a time as a Marine Engineer and spent alot of time thinking and reading about things; getting very confused; and not being able to keep my "finger on the pulse".
Alas, I would be alot happier if I could understand this caper as well as I do ships!

Dean
 
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Reply: 6.1
From: Dale Gatherum-Goss


HI Dean and welcome!

>Hello, I am new to this forum
>thing and IP's.
>Whilst I have no advice for
>Peter, I am posed with a
>similar problem and concerns
>over the purchase of my 1st
>IP.
>I have my principal residence;
>value $625k; equity $370k;
>loan $289k.
>I am the sole breadwinner at
>$105k/annum with a wife, 3.5
>yr old and a torpedo in the
>tube.
>I have the finance side tied
>up as my uncle is a mobile
>lending manager with CBA and
>believe I have a good and
>flexible deal.
>I think I know where I want to
>buy and what styles I'm
>interested in.
>I'm looking at the long term
>thing, ie. 20-30yrs and have a
>pie in the sky dream of having
>approx. 50 properties in my
>portfolio by retirement
>(nothing like dreaming I
>guess).


Well done so far! Let's face it, even if you fail to get your 50 IP's and only get 25 - you would still be a great success as an investor and would have achieved more than most people. Dream big and go for it!!


>I am confused by the returns
>quoted in the forums ie. 10%
>etc. Is this the same as the
>IRR or the real IRR as is
>described in the PIAFpu and if
>not how is this info
>ascertained?


No, the usual meaning when someone quotes returns is the rental income divided by the purchase price.


>Also, I am confused with when
>one could start looking for
>that 2nd or 3rd IP. How does
>one know when the "figures"
>are right? What happens when
>the equity = the IO loan?
>I'm not that good with numbers
>either and have difficulty
>understanding the financial
>concepts.


At the end of the day, Dean, investing does not have to be a precise art and there are no correct answers. I would recommend following your instincts about which properties to buy that will rent well and grow in value. Once you are on your way, you will understand more and more of all this and then you can buy better.

A search of this forum will show some great books that will help you on this journey. I read a great book recently by Craig Turnbull that will help you understand a lot more about investing in property, as of course, will Jan Somers books and Dolf DeRoos' books.


>I work away at sea for 5 weeks
>at a time as a Marine Engineer
>and spent alot of time
>thinking and reading about
>things; getting very confused;
>and not being able to keep my
>"finger on the pulse".
>Alas, I would be alot happier
>if I could understand this
>caper as well as I do ships!
>
>Dean
>
Good luck and enjoy!

Dale
 
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