Newbie Questions... you guys are so patient!

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From: Katrina Maujean


Good morning all

I've been silently watching this forum for a while and have found that I'm learning so much 'hands on' info that you don't find in books... thanks so much for sharing all your hard earned experience with us newbies!

My situation is this: I've been reading and reading and reading books and now I'm at the point where I want to get out and look at properties, speak to Real Estate Agents etc. 'take my 'knowledge' to the streets' if you like. I'm just feeling a little like I will get there and not know exactly what to ask or look for. As such, I'm trying to create for myself a list of questions, a form essentially, that I can fill in with all the criteria I'm looking for. I feel this is the best way for me to take the knowledge in my head and put it into a practical next step.

Where I'm hoping you can help me is with the questions. I've put together a bit of a 'brain dump' of questions that I feel need to be asked and how to find out the answers, but there's a couple of gaps that need to be filled. I guess I'm just hoping for some feedback on my questions.. am I asking the right ones? Is there more I should be asking? (undoubtedly). Am I looking in the right places for the answer? I haven't got anyone in my family who may have done this before me to ask as unfortunately my parents struggled most of their lives... hence my determination to succeed! I just need a little advice along the way.

I've attached the file, however if it doesn't attach properly and you would be willing to take some time to help me, please let me know and I can email it to you? Or tell me what I'm doing wrong in attaching my file?

FYI - I'm looking at new properties / developments for our first purchase (for reasons I won't bore you with now).

Thanks in advance for any advice you can give me!

Kat
 
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Reply: 1
From: Tom Moschitz


Hi Kat,

Fairly comprehensive start. To fill one of your gaps, future capital growth information can be purchased from www.residex.com.au.

I've included the screening criteria I use for you to compare.

Property Screening Criteria
“In the field of investing it is better that one act like a Catholic and marry for life. That way one makes sure going in that the partner chosen is one worth keeping - because there is no getting out.”

The property should be:

1. New, or near new to qualify for full depreciation.
2. Within 5-7% of the suburbs’ median price,
3. Within a small development,
4. Low maintenance, building and grounds,
5. Approved by banks and insurance companies,
6. Spacious in area, inside and out,
7. Preferably brick and tile.
8. Preferably unique, difficult to replicate.


The property should have:

1. Gross return of 7-11%,
2. Pleasing landscaping and setting,
3. Reliable body corporate management is applicable,
4. A good maintenance record if applicable,
5. The highest building standards.
6. Scope for increasing the value (a twist).
7. A point of difference, a reason to chosen over other rental properties i.e: Quiet street, A/C, heating, gas, security, alarm, 2 car spaces, ensuite, nice outlook or a courtyard.

The property should be close to:

1. Schools,
2. Shopping centres,
3. Restaurants and cafes,
3. Freeways is applicable,
4. Waterways or beaches,
5. Units/town houses should be within reasonable distance to the CBD.

The area should have:

1. Met the Residex Top 100 Postcode Predictions criteria,
2. Excellent transport facilities,
3. High capital growth potential,
4. Above average population growth,
5. High employment,
6. Below average rental vacancy rates,

cheers,
Tom
 
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Reply: 1.1
From: Nigel W


Tom

That's a good list.

But I wonder about a couple of the points:

- yield 7-11%. I'm not saying you can't get this (because I do get towards the upper end of that range) but I doubt you can do this easily with NEW property

- value add - the twist. Again, if the property is new/near new and has the highest quality finish, where's your twist?

I suspect that if you bought a near new property from a distressed vendor looking for a quick sale you could achieve a lot of your objectives...but otherwise I'm all ears as to how you do it.

Again, a well thought out list...so we're all looking forward to hearing your response.

N.
 
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Reply: 1.1.1
From: Katrina Maujean


Thanks so much for the advice Tom... much appreciated.

As for adding value, my partner is a landscaper so we're hoping to add value by either striking a deal with a developer (I have a contact who may be able to help me) who may let us do up the yard ourselves.

Failing this, after we buy our first property (which will be an IP while we continue to rent) we will look at buying second hand properties and landscaping the yards to add value.

Thanks again!

Kat
 
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Reply: 1.1.1.1
From: Tom Moschitz


Hi Nigel,

Thanks for the response, I'm sure you'd agree that having a comprehensive screening criteria and falling short on a couple of points is better than no criteria at all. I'll be the first to admit that I haven't been able to tick each and every box for the properties I purchased. Having said that I've just settled on a positively geared property that I'm quite excited about. Details as follows which answer your points:

Purchase price: $190k
Date of Construction: 1998
Currently rented: $14,560pa
Gross return: 7.6%
Residex - Previous 5 years average medium growth pa: 12%
Residex - Next 8 years anticipated average medium growth pa: 14%
Twist: This property has been approved for dual occupancy, it's a double story house which is effectively 2x2 br units. I've estimated the cost to strata title this property will be $12,000. The revaluation upon completion of this will be $260k-$300k

cheers,
Tom
 
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Reply: 1.1.1.1.1
From: Tibor Bode


Hi Tom,

7.6% gross does not sound to me as cash flow positive. Interest 6% plus rates, insurance, maintenance, management, etc. I have to admit I do not take into consideration depreciation. That is the cream.
Or have i missed something?
But the deal seems to me quite good.

Tibor
 
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Reply: 1.1.1.1.1.1
From: Tom Moschitz


Hi Tibor,

I've always included depreciation, I just consider it another deductible expense. As you can see from the numbers below, depreciation is a great deal of cream. The property should be cash-flow positive pre tax by the third or forth year which of course is the ideal scenario. This assumption is based on my personal experience of 3%pa rent increases on average over the last 6 years for my other properties in the same area.

Loan 200,000
Gross rent /yr 14,280
Interest (I/O) 6.00% 12,000
Property Expenses 3,000
Pre-tax cash flow -720
Deprec-building 2.5% 2,000
Deprec-chattels 4.0% 5,000
Total Deductions 22,000
Tax Credit 42% 3,242
After-Tax Cashflow 2,522
Weekly cashflow $48.51

cheers,
Tom
 
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Reply: 1.1.1.1.1.1.1
From: Paul Zagoridis


Hi Tom

I agree that the deal is cashflow positive -- for you and for most people. And what follows is not a criticism of you nor your investment strategy. More luck to you.

However I can't eat depreciation. Nor can I take depreciation to the bank. I can't use depreciation as a deposit on my next deal.

From a business perspective, depreciation allowances are useful for either offsetting against current profits or carrying forward against future profits.

Also remember depreciation is technically a non-cash expense reflecting the reduced usefulness/longevity of the asset.

A brand new property should need zero maintenance. A fully depreciated property should need lots of maintenance. They should balance in the long run.

So the pretax cashflow is what I examine because I don't want to work for a wage.

Paul Zag
Dreamspinner
The Oz Film Biz site is archived at...
http://wealthesteem.dyndns.org/
 
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Dale! Does GST apply to this type of deal ?

Reply: 1.1.1.1.2
From: Ross Sondergeld


Thanks Tom,


I love to see REAL examples. (Great deal.. ! Where is it? i.e suburb.)


You said, "Twist: This property has been approved for dual occupancy, it's a
double story house which is effectively 2x2 br units. I've estimated the
cost to strata title this property will be $12,000. The revaluation upon
completion of this will be $260k-$300k."

OK...

Dale! If they are on-sold is GST applicable to this deal ?



Ross Sondergeld ~ Buyer Agent

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
" Imagine buying real estate the easy way...
...with a Buyer Agent on your side!!! "

Buyerside Real Estate Mobile 0412 289 464
Office 9b, 34 Glenferrie Drive Office (07) 5562 1555
East Quay Corporate Park Fax (07) 5562 1248
Robina QLD 4226, Gold Coast Buyerside@hotmail.com
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~


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Dale! Does GST apply to this type of deal ?

Reply: 1.1.1.1.2.1
From: Dale Gatherum-Goss


Hi

Do you want an accountant's answer or the tax office answer?

The tax office have taken a very narrow approach to the issue that accountants and solicitors believe is wrong. Only time will tell.

According to the tax office, the deal will be sold inclusive of GST because we have created "new" premises. GSTR 2001/D3 is the offending animal (should that be offensive animal??) in this case.

Now, that's the bad news. The good news is that there might be a way around the tax office view by using the margin scheme or the going concern clauses.

A bit more homework, I am afraid.

Dale
 
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Dale! Does GST apply to this type of deal ?

Reply: 1.1.1.1.2.1.1
From: Tom Moschitz


Paul, Thanks for the informed view on depreciation, on a simplistic level it has helped to increase cash flow and in turn allowed me to build up a portfolio quicker than I could of without it.

Ross, Batemans Bay NSW. Picturesque holiday village on the south coast that captures a great percentage of Canberra's retiring population.

Dale, Thanks for the heads-up on GST implications. I've done a couple of strata title conversions, yet to sell one, hopefully will never have the need to.

cheers,
Tom
 
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