Newbie: where/how to start?

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From: Martin Vandenberg


Hi there all. What a great forum this is!
I'm just after a bit of advice to get me started, so here's a few questions, and if anyone can help, it would be greatly appreciated.

I'm engaged, and my fiance and I are keen to get into IP's. Neither of us has any equity, and we earn around 65k gross per year combined. She has the higher income, so the purchase would probably be made in her name. I plan to go up north to Darwin etc, in order to find work in the aviation field, and my fiance will probably join me if I settle there with work, as she is highly employable, in a year or so.

We've had a few different thoughts of how to go about getting started, and I'd like to know what people think would be the best option.

First, is to buy a property here, and rent it out, with the aim of getting something with a positive or near positive cashflow.

Second, is to buy a property using the FHOG of 7k, and living in it and doing some renovations, before moving north, and then renting it out.

Also on my mind is whether to go for a P&I loan, or an interest only? Would P&I be better so we could get some equity on which to buy further IP's? Or would the extra cashflow be better?

I've probably left out some important details which may limit your answers somewhat, but any considerations or ideas to take into account would be appreciated.

Regards,

Martin
 
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Reply: 1
From: Roderick Aguilar


Hi Martin,

I always offer the following advice every time I am asked the question of "Where is the best place to start?":

1) First, figure out why you are investing in property. There are two possible common answers:

(a) I wish to buy something and hang on to it and watch it appreciate in value. Then in a few years time I'll have the option to sell it and take my profit or use it to buy another one. In any case, I will be building up equity which makes the banks more comfortable and easier for me to get a loan with.

(b) I basically want a lot of money now. I don't want to wait 5 -10 years for it. While I am young I want to live life to the fullest with the extra money I am earning from my IP and of course I still want the capital growth for my property to build up my equity over time. In other words, you are after cashflow or instant income.

Whenever I get their response, I then would work with them to guide them towards making a decision which they are happy with. If I get the first reply then I would say:

Very good start! You've come to realise at this early stage that property is not normally associated with instant income. In other words, it will take some time before you can start to earn an income from IP. You "reap what you sow". In other words, you can't just plan seeds today and expect to harvest the vegetables by tomorrow morning. All things natural take their natural course over time. There is a lot you have to learn and the path you take depends on the mistakes you make and the effort you wish to put into the endeavour. Since you don't have any equity then the first thing to do is to build up equity. I would save up for a deposit or get involved in a WRAP or get your family to give you a gift for your deposit to get you started.

Now, if I get the second response (I'm in IP for the cashflow) then I would attempt to explain that only seasoned investors can truly be successful at this. You will get to this stage over time, the key being TIME. Again, good things take time and you will need to be well-connected or have a mentor to guide you who is well connected in order for you to achieve a positive cashflow from day one with an appreciating asset that grows in value at 10-12% every year. It's usually one or the other, cashflow or capital growth but rarely both at the same time from your first IP.

Personally, I would go with the first strategy which is to get into IP with a deposit of 5-10% in a growth suburb. I would pick the suburb I wish to invest in and get to know it really well. That way, when an opportunity comes up, you'll be able to see it immediately as it would stand out while others would let it pass by. Only, by knowing the streets and the suburb of your target area will you be able to spot these nuggets of IPs.

Banks feel "safer" with assets rather than income. So even if you were cashflow positive, they would prefer if you were negatively-geared but with a growing asset which they can take away and sell should you default on a loan. Best of course is a cashflow positive IP which is also in a growing suburb but that would be rare for your first IP.

Finally, if you are relocating to Cairns in the next year or so then where does this leave your IP in Sydney? Do you intend to manage it all the way from Cairns? I can tell you now that unless you're a seasoned investor that this will be challenging especially if you get difficult tenants coupled with incompetent property managers! (which is very common nowadays!). If you wish to get into IP then you will need to commit for the long term. If was settling down in Cairns then I would rather know that market and make money there rather than manage a property remotely. There isn't as much opportunities in Cairns as there are in Sydney but I can tell you now that even living next door to your IP is still challenging should you come across difficult tenants. What if they take you to the Residential Tribunal, will you have the funds to fly back down to Sydney in order to get back the money that's owed to you?

As always, I'm sure the response above will create even more questions for you but that's all part of the learning. Again, I have to stress though that these are my own personal views and are not professional recommendations.

Merry Christmas and a Happy New Year!

Cheers,

Roderick Aguilar
 
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Reply: 1.1
From: Martin Vandenberg


Thanks for taking the time there Roderick. Yes, you're right, it has created more questions in my mind. I might wait a little while whilst keeping an eye out for a good deal, and give the whole thing with regards to moving some more thought.

Just a quick question for those who read this, and have an IP (or IPs), do you rent them out yourself, or through an agent; and is there somewhere where I can find out about do it yourself renting (laws/rights/contracts etc?). Also a quick explanation as to why you choose to rent it this way if possible? (hope I'm not asking too much).

Merry Christmas everyone, and a happy new year.

Regards,

Martin
 
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Reply: 1.1.1
From: Roderick Aguilar


Hi Martin,

Just sharing my experience here. I have attempted to save some money by attempting to take over the property management of the property I bought next door. I thought to myself, since they are next door it would be easier to manage. One other thing I did wrong was that because the tenants "seemed" well off, (had a Harley, and two four wheel drives) due to a very successful business, I thought they would never be late with payment of their rent and decided against taking out insurance to cover the loss of rent.

Well, their landlord at their shop decided to increase the rent. They fought this increase and lost and in the process lost their business as well. Things became very difficult after that and they began slipping in their rent. And because I'd carried out what I'd learned from various investment seminars in getting to know your tenants (know their wants so that you can provide say an air-conditioning unit for the ability to charge higher weekly rent - better rental yield) but made the mistake of getting too close. Being next door they became more than just acquaintances. (I thought this would help us in the future should any difficulties arrive).

But alas, when things got tight money-wise, they began to play hardball. They handed us a letter of demand for "urgent" repairs, threatened to take us to the Tribunal and stated that they would send their rent to the Tribunal for safekeeping. Who are they kidding, they've been behind with their rent for 3 weeks, they don't pay us let alone put aside money for the Tribunal to keep! Later we found out that this was all a bluff.

Being softies we allowed them to extend non-payment of rent on compassionate grounds as neither of them had a steady job, they were about to have a baby and their savings from the sale of the business have now all but dried up. Their "assets", the Harley and the 4WDs it turns out are all leased. They don't own a cent of them.

So to cut a long story short, if you can avoid it, for your first IP, leave it to a third party. Find yourself a good property manager (this will be difficult) and let them worry about it all. I know it costs more but "it's the cost of doing business". Just like insurance, you can't do without it. At least should any dispute go to the Residential Tribunal, you have a third party's view on things which may or may not help you with the proceedings. Evicting them will also be easier as you do not have to physically hand over the eviction notice.

Owning IPs presents some risks. Having a good property manager and by taking out insurance for possible loss of rent are all ways of minimising the risks involved. Should the tenants be late with rent, the property manager/real estate agent makes a record of this. And they should, if they're any good, send the tenants a letter if the late payment of rent begins to become a problem. They should also carry out regular inspections of the property to ensure your "hard-earned asset" is not being "neglected" by the tenants (these inspections however I think are merely fantasy conjured up in order to get your business).

As for finding out more information, there is a booklet called the Rental Guide given out by the Department of Fair Trading which spells out the responsibilities of both landlords and tenants. Also, whenever a dispute arises, it all comes back to the Tenancy Agreement. So grab a copy of the Tenancy Agreement (the document you sign when you take out a lease on a place) and this will outline what is expected of you as a tenant and what you should expect from the landlord.

Cheers,

Roderick Aguilar
 
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Reply: 1.1.1.2
From: TONY SPIERS


Rod Aquilar,

You mention "insurance for possible loss of rent". Can you advise where I might get this?

Thanks

TONY
 
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