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From: Anonymous


Hello All,
I have been using this forum for the past 6 months, but have not seen discussions on the following topics :
1. What do you consider as a good deal. I recently bought a townhouse in Doncaster with a 5 % gross return. Now I do not think it's a good deal but it seems 4 to 5% are the norm for Melbourne properties. To cover a P & I mortgage at 6 %, one really needs a 10% yield to cover all the costs. I realize some people suggest you can renovate,extend, or whatever to increase the return, but it is easier said than done for a newbie like myself.
2. People say one need to select properties close to school, shopping, transport and all the other infrastructure to have good capital growth, how does one explain the growth in areas such as Thornbury,Footscray, Coburg which do not really have very good infrastructure except geographically closer to the city. But it take me less time to travel from Doncaster, than say Coburg, to the city.
3. Do people have experience in investing interstate properties, either good or bad. Can it be done.
Thank you all in advance.
 
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Reply: 1
From: The Wife



1Q. What do you consider as a good deal. I recently bought a townhouse in Doncaster with a 5 % gross return. Now I do not think it's a good deal but it seems 4 to 5% are the norm for Melbourne properties. To cover a P & I mortgage at 6 %, one really needs a 10% yield to cover all the costs. I realize some people suggest you can renovate,extend, or whatever to increase the return, but it is easier said than done for a newbie like myself.
1A. If you dont consider it a good deal, why did you buy it? Perhaps you live in it? or if you rent it out, perhaps you feel you brought there for cap growth? Perhaps you felt you were buying for the long term, cause everything goes up in the long term ( fingers crossed).
You already mentioned lots of ways to increase your return, I dont know if a lot of them will be applicable to a ( presuming) new townhouse in Doncaster. Perhaps you should look elsewhere for property that will present an opportunity to be tarted up. You already know of the technique, why is it easier said than done?


2Q. People say one need to select properties close to school, shopping, transport and all the other infrastructure to have good capital growth, how does one explain the growth in areas such as Thornbury,Footscray, Coburg which do not really have very good infrastructure except geographically closer to the city. But it take me less time to travel from Doncaster, than say Coburg, to the city.
2A. Thats exactly right, "people say". There are no set rules to investing in property, theres not even a rule that says make a profit. All there is, is techniques, and a much quoted saying is, know your backyard, people who know their backyard can make a profit, I know people in small country towns that make tremendous profit, they are 100klms from the nearest shopping centre.
Also there is a beastie called "trends", areas are trending to live in and the prices go up, perhaps one reason is because the area has old houses a few renovators get in there and clean them up and make them pretty and it becomes sought after.

Theres another beastie called FHOG ( FIrst Home Owners Grant), this wee little beastie is playing sceww wiff with the prices of areas all over the country at the moment.

Another thing I can think of, that would be playing havoc with the market, is the influx of mum and dad investors, notice lately how everyone is saying property investing is a good idea, this plays havoc with the market, because they buy in weird ( or not weird) places, driving up prices, they pay full or more than asking price,
I personally believe this is false economy and the bubble will pop in a few areas in time, and the prices will come back down.

3Q. Do people have experience in investing interstate properties, either good or bad. Can it be done
3A. I have experience investing interstate , both good and bad, its pretty much like investing in a new suburb, cept if you dont have the time and money to research it, then you might want to seek alternative ways of research or cross your fingers. When I say research, I mean REAL research, the southern mum and dads that have rushed to buy in Queensland this year, and in years gone by, have done themselves no favours.
Queensland is my main place of investment, and the first one I also warn everyone to be careful with, its very tricky, you need research. The last few years have been good to everyone in investing, its only ever been up up up.

The people who talk of the fear of rising interest rates and huge negative growth slumps in the market, are the ones who still carry some scarring because of the last downturn. As a little exercise, try working out your mortgage repayments on your property at 9% 12% 16%, and you will see why some of us are so "exacting" on researching areas, and feel concerned for the mum and dad investors.


*** Wow I think all that may have sounded negative, sorry bout that, I personally think property Investing is great, Ive done heaps of it, houses, blocks of flats, even commercial, and I think a tiny bit of luck bumped into me, but mostly I believe it was preparation meeting opportunity and me taking action of what was in front of me. I think those who believe property Investing is not hard work, are kidding themselves, there has to be an element of hard work in there somewhere for it to be profitable, I dont believe profit comes to those that havent done the work.

~Genius, the power which dazzles human eyes, is oft but perseverance in disguise. - H.W. Austin~
 
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Reply: 2
From: Les .



G'day Anon,

Upfront, let me say I don't know Melbourne, so figures below are an example only. But the under-lying tenet still holds, so fit your own numbers to it, and see what happens.

Assume $275k purchase price, $250k mortgage, 25yr P&I loan, rental income $275 per week.

With Interest Rates at 6%, the percentage of Principal repaid is 30% of the repayment of the mortgage. And this 30% is not able to be claimed as a Tax Deduction, so you are paying it with After Tax dollars. Using the figures above, Interest on the mortgage is $288 pw, repayment of principal is $87 pw - for a total of $375 pw.
And your income is $275 - so there's $100 deficit right there (of course, there is Tax relief - but there's also Rates, RE costs, Maintenance ....) Your "10% return" comment sounds pretty close to the mark ....

But, if you were to refinance to IO loan, and ferret the rest away, then this would change your position markedly. Let's see how:-

1. Your required mortgage repayments have dropped by $87 pw - and, since these were After Tax dollars, it DOESN'T reduce your Tax deductions - it's just money still in your pocket. This has just reduced the return needed from 10% to around 8.3%

2. If you wish, continue to put the extra $87 pw into Offset account, which effectively does the same as P&I, BUT allows you the flexibility of WITHDRAWING IT at any time for another deposit, or to cover repairs, or even to fix your car, etc. You gain flexibility !!

3. Use this extra $87 pw ($4400 per year) to "add value" to the IP - this could allow you to raise the rental income, AND these dollars might then become Tax deductible (depending on just how you spend them).


Anon, I know this really doesn't answer your questions, but it hopefully may give you some alternatives to think about,

Good luck,



Les


- "Eschew Obfuscation" - ;^)
 
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Reply: 3
From: GoAnna !


Hi Anon,

This post follows on from TW's post on doing your research and the need to put work in to get the returns.

You make a comment that a suburb such as Thornbury is not well serviced nor quicker to the city even though it is closer.

Thornbury is 16 minutes from the city by train. Or you could choose to take the tram or bus.

Correct me if I am wrong but Doncaster does not have a train and is serviced only by bus?

Shopping wise you have the choice of High St, Northcote Plaza and Northland. Not to mention those little shops the still exist in the side streets.

Schools there are heaps of - a number closed cause there were more schools than students.

Recreation? You have pools, gyms, ice rinks, bowling alleys nearby not to mention the river (bike and walking tracks) and golf courses.

And in the case of Thornbury neighbouring suburbs are much more expensive. So the demand is pushed out the Thornbury where they can still afford to buy period family home on a good piece of land. And like TW suggested the period homes are being done up (and the industrial sites being converted to residential) and before you know it the visuals and demograpghic makeup of the suburb have changed making it more desirable and therefore more expensive.

Don't get me wrong, I am not knocking Doncaster. And I think you get a lot for your money there. But I am wondering on what basis you have dismissed other suburbs as having little going for them.

Congratulation on

1. buying an ip

2. being willing to ask questions to further your understanding

Let us know about your next deal.

GoAnna !
"Obstacles are those frightful things you see when you take your eyes off your goal."
-Henry Ford
 
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Reply: 3.1
From: Anonymous


Thank you very much The Wife,Les, & GoAnna,
It just I need some guidance as to what make a good property investment from people like yourselves who have years of experience, your answers have definitely enlightened me and are much appreciated.
 
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