Re: Some Questions ??? Free the Worms Part 2
Reply: 1.1.3.5.1.2
From: Paul H
STANDARD WARNING..THIS IS ONLY A PERSONAL VIEW; do not consider this as
financial advice.
My Newbies basic understanding of property investing in response to mike
looking to hear from newbies!!!!!!!!
I think this thread has many great advantages to help understand negative Vs
positive gearing and options available to invest. I'll try and summarise
what I have read and what I understand and those more experienced can point
out any variations and/or errors.
The one statement that appears most; is that The Most Money made on property
is made at PURCHASE time. Buying wholesale is the way to go.
Ideas on how to buy Wholesale.
1/ Local Expert......Pick an area and understand it nearly
COMPLETELY...This means knowing what values a 2/3 bed house/Unit in nearly
EVERY street is worth. Once you know this; you will see when an asking price
is lower than market value; and as such; you have FOUND your 80% wholesale
purchase. This can be time consuming; but requires little cash or expertise
to start and can be practiced easy by using paper with ads (but no prices)
and to pick what the FMV is and seeing what it. sells for. You can also do
this as a group to help bounce ideas and gain more understanding. This
investigative process is MANDATORY.
2/ Shotgun offers.....On the area that you have researched above; make
a 75% of Fair Market Value (FMR) on ALL properties offered(make 100-200
offers!!). Motivated Vendors will respond to your offers; and maybe 1 in 100
(1 in 10 if your lucky) will settle and you have achieved 80% wholesale
purchase this way. Novices can do this; and also helps to get used to
dealing with agents and the black-art of property negotiating. MOTIVATED
vendors appear to be the main way to get 80% FMV properties.
3/ Buy & Expand.....This way is for the more experienced. This requires
you to evaluate the potential of the site and determine its potential. I.E.
House for sale for $200K; can be subdivided and extra house added for $120K.
Total new valuation on whole lot is $400K. On these figures; $200K is a
good buy for the house. Not generally good for novices as the risk is higher
and needs understanding of planning and building processes; but can be quite
rewarding.
4/ Buy & Renovate....This way is towards the Peter Spaan/ Geoff Doige
way...Buy a property which needs cosmetic improvements; make the
improvements and then re-value. The trick to this is initially to stick to
simple improvements that are low-risk/low work. The last 10 years of
renovators has reduced the number of these available but here are still a
few left; however; for those with a handyperson attitude; there can be good
rewards in this. Tip...look for the long grass and messy yards.
5/ Buy direct from the developer and haggle....This leans toward the
Henry Kaye style. If a development is good enough to invest in; it should
stand on it's own merits. The haggle works when developers need pre-approval
and will sometimes discount to get the deal across the line to start.
Sometimes the prices asked are inflated so that the discount you think you
get; really only brings it back to FMV.
6/ Become a developer.......This is hard to do individually; definitely
not for the inexperienced. However; an option which appears to be gaining
merit is a mini-developer. This is where a group form a syndicate to fund a
development in conjunction with a developer. This appears to work well for
both investor and developer. The developer takes a lower margin whilst being
able to do more developments. The investor gets a larger return for
investing; or buys one or more of the properties themselves. This option
depends on the skills of the developer to locate a good site and having a
design which maximises the site.
Yield Vs Growth
Capitol growth is primarily achieved within 5K's of GPO (8%-10% roughly PA);
and that as you go out from there; growth drops off. Not gospel; but roughly
0.5% less PA per KM further out.
Rental yield is higher further out from GPO; apparently as compensation for
lower capitol growth.
The return a property will give you is a combination of both Yield(Rent) and
Growth. Yield is cash now. Growth is cash later (but access can be had now
via equity loans).
Growth gives you the better long term return than Yield; but you need yield
to pay for things (gotta have cash!!!)
Cash is KING and it is what you need to buy the groceries when you retire;
so make sure you
Negative Vs Positive Gearing.
1/ A Positive geared property today; maybe tomorrows negative geared
property. Look at ALL parts of your proposed deal; and determine what would
happen at an interest rate of 7%, 8%, 9% and 10%. Alternatively; 5 year
fixed rates of 6.75% are around; so fix if you want to know your cashflow
and minimise your risks; try the numbers.
2/ If a property is negatively geared and costs $100 per week ($10,000
loss 49% tax rate, $5,100 out of pocket); and the growth of the property is
$50,000; then you have made a real profit of $32,000 ($50,000-50% CGT
discount = $25,000......taxed at 49% costs you $12,500.....take away also
the $5,100 paid to service loan and you have $32K left)..........But
remember; growth is NOT guaranteed...but can be estimated....and always
allow for a rainy day. Your forced sale is another investors bargain.
3/ Note: It has been suggested that we are near the top of the property
cycle; and unless we are buying at 80% FMR as per above; negative gearing
would be a medium to high risk strategy in the short term. Always get an
independant valuation.
4/ Some people are totally against negative gearing; some on the fence;
plenty of marketers in favour. always consider the big picture; and work ALL
the numbers. Positve gearing and neutral growth isn't a very good deal
compared to Large growth and small negative gearing. Always be careful.
Buy & Hold Vs Flips Vs Wraps
The long term hold strategy is targeted at properties with high growth
potential; with the general consensus being that the property should be no
worse then revenue neutral. Rent guarantees should be viewed with caution as
each property should stand in it's own right and not need guarantees. Buying
properly will allow you to follow the principles in Jan's books and will
progressively grow your portfolio of properties. At the end of the day; a
mix of high-growth; high-yield properties (preferably both at once!!) will
give positive dollars in the pocket to pay bills; as well as positive growth
to protect the value of the portfolio.
Flips are quick buy-and-sells; and unless you know your market VERY well;
can be quite dangerous. The current trend of buying off the plan on long
lead-times till settlement (12-24 months) and then selling before settlement
are versions of this. Some people have done quite well out of this; and some
not so well. Experience and knowledge and also risk management are required.
Other ways to flip are to buy at 80% FMR and resell at 95% FMV. Stamp-Duty
and other expenses can make this prohibitive. Not recommended for those new
to property investing; and lots of research needed and probably lots of time
to implement. Success does have good rewards though.
Wraps. A straight out cash-flow only process; which gives roughly $50 Per
Week per property. No opportunity to increase return; so in 10 years time
when $50 = $20; process reduces in value over time. The positive to this is
if you can do 20 of these; it will give you $1000 per week which you can
then use to support other ventures.
Plenty of people doing this; but no long term history (No one has been doing
it more than 5 years in Australia). The Burley method(or slight variations)
are the most used method in Australia. Research this before you try it.
Financing the investment.
Many options are available...Interest only, Principal and Interest,
Line-of-Credit, Offset; Redraw. The list is endless. The themes that appear
most popular are as follows (each should be evaluated as to each persons
position as different strategies will use different options):
1/ Use the least amount of cash as possible. Deposit Bonds may be able
to be used instead of actual deposits and can be quite effective in
preserving cash.
2/ Revalue your property every 12 months to redraw any extra equity for
further investments.
3/ Mortgage insurance can be used to reduce your cash investment; and
speed up the acquisition of more properties. Find a lender that has an
option that allows you to add it onto the outstanding loan.
4/ Speak to a Mortgage Broker who knows their stuff. Best to do first;
as they can help work out from your position which options can or cannot be
supported. Finance is the key to the whole process; so make sure you get the
best finance broker you can.
This is just a start of my investor guide; and is what I have picked up from
recent threads. Hope it generates more good information.
Cheers.
Paul H.
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