JJ it comes down to this:
We can have a complicated plan or we can have a simple plan.
'Buy Houses Make Money' is as good a plan as any.
Growth in an area and growth for a particular property only shows up when the property is sold.
The last time anything was sold in 'our' street was when we bought in June, 2006. This is not recent sales data and, as I mentioned, the property had been for sale for some time, so the vendor's expectations had been formed in late 2005 when the property was put on the market for an auction sale.
Now, in December, 2007, the next door property is for sale. For sale, not sold, so it would not be in the historic sales data figures. Sales data is compiled from settled sales when the sale becomes a registered transfer and the Valuer General's department is notified.
Hence, we could sell a property now and not settle until March, 2008 and it is in March, 2008 when the figures would be recorded.
So ... in using Chelsea as an example, and coincidentally you happen to live in the neighbourhood, do you see that I am suggesting that making a buying decision based on historic figures may be misleading to you?
Getting back to the IRR (Internal Rate of Return), this is where our figures can be very surprising
For example, our property has improved by about $100,000. We put no deposit into the deal, we borrowed every bean, but over the past 18 months we have trickled about $35,000 into maintenance of the loans.
Therefore, our exposure to the deal is the $35,000 contributed to date, and the capital growth of the property is calculated as an expression of the Rate of Return of the Internal Capital Investment, hence $100,000 / $35,000 = 285%. This is not taking into account the rent received and the tax benefits of gearing.
A good starting point for learning these calculations is Jan Somer's books, which explain the internal workings very simply.
So - getting out there and inspecting properties and making calculations and doing the sums is what it is all about. There is no magic formula and no property has a sign on it 'AAA Grade Good Deal'. We make a deal a Good Deal and we can also make a Good Deal a Super Deal once we get the hang of it.
There are plenty of Super Deals out there. Our very ordinary deal has become a Super Deal because of structuring, other deals may become Super Deals becuase of some other reason, application or purpose, however it is we who makes a good deal better, they don't usually start out that way.
By the way, we devoted every weekend for about three months to finding this property, we drove every street and walked every lane, we booked valuations on properties which we didn't buy and we made written offers. This was the third property to get the full treatment and we are very glad to have bought this particular property and not the others - it is something quite special because even though the current house is quite old the location and position is 'perfect'. When we knock down / rebuild (in about 5 years time) we will have something extraordinary.
However, everything has potential. Don't be misled thinking that potential is something particular, it is not. One of my best investments is a standard 1974 Mission Brown three bedroom house which still has only a single bowl sink in the kitchen, but it has been a 'nice little earner' from Day One and my Internal Rate of Return is incalculable as I do not put any money into it - well, no, tell a lie, I put $40,000 deposit in in 1994 and nothing since then. I bought it for $105,000 and it is now worth about $320,000, so that's $225,000 / $40,000 = 565% increase on my investment. We can't divide that by years as it is years since I put any money into the house except servicing the loan and paying for maintenance from the rent etc
So if you put $10,000 into a deal, achieving 50% increase of capital is the difference between an opinion. If you are wanting to invest the whole $150,000 and want to see $75,000 'cash profit' each year that is a whole different ball game. Not to say it can't be done, but that is trading / running a business and not necessarily investing.
So perhaps the first question is that question:
Are you talking about trading or investing?
Well, this is a post and not a conversation, so perhaps if there is a Melbourne Christmas / New Year dinner you may care to come along and kick a few concepts around. Investing is lots of fun, there is no right or wrong way to do anything (after all, we aren't thrilled about a $35,000 per annum contribution but we aren't that unhappy, either) and it sure beats doing the dishes!
Cheers
Kristine