Strategy advice needed for 150k - don't know what to do

Hello,

I am wondering if you could give me some advice or options that I have not thought of, as I am a little lost at the moment.

I have 150k to invest (borrowed from parents), and I've been looking all around south, southeast, and east of Melbourne for the past few weeks for properties with reno potential around 400k, without success.

There are a lot of old properties, but the resale value just isn't there. I have access to PDOL, which gives all past sales results (Mum is an estate agent).

Anyway, what else can I do with the funds? I don't think I have enough to think about developing so thats not an option. Not too keen on buy and hold as it seems a slow strategy and I don't want to just leave the funds sitting there.

So...I don't know :(
 
JJ, let me put it this way. You have $150k now. What would you be satisfied with in terms of growth? i.e. how much net assets would you need in 1, 3, 5, 10 years for you to think the investment was 'worth it'?
Alex
 
Hi alex,

Hmm, I think I'm fairly risk tolerant (is that the phrase?). Well, aggressive, or not adverse to risk.

I would be seeking a return of 50% for the year. Possible? Or dreaming?
 
Starting with $150k and 50% returns a year, in 12 years you would have 19.4 million. Sure I think it's possible........ What sort of experience and skills would you need, that's the hard part.

Me, I'm just aiming for about 7.2% appreciation on my properties over the long term. None of my ideas will be good enough for you, so I defer to the more experienced members.
Alex
 
Hi JJ

You can achieve more than 50% IRR each year without much effort - I achieve this and more on my 'buy and hold' properties.

Just because you have $150,000 from Mum & Dad doesn't mean it should be burning a hole in your pocket, in fact you are risking their capital if you just jump in with no clear idea of what you are wanting to do or wanting to achieve.

First of all, 50% of what?

Do you mean 50% capital growth of Purchase Price?

50% Internal Rate of Return?

50% increase of $150,000?

Will you be using all the $150,000?

Will you be contributing any further capital?

Will you be expecting a yield and will that be used for servicing?

Get the idea?

With investing, you have to start at the end and work backwards. What do you want to achieve? If you don't know that then you can't get there.

But ....

the journey is where we learn it all. Have fun, good luck, but plan your steps. And believe me, there are plenty of opportunites out there but it takes more than just reading sales data to find them

Cheers

Kristine

PS We bought our future PPOR at Chelsea about 18 months ago. The property had been on the market with no offers for nine months. We bought for what we were prepared to pay for a pre-loved 70 year old house. We have been getting about 3% gross yield. Half the next door property is now for sale about $150,000 above what we paid for the whole thing. Would this show up on the sales data reports? Nope, you have to be there to be aware. Simplistically, our IRR is about 285% for the year, based on no money down (we borrowed the lot), about $100,000 capital gain divided by about $35,000 shortfall on interest less rent.

You can do an awful lot with $150,000 but you have to be able to see, and think, outside the square
 
Hi JJ

First of all, 50% of what?

Will you be using all the $150,000?

Will you be contributing any further capital?

Will you be expecting a yield and will that be used for servicing?

Get the idea?

With investing, you have to start at the end and work backwards. What do you want to achieve? If you don't know that then you can't get there.

I meant 50% return on 150k. Of course I'm just plucking a number from the air.

It's difficult to plan backwards. I don't have a long term goal. I feel somewhat lost.

PS We bought our future PPOR at Chelsea about 18 months ago. The property had been on the market with no offers for nine months. We bought for what we were prepared to pay for a pre-loved 70 year old house. We have been getting about 3% gross yield. Half the next door property is now for sale about $150,000 above what we paid for the whole thing.

Would this show up on the sales data reports? Nope, you have to be there to be aware.

I think the price paid, and the land size would show up in past sales data. Not sure why it wouldn't? I don't understand your comment.

But I live in Chelsea Heights, so right next door to Chelsea.

Thanks for sharing that info. Much appreciated. :)
 
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
 
Last edited:
Hmm, is that a trick question? :cool:

I want what most people want: more.

In a way it is a trick question, but not in the way you think. What I've found is, it's harder to pick the right road if you don't know where you want to go. Without a goal, all you'd be doing is MOVE, and you want to move fast. But where are you moving to? Speed means nothing without direction, especially when you have a can of jet fuel in your hand (borrowed from your parents) and you don't even know whether you're riding a jet or a 50cc vespa. Putting jet fuel into a 50cc vespa is an accident waiting to happen.

As you say, most people want more. Also notice that most people don't succeed and aren't rich. The rare people who succeed purely on 'wanting more' still aren't satisfied despite being rich. Consider that before you put your parents' fuel in the tank.

The mental game is at least as important as the physical.
Alex
 
Hi JJ

Kristine has offered you some invaluable advice. I would be reading and re-reading her posts and then coming back to this forum once you have given
a serious thought to what your short, medium and long term goals are.

Both Alexlee and Kristine walk their talk every day... so if you go
figure what they're saying and gear yourself with goals and action ....
patience is also the name of the game ... you will find yourself with 'more'.

Me, every time I leave this forum .... I have learned 'more'.

Good luck.
 
In my view 20 % Capital gain per year , every year is not realistic.
Some where around half that is feasible.

You could get 30 % return one year if you time the market and were lucky .
I never expect to do this.
If you were looking around for a few weeks then I expect you have not physically visited many houses.
I was lucky. I only had to visit 47 houses before I found the right one.
Couldn't count how many I saw in booklets or shop windows.
The more you see the better opinionated you become.

You would be better to do option trading if you are impatient as there are too many costs for not enough return to buy for the short term.

Sit down and work out the costs involved in owning a property.If you cant do that then you shouldn't be looking at property.
 
Hello,

I am wondering if you could give me some advice or options that I have not thought of, as I am a little lost at the moment.

I have 150k to invest (borrowed from parents), and I've been looking all around south, southeast, and east of Melbourne for the past few weeks for properties with reno potential around 400k, without success.

There are a lot of old properties, but the resale value just isn't there. I have access to PDOL, which gives all past sales results (Mum is an estate agent).

Anyway, what else can I do with the funds? I don't think I have enough to think about developing so thats not an option. Not too keen on buy and hold as it seems a slow strategy and I don't want to just leave the funds sitting there.

So...I don't know :(


You could do worse than parking it in an ING on-line account at 7% while you decide. Not the greatest return, but it's easy, safe and it's income.

I think you also need to narrow down the search area to maybe 2 suburbs that you think will perform. This will help to get you focussed and clear about your direction.

Then, study that area hard as Kristine said so you will know what is good value or not.

I watched an interview on tv last week with Warren Buffet, and he was asked about a company he had just bought, and he explained that he knew the industry well (executive jet manufacturer), knew the value of these types of companies, and saw that he could buy it under market valuation. He believes that the industry is going to boom in the next few years as more companies buy and run their own jets to ferry around their executives etc to avoid the increasing congestion around the world's airports. Had he not been studying this market and known the values, he would not have spotted the opportunity.

Don't discount buy and hold either. It looks slow and boring, but you can make some very good cap gains quite quickly if you choose the right area.

Also, keep in mind that the wealthiest people don't get that way by constantly buying and selling. They constantly buy, and hold assets that are income producing and gain in value.

Buying and selling is more exciting, but the costs associated with this (as your mum can verify) eat a lot of profit, and you are also missing out on compounding long term cap growth.
 
Whatever you do with the 150k, remember this:

The more you attempt to gain on your money the more risk you will be exposed to. Risk of losing some or all of your money.

What Alex is talking about is called the inner game and the outer game. The inner game is what happens between your ears and the outer game is everything else.

The inner game is much, much more important.

When you win that game you can achieve just about anything you want to.
 
[email protected]

If you are 'risk averse' you want to invest in something completed.
My preference would be to leverage into 4 properties off plan with stamp duty savings in Victoria. eg 10% deposit on 4 x $375,000 value properties = $150,000. Let's say they are 3 years off completion and they appreciate at 6% pa before completion, then your equity in these properties would be $270,000 in December 2010.
Cost of borrowing needs to be taken into account, however you are not having to service the loan on full purchase price for 3 years. Ensure that contracts allow for onselling prior to completion to protect yourself.
10 year history of the suburbs for proposed investment should be 9% or higher. Geographic and product type diversification are recommended also.

[email protected]
Absolute Advantage Financial Solutions
 
Looks like a very risky (long term) strategy if you ask me. Suburbs might have an average of 9% growth over 10 years but that does not ensure going forward 5-10 years will have any growth at all.

Where did you get the 6% appreciation for 3 years going froward from?

Very Risky!

Are you an FA?

If you are 'risk averse' you want to invest in something completed.
My preference would be to leverage into 4 properties off plan with stamp duty savings in Victoria. eg 10% deposit on 4 x $375,000 value properties = $150,000. Let's say they are 3 years off completion and they appreciate at 6% pa before completion, then your equity in these properties would be $270,000 in December 2010.
Cost of borrowing needs to be taken into account, however you are not having to service the loan on full purchase price for 3 years. Ensure that contracts allow for onselling prior to completion to protect yourself.
10 year history of the suburbs for proposed investment should be 9% or higher. Geographic and product type diversification are recommended also.

[email protected]
Absolute Advantage Financial Solutions
 
Thats a huge sweeping generalisation and not 100% true.

So, what do they do then?

Forgetting sports and entertainment stars who earn big bucks from their talent in those fields (and often blow it on crap), how do people like Bill gates, Warren Buffet, Jeff Bezos, Donald trump, Richard Branson, Rupert Murdoch etc get rich if they don't buy and hold income producing assets?

Do they sell their assets and stick the cash in a term deposit? Hardly.

Yes, they do sell some of their assets, but Bill Gates is not the richest man in the world because of his cash. It's the assets he holds, and they provide him with his cashflow for his lifestyle. Will Bill Gates sell Microsoft; the company that made him the rrichest man? Of course not.

Buy and hold. I used to earn a very good income, and spent it mostly on lifestyle. I aquired no wealth other than a PPoR, and unless it is used to fund other investing, it doesn't make you rich, as you need an income to hold it.
Try holding a $500k house with no income. Even if you own it outright, the rates, insurance, utilities and maintenance will kill you without an income.

So, I had a good income, a good house, but no wealth. If I lost my income, the house was gone.

Then, I started to buy and hold IP's. Now, my income is a lot less; chucked in the high-paying, no-life job, but my wealth is far greater, and I don't need much income to support the assets that keep gaining in value and increasing income.
 
If you are 'risk averse' you want to invest in something completed.
My preference would be to leverage into 4 properties off plan with stamp duty savings in Victoria. eg 10% deposit on 4 x $375,000 value properties = $150,000. Let's say they are 3 years off completion and they appreciate at 6% pa before completion, then your equity in these properties would be $270,000 in December 2010.

WAY WAY too risky for me. Put down all the cash I have on off the plan properties, when I don't have the ability to get finance for them and with the intention of flipping? You'd better have a DAMN good crystal ball.
Alex
 
LAA,

I understand exactly what you're talking about about. You're preaching to the choir dude. My point is that not everyone has made money in property that way.

I have made plenty of money buying and selling property and know a couple of other that have as well. I'm sure there are thousands out there that have done the same.

A term deposit is not the only alternative to a buy & hold strategy. I have channeled profits from property into my previous and current business and the stock market and made plenty more than i would have on the properties by holding them.


I think you are relating you're own experience and thats cool. But its not everyones.
 
Back
Top