Wanting some information

[parkd]

Hi,

I am 25 at the moment and new to all of this. I am wanting to invest in IPs so that I can retire early and enjoy myself. I have grown up and watched my father work 80hrs a week since I can remember. I have told myself I don’t want this. Don’t get me wrong, I enjoy my job in IT as a support analyst. But as with many I want financial freedom so I don’t have to worry about money. I want to know that I have money behind me if need be.

I have been looking into property investing, but I still feel as though I don’t know anything. So I thought I would ask some questions and see what people think.

1. Should you invest in one area or split it up. I currently live I Perth, WA but I am from QLD. Should I buy all my properties in WA or should I diversify and buy in various states.

2. Looking at house medium prices at the moment, it is almost impossible to get a positive geared property but do people think that negative gearing is ok or should you aim for positive gearing?

3. I have read a number of posts saying that you should get multiple properties to effectively secure financial freedom. How do you get multiple properties with an income off say $57,000 a year? Is it possible?

4. Should you look at building properties or buying already completed homes/units?

5. Should you also look at commercial properties as well as domestic properties?

Thanks everyone for taking the time to read this?

Cheers,

Parkd

 

[jsj]

Hello Parkd,
just being on this site you are way in front of many at your age. My only regret with PI is that I didn't start earlier. I will attempt to throw some light on your questions. There are many here with more experience than I but it is good to read things from different points of view.

1. Should you invest in one area or split it up. I currently live I Perth, WA but I am from QLD. Should I buy all my properties in WA or should I diversify and buy in various states.

I suppose it comesdown to logistics. what will be easier to research, inspect, repair and maintain versus rental demand,yield, capital growth and buy in cost.

2. Looking at house medium prices at the moment, it is almost impossible to get a positive geared property but do people think that negative gearing is ok or should you aim for positive gearing?

In my opinion pos will be difficult to find given recent rate rises and higher prices, even with higher rents. But pos can still be created by renovating and increasing rental yield. eg cosmetic rejuvenation or modifying to increase number of bedrooms. Neg gearing can be utilised to offset tax and can help with repayments, i don't think it hurts to have neg if you are ok with repayments and the capital growth warrants it.

3. I have read a number of posts saying that you should get multiple properties to effectively secure financial freedom. How do you get multiple properties with an income off say $57,000 a year? Is it possible?

One at a time. value adding or smart buying plus capital growth gives equity, rent rises, paying down loans and wage rises will all position you to obtain more finance to buy another , then another...

4. Should you look at building properties or buying already completed homes/units?

This is market specific but things to consider are that (in QLD) you only pay stamp duty on the land component of a new house and land if done on two separate contracts. Maximum depreciation benefits from new property and generally less maintenence and vacancies. New areas usually have covenants so subdivision or development potential is very limited. Look at how many units are being built in the area and at how many are advertised for rent/sale and how long they are on the market. There is more chance of buying under value and adding value to an existing home, usually.

5. Should you also look at commercial properties as well as domestic properties?

I would suggest not jumping in the deep end with commercial until you have some experience.Unless of course you do a lot of homework and all of the numbers add up with a good lease,tenant,property,area. Res is more stable and easier to rent or sell and less likely to become redundant. Comm often has a higher yield but is at risk of extended vacancies. You won't want to pay the loan yourself for twelve months trying to get a tenant in a commercial space if a new complex is built next door.

My Dad also worked too hard for too long for too little and I made a conscious decision some time ago to never go down that road. Funny how wealth tends to skip generations sometimes. I know sons of professionals who spoilt their kids and they don't appreciate any of it thus never get any of their own.
Allthe best with your endeavours,
Keep reading this and other forums and books, magazines, you'll be on your way in no time.
Kind Regards,
Jeff

 

[parkd]

Thanks JSJ

I have been looking at a lot of different information and reading various property investing books. Given todays house prices I am going to safely say that negative gearing will be the only way I will go.

Given that this is a long term investment plan for me (to be able to retire say at 40 for example or evan a little earlier if I feel like it or things change) I am prepared to wait for the CG.

My next qeustions I guess Jeff and being that you work at Raywhite I thought you might be best to answer this, is what would you say is the standard increase in annual values of houses?

If I was to look at my parents house over the last two years I would say that this has gone up by roughly 8% per year. Given this and information that I have read / seen etc. could I safely say that in general houses will increase around 8% per year give or take. Or is this simply the current market working.

The only reason why I ask is because I read somewhere that house prices have risen generally every year for the past 1200 years.

Thanks everyone for reading.

Cheers,

Parkd

 

[MarkB]

Park

The only "should" when it comes to wealth creation is (for most people) that they should do something.

As to how to do it (or how you should do it), like most people here I know (or know of) people who have made alot of money:

• buying properties all over Australia
• buying houses only
• buying units only
• buying cash flow positive only
• buying negatively geared properties
• buying commercial / industrial / retail real estate
• subdividing land
• developing residential properties
• renovating
• flipping
• wrapping
• using options
• developing commercial / industrial / retail properties
• buying in metro areas only
• buying in regionals
• etc, and so on.

There's no should on that list.

What works for one person, may not work for another.

1. Should you invest in one area or split it up. I currently live I Perth, WA but I am from QLD. Should I buy all my properties in WA or should I diversify and buy in various states.

I don't have any strong feelings on this, other than to say that wherever you do buy, make sure you know what you're buying and why you are buying it.

If the first rule in investment is "if it sounds too good to be true, it probably is", then the second rule is "invest only in what you know and understand" - which is my way of saying due your due-diligence before you start making offers.

Before you get too freaked out about spending months and months researching, relax, imho, it doesn't have to be nearly as detailed as that.

But there are a few things you ought to know about any location before you invest in it:

- is the demand for housing strong? (ideally it is growing)
- is the local economy strong?
- what rents well? (no point buying a 1 bed unit, if everyone wants 2 bed + an office)

2. Looking at house medium prices at the moment, it is almost impossible to get a positive geared property but do people think that negative gearing is ok or should you aim for positive gearing?

I would agree with that statement that it is almost impossible to find positive geared property atm (and where you do find it, especially at this advanced stage of the cycle, be cautious imho). Having said that, if you throw enough money at just about any property (reduce the LVR) you can make it positively geared (not that I am neccesarily advocating that).

Personally I have no issue with negative gearing.

3. I have read a number of posts saying that you should get multiple properties to effectively secure financial freedom. How do you get multiple properties with an income off say $57,000 a year? Is it possible?

Save for the select few who do have one IP that is a Pitt St office building paying them $10m pa in net rents, the rest of us tend to have to own multiple properties to secure our financial freedom.

How do you do this on $57k pa?

There could be any number of ways (really) - refer to the list above.

4. Should you look at building properties or buying already completed homes/units?

Building (being a developer) is a high risk / high reward game.

I believe it is easier to start out as a landlord before taking that plunge, but that path may not be for you.

To the best of my knowledge, there are no "residential buy and hold" property investors who have made the BRW Rich 200. Though several developers (resi / commercial / industrial / retail) are on the list.

5. Should you also look at commercial properties as well as domestic properties?

Commercial (retail / industrial) properties are a different risk / reward kettle of fish to residential properties (Different valuation methodology, LVRs, lease terms, legal rights and responsibilities, vacancy rates and periods, etc and so on)

My belief (and I think real life experience reflects this) is that at some point most succesful property investors will move into commercial real estate.

It is also my belief that commercial properties require more due-diligence and especially so for someone starting out. It's not like a house or unit where you can drop the rent $50 a week to get a tenant in - commercial properties can sit vacant for months or even years.

...what would you say is the standard increase in annual values of houses?

It is generally held that prices double every 7-10 years. It isn't always the case and, in some places it would take longer, others possibly less so, but the 7-10 year maxim is the most common used.

...could I safely say that in general houses will increase around 8% per year give or take. Or is this simply the current market working.

Well, whether prices rise 8%, 50%, or fall 20%, it is always the market working (just not as some people would like it to work).

But, if you were the spreadsheeting type allowing for 8% cg long term is about right.

Just realise that it is far from a straight line (a property could stagnate for 9 years and then double in value in the 10th - hey presto ~7% annual cg over that period of time!)

The only reason why I ask is because I read somewhere that house prices have risen generally every year for the past 1200 years.

They haven't risen every year, I am sure. But, over the long term, they have certainly risen. The price of real estate (like any other asset) can be volatile in the short term. But unless you are a trader, it is the medium to long term that you are more interested in and, if history is any indication, over which property appreciates the greatest.

M

 

[steveadl]

Parkd, with point 2 - don't focus too much on median prices for an area to work out yields. Look at indivdual houses/deals.

With price increases in house, a lot of people use the figure of 7%pa (well 7.2% technically) as that equates to a house price doubling every 10yrs. That doesn't mean every house will increase by that price, but if it's just a general guide you're after. I often use 5% to be a bit more conservative in my calculations. These figures are referring to capital cities though, not regional.

 

[Boomer]

1. Should you invest in one area or split it up. I currently live I Perth, WA but I am from QLD. Should I buy all my properties in WA or should I diversify and buy in various states.

With regard to this, you should consider splitting across states once land tax becomes an issue.

 

[parkd]

Thanks

Thanks to everyone that has replied.

Yes I agree that I am going to have to do a lot of research. Beter to plan and suceed then fail to plan.

I am going to invest for the long term because at this point in time, I am happy with where I am work wise, but should this change I want to know that I have some financial backing. Plus I also want to retire early in life. Much earlier than usual as I want to enjoy my life. But I do have one thing to my advantage and that is my age of 25. My plan is to be financially secure in 10 years ie. 35 years old.

We will see.

Once again thanks to all.

Parkd

 

[jsj]

Hello Parkd,

My next qeustions I guess Jeff and being that you work at Raywhite I thought you might be best to answer this, is what would you say is the standard increase in annual values of houses?

The other posts have answered this well.
The averages and medians are difficult to use effectively unless you are sure of the accuracy of the data.
eg an area might have a 45% gain based only on a few high end sales bumping the figures up. The national average doesn't really reflect the local opportunities as areas will have spikes in the market at different times.

Year No. of Sales Av Med Growth Low High
1998 38 $53,263 $49,500 $38,000 $109,000
1999 67 $56,216 $55,000 11.1% $1 $130,000
2000 27 $126,778 $51,000 -7.3% $5,000 $850,000
2001 37 $61,096 $54,450 6.8% $40,000 $145,000
2002 23 $74,496 $52,000 -4.5% $38,000 $175,000
2003 116 $106,487 $64,000 23.1% $39,000 $3,500,000
2004 228 $115,209 $87,500 36.7% $53,000 $800,000
2005 330 $149,787 $100,000 14.3% $68,500 $3,700,000
2006 379 $127,240 $111,500 11.5% $74,000 $500,000
2007 318 $170,956 $132,950 19.2% $80,000 $550,000
2008 2 $574,000 $574,000 331.7% $398,000 $750,000

see how low data pool can affect the stats and a few good sales bump up the figures

Also true that it is a wave line not a straight increase but generally doubles every 7-12 yrs.

I have seen homes sell for 89k in 1994 , sold for 95k in 02, and 350k in 06.
There are many factors but ones most easily recognisable are changes to infrastructure and demographic. (suburbs next to ones just experiencing gains through popular renovating and houses on land which becomes viable for subdivision or change of use) I recently saw a house sold for 140k on sell within two years for 950k when a shopping centre expanded.
One thing to look out for, is many houses in older areas are on two titles. This is simpler and cheaper to split and sell than subdivision.
You will be fascinated by getting an RP Data log in.