what would you consider "average growth" in an area to be-

[rookie101]

ok, soo brand new- hence forums asking a million questions.. im learning LOL!!

in considering areas of high growth, how should i use the realestate.com.au data to pick good suburbs? what is considered acceptable/good growth?
how do you learn to predict future booming suburbs? ANY help would be great, i want to know all!

PS trying to buy first IP.

 

[The Y-man]

Reverse the thinking.

How much growth do you need to make the "numbers work"

i.e. given net income/loss (rent minus all outgoing such as rates, maintenance, fees, interest) what growth do you need to make the investment worthwhile?

eg if rental yield in an area is 3%, interest is at 6%, would you be happy to be getting a growth of 5%?


The Y-man

 

[rookie101]

ok, im not into finance yet- but im trying to learn.. can you please dumb it down for me?

how do i work out rental yield etc? where do i go to source figures etc?

sorry im such a beginner but i learn quickly once told :S hahaha

 

[Kennyjaiz]

Yield is a measure of the percentage of income return you get from an asset.

Gross rental yield (i.e. before expenses)
The yield is calculated by dividing the gross annual rental income by the purchase price (or the current valuation)

e.g.
Rent = $400pw
Purchase Price = $400,000
Current Market Price = $500,000

This information os readily available, you can ask the real estate agent for an appraisal or research yourself online (only use as estimates).

Gross Rental Yield (Purchase) = (400*52)/400000 = 5.2%
Gross Rental Yield (Current) = (400*52)/500000 = 4.16%

Yield calculated with the current gross rent and the original purchase price will give you an indication of how much rents have increased (or decreased) since purchase.

There are other ways to calculate rental yield (e.g. net rental yield), but they are a little bit more complicated (although they give you more of an individualised indication of performance)

Here's an example:
http://realestate.about.com/od/knowthemath/qt/rental_yield.htm

I would encourage you to read widely.

 

[Ausprop]

you could base it maybe on the last 30 year average but even these could be distorted significantly on the upside. Plus the growth may be flat or negative for 5, 7, 10 years then all happen in one year.

 

[The Y-man]

where do i go to source figures etc?

In victoria, we use the government publication for past 10 year performance.

http://services.land.vic.gov.au/landchannel/content/guide

(Sources vary state to state - you may need to buy data from a reputable provider)

We then look at say the top 10 the highest growth over a ten (or more - if you can get hold of older copies) year period to narrow down areas to look at.

Then I use realestate.com.au - and go to the "rent" tab.

See what sort of properties are getting what sort of rent in that area.

eg. a house might get $300 per week, a unit might get $200

Then go to the "buy" tab and see what sort of prices are being asked for those properties in that area.

So for the above example, in the same area, a house might be $500k, a unit might be $300k.

That gives a rental return of (300 x 52) / 500k = 3.12% for the house
and (200 x 52) / 300k = 3.47% for the unit

That's before we even allow for the rates, repairs, management fees etc - but let's keep it simple for now...

Now let's say you borrow the lot to buy the unit ($300k) at 7% interest.

So now to hold the property you bleed 7% - 3.47% = 3.53% pa.

Seeing as cash in the bank can get you 6%, you'd really want this property to be growing at 11% just to make the exercise even remotely worthwhile...

Hope this makes sense....

Finally, if all the analysis becomes too hard, we just say "bugger it" and buy in the suburb where we live (because we know the area, we know a good prices when we see one, and we know the growth)

The Y-man

 

[Ausprop]

So now to hold the property you bleed 7% - 3.47% = 3.53% pa.

Seeing as cash in the bank can get you 6%, you'd really want this property to be growing at 11% just to make the exercise even remotely worthwhile...

Hope this makes sense....

I'm not seeing it Y-man... if you have no cash what are you comparing this deal to? The choice is you either do it or you don't. You could say 'well I'll throw my neg cashflow into shares at the rate of $10k per annum' and build some wealth there. that will be compared to growth of the property (IF any) plus deflation of debt, $300k x CPI, say $10kpa.

for my mind, res property is ok only to the extent cashflow allows (which is why so few investors go past 1 or 2 properties, not to mention the hassle of it all). it is a savings program whereby your CF- is met with debt deflation. and now and then you have a win if the property inflates

 

[jezza]

ok, soo brand new- hence forums asking a million questions.. im learning LOL!!

in considering areas of high growth, how should i use the realestate.com.au data to pick good suburbs? what is considered acceptable/good growth?
how do you learn to predict future booming suburbs? ANY help would be great, i want to know all!

PS trying to buy first IP.

Rookie

What a question, how do I find high growth areas, it something just about everyone on here chases. You can look at back API mag and there are some sites that show medium growth. I tend to really look at neither as it is very basic info units/houses. Then on the other hand growth in a suburbs past performance does not reflect future. I may be incorrect with the suburb but a couple of years ago Grantville(VIC) had between -4 & 3% growth for about 10 years then all of a sudden in 1 year went up 50+%.

What type of budget do you have for your first IP?

Growth can also be attributed to someone doing something about the property, there a countless posts on here where people either subdivide or go and buy a run down place put 5k into it and make 50k overnight.

Another avenue is looking where large businesses set up ( banks/supermarkets/bunnings) however unlike you they companies pay people large sums of money for people to find these locations and are generally in outer ring suburbs.

As you can see your question on how to find the golden suburb has many different possibilities, the reality as your first IP, would be to find a suburb that you have reasonable idea about, that fits into your price bracket and watch that suburb and it neighboring ones.

Also just because you think it has a bad name does not necessarily mean it won't be a bad investment. Some of my best growth suburbs over the last 5 years are ones that others may be too scared to drive in.

Jezza

 

[Ridin-High]

eg. a house might get $300 per week, a unit might get $200

Then go to the "buy" tab and see what sort of prices are being asked for those properties in that area.

So for the above example, in the same area, a house might be $500k, a unit might be $300k.

That gives a rental return of (300 x 52) / 500k = 3.12% for the house
and (200 x 52) / 300k = 3.47% for the unit

That's before we even allow for the rates, repairs, management fees etc - but let's keep it simple for now...

Now let's say you borrow the lot to buy the unit ($300k) at 7% interest.

So now to hold the property you bleed 7% - 3.47% = 3.53% pa.

Seeing as cash in the bank can get you 6%, you'd really want this property to be growing at 11% just to make the exercise even remotely worthwhile...

i disagree that it takes 11% growth P.A to make the exercise worth while.

3.47% - 1.5% expenses = 1.97% net yield

7% IR - 1.97 nett yield = 5.03%

5.03% * debt (300k) = $15,090

after tax cost = $10,563

3.521% increase in purchase price to gain back CF-

Considering you purchased burrowing 100% and paid stamp duty + legals and transfer costs totalling say $10,000 + $10,563 out of your own money so equaling $20,563.

Lets say property price rises 5% to $315k and minus the CF- part thats a 21.5% RIO compared to 4.2% after tax return on the bank deposit. This doesn't even consider inflation killing the after tax return of interest investment and killing the debt attached to the resi property.


+ 3.5% gross rental yield on a unit is really crap and it still works (Only if growth is present)

The two beasts leverage and growth smash it up together. But they can smash you if the market goes the other way.

Let me know what you think

Regards,

RH

 

[Ridin-High]

Also on my personal portfolio including an addition which hasn't been made yet (CF- one)

If growth avg. 4% P.A over the next 10 yrs the profit would be like saving my entire fortnightly pay for the entire period. Pretty cool stuff if it goes that way

 

[Indifference]

ok, soo brand new- hence forums asking a million questions.. im learning LOL!!

in considering areas of high growth, how should i use the realestate.com.au data to pick good suburbs? what is considered acceptable/good growth?
how do you learn to predict future booming suburbs? ANY help would be great, i want to know all!

PS trying to buy first IP.

IMHO, you're asking the wrong question...

Rate of Return (or commonly: Return on Investment) is a more pertinent question as it is a better correlation to what it is that you seek... $.

Before I get post bashed, yes, yield & growth will have an affect upon ROR, however, if you are focussing on just CG from the outset, you are missing the big picture, IMHO.

I consider this in 2 parts:

1. My money. How much do I have to inject into the venture/deal/purchase?

2. My serviceability. How much of my available serviceability do I need to tie up in this venture/deal/purchase?

These 2 points allow one to understand what is being traded off in order to be dealt into the game. Coupled with those 2 parts of the 'equation' I consider what is my timeframe/exit strategy?

So, why do I think this is a preferential point of view on the same subject? Because I am looking at generating income. Income is money flowing to me. Income from property is not always intrinsically linked to growth. Actually, 0% real growth can still provide income... and can still be a good investment. (yep, I expect some flak from this comment)

CG is all well and good, but it does little for you in the short term (generalization) and can leave you asset rich & cash poor. Wouldn't life be better if you were cash rich, in passive income terms, and relatively asset poor? I certainly think so. Obviously CG is a good thing, but it is not the end game. CG has to be converted into Cashflow at some point in time, otherwise all you will end up with is lots of large objects doing very little to improve the quality of your day to day life.

my 2 cents

 

[Nathan]

7 % yield minimum.

10% below market purchase is the minimum at any stretch. Anything else is crap.

 

[murph14]

7 % yield minimum.

10% below market purchase is the minimum at any stretch. Anything else is crap.

Nath, do you recommend the property services tafe course to help learn neg skills to get those sort of deals? (even if not for a rea career)

 

[Wunderbar]

Nath, do you recommend the property services tafe course to help learn neg skills to get those sort of deals? (even if not for a rea career)

He buys in country towns and other random places. No inner-city area yields 7% gross unless you buy a student apartment.

 

[Indifference]

He buys in country towns and other random places. No inner-city area yields 7% gross unless you buy a student apartment.

Ahemm.... wrong. You must have your "Resi" goggles on

 

[Nathan]

Nath, do you recommend the property services tafe course to help learn neg skills to get those sort of deals? (even if not for a rea career)

Nah,

You can find them..

For example I just purchased 3 x properties in cairns this week for myself all $100k purchases ($95-$120k) rents approx $200pw (10%) and valued at $140,000's (approx)

I suggest best way of doing it is finding areas that have properties which "could" meet your criteria and become an expert on these areas. Once you do that you will see whats cheap and whats not.

I would suggest finding 6 areas of play initially to have open mind.

Its all research, not about REA. If you find a property then it comes down to your skill to negotiate which I would have to say is more of a communication, body language, NLP technique.

 

[Wunderbar]

Ahemm.... wrong. You must have your "Resi" goggles on

Are you saying commercial yields are any better? Perhaps - but that's only in outer areas for factories. Again, only small offices in the CBD offer that kind of yield.

 

[The Y-man]

The choice is you either do it or you don't.

i disagree that it takes 11% growth P.A to make the exercise worth while.

You are both correct - I am trying to simplify it as much as possible (eg leaving tax benefits etc aside) to illustrate the undelying thought process that I have.

Ausprop - agree, would have been better to do example with 80-90% loan scenario to show effect of leverage.


The Y-man

 

[Indifference]

Are you saying commercial yields are any better? Perhaps - but that's only in outer areas for factories. Again, only small offices in the CBD offer that kind of yield.

You still have the goggles on... and so what if it happens to be a small office or retail space? if the numbers stack up and the risk is acceptable, what's the issue? Isn't it far better than crap returns in the suburbs?

And you still haven't started to think laterally... Many things can be owned/leased. Many spaces, many locations, many different uses. Just slow down and THINK about it.

 

[bene313]

You still have the goggles on... and so what if it happens to be a small office or retail space? if the numbers stack up and the risk is acceptable, what's the issue?

I like comm too but the issue, for many, might be the 30% deposit required.