Which one of these is the best deal? (Innerwest)

[DennisLeung]

Some good feedback guys, appreciate it.

Just to clarify on my situation at the moment, yes I am on a lower income. I only earn $50K net per year so I can only save about $35-40K per year, but I am living at home and try to minimise my expenses and try to make the most of what little I have. My mum also works and earns approximately the same as me and we live in a boarding house which also generates about $25K fully rented. Now I'm not saying I'm going to mooch off my mum (which I am already by living at home rent free) but at least if there is some rent coming in plus my salary, I feel it is sort of a double buffer against job loss and/or increases in interest rates. That being said, I do take on board you guys' ideals of cash flow positive/neutral/SLIGHTLY negative. In fact, that was my strategy until a few weeks ago when I read Paul Do's book "I Buy Houses" and that other value investing book by Gavin McPherson which suggested to only invest in 10-15km of Sydney CBD due to more of a guarantee of growth, even when picking the wrong part of the cycle in Sydney (which I am doing now).

I agree that you do not have a strategy. I will provide some points I look at before looking at any suburb?
- is the property below or at median price for the suburb? That should answer your 3 locations above, by checking comparable sales and seeing if you can get a deal at or below the median.
I am not sure why you assume higher growth in the short term, if the suburb moved on it's more likely it will stabilize for the short term, or even fall, agree?
Some statistics I pulled for you:
Newtown house price is 13% higher than last year, median $923K.
Annandale house price is 5% higher..., median $1,059K.
Balmain house price is 6% higher..., median $1,330K.

I understand the concept of not buying in areas which have grown recently but deliberately turned a blind eye to this with recent decisions due to some emotional and panic factors which I have listed below.

In a perfect world, I would want:

1. Right part of the cycle (i.e. depressed markets), particularly with low growth in recent years
2. Cash flow neutral/slightly negative
3. But good infrastructure, location and demographic factors

Unfortunately in pretty much all of Sydney right now, only number 3 exists. I agree with some posters who say I should buy in Brisbane. But all my mum's friends say that you shouldn't buy interstate due to the lack of control etc. Eventually I know I will have to venture interstate but for my first purchase even I feel it is too much for me? I think that, combined with "beginner's panic" of "jumping into the market before it rises" has lead me to possibly make some emotional decisions regarding the inner west.

Right now I'm at a loss. It seems like all of Sydney is unpurchasable but I was banking on the boom lasting longer than a few months and that buying 'anything' at this stage would lead to some growth between now and the end of the next year. I really don't want to go interstate due to the logistics and taking time off work etc if I can help it.

Does anyone have any ideas?

 

[skater]

There are two things I got out of that reply

yes I am on a lower income. only earn $50K net per year

And

But all my mum's friends say

FIRSTLY You are on a low income and are contemplating purchasing something that is cf- to the tune of $100-$200pw, and is costing around $1m? Have you talked to a broker? While I'm not a finance guru (there are some on here) that seems rather ambitious.

SECONDLY Is this your investment or are you buying for 'your mum's friends'? Remember, we covered this in another thread. They don't have your well being at heart. They have a vested interest in getting you buy something of theirs.

At the end of the day, you have to man up & grow a pair. This is your journey, and your journey alone. Don't buy something to please someone else (even me, but especially not your 'mum's friends'). Don't buy something that will be a financial drain around your neck, because at some stage you are going to want to leave the nest (you can't live with Mummy forever).

You've been given a lot of advice from some very successful people. It's time to start listening, and to form a plan. You seem to be extremely na?ve and it feels like you've just opened RE.com & thrown a dart.

 

[cozmicmel]

I think the inner west is a good place to invest but as Skater said I doubt you can service a loan that large on your income. Maybe look for a unit instead.

 

[nhg]

I think you may find the banks will only lend about $400-500k on top of your savings on that income.

 

[saiman]

Op needs to decide for himself what to do based on his goals, priorities, comfort zone etc...I know early on I had a similar train of thought as he does and only through experience I started buying for cf and developing a clear strategy...

That said I feel inner sydney is not without merit at this time if you can afford to hold/flip....why would people buy in western sydney when its super hot as it is now just because "there is some juice left"...however much wsyd will grow inner syd will follow in due course...

Not that I'm buying in syd...still hunting cashflow in qld

 

[Sesster]

I was mentioning in another thread how important it is to take some time and learn as much as you can and be informed (say 3-5 months) before jumping in. Its really in your best interest to do that. Because if you want to grow a decently large portfolio to achieve your goals in the quickest time, each buy is important for many reasons.

Good luck mate

sesster

 

[MIW]

In fact, that was my strategy until a few weeks ago when I read Paul Do's book "I Buy Houses" and that other value investing book by Gavin McPherson which suggested to only invest in 10-15km of Sydney CBD due to more of a guarantee of growth, even when picking the wrong part of the cycle in Sydney (which I am doing now).

It seems to me you are all over the place with strategies. A strategy is when you try it and venture out and see if it works for you, someone elses strategy may not be appropriate for you (depends on your risk, finances, situation, experience, etc...).

In a perfect world, I would want:

1. Right part of the cycle (i.e. depressed markets), particularly with low growth in recent years
2. Cash flow neutral/slightly negative
3. But good infrastructure, location and demographic factors

There is no perfect world out there, we either make it perfect or not for us, and that will come with experience. It's knowing and trying that's the starting point.

Also, when you listen to anyone elses advise always make sure it is factual not opinionated. What I mean by that, ask the person how many investments they have, when did they start....?
If the person tells you a story that someone else told them do not take their advise, at least I don't as I realize they are presenting an opinion.
So do Mum's friends have Investment Properties????

I have bought properties unseen, you do not need to physically venture interstate, but somehow with your level of experience I would suggest you do... Remember, investing into RE is a numbers game so I feel you may require more exposure, so I am extremely worried why you would purchase a $1m property as your first deal?????

Educate yourself and read more from this forum and then start but make calculated risks with smaller amounts at first. It's very hard to advise not knowing your level of expertise...
Keep at it though, as hard work, persistence, perseverance and being relentless at this game pays dividends down the track.

 

[DennisLeung]

I don't think I understand what it means to have a strategy. I just want something that is quality and that will have strong long term growth and strong medium term growth so that I can refinance quickly and buy more properties. I feel that inner city will increase in the good times and won't drop as much during the bad times (although I still have to fully research the holding costs when the interest rates are high).

How do you develop a strategy? I'm assuming that everyone here on the forum wants the same end goal, to have a passive income of $100,000 per annum or more from properties. To that effect we would require about 6 properties that are fully paid off and renting $500 per week in today's money. Therefore, their value at today's market would have to be around the $400K-$500K mark each. But then because equity increases take a while to drag the LVR from 80-90% down to 20% or lower, then having more properties will allow me to capture more increases.

Is this how I'm supposed to think?

 

[monalisa]

I don't think I understand what it means to have a strategy. I just want something that is quality and that will have strong long term growth and strong medium term growth so that I can refinance quickly and buy more properties. I feel that inner city will increase in the good times and won't drop as much during the bad times (although I still have to fully research the holding costs when the interest rates are high).

How do you develop a strategy?

In my view, you need to start small ie buy a property for $300K rather than 900K. With 900K - firstly the holding costs will be very significant, and you expose yourself even more when rates rise or where there is a vacancy.

Once you start small, then you can grow from there - you will come up with your strategy as you progress e.g. for MsAli and I, our portfolio is primarily made of strata properties - just the type of properties we feel comfortable with, and this has worked well.

Most people here are in the real estate game as we want to escape the rat race. I am not sure by just "banking" on an inner west property will get you there - what are the guarantees? True these are highly sought after, but you need to consider how this choice fits into the bigger picture for you (and not for your family or family friends). How would this 900K property help you achieve your goals quicker compared to a 300K property?

I think it is very risky just going out and buying a place at this price. If you are so keen on the inner west, perhaps consider a cheaper option eg a unit.

 

[saiman]

I don't think I understand what it means to have a strategy. I just want something that is quality and that will have strong long term growth and strong medium term growth so that I can refinance quickly and buy more properties. I feel that inner city will increase in the good times and won't drop as much during the bad times (although I still have to fully research the holding costs when the interest rates are high).

How do you develop a strategy? I'm assuming that everyone here on the forum wants the same end goal, to have a passive income of $100,000 per annum or more from properties. To that effect we would require about 6 properties that are fully paid off and renting $500 per week in today's money. Therefore, their value at today's market would have to be around the $400K-$500K mark each. But then because equity increases take a while to drag the LVR from 80-90% down to 20% or lower, then having more properties will allow me to capture more increases.

Is this how I'm supposed to think?

find out what your goal is

find out everything thats going to hold you back from getting there

come up with a strategy that will see you overcome these things and map out step by step to get you to your goal

tbh you're never going to get it on your first or second or even third property....just get your feet wet but make sure you're not drowning yourself (in debt)

 

[skater]

so that I can refinance quickly and buy more properties.

In order to do this, not only do you have to buy properties that gain in value, you also need to be able to service the loans.

You have admitted that you are on a low income. How many properties do you realistically think you can get finance for if they are each costing you $100-$200pw?

I think what you need to do is talk to a good broker. Find out what your borrowing capacity is. It's no good running around with stars in your eyes believing you can buy $1m properties, if the best you can buy is, say, $300k. Then find something in the price bracket that you can afford.

 

[DennisLeung]

In order to do this, not only do you have to buy properties that gain in value, you also need to be able to service the loans.

You have admitted that you are on a low income. How many properties do you realistically think you can get finance for if they are each costing you $100-$200pw?

I think what you need to do is talk to a good broker. Find out what your borrowing capacity is. It's no good running around with stars in your eyes believing you can buy $1m properties, if the best you can buy is, say, $300k. Then find something in the price bracket that you can afford.

Yes I'm worried about the servicing as well, if they are costing $250/per week ($180 per week) then what happens when the rate goes up to 8% then these loans will go up to $550 per week loss (before negative gearing) assuming no increase in rent in that time. What I'm wondering at the moment is that when the interest rate goes up, what is the relative rental yield of properties in Sydney? Does the inner west yield increase or does it stay at between 3-4%? If it stays at 3-4% then it's definitely a no.

I do have a broker and he says I can borrow the money required. I think my sleep at night factor is the fact that both my mum and I don't have many expenses and so we can save a bigger percentage of our income without impacting on our lifestyle. I was running some numbers and saw that if we both continue at the current rate we can afford to save about 80k per year which will provide a good buffer each year whilst still being able to keep some of that for a deposit each year in Western Sydney (when the market becomes buyable again). Additionally there is also equity in the current place we are living which may help to buy some time if ratest go up.

The only thing that's stopping me from going to Western Sydney is the lack of good deals available. It seems that most places have dropped below 6% yield now and there are a lot of buyers for everything. If I do make a mistake and overpay will it take longer for me to recover than inner west which shows less declines in the market?

Or maybe I still just continue to wait a few years until rates increases and the market declines before going in? Not sure at this stage

 

[devank]

I do have a broker and he says I can borrow the money required.

Ask him how much you can borrow from ANZ. Generally I'm only comfortable with half of it!

 

[LoneWolf]

If serviceability is of concern, perhaps CF should be your main focus?

We can all wait around to a sunnier day, but when will that day ever come around and how do you know it?

 

[Truly Exotic]

How are you calculating $100 per week loss in rent?

Taking your first example: using pw
Price 900k
Rent 750pw
Mortgage based on 100% at 5% fixed; 865pw
rates; 23pw
insurance: 20pw
management at 6%+gst: 50pw
Maintenance: 10pw say 2-3 service calls for minors
Letting fee/renewal: 15pw
water access; 10pw (I'm guessing)

That's 292pw Or 15.1k negative per year not including any vacancies!!!!!

 

[skater]

What I'm wondering at the moment is that when the interest rate goes up, what is the relative rental yield of properties in Sydney? Does the inner west yield increase or does it stay at between 3-4%? If it stays at 3-4% then it's definitely a no.

Just like the purchase price of properties, the rental amount is governed by supply & demand. What this means is that the current rents could stay exactly as they are for years, while interest rates and/or housing prices push upwards. Of course the reverse is true too, that there could be a lack of available housing for rent & so the rents increase.

deposit each year in Western Sydney (when the market becomes buyable again). The only thing that's stopping me from going to Western Sydney is the lack of good deals available.

You keep coming back to Western Sydney. Why? It's not the only place to invest in, in the country. If there's nothing in Western Sydney that floats your boat, then move onto somewhere else. If you feel unsure about going interstate, you could try Central Coast, Newcastle, Wollongong etc.

 

[scha9799]

I was on $50k a year.

I bought some negative gearing properties and hoping I could get enough capital growth to leave my job.

It's about -200 pw. I worked 2-3 jobs.

I hated my job, every day goes to work is like a torture. In the end, I sold the properties, I couldn't hold it any more.

Now, I have very health + cashflow property.

I will not go to negative gearing again. It's a biggest BS as far as I concern.

 

[DennisLeung]

How are you calculating $100 per week loss in rent?

Taking your first example: using pw
Price 900k
Rent 750pw
Mortgage based on 100% at 5% fixed; 865pw
rates; 23pw
insurance: 20pw
management at 6%+gst: 50pw
Maintenance: 10pw say 2-3 service calls for minors
Letting fee/renewal: 15pw
water access; 10pw (I'm guessing)

That's 292pw Or 15.1k negative per year not including any vacancies!!!!!

I rejigged my cashflow and numbers calculator spreadsheet last night, but the following shows my calculations for the cashflow of the Balmain property (given that the other two have already sold). It shows a roughly $200 per week loss before negative gearing. The management rate I've researched at 5.5%. I did not account for the $10 per week in your calculation and am borrowing 88%.

Just like the purchase price of properties, the rental amount is governed by supply & demand. What this means is that the current rents could stay exactly as they are for years, while interest rates and/or housing prices push upwards. Of course the reverse is true too, that there could be a lack of available housing for rent & so the rents increase.

Now this is concerning. I was banking on the fact that in most cases, the relative rental yield for certain areas remain the same despite interest rate increases. If this is not so, then it's another "no" to buying in the inner west.

You keep coming back to Western Sydney. Why? It's not the only place to invest in, in the country. If there's nothing in Western Sydney that floats your boat, then move onto somewhere else. If you feel unsure about going interstate, you could try Central Coast, Newcastle, Wollongong etc.

Because this is my first real purchase, I just wanted something within distance to get my feet wet. But it sounds more and more like I will have to travel or take the risk of buying interstate.

I was on $50k a year.

I bought some negative gearing properties and hoping I could get enough capital growth to leave my job.

It's about -200 pw. I worked 2-3 jobs.

I hated my job, every day goes to work is like a torture. In the end, I sold the properties, I couldn't hold it any more.

Now, I have very health + cashflow property.

I will not go to negative gearing again. It's a biggest BS as far as I concern.

Are you able to tell me more of your experiences? I'm curious to know where you bought your properties and how long you had them for.

I think what I'm doing in my mind is counting both our incomes and also the existing boarding house income to service the property. E.g. we rent a room out to people off gumtree for $150 per week, so I feel this provides some sleep at night factor as just 2 rooms per week will cover the negative. Granted this is probably not the best way to spend rent money, but I was thinking that this could provide the "sleep at night factor". Also because I live at home, I have very little expenses. I get about $1000 per week net and then spend about $200 per week on food/transport/mobile etc and can put the rest (700-800) to service the mortgage.

Despite this however, I can see you guys' point even according to my above cash flow calculator, as you can see that 3x300K properties each have a higher internal rate of return over 15 years than the 900K monolith (due to a combination of higher purchase costs - stamp duty and LMI in particular, and also negative cash flow). Additionally, there is the big risk of putting yourself in danger with even 1 week's worth of vacancy. On the other hand, 1 property hopefully has 3 times less headache than 3 properties and in my mind (rightly or wrongly) I feel that capital growth is almost "guaranteed" with inner west areas, whereas other areas I feel like it can be more hit and miss.

In summary, I might have to look to Brisbane, Newcastle etc, even though originally I wanted to stay local for the first few purchase(s).

 

[Sesster]

Have you considered a Buyers Agent?

I know there are some people who are dead against it but I believe that if the majority of 'investors' (keep in mind the majority of 'investors' I believe have really very little clue what their doing/how to build a portfolio that will let them retire) used a reputable BA they would most likely be better off with their purchases, rather than just chaotically throwing a dart and hoping.

As long as you choose an area that is not in a boom, and has good medium to long term CG prospects, you cant go too far wrong IF you purchase the right property at a decent price. Hence using a BA unless your willing to put in the effort/time it takes. Its that simple. And to be honest reading back your posts...it just sounds like a disaster waiting to happen on many fronts.

Gumtree for tenants? really...? jeez. Do yourself a huuuge favour and take some serious time to read 10-15 books on proerpty investing (written by aussie authors).

A lot of the suggestions and questions you have will be well answered and covered by most of that material. I would hate to see you have a rotten start and then be disheartened with property investing 2 years down the track.

Sesster

 

[DennisLeung]

Have you considered a Buyers Agent?

I know there are some people who are dead against it but I believe that if the majority of 'investors' (keep in mind the majority of 'investors' I believe have really very little clue what their doing/how to build a portfolio that will let them retire) used a reputable BA they would most likely be better off with their purchases, rather than just chaotically throwing a dart and hoping.

As long as you choose an area that is not in a boom, and has good medium to long term CG prospects, you cant go too far wrong IF you purchase the right property at a decent price. Hence using a BA unless your willing to put in the effort/time it takes. Its that simple. And to be honest reading back your posts...it just sounds like a disaster waiting to happen on many fronts.

Gumtree for tenants? really...? jeez. Do yourself a huuuge favour and take some serious time to read 10-15 books on proerpty investing (written by aussie authors).

A lot of the suggestions and questions you have will be well answered and covered by most of that material. I would hate to see you have a rotten start and then be disheartened with property investing 2 years down the track.

Sesster

I've been to Kinokunyia and read through most of the books they have on sale (Lomas, Spann, Do, Yardney etc), but from speaking to you guys it seems like I have still mountains to learn.

I feel like gumtree is a good adhoc site to use when renting out rooms. You definitely get a higher yield for a property with more bedrooms versus traditional method.

Still unsure of buyers agent. Feel like if I use them now I will never learn, although numbers wise if you use them for a higher end property, then hopefully they can value a 900K property to within 10k of market value (which I am unable to do of yet) and save you e.g. 5-10K and hence you just broke even.