[PeterParkerMember@peterparkerJoin Date: 2003Post Count: 20]

January 11, 2004 - 10:31 am

Hi Redwing:

I think I know the city you’re talking about[]. I agree that it’s got good growth prospects – the average price there is lower than the coastal town to the south and the coastal city to the north.

That yield % is OK (not great) for that city. But I’ve found that charges like rates are proportionately higher for something that rents cheaply ($100-120pw) than somewhere that rents for a little more ($140-160pw) but which has a slightly lower yield %.

The block of 38 scares me off as well. You have little control over the body corp. Also the chances are that at any one time there will be 1 unit vacant. This affects what rent you can charge for your place, and may mean that even if you do it up inside people will still only want to pay the same rent as other tenants there.

Wouldn’t a cheap house or duplex with no strata levy do better for you? Yes you might only get 6% rtn, but you might be paying out less than with the unit.

Given that you’re investing for growth you’d be getting a bigger land component that’s more likely to appreciate. It may also be that you’ll get a longer term tenant in the house than the 1br flat. After all that city is not a high rent place, and anyone with a job should be able to afford to rent at least a 2br flat.

But if the 1br place is handy to everything and in top-notch upkeep maybe you could rent it as short-stay FF and get $160-200pw? That’s the only way I can see it paying, but you’d still be getting less growth than the house.

Re the sheet, I’d include some repayment info unless you were going to buy outright. Before the interest rate rise, I went on $60 per month per $10k borrowed.

I’d also add something re the construction date if you want to claim building depreciation. I would certainly want the option of being able to claim this.

Regards, Peter

[PeterParkerMember@peterparkerJoin Date: 2003Post Count: 20]

May 7, 2003 - 1:11 pm

Multiplying by 1.6 may guarantee it’s positive, but only if interest rates don’t go up much. This is a yield of somewhere near 7%. Better than average but not enough for some.

To me the ’11 second’ thing is just fancy jargon for a yield a bit over 10%. With this interest rates could rise a bit and you’d still be cashflow positive. Or you could put all your rent into your loan and pay it off in nearer to 10 rather than 30 years.

Peter

[PeterParkerMember@peterparkerJoin Date: 2003Post Count: 20]

April 24, 2003 - 11:15 am

I can see what Dean means.

I haven’t done any active looking in Perth, but I’ve heard good things (yield-wise) about the Kwinana and Armadale/Gosnells areas.

I’ve also been told that Broome is fairly go-ahead at the moment, but don’t have the stats.

When I last looked you could get a place in Kellerberrin (and similar towns) for $40k. If you get a good tenant paying $100pw, you might be OK, but i”d be worrying about the almost zero prospect of capital gain, the difficulties of getting a tenant or the town’s negative population growth.

Peter

[PeterParkerMember@peterparkerJoin Date: 2003Post Count: 20]

April 23, 2003 - 10:36 pm

Hi Sooshie – I just happen to love reading []

I find I’m often racked by indecision, lethargy and think of reasons not to do things. I am also sometimes let opportunities slip by.

But when the evidence is overwhelming that the potential benefits far outweigh the risks, I can move quite quickly. The books/software mentioned above, along with my independent analysis have helped considerably.

I’ve been investing for about 8 years, but never in direct property. I did go to one of those free seminars a couple of years ago, but was turned off by the the big loans, negative gearing and slick presentation, which was directed at people with high incomes who already owned their home (ie not me!).

Then one night last December I woke in my sleep with a thought about cheap properties in country towns/cities. I couldn’t get the thought out of my head, so I turned on the light, wrote it down, then went back to bed. The plan was for ‘low priced, high yielding property that at least held its value’.

A country town would be OK, but I’d prefer it to have a growing population. All I’d do is put up a deposit and the rental income would pay the rest.

I approached the bank and got pre-approval for finance (after looking at offerings from other institutions), to make sure that what I was thinking could actually happen.

And so the book buying frenzy began! Checking estate agent websites for prices and rent showed that there was potential for this. I made up a spreadsheet to show that the figures worked out and started looking at this and other sites.

I went on trips around Melbourne (Preston, Sunshine, Noble Park) but the prices even in those areas were not conducive to positive c/f. Also I’d only be buying at the bottom end of the market, but at the end of a R/E boom.

I looked at some country areas in country Victoria. The yields were OK, but I had concerns about population growth in some centres.

Annual leave and a trip to Adelaide in March 2003 for another purpose had me wondering about WA (where I’ve spent most of my life). I did some research on the web and found there was positive c/f property available in a large regional centre which was experiencing steady pop growth. I monitored the web listings, got a listing of recent sales and prices and talked to people. Also before I left got a city map and shortlisted streets/areas of interest. Also told agents that I was coming.

I’d squeezed in a week in WA before Adelaide specifically to look around and buy a place. I located a suitable place with tenants, put down an offer and secured a place. Spoke to council and got engineers and pest inspections.

Now waiting for settlement!

If all goes to plan, everything will have been achieved in under 6 mths. Maybe this was too hasty, but I did heaps of research, found the figures were good, am not experiencing ‘buyers remorse’ and was not discouraged by the 4 Corners show.

However I can’t understand people that will buy properties unseen. What good is being right near the city when you can’t cross the road to get there, easily back out into your street or have to walk over dingy unsafe railway overpasses? The seven days allowed was about right, and I wouldn’t recommend that anyone spend less.

Peter

[PeterParkerMember@peterparkerJoin Date: 2003Post Count: 20]

April 23, 2003 - 9:02 am

Allan, it depends on what you want and where you live. Four questions:

How important is having your own home that you can do as you like and no inspections?

How focussed are you on your financial goals, or do you have lifestyle goals as well?

How long do you intend to live in the one place?

Are you in an area where prices are high and yields are low? If so, stay renting. If not, the opportunity costs of buying (particularly at this time) could be high.

I personally went for renting + buying an IP rather than buying my own PPOR. Even the govt’s $7000 didn’t sway me. but your needs might be different.

Peter

[PeterParkerMember@peterparkerJoin Date: 2003Post Count: 20]

April 23, 2003 - 7:45 am

Here’s what I have in my library and my comments:

‘Streets Ahead’ has lots of good stuff in it, but bear in mind that it is biased heavily towards capital growth rather than cashflow.

For example, it compares one growth property with one cashflow property, when it would have been fairer to compare it with 2 or 3 (due to the often lower purchase price of the latter as well as the ability to pay the latter off quickly).

However it also advocates starting early. Unless you’re a medium-high income earner who already owns their PPOR and/or is willing to borrow lots and take big risks, starting early is easier said than done.

In contrast, starting with cashflow positive is heaps easier, due to their normally lower prices and thus smaller loans. It’s also better psychologically as you can pay the property off fairly quickly and even with one property can have 20-25% of your income passively derived, and are thus well on the way to financial independence without risking everything.

How to Create Income for Life (Lomas) is good and concentrates on cashflow positive property. There is only one key message not contained in other books, and that’s buy properties built after 1985 for the tax benefits. The software you can get if you buy the book is excellent, but the online cashflow positive property register wasn’t (expensive CBD apartment blocks and if the tax laws changed, you’d be stuffed)

Borrowing to Invest (Whittaker/Resnik) A good primer for beginners.

Books by Anita Bell (Your Mortgage and Your Investment Property). Many handy hints and ideas. Cheap paper means books are cheap to buy. Don’t like interest only loans.

I like the approach of saving interest and paying the property off quickly, but I think some of the very fast repayment time frames assume you’re a married couple earning $50k/year each living in your own home (ie not paying rent). If you’re single, renting and earning $30k/yr, 10 years is more realistic than three I think, at least for your first IP.

Various Robert K books – Rich Dad Poor Dad, etc. Very good at motivating, and especially in urging that you get a financial education.

Some of the specific ideas are a bit doubtful, but to be fair he does suggest that those worked for him and you should go away and think up some of your own.

I believe he is not 100% right when he says that your PPOR is a liability. Yes the cost of furnishing it is, but you’d have to do this if living in a rented house. If you own, you’re saving rent and getting an asset that will appreciate. Probably the worst thing though is that if you’re paying it off, it reduces your borrowing capacity to buy investments that pay (though you could redraw from it to get a deposit for an IP).

I would say that provided you don’t spend much on it, your PPOR is an asset, albeit in some areas a poor performing one compared to other investments you could make. In my case I did not buy my PPOR ($120pw rent, $160k value) and chose instead to get an IP ($160pw, $92k) as it more than pays the rent with a mortgage only about 50% the size.

I haven’t got any Jan Somers books, but these are also supposed to be good as well.

Peter

[PeterParkerMember@peterparkerJoin Date: 2003Post Count: 20]

April 22, 2003 - 9:58 pm

I didn’t participate in the online chat afterwards but looked them up the next day.

A real ‘dog’s breakfast, I’m afraid. It was very hard to follow the threads and I didn’t get much out of them; my own reading, and forums like this and the Somersoft one have been far more educational.

[PeterParkerMember@peterparkerJoin Date: 2003Post Count: 20]

April 22, 2003 - 12:12 pm

Thanks for clearing that up Paul. Though I found the way this stat was presented ambiguous (I assumed property earnings, whereas it was actually average weekly earnings).

A couple of points:

1. The US appears to be in a different stage of the economic cycle to Australia at the moment. This may affect comparative prices.

2. Wage averages in the US are misleading. The US has many shoe-shine-domestic-help people on the minimum wage (or less) as well as a disproportionate number of high income earners (who get paid much more than their equivalent in Australia).

It could be that the majority (70-80%) of the population receive below the mean national income. This would skew the stats – I would prefer if they looked at median incomes and median property prices.

3. Even accepting your figures, a property I’m buying is in an area with high average incomes, low property prices, and a steadily growing population.

The property is worth between 100 and 120 weeks of the average wage. This makes it underpriced, even compared to the US.

As I said, there is no one property market, only property markets, which behave differently. Caution is certainly necessary, but this does not necessarily preclude property purchases if you’ve done your homework and know what you’re getting is good value. As a measure of this, someone suggested comparing the cost of the property with how much it would cost to build today, which I think sounds reasonable.

Peter

[PeterParkerMember@peterparkerJoin Date: 2003Post Count: 20]

April 21, 2003 - 9:31 pm

‘this does not just relate investment units but ALL property’.

How can this be?

There is not just one property market in Australia, but several. The current property boom has affected mainly capital cities and some country areas. Other areas have had NO BOOM. I would expect the metro areas would bear the brunt of any ‘correction’ or levelling off, particularly those those off the plan CBD units that have high overheads and minimal land component.

The area that I chose has population growth but has seen minimal price increases since 1994. It also has average yields around 8-9%. Affordability there is also good relative to people’s incomes. I fail to see that this area is over priced, especially given the returns and the steady population growth.

‘When are people going to accept that it’s rental yields that anchor property values’.

People who buy property for income and financial independence do just that. Possibly try asking that question of those who buy mainly for capital gain.

‘in Australia prices are at 430 weeks earning’.

???

Let’s do the sums. $100 per week rent. $100 times 430 makes $43 000. Sounds super cheap to me! And a great yield. If it’s any good in a reasonable location, I’d buy buy buy!

Peter

[PeterParkerMember@peterparkerJoin Date: 2003Post Count: 20]

April 20, 2003 - 10:43 pm

Hi Paul – I’ll rephrase my answer, which I think more clearly answers your question.

Q. ‘surely a renter can see the difference between a $100k and $200k property for the same rent’

A. I would think they could too, though factors such as convenience, number of bedrooms, access to transport & parking would be more significant considerations than sale value.

Note that renters are normally wanting to move into a particular area. As AD said, different areas have different yields. Rents seem to be comparatively constant across Australia. Prices and therefore yields are less so.

It’s unlikely you will find a 4% property right next door to a 10% property. But you will find cities/towns with many 4% properties and others with 8-10% properties. AD has already pointed out the reasons for this.

Thus unless you strike lucky and buy super cheap (ie half-price), you will find comparatively little variation between yields in a particular area. As tenants have already decided their town/suburb, you will not have 4% yield properties competing with 10% properties. The situation you described will not arise.

In other words, unless you’ve got the bargain of the century, you will find that the % yield variations from town to town (6%) are more significant than those within towns (1-2%).

Big investors who have the inside running on cheap properties in expensive areas may differ, but for me, the first step was to find an area that has good average yields (ie 8%) and look for a keenly-priced property in this area. Even with the small variations between properties, you should be able to get something that returns 9-10%.

Peter

[PeterParkerMember@peterparkerJoin Date: 2003Post Count: 20]

April 15, 2003 - 9:19 pm

Surely borrowing money for one purpose (reno), but actually using it for another (deposit) is fraud, and could endanger one’s credit rating?

Peter

[PeterParkerMember@peterparkerJoin Date: 2003Post Count: 20]

April 14, 2003 - 3:32 am

Andy, for this exercise, I assumed that the positive property was in a country (or mining) town with a fairly static population. Thus I didn’t want to assume any capital growth.

However there are some areas where there are cashflow positive properties with high growth potential. Margaret River (WA) in the mid 1980s was an example, and has achieved growth rates as good (if not better) than the big cities. Rents there are higher now, but the prices are even more so, so most properties are no longer positive there. As some have pointed out, some Qld regional coastal areas, might still have both high yields and growth potential. But I did not want to assume this.

Peter

[PeterParkerMember@peterparkerJoin Date: 2003Post Count: 20]

April 13, 2003 - 10:12 pm

But what if you buy in a town where most properties return 8-9%? Provided the vacancy rate is low, the tenant therefore has little choice but to pay these rents.

I stepped into the renter’s shoes when selecting my IP. It is along a well-known CBD street, and is 10 min walk from the centre of town and closer than that to the supermarket and university. There are no busy roads or railway overpasses to cross to get there. It’s well-presented, 3 bedrooms and brick construction. It also has ducted air conditioning and a sat TV dish. The tenant could either rent a place like mine, close to town and low maintenance, or rent an old fibro house in a poorer location for the same price.

Thus even if there is a downturn and my tenant leaves, I’ve selected a place that is highly attractive to tenants yet returns 9% pa.

My approach is not just ‘buy it if it’s cashflow positive’. Instead I’ve made cashflow positive a necessary but not only condition that makes a property worthy of consideration. I am convinced that this is necessary to ensure that even during a downturn tenants will chose my property over someone else’s.

Peter

[PeterParkerMember@peterparkerJoin Date: 2003Post Count: 20]

April 13, 2003 - 9:57 am

Though someone at 30 (contemplating retirement at 40) might want to go cashflow positive also.

Particularly if they also have a good portfolio of shares for some cap gain.

Some people measure their financial progress towards their goal by net wealth. ‘My wealth grew by $20 000 last year, so I did OK’. I did this when capital growth was my key objective.

Now I’m as much concerned about progress towards financial independence. If 10% of my income was passively derived last year, but (thanks to the purchase of a positive cashflow property) next year it will be 25%, I reckon that that’s pretty good progress as well.

It depends on what you want.

I would agree that a single income-selected property would be inferior to a single growth-selected property.

But if you have a property acquisition plan, it should be possible to buy two positive properties in the time it takes to pay off one negative property. And by paying them off quickly, you’re paying the same amount of interest to buy two positive properties as you are on one negative property.

Note that my example assumed that they cost the same ($100k). If not, then the ratio could be 3 or 4. And as it should be easy to go from 4 to 8 properties as it is to go from 1 to 2, ownership of multiple positive properties should be easier still.

Of course all this depends largely on future earnings. I’ve posed this question elsewhere. The answer to this is key to whether investing in low-growth properties is wise or not for the long-term.

Peter

[PeterParkerMember@peterparkerJoin Date: 2003Post Count: 20]

April 13, 2003 - 9:09 am

I’ve gone through this exercise myself and made up a spreadsheet with all the salient calculations. I reckon anyone considering any form of property investment should do it. If you haven’t you’re not ready to invest IMHO.

You should also be aware of what you want. Do you want to be a millionaire by age 45, or financially independent by then? Only you can answer that question, but for me financial independence is what I chose. Your answer to this question will determine what investing approach you should take.

My spreadsheet compares two properties costing $100 000. Both are assumed to return 9% pa, but the split between the cashflow positive one and the cashflow negative one varies. The positive property returns 9% income and no capital gain. I assumed that the growth oriented (neg geared) property returns 5% pa and grows by 4% pa.

To ensure both properties had the same impact on my pocket, I assumed that I could afford the extra mortgage payment for the negatively geared property. But in the case of the positive property, I used this as a voluntary payment to pay it off quicker.

With 7% interest, it took me 30 years to pay off the neg geared property. At that time it would be worth $324k. However the positive property would be paid off in 12 years. So a second positive property is bought. By year 24 you either own two positive properties outright (thus be worth $200 000 and get $18 000pa income) or are still paying off one negative property. However because its worth has increased, your net wealth is actually higher with the negative property, even with the unpaid loan. The difference is less though if you can manage to buy 3 cashflow positive properties in the time it takes to pay off one negative.

Summary: The analysis favours high yielding properties in the early years, but high growth in the latter years. If early financial independence is sought and subsequent properties are purchased, the high-yield approach is preferred. If you’re the opposite, ie if you don’t want to retire early, you’re in your 20s and you have heaps of money to buy a growth property in a choice area, and don’t mind big debts, then high-growth might be the better approach.

Me? Well I did not want to overcommit myself by getting big loans. I also wanted to maintain my existing investment portfolo (which is growth-oriented). I wanted early financial independence and a property that pays from day one. The property should be low maintenance, built post 1985, near town, so easy to let out. The thought of a 30 year loan scares me, but if I can pay it off in 10 I’m happy.

This points to a cashflow positive property. The one I’m buying meets the criteria. The price ($92 000) was also within my budget. Comparable properties in this city (pop 30 000) rent at $170-180pw, so it almost makes the 11 sec rule. However it’s already got tenants (who’ve been there 2 years) and they look after the place, so I’m happy with the $160pw they’re paying.

But you might be different and have different objectives to me, so for you that property might not be suitable.

[PeterParkerMember@peterparkerJoin Date: 2003Post Count: 20]

April 11, 2003 - 1:27 am

One way is to restrain borrowing, maybe by having a debt to equity limit (say 50%). If you already have $100 000 in assets, you can borrow 100% on a a $100 000 property, so you owe a max of $100k on $200k assets. As you pay the property off your situation will improve rapidly. This is a fairly conservative approach and is based on limiting your borrowings. Unless there was a big crash (with your assets falling 50%), you should be safe.

As for talking to kids about money, I know they say you should do it, and not doing this has caused numerous feuds in families, but if they know you’re rich, they might not work hard/invest themselves if they know they have a big inheritance from your diligence. But if you have a big debt not backed by assets, clearly this should be revealed.

Peter

[PeterParkerMember@peterparkerJoin Date: 2003Post Count: 20]

April 11, 2003 - 1:15 am

Hi Dan

In relation to 1. unless I wanted to be in debt for a long time, pay heaps of interest to the bank, and not actually own very much, I would always take out a P&I loan when buying a property chosen for its cashflow. If you don’t you could end up owing as much on the property as it’s worth. Your only benefit will have been a source of income for a while. To keep this income stream going, you will need to find a spare hundred thousand or so for the principle. Not for me, I’m afraid!

There are alternative techniques (eg putting the excess after you’ve paid the interest into a sinking fund) to make interest only work. I have seen this recommended by more agressive capital-gain oriented investors.

But for my part, I would rather a genuinely positive property, where the rent is enough to cover costs, interest and big chunks of the principal so I can get it paid off in 10 years and not 30. If you buy properties that follow the 11 second rule (or close to it if you pay a karge deposit) this should be possible.

Then you can use 100% of the income from Property 1 to pay off Property 2. Once you’ve done this, it should be possible to move from 4 to 8 properties with about the same amount of risk that it took to move from 1 to 2 as you’re using two rents to pay off one property each time.

That’s my strategy, and I still haven’t settled on Property 1. But I can’t see why it won’t work. But it would need at least 15-20 years to work properly.

So to answer your question, genuine cashflow positive is enough income so it pays a P&I loan, preferably with enough left over to pay it quickly. Some people (eg Margaret Lomas) use big tax breaks (most principally building depreciation) to improve cashflow and even make a negative property positive. This works on new, expensive apartment blocks, but is less significant for older places. Nevertheless I would still aim to buy a post 1985 place to get it.

Peter

[PeterParkerMember@peterparkerJoin Date: 2003Post Count: 20]

April 10, 2003 - 7:03 am

Isn’t he one of Robert K’s disciples?

Peter

[PeterParkerMember@peterparkerJoin Date: 2003Post Count: 20]

April 9, 2003 - 12:09 pm

I would recommend getting both a building inspection and termite inspection done, and make these a condition of the sale. You should nominate the inspector, not the selling agent. I know the standard Real Estate Institute contracts in WA have inspections as a standard condition.

There are building inspectors who are builders, or those that are engineers. I contacted the local council to get a list of those in the area. The council’s building dept was also very helpful in advising on what streets had subsidence problems and the best building construction (in the area I bought in, brick veneer was preferable to double brick).

Though it cost more ($500) I opted to get an engineer to look at the place. I went with him while he did it. I found it most educational and would recommend this to anyone planning to make several purchases.

If you notice any problems yourself, you can make your offer conditional on the vendor fixing them before sale. For example a property I’m currently buying had been reduced in price, represented good value compared to similar properties and had satisfactory cashflow ($92 000, $160pw, with tenant, 3br, close to town) so I accepted the vendor’s price on the condition that they replace the gutters (which had leaks) and install a deadlock on the front door. The vendor accepted this. So, yes, you can make the sale subject to repairs/improvements.

Peter

[PeterParkerMember@peterparkerJoin Date: 2003Post Count: 20]

April 9, 2003 - 5:04 am

The title should be simple, succinct and very general. It should tap into people’s aspirations. This could be based on current workplace worries, eg longer hours, unpaid working hours, less time with family, etc. There is also a yearning for people to take control of their life, which is a key determinant of happiness. The title should address these human aspirations and avoid technical terms such as ‘cashflow’, ‘positive gearing’ or even ‘real estate’ or ‘property’.

With the title focusing on broad yearnings to get people in, the subtitle should be more specific, to back up the basic approach (in this case cash-flow positive property). It should not contain numbers.

I suggest the following (subtitles beneath).

1. SACK YOUR BOSS!
Financial freedom through positive cashflow property

2. WHY I DON’T HAVE TO GO TO WORK
Pay yourself more than the boss does

3. THE SEVEN DAY WEEKEND (OR PERPETUAL LEISURE)
Financial freedom through cashflow positive property

4. I DON’T CARE IF I GET SACKED
Earn more than your boss ever paid

5. THE YES DAD
Financial freedom to stay at home

6. DADDY, ‘WHY DON’T YOU GO TO WORK ANYMORE?’
How I became financially free

7. UNEMPLOY YOURSELF…
and let your tenants make you rich

8. A JOB – NO THANKS! (OR WHY I DON’T WANT A JOB)
Be your own boss with investment property

9. WHY SHOULD I …
Taking control of your life with property that pays

10. (If you really want property in the title, how about)

PROPERTY THAT PAYS
An introduction to cashflow-positive property

The ‘read how I bought 130 properties in 3 years’ bit could be a sub-sub title, or additional comment put in a circle somewhere on the cover.

Peter