Forum Replies Created
Properly managed, debt is a useful tool to help one achieve their investment goals.
True, no tenant = no income. But with a little research before you buy extended vacancies are highly unlikely.
I’d also argue that wanting to be successful at property investment does not equal greed. Property investment is something I’m passionate about…. why wouldn’t I want to be as successful at it as I can be?! Making money is great, but it’s the satisfaction of achieving what I set out to that has me hooked.
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PeteDon’t let anyone hold you back Liam, as time is something you can’t get back. The earlier you start the better. And having the right people around you makes all the difference. The relationship I’ve built with my mortgage broker over the last 10 years has been an integral part of my success.
Great idea! Count me in.
I invest with a developer who uses private investment capital to fund a large part of his developments. I believe he came up with the idea because when he started up banks wanted a maximum LVR of 50%, so he offers private investors a fixed rate of return on their money. It means he’s sharing the profits but it mitigates holding costs such as interest on loans, while freeing up his own capital to secure the next development site. It’s obviously taken time though to build up an investor pool.
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PeteI have to agree with Dean here. Particularly with your first purchase, if coming up with the cash needed is stretching your finances to the absolute limit, then buying now is probably not a good idea. Remember, there will always be another house!
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PeteAs someone who works in the mining industry I can tell you that there are more smaller companies going under as well as large scale lay-offs than you hear about in the media so be very wary about buying in a mining town. The industry will return to good times again but who knows how long it will take. As Buyers Agent wrote, timing is important.
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PeteNegative gearing is a great aid/tool to help you achieve your investment goals, but the goal is not to make sure you keep making a loss each year on your IP. Sure, you get a bigger tax return with negative gearing, but what you get back in your tax return is only a portion of what you’ve forked out throughout the year. As an example, if your marginal rate of tax is 37%, then for every dollar you pay out as a loss throughout the year, you’re only getting 37c back. Not such a great return on your money when you look at it like that. I consider the 37c I get back as a bonus only and not a reason to stay in negative gearing territory.
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PeteHi Corey, the IP that we’re selling is down at Aldinga Beach in Bayswood Estate. There’s a few reasons we’re selling but the main ones are:
1. To free up some cash. We’ll do well out of the sale as we got in while land was still cheap down there. This will enable us to pay down our mortgage and look for another investment.
2. While it’s given a good gross rental yield of around 6% (based on what we owe), there’s been little capital growth in the 8 years we’ve owned the property. Upon completion, the house was valued at around 290k, 8 years later it’s looking like we’ll get around 320k for it. Given how much land is available in that area I’m not expecting prices to skyrocket anytime soon, so will sell it and look for a better investment. It looks like we’ve got a buyer already without it even being on the market yet so hopefully it’s an easy sale and we can move on to something better.
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PeteLiving in Adelaide I’ve only ever invested here (to date at least). Am in the process of selling one of my IPs and will be in the market for a cash flow positive property when this one sells. Am very interested to see more examples.
Hi Keith,
Where is your IP being built? Have you done your due diligence in terms of researching the area for growth/rental yield etc? I ask this because I built an off-the-plan IP 8 years ago without doing my research and it just hasn’t performed how I hoped it would. I picked a new estate on the outskirts of Adelaide to build because the land was cheap (85k) and future growth never even entered my mind as I was still fairly new to investing back then. Fast forward to 8 years later and even though I have good equity in the property which had been created by the time construction had finished, it’s only grown in value by about 8-10% over 8 years. There are now a huge amount of similar properties in the area competing for tenants which drives rents down due to oversupply compared to demand. I’d hate for anyone to make the same rookie mistake that I did.
I found the financing process very drawn out as well, it could be just how it is, particularly if there’s significant time between the land settling and the beginning of construction. I had two separate loans. A standard variable rate loan for the land, and a construction loan for the build.
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PeteHi Jodie,
The advice I’ve always been given is to focus on reducing your non-deductible debt first, so I’d even have the $5k emergency money for your IP offsetting your PPOR.
As far as whether to switch your IP to P&I to keep the lower rate is switching lenders to keep a low interest rate an option? I’m certainly not the person to give advice on that, there are brokers on here that can give advice in regards to that, but if you could find a lender that wasn’t increasing their interest rates for investment lending could it be worth paying the fees to switch? We’re with ING Direct and as far as I’m aware they’re not changing their rates for investment lending. I’m not suggesting switching to them but it says to me there must be other lenders out there keeping investment lending rates as they are. We’re paying the same interest rate (4.13% for our PPOR and IPs).
In regards to purchasing assets through super I’d like to hear more of peoples’ opinions on that. My partner and I are at the same stage in life as you are (age, kids, debt etc), I like the idea of it and have recently been making enquiries about starting my own SMSF, but what I’d like to know is given we still have 30-odd years of work before we get to retirement age, how does purchasing property/assets through super now benefit us in the short term if buying more property in the next few years is a goal, to reduce debt on our PPOR in the medium to longer term.
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PeteCattleya, very good advice regarding doing your own research regarding any investment. In regards to my post, I can only refer to my experience with how the developer I invest with works, which is very different to what you’ve guessed. To simplify how he works, an investor loans him “X” amount at “Y% p.a” interest rate, with capital and interest repaid at the end of the project when the properties are sold (typically about 14 months from settlement of the land/property). There’s no purchasing of units or reinvesting the interest, all money is paid out at the end of the project then investors can reinvest at their own discretion. I have, however, changed my view on what Sue should do after reading your post this morning because it looks like I misread her post regarding what she has to spend.
Sue, I based my advice on reading that you had $410k to spend, thinking you had $410k cash sitting in the bank, but after re-reading your post this morning am I correct in saying that $410k minus cash in the bank is your borrowing capacity? If this is the case, I would not recommend investing borrowed funds with a developer regardless of how big or small they are without having a solid foundation of bricks and mortar behind you first. I am comfortable investing with a developer as part of my own strategy because I have a family home and investment properties as a foundation for my portfolio, and am able to use cash and not borrowed funds to invest with my developer.
No investment is without risk, even property if you don’t do you due diligence (I know this from personal experience), and generally the higher the return, the higher the risk. If you do your research, you can’t really go wrong with property, and wait until you have a solid portfolio before you start chasing higher returns.
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PeteIf you are serious about investing in the USA, Try listening to the Bigger Pockets podcast.
http://www.biggerpockets.com/renewsblog/category/podcast/
It will give you a grounding on the differences between the two markets and the problems investors face over there. You will find that there are significant issues with contractors, tenants, property managers and evictions. You also have to allow for thing like regular roof replacements, boilers and other costs we don’t pay here.
BP is also a great place to network with local investors in the areas you are interested in.
Listing to the podcast convinced me to invest in Steve’s fund, rather than doing it myself.Hi David,
Steves’ fund? Can you elaborate please?
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PeteHi Sue,
Very sorry to hear about your current situation, but you’re being proactive about things which is a great start. If I may I’d like to offer an idea/suggestion that may (or may not) appeal to you. Although I’ve been investing in property for 15 years I am fairly new to this forum so I don’t know if this option is familiar with other members on here, and that is investing with a developer. I currently have what’s essentially all my investment capital that’s not tied up in property invested with a local developer here in Adelaide. I’ll run through how this particular developer operates and leave it open for other members’ (and your own) opinions/criticisms.
Their developments are typically small in size, but many in number. In fact, how they develop is the same as I’ve read many members on this forum do. Buy older house on large block, subdivide, renovate old house, build new house at rear, then sell both. This appealed to me over larger developments as I’ve read so many stories of cost blowouts, developers running out of money and going bust etc with large scale development. The director of the company started out doing one project at a time outside of his day job, but became so successful at it, it’s become his full-time business.
The returns he offers are guaranteed, with all relevant legal documentation in place to protect your investment. The returns are tiered depending on how much you invest, but for investments of $100k+ you’re looking at a guaranteed return of $20% p.a. In terms of legal documentation, there’s a loan agreement with a caveat attached saying that he gets paid last so investors get paid before he does. So in the unlikely event that a development doesn’t turn out to be as profitable as expected, they absorb the loss themselves, and the investors retain their full return. In saying that, I was told that each project has to meet extensive feasibility criteria before they purchase a development site so the chances of this happening are extremely low.
If your end goal is to get enough cash together to buy another home for yourself then this might be a good option, in that there’s no entry or exit costs (preparation of legal documents is paid for by the developer) compared to property where you have stamp duty/fees etc (compounded if you’re buying multiple properties). It’s also a cash return in your pocket without having to wait a matter of years for capital growth to occur with property. Even though the return is per annum, it’s also per project, so you don’t get your return until the project is finished, which is generally longer than 12 months (14 months is the average I believe), but it just means you keep earning interest until the project is finished/sold.
So potentially, if you have $410k to work with, investing $400k @ 20% = $80k p.a return. In saying that, one of the cardinal rules of investing is “don’t put all your eggs in one basket” whether you’re a newbie or seasoned investor. If this is an option you may be interested in, I’d recommend “testing the waters”, by investing just a portion of your money with a developer. Whether the developer I use or someone else, if you invest even the minimum amount until you’re comfortable and confident with the process, you’re in a good position. With the developer who I’m invested with, $50k is the minimum investment, which gives I believe a 12% or $6k return p.a. $100k+ invested would give $20k p.a return, and you’d still have $310k in the bank safe and untouched.
What appeals to me about this investment option is it’s creating cashflow. Don’t get me wrong, I’m a huge fan of property and will continue to invest in bricks and mortar, but I’ve been caught a few times over the years having cashflow issues because all my money’s been tied up in property. How many people can say they could find a property for $100k that delivers a rental yield of 20% with no ongoing costs! My personal strategy now involves using my cash return from the developer to fund both future property purchases as well as a better quality of lifestyle.
I hope this gives you some food for thought Sue. Investment choices are intensely personal decisions to make as we all have different situations so I won’t say you should definitely look at this as an option, it’s simply an option that’s either an alternative or better yet an option to use in conjunction with property investment IMHO.
cheers
PeteHi Ben,
In regards to Steves’ book I’ve wondered the same thing in regards to buying so many properties in such a short period of time. I must admit it was a number of years ago now that I read it so much of it I don’t remember, but I will say that times were different years ago. I bought my first ever property in 2001, a 2 bedroom freestanding unit for $81k. I lived in it myself for the first couple of years, but when I moved out and it became an IP, it was immediately a positive cashflow property. I had a mortgage of $120/wk and was getting somewhere around $160/wk in rent. I imagine that properties like these were far more in abundance in times gone by. I am skeptical that such success is possible these days, although success on a smaller scale I can see as a possibility.
The potential trap that I see though with chasing positive cashflow properties at the moment is that what happens when a property that is currently cash flow positive at approx 4% interest becomes a property at 7-8% interest? How many people will be able to cough up the extra cash when their mortgage may double when interest rates revert back to the average?! Particularly if there’s multiple properties to service.
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PeteMy IPs are in Adelaide, and over the years have experienced varying levels of both fees and service. In SA 8.8%(GST inc.) seems to be the typical charge that I’ve seen. I’ve paid 11% before, but it was the agency that charged this premium rate where I received the worst service.
The biggest issues I’ve come across with Property Management agencies are:
1.They have a high turnover of staff. I was experiencing this with two agencies simultaneously, with as little as 3 months inbetween notification that my manager was leaving and a new one taking over. Now if changeover goes smoothly, there’s generally not a problem, but I’ve had issues with changeover notes not being read or understood properly, which has cost me money.
2.Having a property manager who is “soft”. Your property manager needs to be tough but fair, and should be working for YOU and not the tenant. If your property manager can’t deal with tenants effectively when issues arise, then it could very well leave you out of pocket. As an example, when I switched to my current property manager she did a walkthrough of one of my IPs where we had been having minor but ongoing issues with the tenants. Not only had the tenants failed to rectify the minor issues such as cleanliness right throughout the property, they had done some minor renovations to the property over the 6 years they were there without consent. They had also broken lease conditions in regards to pets. When they first applied for the house they had 2 large dogs which we agreed to but they were to stay outside. Not only did they allow the dogs in the house, they bought another puppy and 2 cats, all kept inside. Noone from the agency we had been using had notified us of this, nor did they notice during routine inspections that the animals had been urinating and defacating on carpets and window sills. And this was the agency that was charging the premium 11%! During cleanup the painter and carpet cleaner noticed these things immediately and reported this to my current manager.
The cleanup bill after turfing these tenants out topped $4k + $2k in lost rent. A good property manager would have had all these issues “nipped in the bud” immediately.
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PeteHi Benny, thanks for your thoughts on this.
Some answers to your post….
1.If there is CGT to pay if I sold, it should be minimal. On the advice of my accountant, I had the house valued when I moved out. The house next door which is essentially a mirror image of mine sold not long after I left for a figure that’s (as an estimate) maybe $20k less than mine’s worth now (had it revalued earlier this year as part of refinancing). I based my potential net profit on this lower figure.
2. In terms of my income I do earn a decent wage, although in the last couple of years there have been some quiet spells where my income has dropped for a period of months (I work in a niche market of the manufacturing sector of the mining industry) which is partly why (potentially) over-committing to a highly geared portfolio perhaps isn’t as attractive as it once was. I’ve used equity loans against the property a few times to fund other investments with great success and is definitely what I’ll continue to do if I choose to keep it.
3.The only reason I would sell is if it was the only way to keep moving forward. If I was to sell, then invest the bulk of my capital with the local developer at 20%p.a return, I could boost my income by $40k+ per year which would go a long way towards servicing future loans.
4. Is the $64000 question. I look forward to hearing what people have to say!
Hi Ben,
I don’t think there’s ever a bad time to invest in property, but I think one of the first things you need to ask yourself before putting yourself into a highly geared position is regarding your financial position and job security. Including the family home I own 3 properties, all with an LVR of 80% so I myself am highly geared. I’m more than comfortable being highly geared for the most part, but being in the middle of an extended quiet period in terms of my employment income due to a number of economic factors, I’ve been weighing up the pros and cons to being so highly geared in this current economic climate.
The most important factor (I believe) is how secure is my job/regular income? If you’re confident you have job security and that regular weekly income is coming in then that’s a good position to be in. I’m sure that in just about every instance of someone being highly/negatively geared, the weekly shortfall of cash is made up from their employment income. If you can’t make up the cash shortfall on your investment you’re ultimately not going to be able to keep it for very long regardless of economic conditions.
In saying that, if you can find the right investment property for your situation, then your out of pocket expenses may be minimal, therefore making it easier to handle any economic volatility. Even though I have a high level of borrowings, I get a good rental yield on my 2 investment properties (around 7% each) which puts them just about at neutral gearing in terms of how much they cost me on a weekly basis.
Another option to consider is to invest in a Real Estate Investment Trust (REIT). I must admit I don’t know a lot about them but could be a good way to get started. They offer reasonable returns and you don’t need to invest hundreds of thousands of dollars to get started, therefore reducing the risk from taking on too much debt in an uncertain economy.
cheers
PeteThis sounds like something I have done myself called an “Assignment of Contract”. After construction began on my last IP, I saw the opportunity to make some money onselling land in the Estate my IP was being built in due to the high level of demand (10 registered buyers per available block) and long settlement times. I successfully got my hands on 2 blocks but it was only through sheer luck that I was successful in my endeavour. Thankfully the land agent gave me some good advice throughout the process enabling me to be successful in onselling.
1. Always sign a contract “and/or nominees” after your name. This allows you to change the name(s) on the specific contract you signed to secure the property. If you don’t and put your name only then you’ve just entered into a contract to make the purchase yourself. And be careful because if you haven’t found a buyer come settlement time, or as Terryw wrote if the buyer doesn’t settle, then you’re in trouble. If you haven’t found a buyer then you’re obliged to settle on the property yourself. I imagine it would be a similar outcome if your buyer doesn’t settle.
2. Make sure you are allowed to do whatever it is you’re considering. I was lucky in that the Estate that the land I onsold was in allowed such sales to take place. The Estate next door though had clauses in its land contracts that stated if you sold/onsold a block of land it had to be back to the developer for the original purchase price.
This occurred in South Australia, other states may be different but this was my experience.
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PeteI’m certainly no expert in the area of property development but $100k just to manage the project sounds absolutely ridiculous to me. Have you enquired with any building companies themselves? I know that here in Adelaide I see some of the larger project home builders even advertise on t.v that if you want to develop your property they can assist with every stage of the process. A one-stop-shop kind of thing.
This in itself could potentially save money in terms of holding costs. Having gone through the building process for my last investment property I learned that any holdup costs you money, because once the process begins, you’re paying out mortgage payments but no income coming in until the project finishes. I’d be calling a few project home builders that cover the whole development process and getting a few quotes for their project management side of things.
As an example, this is from the website of a builder here in Adelaide:
http://www.hickinbotham.com.au/page/content/sub_dividing
cheers
Pete
