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Probably still put down a few hundred each year for maintenance.
If it is a brand new property or one that you renovated yourself, then you should be pretty well covered.
If it is a tired old property then expect things to break here and there once in a while.
It is not “whether or not things will break”, but rather “when things will break”.
If things don’t break, then great! You’d be quite happy that those a few hundred are your profit for that year, but even when things do break, that’s OK, you are covered (unless something major that is broken that will require a few thousand to fix, but really should aim to prevent those…).
You mean it is not just the new loan application that they will use 7%…
Even the loans that were already approved at 4%, they will treat that as 7% as well?
Another rule of thumb is “you make the money when you buy”.
You don’t “buy something to lose money and hope to make money in a few years”. You need to make sure before you even buy, what you will buy is going to be making money as soon as you buy it.
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This reply was modified 5 years, 9 months ago by
Steven.
This is the bus tour. They will be taking us out on a tour to visit Townhouse development sites of key suburbs. We will be given a tour inside some of the properties that have completed I think
Forget it.
You are buying a solution. Stay away from them.
Queensland per se is not the problem – the product you were buying was the problem. Sorry to hear of the outcome – but thanks for sharing your story.
I actually think it is not necessarily the product itself that is the problem, but the fact that you are being educated in what you are doing.
I don’t suppose most of those groups are willing to teach you how to do research, how to make sure the numbers stack up, how to perform negotiations, etc…
To share my experience. Sometime early last year, I attended one of those webnairs. The webnair was all good, where the presenter talked about “buy property for below market value, get positive cash flow, and get instant equity”. So OK, that sounded like a strategy I would like to implement. So I went on to look further into this. They patched me up one with of their consultants.
However, during my time with the consultant, I was presented with all those brand new development properties… most of them are in Queensland, and most of they are House and Land Packages, which to me was kind of contradictory to what the webnair’s presenter’s “buy below market value, get positive cash flow, get instant equity”…
But I was willing to give them the benefit of doubt while doing some of my own research. I found 2 things that I really needed clarifications:
1. They are “predicting” growth areas. To me, that sounds like speculation rather than investing.
2. I also found that they are massively building House and Land Packages in areas where population is less than 1000.
So naturally I started asking them questions.
When the consultant I have been in contact with conferenced me into a call with their “acquisition manager”, the acquisition manager said some lines such as that the idea of “buy below market value is a terrible advice”, which directly contradicts to what the person on the webnair is saying….. and that made me raise my eye brows……. what the acquisition manager said next is what really ticked me off… he said “all of the information can be very confusing for beginner investors so they ‘strongly discourage people doing their due diligence and instead have their consultants do the due diligence for them'”…… so my reaction was “hell no”, there is no way I want to work with a group who doesn’t want me to do due diligence myself, that is just absurd.
I never spoke to them again after that day.
Currently I am working with a mentor, looking at New Zealand properties. I did have to pay hefty fee to attend that program (I am sure a few people on this forum knows about it as I talked about it in the past).
Anyway, they don’t sell me any properties, but instead they teach me on how to do my research, how to source properties, how to perform negotiations, how to write up sales and purchase contracts, how to work out if the numbers stack up or not and how to work out renovation, etc… So after I learn those lessons, it is up to me to find my own properties, to maintain contacts with agents, property managers, builders, etc… and my mentor and I keep in touch almost on a daily basis. Basically I would present a deal that I work on and he would provide me with comments on why this is a good/bad deal and if this is a potentially good deal, what he thinks I can do to say add value and increase rent or add value to generate equity.
I know what some of you may be thinking “all those knowledge can be learned for free, so why pay a few K (in my case 28K) to learn those knowledge”? This is because naturally I am not a very good self-learner. A lot of times I may have the knowledge, but when applying those knowledge, I tend to stuff up here and there and I found unless I have someone who is constantly supervising me and providing me with comments, otherwise I am bound to mess up. And this is property investing we are talking about, so one apparently small mistake can end up costing me a fortune. So I’d rather have a mentor who can guide me through the whole process.
Basically my mentor says if I apply the same principle, and I can investigate properties from anywhere in the world, as long as the numbers work out. The most important part is make sure the numbers work.
Also, while they do provide souring agent service, my mentor has never really liked the idea of using sourcing agents. As he would say “you can do everything a sourcing agent can do, so why pay them a sourcing fee when you can learn all of their skills”?
At the moment, I have already worked out my strategy and I have already defined which area I want to invest in, so now I pretty goes on a daily routine like this:
1. look for properties in that area (could be the latest listing or could be listing that hasn’t been sold for months, and months)
2. look for comparable sales in nearby streets and roads (basically within the immediate vicinity) for the past 6 months.
3. find 5-6 comparable for sale, find 5-6 comparable for rent
4. Calculate how much is the purchasing price, how much is renovation cost, add them together.
5. Do the math: Future valuation after renovation – (Purchasing Price + renovation cost) = 20% equity generation or not.
6. Also do the math: (Future rent after renovation * 52) / (Purchasing price + renovation cost) = at least 8% or not.
7. If both 5 and 6 ticks, make offer, try to negotiate a lower price to maximise profit, but it is OK if I pay the asking price as long as the numbers can work out.
8. If one or both doesn’t tick unless the purchasing price need to be reduced, then make an offer based on reduced purchase price. Doesn’t matter if vendor rejects my offer, as I have nothing to do lose anyway. It is vendor’s choice to accept or reject my offer, but it is my own choice to make an offer or not to make an offer. The worst case is a “no” answer from vendor… so what? nothing for me to lose.
The whole routine only takes me like 30 minutes every day… I mean I can definitely spare 30 minutes every day.
I can’t say about other cities, but in the city where I am looking at (Dunedin), for every property, there is this thing called a LIM report.
It basically outlines anything and everything, including: property rates details, land details, site hazard details, drainage points, environment information, land zoning details, past approved consent to make alterations to the properties, etc… so on and so forth
Makes me think this is just New Zealand’s version of “Section 32” that we have in Australia…
Thanks Benny for the reply. I did some more investigation in this regard.
The property is actually in New Zealand, but I thought similar concept should apply.
After talking to a few agents, I was told basically the local council put this phrase on literally every property’s report and it looks like the council put down this as a “blanket to cover themselves as result of earthquakes in Christchurch”.
When searching for information on earth quakes in that city, all information I can find indicate the city itself is very low earthquake risk and the closet incident is an nearby earthquake some 30-40 kilometers away. The only reason why that particular city can “feel” a bit of an quake in the past were usually the result of Strong quakes in Christchurch that can be felt by residents in other nearby cities.
So sounds like a bit of a red herring to me.
Thanks Terry.
Between Option 1 and 2, would Option 2 be normally preferred (unless interest rate for the “second loan” is much higher)?
Option 3 would be good, but doesn’t look like I am in a good position to do so until after I get a pay raise.
Cheers
StevenThe way I described though, won’t work very well in Melbourne or Sydney (or maybe even Brisbane) metro area for the matter.
I mean, if property values are well above 1M and you only get 400-500 per week rental income, then it is impossible to get positive cash flow even if we do buy below market value.
It will probably work in regional cities in Australia.
I have enrolled myself in a mentoring program. Quite expensive (28K), and I will be traveling to Auckland for the mentoring. Yea.. my mentoring program is more about investing in New Zealand rather than in Australia.
My mentor has informed me to pay some attention to an area called “Dunedin” in Southern part of NZ… where a 600K property in Melbourne gives me more or less about 400ish per week, the same 600K in NZ can give me close to 1K per week… that’s already positive cash flow without buying below market value, and imagine if I do buy below market value… my mentor will teach me step by step on how to: deal with agents, negotiate price with vendor, look for information about demographic and how to correlate those information to determine if an area is suited for my strategy, etc…..
Another concept which they teach is “don’t use your own money”. The basic idea is a 2 step process: 1. Find an excellent deal, and 2. Find the money. The concept is, if you can source an excellent deal, then money will find you instead of you having to look for money. It does remind me of when reading “Rich dad and Poor dad”, Robert Kyosaki did indicate back then when he purchased his first investment property, he didn’t even have the initial deposit himself… however, because he was able to source such a good deal, angel investors lent him the money to get started and he pulled the deal off, turned a healthy profit and managed to return the money back to the angel investor (together with added interest charged by angel investor too).
Unfortunately, after doing much research and looking through various areas in Australia, between Stamp Duty (doesn’t exist in NZ) and Capital Gain Tax (doesn’t exist in NZ), then factoring in that property price is so high in Australia causing yield to be so low, as well as the fact that the money that you need to return to the angel investors (and you need to let them profit for a bit too), you will have very little profit left when try to do “buy and sell”, so this method of “borrow someone else’s money” just won’t work very well in Australian market.
One thing to mention though is the above example is a simplistic view.
There are many other factors to take into consideration.
Certain area are good for buy and sell, certain areas are good for buy and let, and certain area are good for multi-let (more common in UK than in Australia… Aussies are not big fans of multi-let for some reasons).
Areas close to hospitals, factories, universities are definitely good for Buy and Let (for factory workers and nurses) or Multi-Let (mostly for students).
Areas where there are primarily home owners are probably better suited for Buy and sell, but can also be good for Buy and let if there are lots of advertisement for renting in that area.
You need to define your strategy first, then define your area, and finally find your property.
I personally don’t like the idea of relying on “growth”. Maybe I am just being paranoid… the way I see it is you never know when the market will go through a correction (or in some cases a sharp correction).
Historically there has been a few times that the market crashed when everybody (including experts) think “now is the best time, it is impossible to crash”.
Expert economists get the market and predictions wrong all the time, and we are not even close to being experts, so I won’t even try that.
I prefer to go with “buy below market” strategy and that way you get both “growth (well, not really growth, but the price difference between the below market value you pay and the market value once you do your renovation is your indirect growth”, as well as positive cash flow.
For example, let’s assume the following scenario:
A beautifully renovated property in an area is worth 600K and can be rented for positive cash flow, while a below average renovated property in an area is only worth barely over 300K in the same area.
Assuming the bank regulation says you need to put down 1/3 of property value as deposit while they can provide a loan that is 2/3 of the value. I know you get up to 80% of LVR, but I am using 2/3 for the sake of the example. In fact 65% is the LVR regulation in New Zealand.
So rather than buying a 600K beautifully renovated property (pay 200K deposit and get a 400K loan) directly and subsequently run out of money to be used as deposit for the next property, why not do this instead:
1. Build rapport with agents in that area, let them know that you are not interested in those 600K properties, instead you want to buy those properties that are averagely renovated (or below averaged renovated, as long as you make sure that you don’t buy something that suffers from structural problems) from motivated vendors.
2. Because those vendors are motivated vendors, this means those vendors are looking to sell as quickly as possible rather than go through a standard 4-5 weeks of sales campaign. Meaning, if you build good relations with agents in that area, agents might inform you that before putting the property on the market.
I mean think about it, if a vendor needs to sell in a hurry and get quick cash to cover expenses at their side (could be due to they run out of cash and are desperate to sell, or could be they are moving and need cash to relocate, could be due to a variety of reasons), they’d be more interested in selling it fast rather than selling for top dollar, as long as the offer is still reasonable to them rather than outrageously trying ti rip them off.
Also, Agents will rather be able to sell a property and move onto the next sale, rather than hanging onto a property for weeks only for an increase of 50k sales value.
3. Because the vendors are motivated to sell in this instance and the property is not even on the market, this gives you more leverage to negotiate price and negotiate conditions in your favor. Just be reasonable when making offers, don’t try to rip the vendor off and you will succeed sooner or later.
4. Assuming you do manage to secure a deal for an averagely renovated property for 300K, that’s still not bad. Because then you only pay 100K deposit (1/3 of 300K) and get a 200K loan (2/3 of 300K).
5. You then spend the other 100K cash on renovation, turning this 300K property into a beautifully renovated property, and bring the property value up to 600K again (need valuation report to prove it of course).
6. So now you have a property that is worth 600K, but in reality, you only spent 200K of your own cash (which is 1/3 of the value) and the bank also only provided a 200K loan (again 1/3 of value), meaning there is another 200K value (1/3 of the value) that is sitting there as equity.
7. Now, bring your valuation report to the bank, request that 200K equity to be released (so you top up existing loan from 200K to 400K, and have 200K cash in hand) and use that 200K as deposit / renovation money for the next investment. Your cash flow will reduce as the result of topping up existing loan, but hey, as long as your cash flow doesn’t go into negatives, it is much better than having to save 200K all of your own money, isn’t it?
There… you get the best of both that way.
It is not easy to do, but the concept is very simple when you think about it.
I recall reading from one of the books or articles (can’t remember specifically where) that Steve significantly started to invest less in Victoria (or was it the whole of Australia?) because what he did in Ballarat years ago, stopped working for him….
Growth property vs an Income property.
I think that’s where buy from motivated sellers below market value is the key I suppose, as this way you get the best of both.
Motivated sellers = you are in a better position to negotiate, and thus better purchasing price for you.
Motivated sellers = they are likely to be sold before hitting market thus less competition
Below market value = less loan for you, and thus less repayment, which translates into good cash flow
Below market value = instant equity. You can spend less on renovation to create the equity you want and get those equity out (assuming if your finance allows and it doesn’t end up putting you into negative cash flow again.)My take is if you only have 1-2, then you may be inclined to do so yourself, but if you have a portfolio of say, 15-20, then it becomes a living nightmare for you do micro-manage everything.
Whether it is tax deducible or not then becomes an independent topic.
I think the answer to that also depends on circumstances too. Some PMs are great with basic buy to let properties, but they may not be the best when it comes to managing multi-let properties (duplex, 4-plex, etc… though not that multi-let are all that common in Australia).
I think a good idea when contacting such PMs are:
1. Give them a map of the suburb you want to invest in and ask them to highlight the high and low demand streets, etc… within that suburb. Repeat with a few different PMs in the same area and see if they match up.
2. Ask them if they have experience managing different types of properties (units, houses, multi-lets, commercial properties, etc…)
3. Ask to see if they can advise some kind of “price guide” and “demand guide” documentations. I would think good PMs have such resources, and they provide good feedback in those regards.
4. Also, important to find out what is their process when it comes to dealing with rent arrears and evictions.
I think asking those questions and looking at their responses will tell you a lot and give you a reasonable feel if the PMs words stack up or not.
Even new home areas such as Mernda are only around 25km from the CBD and you can buy homes in the $500,000 to $600,000 range.
What type of properties are them mainly?
Did a quick search on realestates, seems the cheap ones are mostly properties with 200-400sqm land, and the ones that are bigger than 500-600sqm land are getting close to 700K.
OK, now that we have established this fact, just wondering if there is a way for me to find those information (without have to pay every time I want to find such information)?
I tried the URL Sarah suggested, however, problem with that is it only works against those they are currently listed, rather than those that are already sold. Still useful, just thought it’d be good to be able to have a tool or a website that can list the same for sold ones instead of “currently available listed” ones.
Doesn’t seem to be anything “new” though.. they are banning foreign investors from buying existing properties, but the ban does not stop them from buying new ones.
Australia did exactly the same thing years ago and that didn’t stop the price from skyrocketing.
Not sure why your untrusting of the broker whose opinion is that a LOC would be appropriate, other than to say he didnt elaborate as to why he is suggesting it sufficiently for you, for mine this is problematic
I don’t actually mind people suggesting LOC is a more preferred solution.
But what I have a very big problem with is when being asked to compare different products, that particular broker is un-willing to explain the difference, unwilling to provide the pros and cons of both options and the rationals behind why he thinks LOC is the better solution.
This kind of behaviour gives me the impression that he was trying to hide something.
If he explained the situation like you did, I’d be much more trusting to him.
Yes, but if the strategy is trading properties, then how quickly the properties are sold becomes a good indicator, because the idea is a 3 step process:
1. Buy property under market value
2. Do some refurbishment (cosmetic only, nothing structural)
3. Quickly sell itSo in this case, then you definitely do not want to buy a property in an area where properties are advertized on market for months and months without successful sales.
As for buy and hold, I totally agree this strategy will not apply.
What sort of investments? Many banks will lend on dividend income but it won’t be easy without a job.
This sounds a bit counter intuitive.
Those people who are financially free don’t have jobs. They have good investment incomes… so how are they getting loans approved left and right without jobs and payslips?
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This reply was modified 5 years, 9 months ago by
