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February 23, 2008 - 12:40 am

Well done, Lisa. I must say I didn't think it could be done, but I'm delighted that I was wrong! Better find me a friend in my Council….

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February 22, 2008 - 10:01 pm

I wouldn't be without an agent. It's not because you can't arrange for repairs, sure, you can do that. But there is a lot of complicated legislation that agents have to keep on top of to ensure that everything is done properly. For the 90% of the time when everything is straightforward, yes, it's "money for jam". For the other 10% of the time, you'll be very grateful that you paid them that other 90% of the time when you didn't need them, because they'll be worth their weight in gold.

I would never let rent fall below market value to retain tenants. If you're $20 behind market after this signing, in 6 months' time when you should be raising $50 again, do you raise only $30 to sign them again? Now you're $40 behind market. If your tenants can't afford your property, best to get a new tenant who can.

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February 21, 2008 - 10:23 pm

salacious wrote:

But how high do you think interest rates will go?

As per my last post, I think another 0.5 or 0.75% will be about it. The 1, 3, 5, 7, and 10 year fixed rates on offer with most banks are all within 0.1%; suggesting that they're predicting very stable interest rates in the coming years.

salacious wrote:

Some investors have more than two ip's so if they sell one and put the funds back into other ip's and reduce payments to offset the climbing interest rates with minimal costs and tax payments.This would increase rental return and serviceability.And then can borrow for the turnaround.Their are more than one way to skin a cat!

Absolutely, there is more than one way to skin a cat. My strategy is based upon my assessment that:

1) stamp duty and CGT are far from minimal, and
2) property prices are not going to fall significantly (except in some overheated markets, which I'm not in), and therefore I'm exceedingly unlikely to pick up a replacement property at a good enough price to offset the above transaction costs.

If you were confident that property prices would fall sufficiently to offset transaction costs, you'd sell the whole lot now and buy in again later! I think the risk is, though, that you'd never be sure when the bottom was, and you'd not buy in again for fear that you hadn't yet hit bottom. By the time you're sure that the market has bottomed, it's rising again and you can't get in at a good enough price to justify the transaction costs you've incurred.

So I'm just planning to ride it out. But if you think you're better off liquidating and re-entering, that's fine – I'm not trying to change your mind!

Good luck,

Tracey in Brisbane

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February 20, 2008 - 10:04 pm

I may be wrong, but my understanding is that you can't require a tenant to do any garden work – either that, or it's unwise to do so in case they hurt themselves and decide to sue you. (Can't remember, the issue came up years ago.)

In any case, I wouldn't have thought that garden tidying was essential work, but probably a good idea to reduce risks of snakes and other vermin. I reckon with 2000 m2 that if you get somebody to rake it all into one corner out of the way, that would be more than reasonable. Let it compost; burning is very environmentally unfriendly. And I would have thought that it could all be raked up for well under $500.

Tangata, in this case I agree that $1K is too much, but for future reference do bear in mind that tradesmen are much more expensive in Australian than in the UK! Watching "Property Ladder" and similar I can't believe how cheap builders, electricians and plumbers are in the UK.

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February 20, 2008 - 9:09 pm

Thank you, Boing, for your kind words.

Vendor finance… look, it is difficult to get on established property, no two ways about it. (Developers are quite likely to consider vendor finance, but I prefer to buy something that I can instantly manufacture equity in, and that's usually not a new-build.) I think it's just a numbers game. I made about 15 to 20 offers incorporating a vendor finance component without even a nibble of interest, and ended up posting to several forums very frustrated, asking "how the heck do you get vendor finance?", late last year. Then ended up getting a vendor who was very open to it! And they are relatively unsophisticated; not the type I had good hopes would be interested. You never can tell… In this last instance I think it was entirely due to the skill of the agent.

The main advice that I got was to try and meet with the vendor and agent face-to-face to explain how it works, because whilst there are good real estate agents around, unfortunately, there are a lot of them who simply don't understand vendor finance, or can't be bothered explaining it to the vendor. So many of them seem to think there's something shonky about it, and keep insisting that the vendor "only wants a clean contract". In my experience, if the agent doesn't believe that your offer is a good one, the chance of them presenting it to the vendor in a manner likely to lead to acceptance is near ZERO. If you don't get the feeling that the agent supports your offer, ask to meet with the vendor and agent to present your offer personally. And sell the benefits to them.

In my case, I eventually found a motivated vendor and an agent who completely understood vendor finance and believed that my offer was a good one, and she achieved acceptance for me – quickly, too! In fact I even went back and asked for a bit more vendor finance (about 8%) because I had "run some figures" and not quite given myself enough slack, and they agreed – in exchange for a 1% interest rate rise. So now I'm paying 9% interest on my vendor finance, and they think they've had a win – even though I would have paid 12%

Lenders… as I've said many times before, you need a good mortgage broker. My vendor finance is completely disclosed and my lender still let me borrow 85% for a total of 110% finance. (25% vendor finance.) Some lenders won't do this, but many of them take the pragmatic view that they have first mortgage anyway, so it really doesn't matter how much vendor finance is involved, provided the borrower is sound. (ie that they're not needing vendor finance because they are way over-extending.)

Good luck!

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February 20, 2008 - 7:36 am

I got a reply from the "serial renovator" ; her position is that she's not doing building work because she's not doing structural work. I believe that the QBSA (here in QLD) would disagree with this interpretation and consider that she's renovating illegally. And yes, in QLD I think you're obliged to provide a 6 1/2 year warranty on all works.

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February 19, 2008 - 8:26 pm

If you can do all this work < $100K, you've gotten a bargain!

People doing renos for $20K 1) aren't adding on rooms, they're probably doing cosmetic stuff, and 2) many are doing illegal renovations. In most (possibly all) states of Australia it's illegal to project manage works over a certain value – about $10K retail value, not what it would cost you to do it – but people do it all the time. I'm waiting for the first prosecution and/or lawsuit.

Many renovators seem to think that if they pay electricians and plumbers to do their trades, and don't do anything structural, then you're fine, but that's simply not true. The laws may be excessively restrictive, but they do actually state that if, for example, you need to repaint the interior of your house (say $5K), polish the floorboards for $3K and pay $3K each to a plumber and electrician (total $14K), in QLD you would need a builder's licence to manage this.

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February 19, 2008 - 8:06 pm

nejas wrote:

trakka wrote:

Just this month I've negotiated to purchase a property with the following numbers: purchase price $600K, vendor finance $150K (25%, 9% interest payable monthly, balloon payment at 1 year), yield at settlement 9.5%.

Hey trakka I'm fairly new to the IP arena can you please explain when you talk about vendor finance, ballon payment 100% finance, it being monthly payments yet your not putting any money in?

Sure! I've negotiated with the vendor to lend me $150K of the purchase price; what that means is that this amount is not payable at settlement but at some later time; in my case I've negotiated 1 year. So I've borrowed 85% or $510K, but at settlement I only have to pay the vendor $450K ($600K less vendor finance $150K). This leaves $60K over to pay for stamp duty, legals, etc, which will leave about $15-20K cash left over.

So settlement happens, and at settlement I'm $15-20K cash richer than I was the day before – but I owe the bank $510K and the vendor $150K. Effectively I've borrowed 110% of purchase price, and yes, after purchase expenses I have negative equity for a while based on purchase price ($600K less $660K = – $60K), but given that I'm comfortable that the property's worth $800K as a warehouse, I actually feel that I have an immediate $140K in equity.

The property rolls along for a year, with me receiving the rental income and paying the bank the mortgage payment on $510K, and paying the vendor an interest-only payment on the $150K. The rent is high enough to cover both payments. And tenant pays outgoings, so I'm pretty much even or slightly ahead at the end of the year – let's say that I have $20K in the bank.

On the one-year anniversary of settlement, I have to pay the vendor their remaining $150K. (That's what a balloon payment is – a lump sum payment of principal at the end.) My plan is to refinance against the value as a warehouse, and increase my borrowings to $660K – the $510K I've already borrowed plus $150K to repay the vendor finance – which is 82.5% of the valuation as a warehouse ($800K – or hopefully a little more if I also get some market increase).

By "no money of my own in" I mean that I had no deposit, and no negative cashflow. The property entirely funds itself.

It's a thing of beauty, isn't it?

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February 19, 2008 - 7:33 pm

I've PM'd Linar.

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February 19, 2008 - 9:48 am

billybman wrote:

Renovations would would cost me between 20-30K if done handyman style. I've renovated before and and currently on my 4th, so do realise the mark up that is added by professional labour. In my estimate it's about 70% of the cost.

Bear in mind that doing works of this scale yourself is illegal in many states; it certainly would be in QLD. It may be ridiculous, but any works whose retail value (ie what a professional would charge to do it) is greater than $11K requires a builder's licence. That includes painting, landscaping, everything. You can get an owner builder's licence to manage it yourself, but that can only be done once every 6 years, and also if you only have an option then you're not the owner and wouldn't qualify for an OB licence.

http://www.somersoft.com/forums/showthread.php?t=36542

I have asked a lady that I know who frequently renovates in QLD how she gets around these laws – or whether, as I suspect many others do, she just renovates illegally and hopes for the best – and I'll get back to you if/when I hear any good answer. Just be aware that if you are renovating illegally, you'll need to be very sure that you have the best asset protection and insurances for if anything goes wrong.

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February 19, 2008 - 8:43 am

Moosehead wrote:

From my limited experience with banks, even with a high salary, they won't lend you much more than 600-700k total because of serviceability.

We have approx $2.5M in full-doc loans and can get at least $1M more.

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February 19, 2008 - 8:39 am

Thank you all for your opinions, and for realising that despite my skepticism, I was sincere in my query. I don't think one of these courses is for me, mainly because like Kylie I feel motivated and focused enough already. But I now see that some of the more "cult-like" behaviour, and strange beliefs, that have concerned me are probably far more to do with the individuals involved than with the principles of NLP, which explains why some people that I respect have gotten a lot out of some of these courses.

As you say, Kylie, wherever you can get some benefit, all power to you.

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February 19, 2008 - 12:19 am

OK, gotcha… yes I missed that

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February 18, 2008 - 8:33 pm

I would buy a PPR that has substantial ability to manufacture equity, inexpensively. For example, buy a dated-looking house and gradually update the paint, window treatments, get the garden looking nice – basically buy something tired and make it look fresh and loved. Then get it revalued and draw the extra equity out as a deposit for your first IP.

From a purely financial perspective, you're better off continuing to rent and buying an IP, because of the tax benefits, but I recommend a PPR for these reasons:

* if cashflow gets tight, it can be tempting to sell an IP, whereas you'll tend to ride out the challenges in the home you're living in
* there's a feeling that comes from living in your own home that I consider worth a great deal
* whilst you can't claim the negative gearing benefits each year on your PPR, you do get CGT exemption. (Yes, I read the post about buyng a PPR and moving out and making it a CGT-free IP; I can't be bothered manipulating my affairs simply to try and defraud the Australian taxpayer. Whilst it may be difficult to prove, if your intent was always to move out, then it is fraud.)
* it's easier to continually improve and maintain a PPR – because you're living in it – and maximise its value

Best wishes!

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February 18, 2008 - 8:04 pm

Linar wrote:

I know that there are many organisations to subscribe to the theory of living off your equity but I have yet to come across a bank who will facilitate that for me.  Whenever I say this I get inundated with offers from mortgage brokers who assure me that they can help me out but, as I have just said, no bank has ever said to me that they will do it. 

Um, I'm totally baffled: why don't you go with one of those mortgage brokers? They're absolutely right; it can be done. Navigating this territory directly with a lender is very difficult, though. I'm not a mortgage broker, but I wouldn't be without one.

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February 17, 2008 - 10:02 pm

* How long to run on the lease?
* How solid is the tenant (ie likely to remain in business)? What bond/guarantee do you have if the tenant disappears or goes bust?
* What are the lease conditions with respect to increases (percentage increases or market review, or combination)?
* How does the current lease amount compare to market? (Check with other real estate agents and valuers – the truth is probably somewhere in-between the optimism of agents and conservatism of valuers.)
* If this tenant went bust or the lease expired, how easy would it be to get a new tenant, and how much would a new tenant be likely to pay? (This is usually expressed in $ per square metre per year. So if you ring an agent and ask what office rents are in that area, and he answers "about $100", that means $100 x (square metres) per year.)
* What does the lease say with regard to outgoings. (Usually in commercial, tenant pays outgoings, but best to check.)
* Why is the property being sold?
* Any chance of some vendor finance?
* Any opportunities under current zoning to further develop the site?

Plenty more – but that's a good start!

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February 17, 2008 - 9:13 pm

I'd sell the existing PPR and buy the new PPR right now, before your income drops. I think I'd be telling the lender that you've figured out that it's a better financial option for you to rent in your current location and own another IP in your home town, and not tell them your plans to move/change jobs. After all, it's only a plan, and plans change. If you've already accepted the new job, however, then be very careful that you don't tell any untruths – I never lie, but one doesn't necessarily have to tell them things that they don't ask, or plans that may or may not eventuate.

After you've settled the new property, well, perhaps you may decide that you'd like to move back to your old home town after all and live in that IP; you may even decide that on the afternoon of settlement day.

And before you change jobs, I'd also be pulling as much equity out of the current IP as I could, too, by way of a redraw or refinance, in case you want to invest further, or even just to have some "buffer". With lower paying jobs and further interest rate rises likely, and perhaps your family enlarging, it always pays to have some cash handy. From what you've told us of your financial situation, I'd be wanting at least $20 or $30K in cash accessible.

When you're in a strong position, arrange as much finance as you possibly can; because if (heaven forbid) you get into trouble, you can't get it anymore. Or as an extremely successful investor that I admire put it: "Whenever somebody offers you money, take it!"

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February 17, 2008 - 8:28 pm

JONCHU wrote:

It is also important to understand that accumulating properties is just one aspect of full time investing, however like any other successful business you need to sell something. This is what full time investors do, I do.

There's absolutely no reason that I can think of why you can't have a successful investing business holding everything, renting it out and refinancing to access increasing equity. I do think that if you have a poor performer, you should sell, and tax shouldn't put you off doing so, but I'd like to know on what basis you can say that one "needs" to sell anything.

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February 17, 2008 - 3:39 am

I think Darra's a good pick; I'd also consider Morayfield (Caboolture) and Riverhills (Centenary suburbs).

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February 16, 2008 - 10:53 pm

Unless you have a high income, you'll need to buy cashflow positive, or at least "not too negative". And yes, they are hard to find and you'll have to be creative.

I think the best strategy is to find a commercial property earning at least 8%, negotiate vendor finance (eg 30% for 5 years), then the bank pays the vendor 30% at settlement, and your 10% ($200K) is used to cover purchase costs and help with any possible negative cashflow. After 5 years, you should have obtained sufficient growth to refinance and continue.