how to invest? capital gain or high rent return

Hi Ya,

Firstly, don't purchase a house because you'd like to live there.  Big mistake as it is the wrong basis for a decision.

Secondly, only ever purchase a house when the numbers tell you to.  There are any number of good applications available that will work the numbers for you ranging from Excel spreadsheets to full applications that work out all of the pros and cons.

Thirdly, with $600K to spend, do not go out and purchase a house.  With that sort of money you have enough capital to purchase 4 houses valued at $500K and have change (that allows for a 20% deposit which will give the banks some comfort and cash to cover purchase costs).  Why purchase 4 and go into debit when you could purchase without debit?  Simple.  For ease of comparison and calculation let's assume a 5% capital gain average.  If you purchase one house valued at $600K you will have one property valued at $600K and your equity will increase by $30K in the first year.  While that is nice, it is just $30K.  However, if you purchase 4 houses valued at $500K, you will have $2 million worth of property increasing your equity by $100K in your first year.  That $100K which will be enough to purchase an additional house house in your send year and every subsequent year thereafter.

So, if you purchase 1 house valued at $600K, at the end of the second year you will have $600K worth of property earning you capital gain.  But if you buy 4 now, at the end of your second year you will have $2.5 million (minimum) earning you capital gain.

Having said that, I'd suggest you purchase houses on 10% deposit, not 20% however, that will mean you will (may) have to pay mortgage insurance.  Why would you do that?  Simply.  Mortgage insurance may cost you up to $10K per house.  So what?  By only making a 10% deposit, you increase your purchase opportunity by 100%.  That means that in the example above, instead of having 4 houses earning you capital gain, you now have 8.  In other words, for an increase in cost of just $80K you increase the value of your your property portfolio by an additional $2 million (it's now $4 million not $2 million) earning you $400K capital gain per annum not $30K.  With an additional $400k per annum in the first year that is enough capital to purchase an additional 3 or 4 houses in the second year meaning your portfolio is now valued somewhere between $12 and $13 million earning you capital gain etc, etc, etc..  You can do the sums for yourself.  You could even retire and live off the capital increase by line of credit.

No wonder books titled "from 0 to 130 Houses in 3.5 years" can be written.

My own example, and I do not have anywhere near 130 houses – yet.  During 2010 I had $73K to 'spend'.  That $73K was a line of credit on my current dwelling, on which I still owe near $200K.   Early December I signed a contract to purchase a property in a coal mining town in Queensland for $468K.  I put down a 10% deposit.  Fortunately for me my bank contact used the mortgage insurance already paid on my dwelling to cover the Qld purchase.  The house cost me all up $485K after expenses.  When I signed the contract it was still being built.  I took possession of it 30 June 2011 and had tenants move in 13 July on a 12 month lease at $950 per week.  That is a little over 10.5% rental return and i've been advised by my managing agent it could go to a minimum $1300 per week (nearly 14.5%) if the current tenant breaks their lease and the property goes back on the market!  So don't be excited by 8.5% rental return.  Do your research first.  By September 2011 I was advised i could put the property on the market for sale at between $560K and $580K. Had I waited for a 20% deposit, I still would be without an investment property, I would be approximately $100K worse off and I wouldn't now be considering having my second investment by the end of this year.  So far I still haven't seen the property.  I live in Perth. (I have seen photos). By the way, quess who won't be selling!

Bite the bullet.  Do it.  Listen to the advice Steve (and others) provides.  It's good advice.

Why purchase where you get either rent or capital?  Go where you can get both!

Cheers.

WIthout Capital growth you are not going to make any money in the long run.

You can afford to pay out $10,000- $15,000 a week?   So you have $520,000- $780,000 a year spare money?  Want a wife??

There are more than one way to get to a million. Starting with 600k .. a great start.

The answer comes to what else you bring to the party. Cash .. nice .. but leverage requires income. Assets? can bring those?

Bank looks  at the three issues and makes their decisions on those.

ASSET
INCOME (INC RENT)
LIABILITIES AND EXPENSES (INC CREDIT CARDS)

If you are an accountant .. you are probably more than familiar with these three item sets. So the broader answer to where to invest should be .. do you have a balanced portfolio of all three to go forward?

Some people find themselves committed to the house as a debt pit. Thats ok .. it'll return eventually .. but in the meantime you may have 10-15 years to wait. Thats part of your life .. like it or not.

The big mistake is assuming that a current high demand area remains a continuous demand area. That having a large outlay and large expense sheet .. actually produces a better return. That investing a large sum on a certain expensive site will lead to better returns.

Value lies in recognising potential in a given area for something its not yet established as. Transformation for profit only works when the expense vs outcome is worth the effort.

The other thing to remember is that a good property investment should never be treated as a passive concern. If its a passive concern .. you are either neglecting the property or not utilising it to its full potential. Both of which restrict your ability to produce a better result in the longer term.

If you have the ability to borrow well using the 600k as a basic deposit .. in these troubled times .. dont borrow to your limit. Leave both a safety margin in your borrowing and a buffer to your possible expenses. Where this amount lies depends on your expertise with property rather than a genuine figure.

Bringing what i just said back to your actual concerns.

Since you are on a low doc situation .. your long term issue remains LACK OF ASSESSABLE INCOME. Thats going to be a problem with ongoing lending unless you are coming back with a reasonable rental income in the near future.

So your immediate adjustment will be a requirement for a more solid cashflow.

Property in Tasmania is returning 8%? WONDERFUL ! Since you can currently borrow at anything up to 2% less you have a situation where the property can return a positive result and extra cashflow within a limited period of time.

The other thing to consider will be the lifestyle choice. If you find yourself going to TAS regularly anyway, you can accomodate the transit to TAS as a partial tax deduction as transit expenses for your business venture.

The correct thing to do with a low capital growth high return property is purchase it and immediately start on loan reduction over and above the tax deductible interest amount. Graduating the property to a largely debt free asset and a reasonable income return. It means you can use it for a bricks and mortar asset to lend against (that fits neatly into the ASSET column of my previous example) an ongoing and regular income from your property (that ticks the INCOME column) and a bit of expense to keep the place running ( LIABILITY  but hey .. you get the other two plusses so thats ok). That puts you into a much better position for your second time going around and asking the banks for more money.

Ask the banks and lending institutions which POSTCODE areas they WONT lend against or borrow on. Thats very important. If your area is 8% and they wont lend against it .. your above equation is meaningless as the banks just wont allow you to do it.

Above all – here is the best advice – since you are going in as a new investor, DONT TAKE MY ADVICE AS GOSPEL YET. Explore whats possible. Attend open homes and get an idea of what actually is in demand. Get a broader experience sheet. This isnt to make you an instant expert .. but it will give you market understanding and market knowledge. That will allow you to make better long term decisions. And then you can come back .. read this .. and see how close i was to being right on the issues.

If buying for cash you need extra special planning, especially from an tax and asset protection angle.

But, good idea. You could get a $100,000 for 80k and later borrow against it at 80% x 100k = 100% finance (in theory).