Managed apartments are simpler to own. You don't have to worry about a tenant. The manager will find one for you or, if they don't, they will pay you rent anyway. You don't have to worry about maintenance. They sort all that out. It is an easy investment.
The body corporate fees for a managed apartment are considerably higher than for a normal one. The rental guarantee has to come from somewhere. The manager's salary has to come from somewhere.
The danger with such a simple investment is that you have handed over control to the manager. If he does a good job, great. If he doesn't, there is very little you can do about it. Rental guarantees only last for a specific time. After that, you're often on your own.
Again, if the deal works, then it is worth doing. But you do need to consider the long term, and assess the risks. You don't want it to be a bad deal in 5 years' time. What's more, you don't want it to be so bad a deal in 5 years' time that you can't sell it off to anyone.
Note. Figures in this article may be of a historic nature and may not reflect the circumstances at the time of posting. Posts in this blog should not be taken as investment advice, merely as views of a general nature. Individuals should seek qualified advice tailored to their specific circumstances from licensed advisors.
Friday, April 24, 2009
Tuesday, April 21, 2009
Buying Units Off the Plan
Some developers will sell apartment units before they're actually built. This gives them money to build them. Often their sales team will tell investors how wonderful the units are going to be, and what good returns they will get. If no units of this type already exist in the area, then their returns are pure fiction. There is no way that they can come up with a valid rental price for them. If there are none of this type in the area, there may be no demand for this type in the area. For example, 1,000 1-bedroom units in a suburb with 99% of the population being married with 2 kids under 5 is unlikely to be a good buy. And the rent for 1,000 of these empty units is likely to be zero.
If there are others in the area, then you need to look at what these are renting for. Sure, the new ones may be bigger, brighter, better and so forth; but the dollar amount of these benefits is not market tested. All you know is that the current ones are renting for $x. It is likely that newer ones will rent for more, but how much more is still unknown. All you can rely on is $x.
If the demand for units in the area is 1,000 places, and there are currently 1,000 old places, building 1,000 new ones is likely to result in half the total units being empty. The newer units may attract more occupants, but if they are more expensive they may not too.
If an off-the-plan unit makes sense after due diligence, then you should buy it. You need to be very sure of what it will rent for, based on comparable rents in the same area. You need to be very sure that the current population will support the new units. And you need to be very sure what the costs will be. It would be wise to compare costs suggested by the developer to actual costs for similar constructions elsewhere that have already been completed. Often features such as swimming pools and electric security gates on car parks, cost a lot to maintain. They can result in frequent and expensive repairs, which push the costs up.
Note. Figures in this article may be of a historic nature and may not reflect the circumstances at the time of posting. Posts in this blog should not be taken as investment advice, merely as views of a general nature. Individuals should seek qualified advice tailored to their specific circumstances from licensed advisors.
If there are others in the area, then you need to look at what these are renting for. Sure, the new ones may be bigger, brighter, better and so forth; but the dollar amount of these benefits is not market tested. All you know is that the current ones are renting for $x. It is likely that newer ones will rent for more, but how much more is still unknown. All you can rely on is $x.
If the demand for units in the area is 1,000 places, and there are currently 1,000 old places, building 1,000 new ones is likely to result in half the total units being empty. The newer units may attract more occupants, but if they are more expensive they may not too.
If an off-the-plan unit makes sense after due diligence, then you should buy it. You need to be very sure of what it will rent for, based on comparable rents in the same area. You need to be very sure that the current population will support the new units. And you need to be very sure what the costs will be. It would be wise to compare costs suggested by the developer to actual costs for similar constructions elsewhere that have already been completed. Often features such as swimming pools and electric security gates on car parks, cost a lot to maintain. They can result in frequent and expensive repairs, which push the costs up.
Note. Figures in this article may be of a historic nature and may not reflect the circumstances at the time of posting. Posts in this blog should not be taken as investment advice, merely as views of a general nature. Individuals should seek qualified advice tailored to their specific circumstances from licensed advisors.
Friday, April 10, 2009
Due Diligence
Due diligence is a process of determining the facts about a deal. You need to know what it WILL cost and what it WILL return. If an agent says he thinks the rates are $500 per annum, you had better find out what they really are. If an agent says it will rent for $250 per week, you had better find some proof that backs this up. Agents sometimes omit the words "I think", and at other times have a very optimistic view of returns.
Whether the water heater will break down in the next six months or not, is an opinion. How old it is, is a fact. How long they last for on average, is another fact. The statistical likelihood of you needing to replace the water heater, can be determined from these sorts of facts. Whether there are termites in the building, is a fact that can be determined. The value of a building with termites, is different to the value of a building without termites. Whether there are termites on the property, but not in the building, is another fact. If there are termites on the property, you may need to pay to keep them out of the house. This is an extra cost. Due diligence involves finding out all of the costs and the real return. Only with the facts, can you make a sensible investment decision.
Note. Figures in this article may be of a historic nature and may not reflect the circumstances at the time of posting. Posts in this blog should not be taken as investment advice, merely as views of a general nature. Individuals should seek qualified advice tailored to their specific circumstances from licensed advisors.
Whether the water heater will break down in the next six months or not, is an opinion. How old it is, is a fact. How long they last for on average, is another fact. The statistical likelihood of you needing to replace the water heater, can be determined from these sorts of facts. Whether there are termites in the building, is a fact that can be determined. The value of a building with termites, is different to the value of a building without termites. Whether there are termites on the property, but not in the building, is another fact. If there are termites on the property, you may need to pay to keep them out of the house. This is an extra cost. Due diligence involves finding out all of the costs and the real return. Only with the facts, can you make a sensible investment decision.
Note. Figures in this article may be of a historic nature and may not reflect the circumstances at the time of posting. Posts in this blog should not be taken as investment advice, merely as views of a general nature. Individuals should seek qualified advice tailored to their specific circumstances from licensed advisors.
Thursday, April 9, 2009
Facts Versus Opinions
If you make decisions based on facts, you will get right answers.
If you make decisions based on opinions, your answers may or may not be right.
Right decisions lead to making money. Wrong decisions lead to losing money.
There are a lot of opinions in the world that are advertised as facts. "Real estate experts say that the market will rise by 15% over the next year" is just an opinion. It is true that they said it, but there is no guarantee that it will happen. What IS true is what the market is doing now.
A deal has to make sense now - when you buy. Relying on sales pitch that "the value of these units will go up $50,000 in the next six months", is a recipe for disaster. They might, which is great, but they might not too. If they don't, you could be left with a financial disaster. If the deal makes sense now, do it. If not, don't.
Note. Figures in this article may be of a historic nature and may not reflect the circumstances at the time of posting. Posts in this blog should not be taken as investment advice, merely as views of a general nature. Individuals should seek qualified advice tailored to their specific circumstances from licensed advisors.
If you make decisions based on opinions, your answers may or may not be right.
Right decisions lead to making money. Wrong decisions lead to losing money.
There are a lot of opinions in the world that are advertised as facts. "Real estate experts say that the market will rise by 15% over the next year" is just an opinion. It is true that they said it, but there is no guarantee that it will happen. What IS true is what the market is doing now.
A deal has to make sense now - when you buy. Relying on sales pitch that "the value of these units will go up $50,000 in the next six months", is a recipe for disaster. They might, which is great, but they might not too. If they don't, you could be left with a financial disaster. If the deal makes sense now, do it. If not, don't.
Note. Figures in this article may be of a historic nature and may not reflect the circumstances at the time of posting. Posts in this blog should not be taken as investment advice, merely as views of a general nature. Individuals should seek qualified advice tailored to their specific circumstances from licensed advisors.
Wednesday, April 8, 2009
Control
Your chances of making money are much greater if you control all aspects of the investment. If you don't control the investment, your chances of making money are slim.
Examples are: sticking $1,000 into a super fund run by someone who picks stocks and decides when to buy and sell. You have no input. You have no control. If you're lucky, it may go well. If you're not, it won't. If it doesn't go well, there is nothing you can do about it.
Second example: you invest $1,000 in BHP shares. You decide when to buy and when to sell, but you have no control over the running of the company. If the company is well-run, the share price will go up. If the company is poorly run, the share price will go down. If the price goes up, great. If the price goes down, there is nothing you can do about it. Successful share traders set themselves hard rules on when to buy and sell. If those conditions are met, they buy or sell. This is more successful than people who hope for a better outcome, but it is still dependent on which way the wind is blowing.
With property investing, or a company, you have direct control over all aspects of the investment. You decide how much the rent is. You decide whether to renovate. You decide how much to charge for the product. You decide whether to choose a cheaper supplier. If it makes money, great. If not, then you can change it. If you don't change it, you can still lose money. But if you pay attention and actively manage the investment, then you will make money.
Note. Figures in this article may be of a historic nature and may not reflect the circumstances at the time of posting. Posts in this blog should not be taken as investment advice, merely as views of a general nature. Individuals should seek qualified advice tailored to their specific circumstances from licensed advisors.
Examples are: sticking $1,000 into a super fund run by someone who picks stocks and decides when to buy and sell. You have no input. You have no control. If you're lucky, it may go well. If you're not, it won't. If it doesn't go well, there is nothing you can do about it.
Second example: you invest $1,000 in BHP shares. You decide when to buy and when to sell, but you have no control over the running of the company. If the company is well-run, the share price will go up. If the company is poorly run, the share price will go down. If the price goes up, great. If the price goes down, there is nothing you can do about it. Successful share traders set themselves hard rules on when to buy and sell. If those conditions are met, they buy or sell. This is more successful than people who hope for a better outcome, but it is still dependent on which way the wind is blowing.
With property investing, or a company, you have direct control over all aspects of the investment. You decide how much the rent is. You decide whether to renovate. You decide how much to charge for the product. You decide whether to choose a cheaper supplier. If it makes money, great. If not, then you can change it. If you don't change it, you can still lose money. But if you pay attention and actively manage the investment, then you will make money.
Note. Figures in this article may be of a historic nature and may not reflect the circumstances at the time of posting. Posts in this blog should not be taken as investment advice, merely as views of a general nature. Individuals should seek qualified advice tailored to their specific circumstances from licensed advisors.
Tuesday, April 7, 2009
Leverage
If you buy $100,000 worth of shares for $100,000 and they go up by 10%, they are worth $110,000. You have made $10,000. This is a 10% gain on your money.
If you buy a $100,000 property for $20,000 down and $80,000 from the bank and it goes up by 10%, then it is worth $110,000. You have made $10,000. This is a 50% gain on your money.
In the first case you had to put up a lot of money, and only got a 10% return. In the second case you put up less money, the bank contributed, and you took all the profits. Your return was 50%.
Note. Figures in this article may be of a historic nature and may not reflect the circumstances at the time of posting. Posts in this blog should not be taken as investment advice, merely as views of a general nature. Individuals should seek qualified advice tailored to their specific circumstances from licensed advisors.
If you buy a $100,000 property for $20,000 down and $80,000 from the bank and it goes up by 10%, then it is worth $110,000. You have made $10,000. This is a 50% gain on your money.
In the first case you had to put up a lot of money, and only got a 10% return. In the second case you put up less money, the bank contributed, and you took all the profits. Your return was 50%.
Note. Figures in this article may be of a historic nature and may not reflect the circumstances at the time of posting. Posts in this blog should not be taken as investment advice, merely as views of a general nature. Individuals should seek qualified advice tailored to their specific circumstances from licensed advisors.
Monday, April 6, 2009
The Rule of 72
For most normal values of interest, the interest rate multiplied by the number of years it takes for the principal to double equals 72.
This means that property, which doubles in value every seven to nine years, has 8% - 10% growth per annum. 9 years * 8% = 72. 7 years * 10.3% = 72.
This rule only works if the interest rate (or growth) is not "very small" and not "very large". The proper equation is 2=(1+rate)^years. If you works this out [edit: that's leprechaun speak; "If you work this out" is the English.] , you will find that it comes to rate*years=72 in most cases.
If you take out a car loan at 12%, after 6 years of payments you have paid twice the cost of the car. 6*12=72.
This equation is an easy way of determining what prices will be in the future, if you know the growth rate. This information is not crucial, but it does help in working things out in your head for "what-ifs".
Note. Figures in this article may be of a historic nature and may not reflect the circumstances at the time of posting. Posts in this blog should not be taken as investment advice, merely as views of a general nature. Individuals should seek qualified advice tailored to their specific circumstances from licensed advisors.
This means that property, which doubles in value every seven to nine years, has 8% - 10% growth per annum. 9 years * 8% = 72. 7 years * 10.3% = 72.
This rule only works if the interest rate (or growth) is not "very small" and not "very large". The proper equation is 2=(1+rate)^years. If you works this out [edit: that's leprechaun speak; "If you work this out" is the English.] , you will find that it comes to rate*years=72 in most cases.
If you take out a car loan at 12%, after 6 years of payments you have paid twice the cost of the car. 6*12=72.
This equation is an easy way of determining what prices will be in the future, if you know the growth rate. This information is not crucial, but it does help in working things out in your head for "what-ifs".
Note. Figures in this article may be of a historic nature and may not reflect the circumstances at the time of posting. Posts in this blog should not be taken as investment advice, merely as views of a general nature. Individuals should seek qualified advice tailored to their specific circumstances from licensed advisors.
Sunday, April 5, 2009
Cashflow Positive Properties Don't Get Growth
An argument against cash flow positive properties is that they never go up in value. This is not true.
In 1984, you could probably have bought a 3-bedroom house in Canberra for $38,000.
A cash flow positive property in the sticks may have cost $20,000.
Canberra prices are currently about $300,000 for a 3-bedroom house and, according to the argument, the house in the sticks should still be $20,000. If you do a quick search through property ads, you will be hard-pressed to find a house this cheap.
If rents these days are $190 per week in the sticks, and if house prices were still $20,000, then your yield would be (50 weeks * $190 per week = $9,500) / $20,000 = 47.5%.
Why would anyone buy a house in Canberra with a current rental yield of 3% if they could get one yielding 47.5%? Even if the die-hards refused such a deal, the cash flow positive buyers would snap it up.
This drives prices up, and you don't see places with such huge yields. This means even cash flow positive places go up in value.
In 1984, you could probably have bought a 3-bedroom house in Canberra for $38,000.
A cash flow positive property in the sticks may have cost $20,000.
Canberra prices are currently about $300,000 for a 3-bedroom house and, according to the argument, the house in the sticks should still be $20,000. If you do a quick search through property ads, you will be hard-pressed to find a house this cheap.
If rents these days are $190 per week in the sticks, and if house prices were still $20,000, then your yield would be (50 weeks * $190 per week = $9,500) / $20,000 = 47.5%.
Why would anyone buy a house in Canberra with a current rental yield of 3% if they could get one yielding 47.5%? Even if the die-hards refused such a deal, the cash flow positive buyers would snap it up.
This drives prices up, and you don't see places with such huge yields. This means even cash flow positive places go up in value.
- Please Note:
- Figures in this article may be of a historic nature and may not reflect the circumstances at the time of posting.
- Posts in this blog should not be taken as investment advice, merely as views of a general nature.
- Individuals should seek qualified advice tailored to their specific circumstances from licensed advisors.
Share Options
Sometimes stock markets go down. Sometimes they do this for a lengthy period of time. If the share market is trending down, one way of making money, in what would seem to be the worst possible time for making money, is to use options.
An option will allow you to sell shares at some time in the future even though you don't currently own any shares.
The way this works is you buy an option to sell 1,000 shares of XYZ stock in one month's time for a stated price. You have to pay some money for the option to do this. In one month's time, when the price of those shares has fallen, you then buy those shares and immediately sell them again at the price that was agreed in the option. The person that you bought the option from has to buy those shares off you at the agreed price, if you choose to sell.
For example, an XYZ share might be worth $10. The market is falling. You buy an option to sell 1,000 shares of XYZ at $9 in one month's time. The option costs you $10. In one month's time the price of XYZ has fallen to $8 a share. You immediately buy $8,000 worth of XYZ and then sell them for $9,000. You have made $990 profit ($1,000 less $10 costs).
An option, in this case, is an option to sell. You don't have to sell. It's your choice. If XYZ had instead bucked the market and gone up to $11 a share you could buy 1,000 shares for $11,000 and then sell them for $9,000 if you wished. You would lose $2,000, so it's not a good idea. Given that you have the option to sell, you can choose not to exercise the option and to not lose $2,000. You have, however, still lost your $10 option fee.
Shares, even with options, is still gambling. If you have your eyes open and your ear to the ground, you can make a lot of money with options. The trick is to have enough good information to know where the market for a share is going.
In the example above, you could have made a $1,000 profit for a $10 investment. This is a 10,000% return on your investment. Whilst such a percentage seems absurdly and unrealistically high, these sort of results are possible with options. They are extremely leveraged. In this case $10 down controlled $10,000 worth of shares. In property, you would have $20,000 down controlling a $100,000 property.
Posts in this blog should not be taken as investment advice, merely as views of a general nature. Individuals should seek qualified advice tailored to their specific circumstances from licensed advisors.
An option will allow you to sell shares at some time in the future even though you don't currently own any shares.
The way this works is you buy an option to sell 1,000 shares of XYZ stock in one month's time for a stated price. You have to pay some money for the option to do this. In one month's time, when the price of those shares has fallen, you then buy those shares and immediately sell them again at the price that was agreed in the option. The person that you bought the option from has to buy those shares off you at the agreed price, if you choose to sell.
For example, an XYZ share might be worth $10. The market is falling. You buy an option to sell 1,000 shares of XYZ at $9 in one month's time. The option costs you $10. In one month's time the price of XYZ has fallen to $8 a share. You immediately buy $8,000 worth of XYZ and then sell them for $9,000. You have made $990 profit ($1,000 less $10 costs).
An option, in this case, is an option to sell. You don't have to sell. It's your choice. If XYZ had instead bucked the market and gone up to $11 a share you could buy 1,000 shares for $11,000 and then sell them for $9,000 if you wished. You would lose $2,000, so it's not a good idea. Given that you have the option to sell, you can choose not to exercise the option and to not lose $2,000. You have, however, still lost your $10 option fee.
Shares, even with options, is still gambling. If you have your eyes open and your ear to the ground, you can make a lot of money with options. The trick is to have enough good information to know where the market for a share is going.
In the example above, you could have made a $1,000 profit for a $10 investment. This is a 10,000% return on your investment. Whilst such a percentage seems absurdly and unrealistically high, these sort of results are possible with options. They are extremely leveraged. In this case $10 down controlled $10,000 worth of shares. In property, you would have $20,000 down controlling a $100,000 property.
Posts in this blog should not be taken as investment advice, merely as views of a general nature. Individuals should seek qualified advice tailored to their specific circumstances from licensed advisors.
Share Trading
The basis of share trading is to buy low and sell high.
In many ways this is gambling, because you have no idea what the price will do after you buy it. Despite this, some shares have predictable characteristics.
The shares you are most interested in as a trader, are ones with high volatility. This means that their prices fluctuate extremely. You also want shares that are fundamentally sound, so that the company doesn't go broke. If you know that the share price is going to fluctuate between a reasonable high and a reasonable low, then you can buy close to the low point and sell close to the high point. After you have sold near the high, you wait for the share to return towards its low point. Then you buy it again, and sell it again when it gets near its high point.
If the price is $30, and it varies by $1, then you make 3% profit. 3% profit is not a lot compared to a rental property with a 10%, or even 5%, yield. The trick with shares is that if the price fluctuates every three days then in a year, and 100 trades, you have made 300%. This is considerably better than a 10% rental yield. It is even better than a 10% rental yield leveraged by an 80% loan to value ratio (which gives 50% return on investment).
The main problem with shares is that you are gambling that the price will go up. Even with a predictable share, there is a chance that company management or the world in which it operates will do something silly causing the share to plummet. It is not a good idea to have bought a share just before it plummeted.
Posts in this blog should not be taken as investment advice, merely as views of a general nature. Individuals should seek qualified advice tailored to their specific circumstances from licensed advisors.
In many ways this is gambling, because you have no idea what the price will do after you buy it. Despite this, some shares have predictable characteristics.
The shares you are most interested in as a trader, are ones with high volatility. This means that their prices fluctuate extremely. You also want shares that are fundamentally sound, so that the company doesn't go broke. If you know that the share price is going to fluctuate between a reasonable high and a reasonable low, then you can buy close to the low point and sell close to the high point. After you have sold near the high, you wait for the share to return towards its low point. Then you buy it again, and sell it again when it gets near its high point.
If the price is $30, and it varies by $1, then you make 3% profit. 3% profit is not a lot compared to a rental property with a 10%, or even 5%, yield. The trick with shares is that if the price fluctuates every three days then in a year, and 100 trades, you have made 300%. This is considerably better than a 10% rental yield. It is even better than a 10% rental yield leveraged by an 80% loan to value ratio (which gives 50% return on investment).
The main problem with shares is that you are gambling that the price will go up. Even with a predictable share, there is a chance that company management or the world in which it operates will do something silly causing the share to plummet. It is not a good idea to have bought a share just before it plummeted.
Posts in this blog should not be taken as investment advice, merely as views of a general nature. Individuals should seek qualified advice tailored to their specific circumstances from licensed advisors.
Financial Survival
If you want to survive in this world, you need to have money.
The usual source of money is a job. Most people with jobs have only one. If something happens with that job, then you don't have money.
A better approach is to have more than one income stream. The more income streams you have, the less vulnerable you are to any one of them running dry. Property is a good way of generating an income stream. The more properties you have, the more income streams you have. If one property is smashed to the ground by a falling meteor, then you still have your other properties generating income whilst you rebuild the first house.
You can also have other things generating income streams. These could be: a business, royalties or shares. There may be other options too. So long as the items return an income, they will aid your financial survival. If you own shares that don't pay a dividend, then they are not generating an income stream. If you trade shares that don't return a dividend, then the trading creates an income stream.
Posts in this blog should not be taken as investment advice, merely as views of a general nature. Individuals should seek qualified advice tailored to their specific circumstances from licensed advisors.
The usual source of money is a job. Most people with jobs have only one. If something happens with that job, then you don't have money.
A better approach is to have more than one income stream. The more income streams you have, the less vulnerable you are to any one of them running dry. Property is a good way of generating an income stream. The more properties you have, the more income streams you have. If one property is smashed to the ground by a falling meteor, then you still have your other properties generating income whilst you rebuild the first house.
You can also have other things generating income streams. These could be: a business, royalties or shares. There may be other options too. So long as the items return an income, they will aid your financial survival. If you own shares that don't pay a dividend, then they are not generating an income stream. If you trade shares that don't return a dividend, then the trading creates an income stream.
Posts in this blog should not be taken as investment advice, merely as views of a general nature. Individuals should seek qualified advice tailored to their specific circumstances from licensed advisors.
Buying Cash Flow Positive Properties
A cash flow positive property is one that makes more money than it costs to own.
To buy a cash flow positive property, you only need to know how much money it will return and how much it will cost to own. You don't need to consider location. You just need to do the numbers.
The money it will return is the weekly rent multiplied by the number of weeks it is rented each year. In some cases, your place will be rented for all 52 weeks of the year. However, many places have different tenants in them from year to year. This usually means that a property will be vacant for a few weeks each year whilst it is between tenants. An easy figure to use is: rented for 50 weeks per year. This makes the maths easy because the annual return is the weekly rent divided by two with two zeros on the end e.g. $180 per week is $90-00 or $9000 per annum. If it costs you less than $9,000 a year to own this property, then it is cash flow positive.
You always look at the rent first. You can ring property managers in an area, and ask them what places are renting for. You can look at ads in the newspaper or on the net to see what rents are being asked.
The cost of owning a property is mainly determined by the interest rate the bank charges for your loan. Whilst this may not be true if interest rates are extremely low e.g. 1%, it is [was, at the time this was orginally written] valid for the current economic climate. At the moment, interest rates are 7%.
In addition to the cost of the loan, you will need to pay management fees, rates and insurance. You should also allow an amount for maintenance of the property. These other costs come to about 3% of the cost of the property. Actual figures vary. Property managers charge between 5 and 10 percent of your rent, rates can be about $1,000 per annum, and insurance is currently about $300 per annum. A standard figure for maintenance is 5% of the rent.
If the interest rate is 7%, and the additional costs come to about 3%, and if you put nothing down on buying the house, then you are up for 10% of your purchase price each year in order to own the house.
For this to be cash flow positive, your rent needs to be at least 10% of the purchase price. This means you can quickly determine the maximum price you can pay for a house by looking at the rent. For example, if rent is $180 per week, this is $9,000 per annum, so you cannot pay more than $90,000 for the property if it is to be cash flow positive.
Of course, if you are buying in an area where houses are typically $150,000, you will have a difficult job to buy one for $90,000. That doesn't mean that you won't find someone that needs to sell his house, and is willing to do so for $90,000. It also doesn't mean that you can't find an area where you can buy a house for $90,000.
Figures used in this post are of a historic nature and don't reflect prices at the time of posting.
Posts in this blog should not be taken as investment advice, merely as views of a general nature. Individuals should seek qualified advice tailored to their specific circumstances from licensed advisors.
To buy a cash flow positive property, you only need to know how much money it will return and how much it will cost to own. You don't need to consider location. You just need to do the numbers.
The money it will return is the weekly rent multiplied by the number of weeks it is rented each year. In some cases, your place will be rented for all 52 weeks of the year. However, many places have different tenants in them from year to year. This usually means that a property will be vacant for a few weeks each year whilst it is between tenants. An easy figure to use is: rented for 50 weeks per year. This makes the maths easy because the annual return is the weekly rent divided by two with two zeros on the end e.g. $180 per week is $90-00 or $9000 per annum. If it costs you less than $9,000 a year to own this property, then it is cash flow positive.
You always look at the rent first. You can ring property managers in an area, and ask them what places are renting for. You can look at ads in the newspaper or on the net to see what rents are being asked.
The cost of owning a property is mainly determined by the interest rate the bank charges for your loan. Whilst this may not be true if interest rates are extremely low e.g. 1%, it is [was, at the time this was orginally written] valid for the current economic climate. At the moment, interest rates are 7%.
In addition to the cost of the loan, you will need to pay management fees, rates and insurance. You should also allow an amount for maintenance of the property. These other costs come to about 3% of the cost of the property. Actual figures vary. Property managers charge between 5 and 10 percent of your rent, rates can be about $1,000 per annum, and insurance is currently about $300 per annum. A standard figure for maintenance is 5% of the rent.
If the interest rate is 7%, and the additional costs come to about 3%, and if you put nothing down on buying the house, then you are up for 10% of your purchase price each year in order to own the house.
For this to be cash flow positive, your rent needs to be at least 10% of the purchase price. This means you can quickly determine the maximum price you can pay for a house by looking at the rent. For example, if rent is $180 per week, this is $9,000 per annum, so you cannot pay more than $90,000 for the property if it is to be cash flow positive.
Of course, if you are buying in an area where houses are typically $150,000, you will have a difficult job to buy one for $90,000. That doesn't mean that you won't find someone that needs to sell his house, and is willing to do so for $90,000. It also doesn't mean that you can't find an area where you can buy a house for $90,000.
Figures used in this post are of a historic nature and don't reflect prices at the time of posting.
Posts in this blog should not be taken as investment advice, merely as views of a general nature. Individuals should seek qualified advice tailored to their specific circumstances from licensed advisors.
How to Find a Growth Property
Houses go down in value. They are just like cars, stereo equipment, and golf clubs. Once they are used, they are less valuable. As they get older, they become less valuable still. Eventually you could throw one out as having no value.
The land that the house sits on, however, goes up in value. This is because there is a finite amount of land and an increasing number of people wanting land. The supply of land is fixed. The demand for land keeps growing. This means land prices go up.
The key for a growth investor is location. You need to pick a location where an increasing number of people want to live. Some places don't have a lot of demand. They are places where people don't want to live. You don't want to buy there. Other places have people clamouring to get in. These are the trendy places, the cool places where everyone wants to be. Often these places will be close to the city, because by their nature cities have lots of people.
The key to buying a growth property is to find out what the property is worth and what the land by itself is worth. A good rule of thumb is that if the land value is 30% or more of the total property value, you will get good growth.
Places which have a lot of owner occupiers tend to go up in value faster than other places. This is because owner occupiers do up their houses for personal reasons, and without regard to cost. Owner occupied houses tend to be prettier, better maintained and more lavish than rental places. If you are in a suburb with very few other rental places, then the average value of houses in the suburb is likely to go up as fast as owner occupiers spend money on their houses. A valuation looks at the average price of houses in your area. It may discount this figure if your house is below average, but the average is where they start working the valuation from. It never hurts to have this average going up.
Posts in this blog should not be taken as investment advice, merely as views of a general nature. Individuals should seek qualified advice tailored to their specific circumstances from licensed advisors.
The land that the house sits on, however, goes up in value. This is because there is a finite amount of land and an increasing number of people wanting land. The supply of land is fixed. The demand for land keeps growing. This means land prices go up.
The key for a growth investor is location. You need to pick a location where an increasing number of people want to live. Some places don't have a lot of demand. They are places where people don't want to live. You don't want to buy there. Other places have people clamouring to get in. These are the trendy places, the cool places where everyone wants to be. Often these places will be close to the city, because by their nature cities have lots of people.
The key to buying a growth property is to find out what the property is worth and what the land by itself is worth. A good rule of thumb is that if the land value is 30% or more of the total property value, you will get good growth.
Places which have a lot of owner occupiers tend to go up in value faster than other places. This is because owner occupiers do up their houses for personal reasons, and without regard to cost. Owner occupied houses tend to be prettier, better maintained and more lavish than rental places. If you are in a suburb with very few other rental places, then the average value of houses in the suburb is likely to go up as fast as owner occupiers spend money on their houses. A valuation looks at the average price of houses in your area. It may discount this figure if your house is below average, but the average is where they start working the valuation from. It never hurts to have this average going up.
Posts in this blog should not be taken as investment advice, merely as views of a general nature. Individuals should seek qualified advice tailored to their specific circumstances from licensed advisors.
How to Make a Profit
You make your profit when you buy. If you buy and sell houses, you are hoping that you can sell them for more than you paid for them. The key word in that last sentence is "hoping". You have no guarantee that prices will go up or prices will go down. You can guess. You might be right, but it's still a guess.
If you buy a house for less than it's worth, you should be able to immediately sell it for what it is worth and make a profit. This is called a flip.
You don't have to sell the house in order to have a profit in the deal. You can simply refinance and extract the profit that you have created by buying at a discount to market value. When you buy at a discount, your profit is a fact based on what market values actually are at the present and what you actually paid for it at present.
Posts in this blog should not be taken as investment advice, merely as views of a general nature.
Individuals should seek qualified advice tailored to their specific circumstances from licensed advisors.
If you buy a house for less than it's worth, you should be able to immediately sell it for what it is worth and make a profit. This is called a flip.
You don't have to sell the house in order to have a profit in the deal. You can simply refinance and extract the profit that you have created by buying at a discount to market value. When you buy at a discount, your profit is a fact based on what market values actually are at the present and what you actually paid for it at present.
Posts in this blog should not be taken as investment advice, merely as views of a general nature.
Individuals should seek qualified advice tailored to their specific circumstances from licensed advisors.
Buying a Property
Ideally you want to buy a property in an area where the values will go up. Ideally it will also bring in more rent than the interest cost for the loan to purchase it. Often these two ideals conflict with each other and you can't have both. If you find a property in a growth area with a good yield, then that's the one to buy.
Before buying a property, and before negotiating with the vendor, you MUST know what the property is worth.
The way to find out what a property is worth is comparable sales. You look at what properties have sold recently in the same area, and what they sold for. This will give you a pretty good idea of what the place you are looking at buying is currently worth.
If you can buy for 20% less than what it's worth, you stand to get your money back very soon after the purchase. The reason for this is that banks will loan 80% of the value of the property. You have to come up with the other 20% plus closing costs. If you buy it at 80% of what it's worth, you can effectively have the bank pay the whole lot for you (except for closing costs).
Closing costs are typically 5% of the purchase price. So for $100,000 house, closing costs would be $5,000. Normally you would have to pay $25,000 and the bank would pay $80,000. If you buy it for $80,000, your closing costs are approximately $4,000 (5%), you have to come up with $16,000 (20%) and the bank will chip in $64,000. After you have held the property for a little while, you can have the bank revalue it. They should come up with $100,000. This means you can refinance to $80,000, which gets your $16,000 back. You can then go on to buy another place with your same $16,000. You still need to come up with the $4,000 closing costs though, each time.
If you save $100.00 a week for a year, you can buy another house every year this way. One house a year is painfully slow. If your first house is yielding more rent than the interest, then the extra cash can also go to saving the closing costs for the next place. This means you might be able to buy your second house after 9 months. Of course, after you've bought two houses that are returning cash, you will need to save less to get the third $5,000. This means you could have your third house after another 6 months. And so on.
If you could buy your first house at even less than 80% of the value, you could conceivably revalue it in a month to recover all of your money. This means you can buy your second house immediately. Whilst the odds of being able to do this are against you, some people really need to sell their house now and would rather have less money if they can have it now.
None of the above should be considered investment advice.
Individuals should seek qualified advice that suits their specific circumstances.
Before buying a property, and before negotiating with the vendor, you MUST know what the property is worth.
The way to find out what a property is worth is comparable sales. You look at what properties have sold recently in the same area, and what they sold for. This will give you a pretty good idea of what the place you are looking at buying is currently worth.
If you can buy for 20% less than what it's worth, you stand to get your money back very soon after the purchase. The reason for this is that banks will loan 80% of the value of the property. You have to come up with the other 20% plus closing costs. If you buy it at 80% of what it's worth, you can effectively have the bank pay the whole lot for you (except for closing costs).
Closing costs are typically 5% of the purchase price. So for $100,000 house, closing costs would be $5,000. Normally you would have to pay $25,000 and the bank would pay $80,000. If you buy it for $80,000, your closing costs are approximately $4,000 (5%), you have to come up with $16,000 (20%) and the bank will chip in $64,000. After you have held the property for a little while, you can have the bank revalue it. They should come up with $100,000. This means you can refinance to $80,000, which gets your $16,000 back. You can then go on to buy another place with your same $16,000. You still need to come up with the $4,000 closing costs though, each time.
If you save $100.00 a week for a year, you can buy another house every year this way. One house a year is painfully slow. If your first house is yielding more rent than the interest, then the extra cash can also go to saving the closing costs for the next place. This means you might be able to buy your second house after 9 months. Of course, after you've bought two houses that are returning cash, you will need to save less to get the third $5,000. This means you could have your third house after another 6 months. And so on.
If you could buy your first house at even less than 80% of the value, you could conceivably revalue it in a month to recover all of your money. This means you can buy your second house immediately. Whilst the odds of being able to do this are against you, some people really need to sell their house now and would rather have less money if they can have it now.
None of the above should be considered investment advice.
Individuals should seek qualified advice that suits their specific circumstances.
When to Sell
It is rarely a good idea to sell a property.
Selling incurs capital gains tax, so you lose half of your profits. A better approach is usually to refinance the loan.
If you bought a property for $100,000 with an 80% loan ($80,000) and the property goes up to $150,000 you can sell it, get a $50,000 profit, pay up to $25,000 in tax and pocket $25,000.
Alternatively, you can refinance it to 80% of $150,000 or $120,000. This gives you an extra $40,000 in your pocket (from the bank) plus you get to keep the property.
Despite this, if you own a property that is costing you a lot to maintain and which is attracting poor tenants who constantly give you more things to maintain (breakage) it might be better to get rid of it.
Edit: Don't sell a property because of poor tenants - change the tenants.
If, however, the property ONLY attracts poor tenants (it suits that end of the market), perhaps it would be better to sell the property.
Selling incurs capital gains tax, so you lose half of your profits. A better approach is usually to refinance the loan.
If you bought a property for $100,000 with an 80% loan ($80,000) and the property goes up to $150,000 you can sell it, get a $50,000 profit, pay up to $25,000 in tax and pocket $25,000.
Alternatively, you can refinance it to 80% of $150,000 or $120,000. This gives you an extra $40,000 in your pocket (from the bank) plus you get to keep the property.
Despite this, if you own a property that is costing you a lot to maintain and which is attracting poor tenants who constantly give you more things to maintain (breakage) it might be better to get rid of it.
Edit: Don't sell a property because of poor tenants - change the tenants.
If, however, the property ONLY attracts poor tenants (it suits that end of the market), perhaps it would be better to sell the property.
Cash Flow versus Growth
A cash flow positive property generates money from day 1. It is a machine that spits out money.
A growth property will often cost you money to hold. The rent you get is less than the amount of interest you pay on the loan that you bought it with. Despite this, people still buy these properties. The reason behind this is that these properties go up in value allowing you to sell for a profit or to refinance to get your money back.
There is merit in both approaches. What it comes down to is how much rental yield you get plus how much growth you get. An investor will normally be after the greatest return.
A growth property will often cost you money to hold. The rent you get is less than the amount of interest you pay on the loan that you bought it with. Despite this, people still buy these properties. The reason behind this is that these properties go up in value allowing you to sell for a profit or to refinance to get your money back.
There is merit in both approaches. What it comes down to is how much rental yield you get plus how much growth you get. An investor will normally be after the greatest return.
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