Constructive Criticism

Definitely agree. So many better cf yielding options other than RE. For us, RE is all about growth of wealth, not cf.

 

The growth is slow that’s for sure, however with my properties in particular there have been recent sales right next door if not just across the street on very similar properties, land size, bedrooms, building quality etc that have sold for between 80 - 100k more than I paid 4 years ago. That’s probably not much for many people in this group but it’s x 2 for me and as a % it’s very high for the time frame. That’s unfortunate to hear your friends didn’t see the same.
Have you ever been to the area? The amount of work that I have seen happen since the first time I bought in back then is tremendous. I’ve been flying there almost every second week recently and there’s always something new every time. The general feel in the area is also quite good. People are starting to take greater care of their properties and creating street appeal as best they can within their means.
The tenant quality is quite poor I do agree but I am fortunate enough to have had the same tenants since day 1 and have been great so far. One of my properties the tenants have never even missed a single rent payment in 4 years.

My whole entire portfolio has become entirely cashflow neutral. That’s also allowing for maintenance. My two Elisabeth properties are cashflow positive and my Townsville property cashflow negative but is offset by the other two.

One could argue that there’s no jobs in the area considering the general consensus is everyone there is on Centrelink. But there are actually a lot of jobs in the area with the shopping centres, industrial areas near by and even the aged care industry’s to name a few. That’s not to mention even the easy 30 minute commute to the cbd via public transport that many people would also take to work and the jobs being created by the new infrastructure being built.

Building capital at the end of the day is absolutely true wealth. But for young people like my self that this would be aimed at we generally don’t have much to start with and wouldn’t be able to sustain a mortgage for long without decent cashflow from the property.

 

@Jess Peletier @Leo2413

Shares are a great source of cashflow we can all agree on that.
But picture this you’re in your 20s, you’ve saved up 30k, you could buy shares with that and reap a return of 6.5% is the average dividend return on ASX shares which would be $1950 pa and then compound if you re invest. And then let’s say 5% capital gains pa (what’s the CGT on shares in this scenario?) so let’s say you walk away with 15k profit. After 4 years.

Say now you use it as a deposit and buy a duplex in Elizabeth, 150k (there are cheaper ones) that will rent from anywhere between 220 - 250pw. Let’s go with $220 for this example. That’s a 7.6% return. Your mortgage is 130k in the beginning after expenses and at 4.5% for the sake of this example. So after rates and allowing for a bit of maintenance let’s say you’re walking away with 1% of your rental return. So you pocket $1500 pa. That’s $450 less than your shares but we haven’t taken into account capital gains yet. Elizabeth a couple of months ago was like -1.5% if I remember correctly and is now + 1.8% according to realestate.com so is that actually +3.3%? Let’s actually just say it’s +1.8% so that’s $2700 pa in capital gains pa, I can’t be bothered to compound that at the moment so let’s say in 4 years you can then sell the property for $160800. So with the property after 4 years you’ve walked away with 6k in cash + after CGT 5400 in CG = total of $11400 and that’s not taking into account work that you could do on the property to add value, worst case rental rate and the fact that things in the area have just started to move.
However with the property if you take it in a longer run your cashflow would start to grow at a faster rate than your 30k in shares.
Obviously both avenues have risks and advantages too.

 

There's no 'one strategy for all' out there. Depends upon various factors of the investor. Generally speaking (which is all we can really do here without knowing specific details of the investor) I would be looking at shares for cf and real estate for wealth creation.

With your scenario I do agree I would be buying RE but not for CF. I would be buying for CG and to add value to start the wealth engine running. I wouldn't be looking at cheapies for CF specifically. I'd be looking to get cheapies with add value potential and good CG potential if possible. Or some variation of that according to the financial situation of the investor.

 

@Robert Petty I think you've forgotten to factor in stamps and LMI.

Nope, it's 0.3%.
Even if you pocket $1500 k/yr, if anything goes wrong it's gone. And with the tenants in Elizabeth, a LOT can go wrong.

If I was in my 20's with $30k saved up, I'd keep saving and buy something with CG. You can buy a decent OO house in some areas with not much more than that.

 

@MTR I'm going to have to agree with @Robert Petty about Elizabeth finally turning a corner.
I get surprised each time I drive past there (not too often) around the amount of work that has gone on there.
It will continue to take more time, but I really feel like there is a positive shift in the area.
Time will tell, but believe your friends might have got out just before they finally got to see some return.
Definitely doesn't mean it was the wrong decision by them, I don't know their personal situation - capital could have been used elsewhere.
But I know personally my property in Elizabeth East was bought for $175k it currently rents for $265p/w same tenants since I bought it.
It sits on 900+ sqm pretty easy to hold property like this - good amount of options.

 

Did you watch recent doco on Jimmy Barnes, this is where his lived when arrived in OZ

 

I personally agree with Brady. I have 1 IP that I bought for $205k , 900 sqm corner block with 3 bedrooms, renting out for $256/week to a good tenant. My nephew bought 1 IP in Elizabeth South for $195k, 3 bedrooms , 1007 sqm corner block, additional $5k for renovation and is renting out for $265/week. The return is not huge but in helps to repay the interest. The council is quite active in upgrading the area. Holden plant site has a chance to become a business park which would create jobs in the future. Also more investment allocated to equip Defence industry in Salisbury which is quite near to Elizabeth

Holden factory site sold to Melbourne developer

 

@Jess Peletier i actually did roughly take those into account, 30k on a 150k property is 20% deposit so maybe a tiny bit of LMI but not much and then that’s why I said remaining mortgage would be 130k instead of 120k to account for stamp duty.
As I type this I’ve just checked a calculator and LMI would be 1K, stamp duty 4K and then conveyencing Etc would brink total costs to about 8k. So I actually over estimated the costs, I guess that’s another 2k in the back pocket.

Anyway this is definitely not an argument. At the end of the day it comes down to everyone’s scenarios. There are many great investment opportunities out there, however the point of my original write up seems to have been lost in translation.

On that note though I leave you with, no, no I didn’t forget LMI or stamp duty.

 

I’ve really enjoyed your input on what I had to say, and you know that with most things you’ve said I agree with under certain circumstances.
However, let say you make 50kpa. You don’t have much of a deposit and your borrowing capacity is 200k. What would you do then?
Discussing how money would be put up to better use in better quality properties is a bit null and void when there’s no way that you can afford to get into that bracket.
It’s just not even in the realm of affordability or topic I was covering is what I’m trying to say.

 

Ok, I'll answer two ways.

Scenario 1. Assuming you are asking ME, what would I personally do with that scenario. I would increase that 50k income by some short health courses in tafe. AIN, bloods, pathology etc. That will enable me to work pretty much 24/7 and rake in a lot more money to join my 50k. Then I would be looking for add value real estate to flip. I would stalk certain markets until I was confident I could flip a deal and make a small chunk of money. Then I would repeat it again. Until I had a larger pool of deposits to expand my portfolio. Doing all that while raking in the money working 7 days a week.

Scenario 2. Assuming the person is not too serious about wealth creation and only wants to earn 50k. I would still use the deposit I had to buy a Cheepie place that I could add value to and flip for a small profit. Then rinse and repeat. I am certain these exist if one is obsessed to stalk these markets. Once I built up more equity I would expand faster. Always making sure my serviceability s maximised as much as possible from hardcore working 7 days. Low cost of living as much as possible too.

That's what I would personally do in that situation.

 

@Leo2413
I love it, you’ve got the ambition and motivation that I wish the rest of the people my age had.

 

Cheers . I wouldnt worry about others your age. You're clearly head and shoulders up and away. Keep at it buddy and youll be set in time.

 

Many forget CG is not taxed if it stays unrealized. Income is taxed each year on year.
An investment should be evaluated with all aspects, cash flow, tax, depreciation, CG, management of more or less IPs, costs, and so on.
Cannot just look at CF or CG in isolation, just my opinion!
Perhaps the younger generations adopt to income strategy as they live in higher consumption times...? They assume more income more to spend or do they think more to invest?

 

Or to calculate the actual return on investment (your money put in as opposed to leveraged funds).

 

Agree. Essentially, in analyzing all those factors you're trying to assess the overall risks of the deal.

 

That’s a tough one. For me personally I would like to think I’ll never sell and always just draw on my equity to move forward and build a bigger and bigger portfolio.
Most of my generation though seems to just want to party and travel at this point in their lives.
So yeah I’d say more income is seen as more to spend.
The reason I suggest in the original post to seek cashflow as an initial investment property is because that way they’re not out of pocket much or at all and can get the feel for what it’s like to have a property. It’s a massive step for most people. And just like eating something sour as a child a bad experience that one can’t handle in realestate could put them off it or at least artificially inflate they way they see risks in the class.
I love your statement about people forgetting CG isn’t taxed until it’s realised.

 

Just read the book, "The Millionaire Next Door", even though written in the 1980's I think and based on US statistics of millionaires it should open some eyes. They actually present their statistics that Millionaires in US pay on average 7% tax as opposed those high income earners just to the fact that majority of their net wealth is invested.
I totally agree about having cash flow, it is necessary but not priority for me, we do need reasonable cash flow to maintain and to accumulate while growing the asset base. But in hindsight now, having been in property since 1989, and really accumulating IPs since 2000, I would have preferred to have fewer IPs in better CG locations than many, many in less superior locations. You know like in Monopoly, converting so many house to just one hotel instead. So now I can choose and change my strategy, as my large portfolio with very low LVRs permits me to be selective in buying golden gooses now, or those hotels.
It took me about 8-10 years to accumulate and learn, then couple of years to off load lemons, and then to re-enter and be more selective now.
Trust me the young adults in our family don't realize how lucky they are, if they will take our advice now, as we can save them the time and minimize the mistakes we made. But no regrets, perhaps these are the lessons we had to learn?
And of course the plan is never to sell, why realize the capital gains tax?
By the way, you also need and exist strategy plan too as you cannot just accumulate forever, as we don't have infinite life span....!

 

@MWI
I will have to find the book and give it a read.
I like your opinions a lot. It seems that there’s plenty of wisdom to be gained from you and I hope that the young adults you mentioned in your family one day take on board what you have to say.
Maybe when I’m in Sydney again sometime there might be a PC catch up? Or I could shout you a coffee and pick your brains.
Anyway thanks for your input and hopefully you can read my next write up and share your views.

 

Good strategy

I am slightly regretting my higher yield approach.

At this point in time I have 3 vacancies and multiple arrears and damage,

Any cash flow has long gone, that now I don't even count any cash flow as cash flow.
Which means I should have gone down he cg route