VIC Does anyone invest in cheap property? Low outlay, low socio-economic areas?

Good question. Entirely agree. Opportunity cost is around 15% I would say, as I made 15% on other properties over that period (Admittedly, market has boomed so unlikely to be anything like that in future). The question to answer is, what will be the return on that $150k property over the next 20 years?

 

Sorry, but that probably won't happen. Irrespective of your price point, but even less likely at the bottom of the market.

Exactly. Currently each property is cashflow positive after all costs and I would expect them to be even more so in 20 years’ time. Not only that, but I would not have been able to buy any more low yield, (potentially) high capital gains properties, but I was able to buy these. So I rate my opportunity cost as being very low.

Especially in the current climate. If I was looking at buying now, I’m not sure where I would turn to for prospective capital gains. All of Sydney and Melbourne would be out, Adelaide and Brisbane don’t seem to rise significantly, Hobart is probably nearing the top of the current cycle. So maybe Perth? But that’s a bit of a question mark as well.

So I personally think that if $150k properties do in fact exist within a 2 hour drive of Melbourne (I’ve got no idea if they do), then that might be as good a place as any to maybe get capital gains and the bonus is that you’ve got more money in your backpocket after you buy.

 

Another question I have about buying in lower socio economic areas. Is the quality of the tenant any different? My experience has been that for well maintained properties in these lower socio economic areas, tenant quality is just as good. I have one tenant on a pension now who has never been late on a single payment in 17 years. And only 10 maintenance call outs in that period.

Perhaps if you rent out a poorly maintained property, then things are different.

Interested in hearing from other PC members think on this issue.

 

Hazelwood closing hasn't had a drastic effect on the economy here in the Valley. As discussed before a lot of the workers lived in Traralgon and surrounding areas. I reckon you can pick up a decent house in Morwell for under 200k. However, if you can stretch the budget to 220/230k you can get a tidy brick 3 bedder in Traralgon which would be my preference. There are some in Newborough for under 200k without the stigma that you could look at to. Churchill has the Uni and is worth looking at but as in all towns you need a good PM. Traf is now too dear

 

What's the net?

 

Couldn't agree with this more!

I have a few properties that are at the lower end of things and have a few tenants on welfare but, touchwood, have never had a problem.
Maybe this is just good luck or maybe because I've been patient when selecting a tenant even if that means having the house empty for a few extra weeks or not getting the absolute most money possible per week.

Having a reasonably well presented house can make a big difference too, a fresh coat of paint, making sure everything is clean and working and a maintained garden sets the precedence for how it should be kept.

I think some people try to rent out unloved rough houses to whoever they can and then are surprised by the results.


That being said there is obviously element of luck too

 

If your tenants are on welfare, how do you expect the rent to rise and the property to grow in value?

Looking at it the biggest problem I have with lower end properties is the value really only seems to increase with inflation and if that. Of course its different if an area is gentrifying but a couple hours out from a major capital will take decades?

Cheap today, Cheap tomorrow.

 

Depends on maintenance and the like, but around 1%.

 

Wait, your net yield is 1%??

 

Did you think that's high or low?
To me net is at 105% LVR after all other expenses but plus depreciation.
What's your definition?

 

All aboit timing, look at suburbs like Mt Druit lower socio, in 2013 could have purchased mid 200k, today 500k+
You will also find same happened in lower socio burbs in outer west Melb..... timing


Elizabeth.....nope..... timing is all wrong... you will sit and hope or worse bleed

 

Same as yours. 100% + stamp duty + ongoing expenses but excluding depreciation. Mine are 6% using those calcs.

 

How on earth do you get 6%? Your gross rent must be well above 10% for that.

 

I guess the amount of rent the renters can comfortably afford is not necessarily how much the homes rent for and does not necessarily indicate property value. If it did, it would mean the rent would go up and down with the occupants income. I think this does happen if you are in houses supplied by the government, and quite a few of these people end up paying above market value for rent simply because they obtain work. There is always a capacity to earn more if you are on benefits. I think these areas can 'turn' into higher rental paying areas and the renters who are stuck on welfare tend to move to neighboring towns with cheaper rents. This is because renters are able to move quite easily. I guess you need to not only look at the data for town growth in the way of numbers, but also that the area is growing in terms of the unemployment rate decreasing.

 

How are you calculating net yield? Are you basing this off new purchases or purchases that you made years ago?
Because I can't see a whole lot of net yeild positive offers on the table at the moment. Any examples?

 

Let's take one property for example.
Bought it for $143k, at 105% LVR, let's just make it $150k. Interest rate is 4%, so interest is $6,000. Council rates are $1,500, insurance is $1,000, PM is 7% of rent or $800, water is $500. All up, that's just under $10,000.
Rent is $220, so $11,440 per annum. Assuming depreciation and maintenance cancel out, that leaves $1,440 (before tax), or very close to 1%.
Purchase price and rent are actual numbers for two of my properties, the rest of the numbers are approximations, but should be pretty close to the money. Obviously any vacancies eat into my profit straight away.
I'm banking on eventual rent increases, because even a modest 20% rent increase in the next decade would result in an additional $2000 profit per property per year. Times that by six and you're at $18k (including conservative $1k per property currently). Not a massive amount of money, but that's one day a week that I can take off work, just from my little crappy Elizabeth properties.

 

I'd hate to have too much exposure to that market too - they're so demanding .

 

I think 6% net is before subtracting interest (gross yield - expenses). I think the majority of people calculating net yield that way. Your net yield sounds more like net cash flow.

 

Thanks for the response Brendon. What type of suburbs in Melbourne do you invest in? I have a mix. Expensive ones in eastern suburbs, also western surburbs (low socioeconomic) + very cheap outer east.