how do we explain to a novice about the value of owning property in top location

Discussion in 'Where to Buy' started by justine77, 18th Oct, 2017.

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  1. justine77

    justine77 Well-Known Member

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    how do we explain to a novice about the value of owning income producing residential property( block of apartments) in top location

    that they double in price every ten years and have done so for the 50 years they have been owned by a relative

    that nothing is more foolproof

    that selling and trying to invest in something else without being an expert and with low interest rates not giving much return, is not foolproof.

    i'd like as much info explaining the above as possible to a novice please.

    the only problem it has is it needs updating. to attract better tenants
     
  2. JesseT

    JesseT Well-Known Member

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    If you can't explain it simply, you don't understand it well enough. Albert Einstein
     
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  3. 2FAST4U

    2FAST4U Well-Known Member

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  4. highlighter

    highlighter Well-Known Member

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    The fact property has done very well for 50 years (a very unusually long time to go without a significant correction) does not mean it will definitely continue to do so. That's not how housing markets work. Prices also don't always double every ten years.

    In many cities apartments have entered a state of oversupply, meaning many are at a heightened risk of a correction, and it is difficult to say when or whether those markets will absorb the excess long term (which could in some cases mean a long period without capital growth). A recent BIS Oxford Economics study of off-the-plan apartments over five years in major cities, showed about half have actually sold at a loss since 2011. Established apartments are also a risk, though these weren't the focus of the study (you could argue more of a risk, because why buy an old two-bedder if you can buy one of multiple brand new ones?) Keep in mind too that interest rates, according to the RBA, are more likely to rise than fall.

    Nothing is ever foolproof. Property, like all assets, comes with inherent risk. It's not the Jesus of investment vehicles. It is no better or worse than many other investment types (maybe this person would prefer, say, a diverse portfolio of shares or an index fund).

    When corrections in real estate markets do happen, investors require a lot of patience and active dedication to continue doing well, and novices are often not particularly good at this. In rising property markets, every amateur can become an investor and make easy money, but in falling markets you have to know what you're doing and have to have a long term vision. It becomes a much tougher job.

    It's usually best to let people make their own investment decisions. You can advise, but no one has a crystal ball, and people need to be able to judge and take their own risks.
     
    Last edited: 18th Oct, 2017
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  5. Scott No Mates

    Scott No Mates Well-Known Member

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    Put the numbers on paper so they can see and understand it.

    Market Value of the property
    Net realisation if sold today (agents fees, legals, capital gains tax, outstanding loan balances etc).
    How much interest they will receive if they put it in a bank term deposit etc
    How much nett rent are they collecting (less expenses - management, rates, water, land tax etc)
    How much they need to spend on upgrades
    New nett rent after upgrade

    It is then simple to compare the options.
     
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  6. DowntownBlock

    DowntownBlock Well-Known Member

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    By top location (Ie Suburb) in Sydney for example this means 2-3% yield.

    Yep good luck explaining to someone why they should lose money on a weekly, monthly basis for promise of increasingly uncertain Capital Gains down the track sometime..
     
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  7. Athikalaka

    Athikalaka Well-Known Member

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    I'd like your insights on what you would suggest telling a novice?
     
  8. Angel

    Angel Well-Known Member

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    Justine's family have probably owned this block for the fifty years and it is probably very very cashflow positive. For all we know the yield could be 1000%.
     
  9. Corey Batt

    Corey Batt Well-Known Member

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    Ah - but what about the yield based on current values?

    Considering you can always sell the asset and reinvest elsewhere (albeit with tax considerations), it's important to base yield decisions on the current, not historical value otherwise you may be short changing yourself compared to alternative investments.
     
  10. Joynz

    Joynz Well-Known Member

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    If your relative has owned the property for 50 years, then they aren't a novice.

    Also, they are now probably elderly and want to make use of the money.

    They may be 'asset rich but cash poor'.

    Also, assuming this is the property that needs significant renovation mentioned in your other threads, then they might prefer to sell it and let someone else invest in improvements.
     
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  11. DowntownBlock

    DowntownBlock Well-Known Member

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    This is a big question, and the first objective would be to understand more about this 'novice'..

    What returns are they looking for? What risk can they tolerate? Are they seeking CG or cashflow? Can they afford to pay cash weekly / monthly etc if rates pick up.

    This will allow you to compare this (at current valuations and yields) vs other investments.

    There are many low maintenance investments that pay more than 2.5% yield if cashflow is important for example.

    Providing more details would be useful.
     
  12. Marg4000

    Marg4000 Well-Known Member

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    From other posts it appears that this block is VERY run down and needs major refurbishment. As it is so neglected it only attracts a very dubious quality of tenant, again outlined in other posts.

    Maybe there is no money available for necessary renovations.

    If so, selling may be the best option for the owners rather than the continuing hassle of problem tenants. But perhaps not good news for anyone hoping to inherit......
    Marg
     
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  13. MTR

    MTR Well-Known Member

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  14. Angel

    Angel Well-Known Member

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    That is the other issue to consider. The last thing the"novice" owner needs (if the novice just inherited) is a major refurb. Let it go and enjoy the proceeds. The last thing any elderly owners need in their twilight years is a major refurb. Ditto about enjoying the proceeds.
     
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