Investment

Discussion in 'Investment Strategy' started by Heyman_526, 30th Jun, 2020.

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  1. Heyman_526

    Heyman_526 Member

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    23rd Jan, 2020
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    South Australia
    Hi I was wondering if I can get some help please I'm always looking at properties but I'm unsure of how much rent it could generate once I purchase it's going to be an investment Google is telling me rent is about .8 to 1 percent of the homes value per month but that was not from an Australian website that is why I'm unsure is there a formula to work out how much rent the property could get without contacting the agent? Thank you very much for your time.
     
  2. PurpleTurtle

    PurpleTurtle Well-Known Member

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    Look at similar properties for rent in the same area.
     
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  3. C-mac

    C-mac Well-Known Member

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    Ah the "1%" rule. That is a metric mostly used in US residential property, not Australian property. Yields are so much lower here as a percentage; that you'd be lucky to get to more like 0.4% rule

    E.g. a $300K value property in Australia would be lucky to rent for $1200 a month = 0.4% under such a rule.

    Also, that metric is specific to gross rental return. There's generally two ways investors seek to make $$$ from an investment property:

    1) Capital growth (so, you buy for $300k today, and maybe in a few years in a good case, or a few decades in a worst-case o_O it goes up to say $400k value; at which point the only way to 'realise' that $100k of capital growth as income/tangible profit; would be to sell the property); or

    2) Rental return/yield (I.e. in the same $300k property example, you are hoping that your annual rent minus all running costs and taxes; would return you a profit each month/year)

    Of course you are probably thinking: can't the one property give me both? :p The truth is that most investment properties will offer some combination of both; but often at the trade-off of one of them.

    What I mean is; a high capital-growth property usually has weaker income, oftentimes so weak that the property actually 'runs' month in month out at a loss. As in, the expenses cost more than the income coming in. If you have a job or other income during the year, you can then offset losses against this other income, often resulting in a lower total income. This usually means with lower income you fall into a lower tax bracket. Aka this is negative gearing.

    Conversely, high rental-return/"cash flow" properties often come with lower capital growth. That doesn't mean $0 capital growth; but usually lower. E.g. instead of a capital growth property of say $300k purchase price going to say $500k value in 10 years' time; a higher-yielding/rental returning property may onoy grow to $350k during that same 10 year time period.

    Others might be quick to jump in here and say that you can have BOTH from the same property and that residential properties exist that offer both - and I'm sure that they do - but in my experience these are harder to find.

    Pre-covid, one way some folks "manufactured" both, was to buy a high capital growth properry in a high demand suburb, and one that was also popular with tourists too; and then air bnb the property out at often very high returns. This in itself is a more labor intensive strategy and now post-Covid is actually a terrible strategy due to zero international tourists/students.

    People might argue one is better than the other. My personal view is that if you are under 30 or 40, time is on your side. You are likely in your PAYG income-earning prime years. You can probably afford to make zero/low rental yield during these years; holding a property type that is more likely to appreciate in value. Why this matters is - if you want to grow in investment property towards a goal of financial independence - you really need to get a bunch of capital growth early on, so you can extract that as equity to then use to put down as downpayments (deposits) on property #2, #3, #4 etc. From there you can expand your position a lot faster, especially if you buy a mix of more capital growth properties as well as some yield/cash-flowing ones.
     
    Last edited: 30th Jun, 2020
  4. Lindsay_W

    Lindsay_W Well-Known Member

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    If you've got a good broker with RP data access they can generate rental estimates and other property reports for you.
     
  5. Heyman_526

    Heyman_526 Member

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    23rd Jan, 2020
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    Location:
    South Australia
    Thank you all for your help i appreciate it.

    My thoughts were potentially getting a new construction build that I can possibly add to as a block of apartments and then apply for a sub division but if I do this then the value of the property may not increase at all because the land would have already been established.


    How long would it take to build a block of apartments? And also what are some of the costs involved? It has to go through the government for planning I'm just trying to estimate what sort of time frame and money it would take for construction and styling from start to finish so I can try work it into my loan when I decide to do it.

    I'm just trying to find the most cost effective way of building the block that has a reasonable time frame without cutting corners.
     
  6. Lindsay_W

    Lindsay_W Well-Known Member

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    Building a block of apartments - Not a small project by any means, likely that funding will be commercial therefore you may even need to have some pre-sales prior to getting approved and max LVR would be between 60 and 70% for most lenders so you would have to make up the 30%-40% shortfall (+costs) with cash.
    This is not something for the inexperienced, it's an easy way to lose money.
    You'll need to do a proper feaso if you haven't done one already
     
    Last edited: 2nd Jul, 2020