Learn from my mistakes- follow me through the purchase of my second IP

Discussion in 'Investor Stories & Showcase' started by Nick Bow, 5th Oct, 2017.

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  1. Nick Bow

    Nick Bow Member

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    My name is Nick, I am 28 years old and purchased my first IP 2 years ago (2015).

    I hope by sharing my story with this community some of the mistakes I've made can be a lesson for those who are thinking about starting their investing journey. And the good people following can keep me accountable.

    When I decided to buy in 2015 it was for all the wrong reasons. I had saved extremely hard and made a lot of sacrifices to get to the point where I was ready to purchase, albeit with zero knowledge or idea of what my end goal was. All I knew was that I didn't want my money sitting in a bank account doing nothing. So I jumped in head first and purchased a 2/2/1 unit in Balmoral, Brisbane.

    First mistake- No clear goals or vision

    What have I done to rectify?

    End of 2017 - purchase next IP
    End of 2018 - have 3 IPs
    End of 2023 - $3 million portfolio
    End of 2028- 50K passive income

    I've verbalised and written down my goals.

    What would I have done differently knowing what I know now?

    Purchase a house and as much land as I could afford as close as possible to CBD (Brisbane/Sydney/Melb).

    If you have any advice on goal setting and its importance and the success you've had please share.

    My next post on this thread will address the importance of having a good team around you and what happened when I crashed a contract due to finance.
     
  2. Anthony Brew

    Anthony Brew Well-Known Member

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    Lack of a goal which stems from a broader problem of lack of education in property investment is something many people have because you don't know what you don't know, so you have no way to find out this information that you don't know and you don't even have an idea that you don't know it. It's great that you have learned from this, but don't be too hard on yourself because you are blaming yourself for something that (I believe) you had no control over.

    Also the lack of education is only part of the problem with your 2015 purchase. The other part of the problem is bad luck. I was in exactly the same boat at end of 2015 and knew even less than you (much less actually), but because of nothing more than dumb luck of being from Sydney's eastern suburbs, I bought a 1-bedder near Sydney CBD and it seems to be an ok investment due to the structure of Sydney and also because the boom continued for another 2 years there. If I was from Brisbane, I would be in exactly the same boat as you.

    You can't control the luck side of the equation, but you can control how you react to it and. Good on you for pushing forward and learning/improving. Also great idea to post about the your purchase of your second IP, because you will get a lot of constructive comments from more experienced people on here.
     
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  3. Nick Bow

    Nick Bow Member

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    Thanks for the input @Anthony Brew . The story is not all doom and gloom! The performance of my first IP has been OK. Which means I either bought under market or experienced some growth.
     
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  4. Colin Rice

    Colin Rice Mortgage Broker Business Member

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    Seems like you have done ok to me.

    My first property was a 1 bedder in Dianella Perth WA which is 8k from Perth CBD. It was what I could afford at the time in July 2000.

    Went to a weekend property seminar in 2001 and the speaker (Paul Counsel) said the following which at the time and in retrospect was sage advice;

    "Buy what what you can afford whether it is a bedsit, 1 bedroom unit, 2 bedroom unit, 3 bedroom house, 4 bedroom house etc."

    You have taken action and had a positive result and that is to be commended.
     
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  5. Nick Bow

    Nick Bow Member

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    In mid 2017 I was ready to purchase again. This time with a little more knowledge and a clearer idea of what and how my next IP would help me achieve my goal(s). Thankfully I was able to draw 25k equity from my first IP. With the help of a mortgage broker recommended to me through a BA. (We didn't use the BA because we thought our money could be used towards a bigger deposit)

    This time having done a lot more reach on suburb fundamentals. I narrowed down to a few suburbs within 15km of Brisbane CBD. My main focus was buying as close to the city as possible, while also targeting the most in demand properties, good sized land and areas in close proximity to schools/shops/transport.

    We narrowed our search to a few properties and over the Easter holidays travelled to Brisbane and inspected them. We placed an offer the next day.

    24 Hours later the owner had accepted an offer for 30k under the asking price. To be fair it was 80k lower since the property was originally listed @ $680k.

    My finance and I thought we had a steal at this price but the bank valuation came in at exactly the price we had agreed on. Not ideal when we really wanted to purchase under market to accelerate our accumulation of properties.

    Unfortunately 1 week later I was made redundant from my job. I quickly got onto the phone to discuss options with our broker as our finance would no longer be accepted by the bank based on only my finances. In the end we decided to crash the contract using the finance clause, since I wasn't happy to drag out settlement in the hopes I would find a job quickly.

    Second mistake- not getting the right help, timing when is right to buy for you

    What have I done to rectify?

    Research, research, research. Podcasts, books, forums. In the last 6 months I feel like I have increased my knowledge 100 times over. As for being made redundant my line of work there is not a lot of certainty so all I can do is plan for the worst and hope for the best.

    I now take a look at the bigger picture, at the time crashing the contract was a real pain but I think I will be far better off. The property wasn't a dud but it also wasn't special or a bargain and didn't have much value add potential. Small house on the low side of the street on a busy road (not a main road). I can do better and I can do that myself or with the help of BA if needed.

    What would I have done differently knowing what I know now?

    If I had my time again I would have waited to get the 20% deposit as well as enough to engage a BA or bought a little further out from the CBD. I may have gotten lucky in this case but I'm happy I withdraw the equity when I did because I'm not sure it would be available to me in the near future.

    I still have mixed feelings about this experience. Would love to hear your thoughts.

    ps. sorry for the length of this post
     
  6. thatbum

    thatbum Well-Known Member

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    It sounds like you made the right decision to pull out of the purchase - and I say that even putting aside the redundancy issue.

    If your strategy is to buy below market value, it seems odd to me you picked a property that wasn't special or a bargain, and had little value add potential...

    I have a similar strategy, and I will literally trawl through tens of thousands of listings to look for those special properties that fit my strategy.
     
  7. Nick Bow

    Nick Bow Member

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    Young, dumb and stupid was almost the name my thread.
     
  8. Gockie

    Gockie Life is good ☺️ Premium Member

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    My thought is that this will always be the case, you won't find a lender valuing a property more than the contract price. However, if you make an offer for more than they think its worth then you may not be able to finance through that lender.

    You can get near instant equity by renovating then getting a revaluation, you will probably need to wait a few months though.

    And job... wow that's timing. I think you did the right thing with that scenario, given the property wasn't particularly special and you had no guarantee of ongoing employment.
     
  9. MWI

    MWI Well-Known Member

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    You can also add specific clauses in the contract, like subject to your financiers' valuation (that way you know you can opt out if the price is above).
    However, it would imply to me that you have set up the first reason for property investing, ok, to achieve $50K rents in year ?. This and time then really dictates the property you wish to buy... when say 20% equity growth then you pull out $X amount, and so on.....
    The second reason why I think most do not progress beyond one or two IPs is because they really don't understand or have an investment strategy. So what is yours, do you plan to buy in Brisbane only, one state, will it be up to 20kms from CBD, will it be townhouses or houses, will it be with renovation potential, etc... You need to be much more specific in your investing strategy as that will make it much easier to progress, have clear path, so at least to try not to make emotional decisions. We all make mistakes, that's part of life, but as long as we learn from them not to repeat yet to progress, will be the key!
    It's like saying I want to lose weight, but what will be your actual ACTION steps? How much you wish to lose, by which date, how will you do it, go through and eliminate junk funds, make weekly shopping lists, follow low carb diet, will you incorporate Interval Training say 15 minutes a day, etc... These specific steps are required into RE investing too.
    For example, you can break down even purchasing a property in BRI into steps... perhaps that should be a learning curve for the next one. Follow a your steps (Finances sorted, obtained a contract, passed it to my lawyer to check special conditions or added/changed clauses, did relevant searches, made offer with expiry date and time, took out building insurance - required in QLD after contract sign rather than after settlement....).

    Below is some advise I have posted to a friend, perhaps it may become a little bit useful to you too?

    Remember one IP will not be enough, but it is a great start, what you need to decide are two things:


    • What do you want to achieve from IP (you need to quantify it, say you want $100K in rental income). From then you would perhaps need to have assets around $4,000,000 (you would calculate around 3% net rent - less 1% for outgoings), so 3% of $4million is around $120K.
    • What investment strategy you would use, as there are SO MANY WAYS TO INVEST into property. Will you be buying say in 3 states (NSW, QLD, VIC), will you be buying older townhouses say within inner or middle ring suburbs with renovation potential (this is just one example). Buying new units off the plan, buying houses in new estates, buying your own house, and renovating and upgrading and moving.

    Let me give you a statistic in AUS 90% of investors own only 1 or 2 properties! So you and spouse need to decide if property is for you for your financial wealth building? Then you would need to grow your assets base (acquiring as many IPs as possible - slowly no need to rush there - say towards that $4million mark - so your asset base and time will dictate how many IPs you will need to buy).



    So your plan may look like that, say within the next 10-12 years you plan to invest, perhaps practice delayed gratification, make IPs the most important thing where you would just accumulate, keep buying. So each time you may need to save up around 25% (20% deposit so no LMI (Loan Mortgage Insurance) and 5% for purchase costs). It is the hardest process those first accumulating years as you maybe 80% in loans, geared, your LVR (Loan to Value Ratio) is then 80%).



    Now on $4million 80% = $3.2 million, but then imagine next 10-12 years, say you asset base of $4million grows by only 5%, so now after 10 years your asset base would be now $6.5 million (yet loans still $3.2million), so you are now about 50% LVR. When IPs are 50% loans to 50% equity, they usually maintain themselves, no need from your income. Now imagine they grew by 8% not just 5%? Now let’s imagine next 10-12 years, perhaps your retirement now, your asset base is now $10.5million only growing at 5%, and loans still $3.2million). Now you have a choice you can sell some to pay off the debt (you could have saved from previous years to pay some off, via offset accounts, you could use your Super to pay them down, you have many choices.).



    What you both need to understand and realise property will make you rich after about 30 years (that’s what my mentor said, not a get rich quick scheme), and I agree, you would need about 3 cycles in growth (the 1st being hardest where you accumulate and have most loans, then eventually your loans are less in value due to inflation, even though the amount is the same, and compounding would do its thing).



    I have read heaps, attended heaps, experienced heaps, have extensive knowledge in this matter so I can guide you about the process but then it is really up to you both if you wish to build wealth via property. If so I suggest reading for at least 3 months and acquiring as much knowledge as possible is the start (I can point you in the right direction), as you need to understand that it works like compound growth, so time is needed in the market, the sooner you start the better….



    It is simple to understand but not easy, but what in life is easy? If you focus and have BIG enough WHY (suggest you write 100-200 reasons as below) you will then persist and persevere, and be better off…. and face all challenges ahead!


    So if you are really interested to build wealth via property investing, first you will need to write 200 reasons what it would do to your life, how will it make it better? And I do not mean lifestyle factors, like you can travel or buy a speed boat, or have a castle, these are spending habits, I want reasons that will improve your life.


    For example my reasons why I wanted that 1st property were:
    • So I don’t live with my parents
    • So I don't pay someone else the rent
    • So spouse and I can run around in undies in our house
    • So I don’t pay rent to someone else
    • So I can decorate as I want, hang pictures on walls
    • So I can be a boss in my house
    • So I can get up when I want
    • So I can eat when and what I want
    • So I cannot listen to parents arguing
    • So I can have it paid off so if I lose a job I do not need to worry I have a roof under my head
    • So if I start a family I can stop or quit work
    • So I can bring up my kids and form family memories
    • So we can have parties
    • So I can send kids close to better private and catholic schools
    • So I can set example to kids by doing it not just by talking
    • So I can become responsible for my life choices
    • So I can leave the kids or family inheritance
    Now I can go on and on and on, do you get the picture, do you want your property? Why? Make out a list of MANY reasons, as many as you can! Read it every day to yourself, I was obsessed and I would deny myself many things as that was my priority!


    Also, you could also buy in SMSF, but maybe not for long as banks may soon pull out these products?
     
  10. Nick Bow

    Nick Bow Member

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    Thanks for such a detailed response. A lot of useful nuggets of information in your post that I will be using.

    As for my specific weight loss program I MEAN investment strategy I have a very clear vision for my next property. I just didn't want to bore everyone because my posts were already becoming quite long and I wanted to keep the posts as generic as possible.

    As for long term outcomes I have a blurry vision of when/what/how I can achieve my goals, but at this moment in time the goalposts are moving a lot and often so I don't to get tied down thinking too far ahead. You've gotta crawl before you can walk.

    Let's just get through this weeks weigh-in and fingers crossed that I've lost some weight.
     
  11. Jess Peletier

    Jess Peletier Mortgage Broker & Finance Strategy, Aus Wide! Business Member

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    Hi Nick,

    Have you had your servicing run by a broker to see what you can realistically afford to buy over the next 5 years? It's great to have big goals but it's also important to find out if it's realistic. Many people are discovering that their incomes won't allow them the portfolio they initially planned, so it's good to be aware of any limitations early so you can change course if necessary.

    This could mean a change in the type of property you buy, a change in the quantity of properties, or a decision to invest in a few asset classes instead of just one.

    It's also important to consider family into the planning equation - whether kids will come along, whether you'll lose an income for any period, whether you'll buy a PPOR, and so on.
     
  12. Nick Bow

    Nick Bow Member

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    In discussions with a broker now. I may do a post about my experience with them in the near future.

    And very important point re family and kids and the impact on investing. Something my partner and I have talked about a lot. Which is why we want to makes moves now while our incomes are high (mine in particular which may never be as high as it is now, since I'm working in the mining industry) and our overheads are relatively low.
     
  13. Jess Peletier

    Jess Peletier Mortgage Broker & Finance Strategy, Aus Wide! Business Member

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    You have a unique problem in that you really need to plan around a significant drop in income. It's super important for you (and even more importantly, you broker) to have a specific conversation about what you'll do when the time comes, and how you'll manage expiring IO periods - this is likely to make a doubley huge impact when your income drops, as you'll not only have payments that are significantly higher, but also have way less income to put toward them.

    I've worked with lots of miners (I used to live in Port Hedland) and a values based goal setting session is probably the best thing I do with them. It's really useful to clarify what they want to achieve while they're on a large income - I found in many cases, despite seeing me to invest, it was to be able to buy a home and settle down once the mining gig comes to an end. This requires quite a different strategy than just building a portfolio, and if they'd charged ahead they would actually have made it very difficult for themselves to ever actually leave their mining jobs.
     
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  14. Nick Bow

    Nick Bow Member

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    SO true. And I've seen some close friends in very tricky spots financially by over reaching. Possibly with better advice (like yours)/knowledge/team they may have made more informed choices.

    You are 100% right about serviceability and not over extending myself and right now I am in the early stages of ironing those wrinkles.
     
  15. Nick Bow

    Nick Bow Member

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    @Jess Peletier as I have said a few times, the goalposts are always changing and adapting to situation is half the fun.

    A great man once said 'the measure of intelligence is the ability to change'.
     
  16. dabbler

    dabbler Well-Known Member

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    lol.....

    So you think many were "experts" in research etc & that is how they made lot of money ?

    How about this theory......most would have just gotten lucky. That even includes members here.

    When the market is all rising because money is cheap and easy, well, all will do well.

    So, I think your over thinking things, I have done well on units, even though I spent my youth being told not to go near them, your timing is not good, but hold it long enough and it will right itself, maybe consider living in it and a new job nearby ?

    As for the second one, you would have been told val came back at contract price, this is normal, so it may have been a good buy, or maybe not, but with no job and if no reserve to draw on, maybe no choice but to do as you did.
     
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  17. Nick Bow

    Nick Bow Member

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    Thanks for your input.

    Analysis paralysis- ITS A REAL THING!

    To address your point on being an expert through research- I may have misspoke. I am researching to get the knowledge to make the best and most informed decisions I can at the time, nothing more nothing less. I would be doing myself a disservice by not committing to the whole process and learning as much I can.
     
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  18. Jess Peletier

    Jess Peletier Mortgage Broker & Finance Strategy, Aus Wide! Business Member

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    I agree, but when talking about investing in property in your context, adapting to situation after the fact will likely mean selling property so you can afford to eat. If that's fun, awesome! :)
     
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  19. dabbler

    dabbler Well-Known Member

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    Yes

    and

    Yes, of course.
     
  20. Tom Rivera

    Tom Rivera Property Manager Business Member

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    Great comments! There's a real misconception out there that there's this sizeable population of "super investors" who have access to the best investment opportunity at the best prices that aren't available to the mere general public.
     
    Last edited: 13th Oct, 2017
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