My Property Investment Journey - Week by Week

@albanga, what do you mean by "policy" and "policy changes"? Sorry if this may seem like an obvious question, but I'm still getting my head around how everything works in the property investment world...

 

Any particular song requests?

 

@Excalibur1 I'm also leaning towards better yield than GC, based on my limited knowledge. Quick question: what is "dual occ"?

 

Absolutely agree. Also, if you compare, in the long-term (20+ years) an OTP with a property that is let's say 5 years old, both will be at the same price mark, which means GC will have been smaller for the OTP.

 

Duall Occ = Dual Occupancy properties

Those can be house +granny flat to increase yield, or duplexes. or block big enough to build 2 separate houses.

All of the above increase yield. @euro73 is expert in NARS but that is believe is at the end of its life, there might be few more properties available. Dual occ is next best thing for higher yield other than going commercial. look into LICs (Listed Investment Companies) too.search it on this forum.

 

This is dual occ. 2 dwellings on a single title. Not possible in most states, and in those where it is possible, there are often draconian restrictions. Can be done in NSW, WA and in some limited parts of QLD, but works best in NSW. The ability to do a detached 60M2 dwelling without requiring council approval or subdivision is where NSW has the advantage .

 

Week 3: 2/4/17 to 8/4/17

Key learnings this week:
- High yield can be an indicator of potential growth, given that renters go first and then investors jump in. Exceptions to this are, obviously, areas where people are reluctant to buy (mining towns, for example), or areas where prices are going down (therefore yields are going up), or areas that usually don't have capital growth for whatever reason (one bedroom units close to universities, for example) - all of these scenarios might have high yields but no potential for growth. The key is trying to find areas where there's an imbalance between supply and demand, and looking at yield is a good way to start looking for these areas.
- Land to Asset Ratio: the land generates growth and the building generates the income (via rent). That's why, in properties with cheap land, yield is higher (most of the value of the property comes from the building), whereas the opposite happens in properties where the land is expensive and is a big part of the value of the property.
- Solicitor vs Conveyancer
- Basis Points
- Assessment Rate

Lots of interesting learnings from this thread as well:
- Every pre-approval is a credit hit and stays in your file for 5 years, so it's important to only use it when it's needed (for an auction on for when you want to lock the policy with the lender). Other than that, a good mortgage broker should be able to give a good idea on how much you'll be able to borrow (thanks @aussieB / @Jess Peletier / @Eric Wu / @Terry_w for this one)
- Dual Occupancy is a good way to get higher yield, and some states are easier than others when going for it (thanks @Excalibur1 / @euro73 for this one)
- Good eye-opener in terms of how inflation needs to be accounted for when doing long-term plans (thanks @Kat for this one)
- Why it can be risky buying OTP when comparing to something established (thanks @albanga for this one)

I believe I'm now at a point in which I have the basic fundamentals reasonably well understood, which means it's time to start getting a little closer to the practical side of things. Over the next few weeks I plan to start checking data and properties (both for sale and rent) for different suburbs, as well as start talking to a few brokers and buyer's agents. Theory is good, but you only really learn when you get your hands dirty!

With that in mind, I'll leave a question here: which sources of information do you guys use for analysing numbers in different suburbs? The obvious answer would be www.realestate.com.au, but I'm sure there are better and more comprehensive ways...

Thanks for all the support so far, I'm loving this journey.

 

When most people here refer to "policy" they are referring to the banks policy for lending. Every lender has slightly or majorly different bank policies that they comply with.

The policy could be in regards to lots of things but just an idea it would include how they assess income and debt, LVR restrictions, security restrictions.etc

Just a few simple examples:
ANZ's policy is they will allow the use of 1 single years business financials. Almost all other lenders will want to see 2 so you can imagine how powerful this policy is for a new business or someone who say had 1 bad year but 1 good year.

Liberty a well known name on here will assess other banks debts at actual repayments. So whilst almost every one else adds a buffer they take actual. If your on IO repayments with other banks then you can imagine how Liberty can drastically increase your borrowing capacity.

In the past 6 months their have been some drastic changes to lenders bank policies and previously GO TO lenders are now almost completely out the game. Just ask your broker what policy changes CBA has made in the past 3 months alone.
What was once the go to anchor lender for investors is now on the sidelines.

My point about pre-approval is a good one will have locked you in before a change was made.

 

Thanks, @albanga , it makes sense now and I can see why it might be a good idea, in some cases, to get a pre-approval.

 

Week 4: 9/4/17 to 15/4/17

Hey PC'ers, hope you're all having a great Easter. I'm writing this post from Forster, NSW. Came here with my wife and a couple of friends for the Holiday and really enjoyed the calm and chilled atmosphere of the town. Wouldn't live here, but it's definitely a nice place for some quite time away from Sydney.

While exploring the town, I spoke briefly to a real estate agent and he said it's pretty easy to find tenants for a 2 bedroom house for 400/week, and there's plenty of them for sale around the 350k mark. However, all real estate agencies have lots (and I mean LOTS) of properties for sale and only a few for rent, and I honestly don't know how to interpret that. Does it mean that there's almost no rental market? Or is it actually the other way around - there's so much demand that only a few properties are available at any point in time?

Didn't actually sit down and study much this week, but heard quite a few interesting podcasts from the Property Couch. Highlights for me were the "ABCD" ones (the four pillars of property investment): Asset Selection, Borrowing Capacity, Cash Flow Management and Defence. Strongly recommended for anyone starting out (like me).

In terms of where to invest, my interest in Brisbane grows bigger and bigger, while my interest in Melbourne is slowly dwindling away. I'll need to go to Melbourne in the end of May for a weekend, so I'll try to use any free time to drive around and get a feel for the city and its suburbs. Will do the same in Brisbane sometime later, probably in June or July. Newcastle and Central Coast are still in the picture, especially considering how dual occ is easier in NSW, but first I want to drive up there and spend a few weekends on the ground in both these two places to understand them a bit more. Will try to do this in the upcoming weekends.

Still on the "where to invest" subject: I've also been trying to understand what the pros and cons of investing in small one bedroom units close to universities are. There's areas in Melbourne (Burwood and Bundoora, for instance) where it's possible to find these units for 150k and rent them out for 200/week. No potential for growth, I know, but it's a small investment anyway and it's a property that will pay for itself quite quickly, right? So... what's the catch here?

To wrap it up: despite having the money to take the plunge, I'm definitely waiting for a few more months. There's still too much to learn, too many places to visit and too many questions to be answered.

On a completely different note: finished reading The Slight Edge and loved it (shared it with my wife right away). Awesome book, strongly recommended - not only on the financial front, but for pretty much everything in one's life: health, family, relationships, career, investments etc.

That's it for this week, cya all next Sunday.

 

150k @ 5% loan = $7,500 pa
20% of the rental income in holding costs = $2,000 pa
total outgoings = $9,500

total incoming = $10,400

Is it really paying itself off quickly @ $1,000 pa ?

What am I missing that makes it attractive if there is no potential for growth?

 

Tks @Anthony Brew. My analysis would be considering a 20% deposit, but it still doesn't change the numbers much. It gets even worse if you try to be a bit more conservative and go for a 9% vacancy rate (4 weeks per year).

The catch are the holding costs, which I completely ignored in my first look. I think I should actually say "slowly paying itself" rather than "quickly". If there's one good thing about it is that it's cheap to buy: 15k (10% deposit) + 2k (LMI) + stamp duty (4k) + solicitor/cleaning/etc (2k) --> 23k would get you in. But apart from that, it's just a cashflow neutral property with no potential for growth - definitely not a good investment choice. Thoughts?

Thanks for the answer!

 

Week 5: 16/4/17 to 22/4/17

Key learnings this week:
- Fully realised the potential of an Interest Only loan with an Offset Account. I had previously understood the concept, but only this week I got a full grasp on why it's a good idea. Being a conservative investor, I had serious concerns around I/O rather than P&I, but now I understand that, mathematically, it's exactly the same thing if you have the discipline to put the money that would be, in a P&I loan, the Principal component of the loan, in an offset account. If you keep doing it, at the end of the loan you'll have all the money there and the property will be yours, just like in a P&I loan. The advantage is that the money is available to me at any point in time in case I decide to use it as a deposit for a new investment, whereas I would depend on a bank/lender if I wanted to use that equity for a new investment - that's the key difference.
- Never underestimate the holding costs (property manager + council fees + strata fees + landlord insurance + building insurance + repairs/maintenance) - Thanks @Anthony Brew for this one.
- During the construction period, you can only go for variable rate. After the property is finished, it's possible to choose between fixed and variable.
- Depreciation has 2 parts:
- Capital works (cost of construction) --> 40 years (2.5% per year)
- Fittings and fixtures --> only for the first 7 to 10 years, depending on the item

My interest in Melbourne grew a bit this week based on the news I've been reading, especially the prediction that it will have, by 2037, more inhabitants than Sydney. Brisbane still seems to be a better option, though.

A bit disappointed by the fact that this thread has been moved from "General Property Chat" to "Investor Stories" - it doesn't get nowhere near the visibility it had before. It's fine, I'll keep posting every week nonetheless. It's a good way to solidify my learnings and, as I said in the first post, I'm sure it will be pretty interesting to look back at this a few years from now.

 

Doesn't look like a good investment choice - if your assumption that is will have no growth is correct.

Not only investment. You also can use the money and have it tax deductible if you use it for non-investment purposes like using it to pay for a holiday or a car.

It will also help others more than you realise and they will appreciate it.

 

Yes, @Anthony Brew, I'm hoping it will be useful for a lot of people out there.

How is it tax deductible for non-investment expenses? Didn't get that... would you mind explaining in a bit more detail? Tks a lot!

 

Say interest only payment is $500 pm and if you then put in an extra $500 pm into the offset, then you now are paying the interest on principle less amount in offset. You also lose some tax deduction on that since you are simply are making less of a loss by paying less interest.

The money in the offset is considered just a bank account and not a payment of the property. So you can then take this out of your offset and use it however you like (including for a holiday or whatever) and your loan payments revert back to previous where you are now making more of a loss (via more interest) and the higher loss is the same as previously and has the same tax deduction as before.

This is very different to pulling out equity from a property where it is only tax deductible if you use that money for investments.

Sorry, it's late and I am not sure if that was clear.
I'm sure it's in Terry's tips and probably clearer than what I said (though he has a lot of tips so you may need to search through a few of them to get to it)

 

Week 6: 23/4/17 to 29/4/17

What a week!

Had my first contact with brokers, and was surprised by how different their approaches can be. One of them just asked me a few quick questions and already gave me an estimation of how much I can borrow and at which rate. The other one, on the other hand, sent me several forms to fill and asked me for much more details, and will come back to me tomorrow. Needless to say, the thorough broker scored points with me, whereas the "quick" one won't ever hear from me again. At least I learned one important thing from him: the higher the LVR, the less options I'll have.

Caught up with a friend who started investing about 5 years ago and has 3 investment properties, all of them in regional areas (two in QLD and one in the Hunter Valley). He said his journey started with Destiny (heavily focused on regional), but now he profoundly regrets it and says the properties are not performing as expected. He has become a Michael Yardney advocate - blue chips all the way. In his own words: "if I could go back in time, I would have focused in Sydney only, even if that meant having only one property instead of three". When I started talking to him about buying dual occ in regional areas so that I could focus solely on capital growth (which is something I've been considering), he almost slapped me in the face.

There were two things he mentioned that resonated with me though. One was "learn from the teachers, not from the ones studying with you". In other words: read the books from the guys who were successful in this business, rather than following everything you read in a forum. I agree to an extent: I'll definitely read the books, but I won't ever deny the massive value this forum has.

The other thing he mentioned was: "what matters is time in the market, not timing the market". Agree 100%, and it aligns with my philosophy. I don't want to be a trader, it's all about the long-term.

Like a good Michael Yardney follower, he also mentioned Living Off Equity, which I haven't studied in detail but am a bit skeptical about, especially with regulations getting tighter every day.

Also caught up with a friend who will buy in Melbourne soon, and he said he doesn't care about the possible correction/bubble. His plan is to buy an established 2 bedroom apartment close to the CBD in the 800-900k mark using a good buyer's agent. He believes Melbourne has all the fundamentals in place to have great growth in the long-term (20 years). I agree 100% with him and I would definitely do the same if I could, but unfortunately it will take me about 15 months to have enough money to cover all the upfront costs of a property like this, so that's not an option for me at the moment.

Also, great explanations from @Anthony Brew and @The Y-man about why the money in an offset account is tax-deductible (tks guys!).

And finally: I saw someone say somewhere that a $1 dollar increase in income translates into a $7 increase in borrowing capacity. Can anyone confirm if that's really the case?

Cya all next week!

 

Terrible that your mate started with 3 regional properties. Some people have the worst luck. I say luck because it can be very difficult with the mass of information and misinformation to find out how to distinguish between a good property and a lemon and I believe luck has a lot to do with being able to find that information.

Having said that, it sounds like he is saying focus on Sydney only because Sydney boomed most recently. He would have done ok in Melbourne also, but only has seen the crazy rise in Sydney in the media. He also would say invest in Perth after the astronomical boom in Perth of 2000-2009, but Perth has made no money at all in the past 9 years since.

Regarding how much your borrowing capacity changes according with circumstances, Redom's post below is excellent. Actually all of his posts are. Incredibly fortunate to have him on this forum.
How to calculate changes to your borrowing power