Why a slum lord ?

Discussion in 'Investor Psychology & Mindset' started by JDP1, 7th May, 2016.

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  1. skater

    skater Well-Known Member

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    There is a lot of difference between being an investor of low cost properties and being a slumlord.

    We own many properties in lower socio areas, but we are not Slumlords. They are all kept in clean condition, and maintenance is promptly done, when needed.

    I think you should check out the definitions.
     
  2. skater

    skater Well-Known Member

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    Why not in the long term?
     
  3. ellejay

    ellejay Well-Known Member

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    If I'd bought the most expensive I could afford I'd probably be sitting on 2-3 ips now. Looking at numbers posted by others chasing growth it may have given me a few hundred k each growth over the short to medium term depending on the market? How much is left though after all costs? I'm not sure because I haven't done that, but say I could have made that over the last few years of investing. Going for a mix with more higher yield properties over the last four years or so has allowed me to buy a lot more properties across a few different markets. I reckon I've made similar equity, but they've been paying for themselves from the start. Everyone's situation is different but I like having multiple properties because I it gives me more options (and challenges, so I'm learning more). I agree you do need to buy with some growth in mind, even if those areas will never boom.
     
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  4. ellejay

    ellejay Well-Known Member

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    Agree with this question. I'm holding my high yield ones long term because the tenant is paying off the mortgages and all costs so why would I want to sell sooner rather than later? However, the negatively geared ones that I have to top up with my own money the plan is to sell when it looks like the value is about to plateau. Wouldn't make sense would it, to keep paying to hold them?
     
  5. JDP1

    JDP1 Well-Known Member

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    Yea..you know what i mean...investor in low socio properties. No one here is extorting rents from the poor, treating them poorly/illegally etc...
     
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  6. skater

    skater Well-Known Member

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    Well, no, you stipulated slumlords. It's important tp know what a slumlord is.
     
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  7. skater

    skater Well-Known Member

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    Lower value property often has higher yields, lower Stamp Duty to get in and lower land tax liabilities. If you bought one property worth $1M, and it grew in value to $2M, when you sell, you will incur a huge CGT bill, compared to 5x$200k properties where you can stagger the sale over 5 financial years.
     
  8. ellejay

    ellejay Well-Known Member

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    This is my impression too, but it's hard to work out from posts how much is actually made following the sale of properties as in your example. Thanks for confirming what I suspected.
     
  9. jim1964

    jim1964 1941

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  10. skater

    skater Well-Known Member

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    My latest sales:
    1) purchase price $185k. Sale price $411k
    2). Purchase price $150k. Sale price $310k
    3). Purchase price $186k. Sale price $490k
    4). Purchase price $210k. Sale price $380k
     
  11. ellejay

    ellejay Well-Known Member

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    Exactly, that's why I can't believe some people still go on about cash flow vs growth as though they're opposites. I was actually meaning that you don't see a lot of figures from equity actually gained from negative geared properties following sale. Perhaps because many investors never sell but pass on to children etc?
     
  12. Taku Ekanayake

    Taku Ekanayake Well-Known Member

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    I'm a proud slum lord. Mirroring what most have said:
    - Lower barrier to entry
    - Better cashflow
    - Greater yields looks good on paper when servicing with banks
    - Ability to buy pre-gentrification or during early-gentrification phase
    - After quick cosmetic reno, you can create enough equity to repeat process again on another slum property

    Also, just looking at the numbers (and yes but these are made up numbers but realistic also):
    Slumlord property = 4% CG & 7% yield
    Blue chip = 7% CG & 4% yield

    The overall return could be considered quite similar. And to note, I like the look of higher yield because this is a certainty - rental coming in every week. Where as with CG - you are speculating at the end of the day.

    After building a sizeable portfolio of these types of property, I may diversify into more blue chip properties but right now, this strategy allows me to buy more properties, without it affecting my lifestyle, and create a passive income, as well as capital growth (however lower CG, than blue chip).

    A strong arguement can be made for either approach, dependant on what stage of your investing journey you're on.
     
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  13. sash

    sash Well-Known Member

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    That's what...iouse being saying.....know some people who have $700k in CG trapped in houses...and anxious as their land tax bills are now out of control (25k plus) and if they sell they will have to add 350k onto their incomes. That means 175k straight to the taxman.


    Classic example of managing the affairs..well if you don't sell of them in one go better still if you can split income across husband/wife.

    1) purchase price $185k. Sale price $411k Buy/sell costs will probably leave you with 210k in of which you will probably only add 100k to income if there is 2 of you that is 50k! And assuming no other income...you would only pay about 8k in tax each

    2). Purchase price $150k. Sale price $310k. Buy sell costs about 15k so you will only pay on 37.5k income or about 4k tax.
    3). Purchase price $186k. Sale price $490k. About 67.5k each for tax purposes so will pay about 14k each...
    4). Purchase price $210k. Sale price $380k...on and on...so you get the drift...in your case I believe this as not taxed due to losses in a trust.

    So based on the above if you paid tax on first 3.....on profit of say 680k...you are only paying less than 55k in tax...which represents about 8% on total profits. Very noice.....
     
  14. skater

    skater Well-Known Member

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    It's better than that though. Sales staggered over different years, and mopping up of previous losses, means very little tax at all.
     
  15. sash

    sash Well-Known Member

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    Yep...some may not have at option......but even if you paid tax ...it is still a small amount comparatively.....
     
  16. Blacky

    Blacky Well-Known Member

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    I take it you dont mean slum lord in the literal sense - more just 'below average priced property'.
    Lots of reasons as others have stated.
    1) lower entry cost - allows you to by more sooner.
    2) usually better yields
    3) bigger market for both rent and sales. Results in less/shorter vacancies and reduced selling times
    4) risk management - you can buy multiple properties accross states. Thereby mitigating some localised risk. In additition a vacancy in one, doesnt impact the whole portfolio as much (eg comparing 4x $250k properties against 1x $1mil property).
    5) spread (reduction?) of costs (stamp duty).
    6) Often these markets are not impacted as much by a declining market - however, this is a gross generalisation and you will find many examples of the opposite being true.
    7) flexibility - you can sell across different time periods (tax advanatage) and stagger sales in case you need to access equity.
    8) bank flexibility - you can spread your banking accross multiple banks (reduced risk, increase competition).

    Probably others Im not thinking of right now.

    Some down sides in it too though. You need to balance it with your own strategy.

    Blacky
     
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  17. sash

    sash Well-Known Member

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    I am all for being a Slum Lord...and agree with your comments below....but ...like the movie Slum Dog millionaire....I draw the line at take a swim through sewage to secure an autograph.... of a famous actor. ;)

     
  18. Skilled_Migrant

    Skilled_Migrant Well-Known Member

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    Visited the slums today aka birdcage...one too small for a split....other one has graves as the back neighbors...What ya think will happen to birdcage after the election ? Keen to buy there....
     
  19. Joshwaaaa

    Joshwaaaa Well-Known Member

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    My mate is king of the slum lords, he has three 4-5 bedroom houses he rents out room by room to the worst of the worst, spends around $20k setting them up after purchase.

    It's all about cash flow for him the money coming in covers all costs and all his living expenses which intern allows him save/invest elsewhere his entire pay slip which is hefty
     
  20. spludgey

    spludgey Well-Known Member

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    I think in order to answer this question, you've got to ask "Why?" a few times.

    Why do I want to be a slum lord?

    Because I want to retire on positive cash flow and I believe this is a good way to do it.

    Why?

    Because yields in low socio economic areas are generally much higher than in well off areas.

    Why?

    For better or worse, most people in those areas will be able to neither to qualify for a mortgage nor ever save a deposit for a property. This means that rents don't have to be on par with mortgage repayments or less, as is the case in other areas, as most residents are unable to transition from renters to owner occupiers.