Property Investment Part 2
September 18th, 2007 - Posted by Alan Howard
So we all piled into the car around 8:30 on Sunday morning. There was Deidre, Peter and Lucy, with me driving. We headed on up to Wollongong, about a 2.5 hour drive north-east of Canberra. You head up the freeway towards Sydney, and then shoot over to the right, heading to the coast where Wollongong is located. It’s where the property investment group was based. We managed to find them ok, and I was surprised how big the building was.
Getting out of the car, we stretched our legs and then went inside. There were a lot of empty desks with phones. It was Sunday after all… I guessed they had a huge staff of phone consultants making cold calls every day, trying to drum up business.
And speaking of business, that’s pretty much what we engaged in for the whole afternoon. We were there from 12pm through to 6:30pm, and we walked away with a brand new property of our own.
During that time we found out about the various options available to us, and how we could take advantage of them for our circumstances. We were presented with a property to consider, which we decided to take. We had the finances explained to us, and we signed a LOT of paperwork.
My friend Peter had an incorrect explanation of finances made to him, so he was pretty annoyed about what they seemed to want him to do, and he wasn’t interested. I got the finance manager to explain the situation to him correctly, and Peter was happy after that. He walked away with a property of his own too.
I should clarify that ‘walking away with’ our own properties was dependent on the successful attainment of finance, which we suspected we wouldn’t have a problem with. Deidre’s and my borrowing capacity was very surprising: $650,000. We chose a property in a developing area outside Melbourne that was about $330,000. Starting ’small’.
We left, feeling like new property owners, something we hadn’t ever felt before. Something worth celebrating! So it was dinner and drinks at a restaurant on the way out of Wollongong, and then the drive back home to Canberra, arriving about 11pm.
That was Sunday.
On Monday I did some research and had some concerns about the value of the property in relation to similar houses in the same area. I sent them an email and asked them to advise of the major difference between values, up to $80,000. Quite considerable! I know values can change between houses, but by that much? Same property type, even the same street?
They didn’t reply to the email by today, so I tried phoning our account manager, who was unavailable all day today.
Now, there’s a 3-day cooling off period on the contract, and that was expiring tomorrow. Due to the unanswered concerns about the value of the property, the unavailability of our account manager, and various information on the internet that seemed to suggest the group regularly overprices their properties, we made a decision.
We rang them and cancelled the contract, terminating the agreement, and saying goodbye to our first property investment. The one that never was.
But don’t worry! The experience was invaluable, and we’re really very happy about it. We’ve discovered our borrowing capacity. We’ve discovered that we have the potential to invest in nice properties anywhere around the country. We’ve gone through the buying process - at least to the point before the end of the cooling off period - and we know what to expect in future. We have a better idea of the kinds of questions to ask, and how to quickly research investment groups and properties.
This is all invaluable as we move forward.
I’ve made the first step to doing it alone, so to speak, instead of having a property investment group managing it all for us. I’ve checked the value of properties for sale in Adelaide, in the suburb that my brothers live in. I’ve checked the range of rent that is being asked for in the same area. I’ve found that the average property is about $125,000 with the average rent being about $160 per week. The way I figure it, with tax benefits and depreciation, we could potentially make a profit from a cashflow positive investment.
So I texted my brothers’ landlord and asked if she’s interested in selling the house they’re in. She was, and asked me if I was interested in buying it. I said possibly, depending on price and the condition she’ll be leaving the property in. She’s going to get back to me.
Tomorrow night we’re speaking via video conference with a major property investor in Sydney, that I was introduced to tonight by my Sydney friend, Peter Hagerty. We’re hoping that we can get some good information from him about better ways of doing things.
So that’s the update on property investment. It’s all so very, very exciting!
Entry Filed under: Create Your Reality
7 Responses to “Property Investment Part 2”
Posted: Sep 18th, 2007 at
I’m glad you got out of it. When you said developing areas of Melbourne, my heart sank because I know the developing areas of Melbourne’s fringe are, for the most part, stagnant at the moment thanks to interest rate inceases. Inner Melbourne is booming (we just sold our house for a price that was a whopping $250k more than it was valued for at the start of the year) but outer Melbourne is floating. I’d suggest you invest in a market you know well, not just in terms of what looks good on paper, but places you have lived in and know well enough to have that ‘gut instinct’ about.
Posted: Sep 19th, 2007 at
I’m glad you are getting out of that one. That was close! I held my tongue when I heard you were going down that path. I’ve heard heaps of horror stories of people being flown up to QLD from CBR for ‘investment opportunities’. Beware!
Warwick
Posted: Sep 19th, 2007 at
Thanks mrsj. I’m feeling more like investing in a known market now, but I’m sure I had to experience what I did in order to learn from it.
I think everyone’s glad I’m out of it… So maybe you could give me some advice as to what you think I should get IN to?
Give me some tips about where to buy, what to look out for, the best way of buying, etc. I’m all ears.
Posted: Sep 19th, 2007 at
Personally, I believe we’re in a bull market and, as such, I wouldn’t be buying a thing. Unless you spot an out and out bargain. There will be another interest rate rise in the next two months, after which I think we’ll start to see bargains. Have a look at domain.com.au as they always have great articles about what the market is doing.
Posted: Sep 19th, 2007 at
Hi Alan,
This is a topic I’m rather passionate about, so apologies if I’m a little vocal.
Here’s a few other bits of advice that aren’t obvious:
- The cost of buying and selling a property is significant. Some items are tax deductible, others aren’t - get a good accountant! One that isn’t obvious and I gather is correct is that in the ACT if a property is bought for investment, stamp duty is tax deductible (this is related to the land being leasehold I think).
- Property management fees are usually 10% of rent or higher. You can manage a property yourself, and I have all the documents for ACT property management laws etc. It’s easy when the tennants are good - but can get very awkward if there are any disputes.
- Get a depreciation schedule done. There are professional companies like ‘write-it-off’. You can legally claim heaps on depreciation.
- If you decide to sell the property and you’ve made a capital gain on it, you will incur capital gains tax. Specially nasty in the first 12mths.
- Go crazy on insurance for liability, loss of income etc.
- In these uneasy times, DHA houses may be an option. Returns aren’t as good, but you have guaranteed rent for a long period of time and they fix the house up at the end of the term.
I could go on, but I’ll stop now
And of course, I don’t purport to be an expert, so check all I’ve said, but hope the advice is worthwhile.
Warwick
Posted: Sep 20th, 2007 at
I’m looking at all sorts of options right now, including cashflow positive investments, where the income exceeds the cost. That would only come from a low-valued property that’s got a good rental return. Based on what seems to be market value in the area, the house my brothers are in would return a 7.5% yield. That’s if I get it at value. If I get it at a reduced price, that only raises the yield.
Finding high-yield properties is, I think, better than hoping for capital gains in the future. If you can actually make money from them from day one, instead of them costing you money, then the increased income can be used to go back into other investments. For example, a strategy I liked that I learned about a few years ago is that for every two cashflow positive properties you have (eg. low capital gains but high yield) you have one negatively geared property for the capital gains. The money you earn from the CF+ properties would cover the cost of the negatively geared property.
I’m more interested in having a property manager to look after the nitty gritty, and just claim back the costs against tax. That way I don’t have to worry about chasing after landlords. Much easier, I think, especially if you just want to reap the rewards without the stress and hassle.
MrsJ and Warwick, thanks for all your tips. The good thing about having you provide them via this blog is that they’re there for me to refer back to, and that your tips can help others too.
Does anyone else have any tips to add?
Posted: Sep 26th, 2007 at
Sorry for being late!!
Alan you already know my stance on property investment as we discussed a bit off your blog. Just want to agree with what Warrick said “you can claims heaps on depreciation”. Recently we received a sizeable cheque from the tax department and 75% of the refund was claiming on depreciation! We are not in property investment. But any business should be able to claim heaps from depreciation. Cheers
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