Real Estate as an Investment? (1 Viewer)

[Skittled]

Anyone on BOS looked into this at a young (relatively, at least) age? Am interested in it as an option in the coming year or two (Finance 101 made me realise just how much interest people pay back on loans, so I want as much deposit as i can) & am interested in any stories or opinions or thoughts anyone might have...?

 

[Soma]

You won't be able to find any places in sydney which are not negatively geared, even if you have a big deposit if you have insufficient income to service the loan you won't get one.
I recommend you look into the taxes and duties involved of which there are quite a few.
The housing market looks set to fall off so when it does would be a great time to buy just as long as you are not looking to quickly resell.
Interest rates are probably going to increase this year, this is good and bad in that a lot of people will no longer be able to service their loan and will have to sell cheaply.
You should look into First Home Owner Grant entitlements although I think you need to live there for about a year, you will also have to pay capital gains tax if you don't live there for a certain length of time.
Personally I don't think property is the way to go as a young investor. Much better to invest in a share portfolio, perhaps even look into margin lending products, there are too many taxers involved in property, plus you will need to worry about getting tenants and the market looks set to fall in the shortterm anyway.

 

[LeftrightOut]

I wouldn't touch property in Australia, but that's probably just me.
These things to think about are if you own only one property, it's an economies of scale thing.

First off in NSW if it's not your PPOR you pay land tax, they abolished the cut off so you pay on any investment property. http://www.osr.nsw.gov.au/portal/page?_pageid=33,184904&_dad=portal&_schema=OSRPTLT

You then get to pay rates, both council and interest.

Then you are expected to do maintenance, I know the place I rent the owner had to spend more on installing a working air con than he makes off me in 10 months. That's without them having to fix some other minor problems because I can live with those. This isn't even taking into account structural issues your property may develop, you see so many renovation shows because houses really are that shoddy My place has cracks all over the place because of the soil type but it really doesn't bother me, when the sun comes shining through I might start worrying. And that is without termite or mold.

If you don't manage it yourself you pay a cut to the Real Estate agent to lease out. If you manage it yourself you might possibly earn more working at maccas than the fees you save.

On top of that you get to pay insurance, if your tenants destroy your house great you get a fraction of your money back, otherwise your insurance premiums just suck money from you. You also get to worry every day it's not rented out.

Houses aren't very liquid. I don't consider being able to get a HELOC as liquidity.

Most people who negatively gear hope to get capital appreciation when they sell so if they lose say $5k a year on it they hope when they sell it will go up by more than $5k a year on average. But just as things can go up they can also go down.

If you can find a cashflow positive place then great, but be aware it may not stay positive for long.

If you are really interested have a read of the somersoft forums, they are a great resource for Australian property investment. Just be aware the people there are heavily property focused so it may be a bit biased, but some have made a good living at it, but remember not everyone is as dedicated or lucky to find deals. http://www.somersoft.com/forums/

You really need to check where you are at in life and what your aims are for the money to be able to get a good picture of whether property is for you. If you only have $10k deposit and don't make more than $30k a year then maybe purchasing a property worth even 3 times your yearly pre-tax income ($90k) may not be a good idea. People say property is low risk, only if you have the funds to see you through the rough times. How many times have you read stories in the newspaper of families who are going broke because interest rates have risen and they need to pay $30 more a week for the house?

People do make money off property, some work hard on finding the good deals, some get lucky but overall I wouldn't put my money on the casual investor making more than if they were in stocks. I'm more into stock and alternative investment vehicles just so you know my bias

On the plus side, you have something you can draw more money against. You can depreciate some of it. You can write it off on tax. It could appreciate more than it costs you to run. You get to drive past it and think "That is mine".

Wrapping properties seems to be the big money thing at the moment, the rent to own deals.

Edit: Just to add, you also get to pay a nice chunk for the privilige of buying and selling the property to a variety of places like the real estate agent (commission), solicitors (contracts, conveyancy), the government (stamp duty, Vendors Tax) and so on.

 

[SashatheMan]

i dotn know much about real estate, but i am interested in shares and the stock exchange though.

 

[doe]

leftrightout is pretty correct. however, i am a big believer in property as an investment and plan to buy 2 places this year (1 to live in, 1 as an investment). owing your on house (or at least having serious equity in it) is an important part of property strategy.

as leftrightout pointed out, property is not particularly liquid (ie it takes a long time to sell compare to shares etc). it is also a long term (5+ years probably) investment.

a strong advantage of property is it gives you leverage. just say i have $100k, and can borrow $200k to buy a $300k property (excluding fees etc, this is just a simple example). say then, the value of the property increases 10%, it is now worth $330k. i still owe the bank $200k, but now have $130k that is mine.

if i had taken that $100k and invested in shares, and those shares go up 10%, i would have $110k that is mine.

this is leverage in action.

it depends on your goals, you can invest for growth (ie your money grows) or for dividends (ie you get money back). for example shares that pay dividends.

i see property as a growth investment. i am not looking at making money off rent at this point in time, for me the rental income will predominantly go to covering my expenses. the plan is that over time the property will increase in value and that is where the money will come from. one thing in my favour is that over long periods of time (10 - 15 years) property is fairly like to increase in value, usually at a greater rate then inflation. (ask your parents what their first house cost).

as for strategy, for me it will go something like this.

my own home say i have $300k equity and a $100k loan on a $400k property. i then get another loan for say $250k on this house and buy an investment property for say $200k. the other $50k goes towards fees/taxes and the first years loan repayments. say after about 2 or 3 months i find a tenant which provides rental income which then goes towards maintenence and loan repayments. i now have 2 houses, one that is unencumbered with a mortgage (ie the investment property). when i feel financially comfortable, i can get a mortgage on that investment property and buy another one, that will now be unencumbered. later on i can get a mortgage on that to get another investment property and so on.

if the loans i get for the investment properties are for interest only, the payments will be noticably less than a principal and interest loan. they also mean that i will never completely own the investment properties, a portion of it will always be owned by the bank. so, if i dont make money from rental income (which goes mostly for expenses) and i will never own the home, where is the money? the money comes from increases in property prices, ala the leverage example above. this is not assured, and they look like to stay flat or go down over the short term, but that does not worry me, as in the long term it is likely they will rise.

the basis of this strategy lies in me owning all (or most of) my own home. that way i am always 1 up on my mortgages , ie i have an unencumbered house that i can borrow against.

it is not without risk, but again the risk is offset by the tangible value of the house. it is still a physical thing occupying land that can be sold if need be. this is one of the reasons it is easier to get finance for homes from banks, they are fairly safe. property is certainlyt expensive and there can be a lot of fees involved, but over the long term these matter less. my dad got into investment property about 10 years ago with $100k and has done quite well (he did get lucky with timing though). i am lucky as i will have him around to hold my hand this year and next.

 

[SashatheMan]

hey doe how old are you?

nice explanation of property btw

 

[doe]

i am 24, will be 25 in april

my financial goal in life is to be able to stop work by 45, so i have 20 years. it seemed not that long ago i had 25 years ...

 

[Soma]

Doe, almost all banks have a limit on how long you can make i/o repayments.

 

[LeftrightOut]

Just a few points.

You can leverage your position in shares as well, and in more ways than you could using property. First of all there are margin loans, then you have warrants and options as well. You don't have to go direct shares, you could go managed funds or LICs although these have negatives and positives as well.

Shares are riskier even if you do more research but I believe at a relative young age high risk/high return options are more sensible so if you blow say 10k on shares and lose it all you're still better off than having a loan hang around your neck. The share markets move a lot quicker as well meaning you can get a result faster in shares than you would with property especially if you jump around different shares. There are other speculative investment options out there that some may overlook as well.

Doe the strategy you have is what most people who are into property are planning on having, the problem is it only takes a few bad choices to ruin it all as a forced sale will cost you in a low market.

You can always refinance i/o loans and once you have a good relationship with the bank they become more favourable with rates and charges.

 

[doe]

yes i am in a lucky position as i have enough cash to mostly buy my first place (which wont be anything fancy, but i should nearly own it outright, a big help). i also have time on my side so i can afford to be conservative. i have nothing at all against shares as investments, and i am currently doing (just started) a postgraduate diploma in applied finance and investment. ultimately, i dont understand them well enough to get involved at this point in time, i would be more or less guessing. ideally by the time i finish my course i will have a pad and one or two investment properties and can start getting into shares then. it really is just a matter of priorities, i am fairly risk adverse.

i am still sussing things out and have no plans to buy for another 6 or so months. it is good to hear feedback on my plans as well. i am hoping to lean on my old mans experience a lot too. i spoke to my boss this morning, he bought a place 5 - 6 months ago and it has lost 10% value ... meep!

 

[Benovista]

do u come from a wealthy familt or did you earn all your own money? My dad has worked all his life and only recently owned his house outright...

 

[:: ck ::]

obviously he comes from a rich family

 

[alien]

one of my friends comes from a normal family, is 26 and went to uni and worked his butt off and now he's a millionairre! and he did it all on his own

 

[sladehk]

Rich Dad, Poor Dad offers a radical new way/philosophy on investment/'getting rich'

 

[LeftrightOut]

Rich Dad, Poor Dad offers a radical new way/philosophy on investment/'getting rich'

Nothing radical about it. Most of it is common sense and some of it is very questionable. Here's a good analysis of it http://www.johntreed.com/Kiyosaki.html

 

[acmilan]

Me and my brother and sister share an investment property in goulburn and it is very worth if you find the right place. The good thing is that we dont have a loan to pay back as we bought it with our own money and it has since increased by about $50,000 in its valuation as well as the profit from rent.

 

[doe]

i am from a fairly typical middle class family, my mother is a high school teacher and my father was a carpenter then later in life a clerk in a building company though he has now retired. just recently i got lucky so things have been moved forward a bit. even if i hadnt i have enough in the bank such that i could still go out tomorrow and buy a place. i would just need to borrow more and i would spend a few years paying that off.

paying off a loan, even a small one, takes ages, however if you're single with no dependants (like me) you can pay it off quicker. again its not about owning it outright, which would be ideal, its having enough equity so that you can borrow enough to buy an investment property.

i really have just worked my arse off and made a lot of sacrifices to be in the position i am in today. for example its 9pm and ive just gotten home, i left the house this morning at 7am, and yesterday was exactly the same. in december last year i would work monday to friday, then drive to the airport friday afternoon to fly to melbourne, work saturday and sunday there then fly back sunday night in time for work on monday. i work for myself and it has taken a long time to set up this position, and it is more risky (i have minimal job security) however i do probably get paid more than most others my age.

all of the money i have saved up i have basically made over the last two years (which included full time uni). i have not had an easy life but instead of being a victim and giving up i have worked hard. more importantly i have kept an eye on the future and where i want to be and worked towards it. one of the reasons i think i have done ok is i have a lot of life experience. a lot of crap has happened to me but each time it has i have learnt my lesson (eventually). a lot of the time when i got into a bad situation it was my own fault, even though it didnt seem like it at the time.

a lot of books on money for young people suggest saving from age 16 up, which is a great idea but the reality is it probably wont happen. i would suggest to you all while you are young and at school or uni is to go out and live your life. there is a big wide world out there waiting to be explored. go travel, go and party, you are only young once. that said be careful not to fuck yourself up on drugs or end up dead/pregnant or whatever. there are many things you need to be able to make money and money is only one of them. if you are smart you dont need a lot of money to get started. far more important is your knowledge and your personality (or perhaps your values), and you can start working on those right now. read books and learn how the world works. once you have reached 22/23, finished uni in your first fulltime job then start saving up etc, hopefully you would have laid a foundation that you can build on to help you on your way.

i see a lot of people who just arent prepared to make the effort. for me there is no question. i watch my own arse because i know noone else will. it is not easy, even now there are frivolities i would like to spend my money on or places id rather be, but it is not so hard as to be impossible.

i am not normally this serious in real life ...

 

[elisabeth]

What do you do Doe, if you don't mind me asking? You just piqued my curiousity when you mentioned flying down to Melbourne to work weekends.

 

[doe]

i work in computer security and do "secure development", which is a bit of an oxymoron. the weekend work was some security stuff that had to be done outside business hours. my first real job was as a webdeveloper earning a mighty $13/hour

 

[sugaryblue]

i am thinking about it, in fact, thinking of like a small unit in the eastern suburb or at the northern beaches