When all is said and done...

Hi all,

I am possibly looking to purchase 1-2 investment properties this year. I've been a long time reader of this forum and have enjoyed all your excellent advice and opinions

I'm wanting to know the following.......
I've read so much about how good things can be if you get a great tenant, as well as how bad things can be if your tenant goes pear shaped or your property manager is useless. When you think back on your investments OVERALL, are you happy with the fact that you bought IP's, or do you find yourself frustrated or perhaps barely breaking-even financially at the end of the year because you're always repairing something or chasing a delinquent tenant?

My thought was this - I have my money tied up in a short term TD at the moment, earning 3.8%. I do not need a loan/mortgage to purchase the properties I would like to. If I was able to earn 6% minimum yield and had a great tenant, I could live with that. However, lets say there was a major repair or the tenant was a ratbag, messed the place, didn't pay after X months etc. Also management fees to evict and to re-let property, advertising, insurances etc. That could easily take 2-2.5% off the yield, leaving me close to what I'm getting from the bank anyway (with less risk, lol).

Just not sure whether to take the plunge or play it safe with the bank. Thoughts?

You are only factoring in rental yield when comparing an IP to a TD. You have neglected CG in your calcs.

erink said:

My thought was this - I have my money tied up in a short term TD at the moment, earning 3.8%. I do not need a loan/mortgage to purchase the properties I would like to. If I was able to earn 6% minimum yield and had a great tenant, I could live with that. However, lets say there was a major repair or the tenant was a ratbag, messed the place, didn't pay after X months etc. Also management fees to evict and to re-let property, advertising, insurances etc. That could easily take 2-2.5% off the yield, leaving me close to what I'm getting from the bank anyway (with less risk, lol).

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If you don't want to borrow money, go buy some shares instead. Not hard to get 6% yield, no repairs. Don't like risk? Stick to term deposits for 50 years and see how you go.

Comparing the yield on a property to a term deposit isn't really the right way of doing it. For standard residential buy and hold, most of the return is coming from leveraged capital gains.

When you add cg annual returns for me they are around 5-9% on my city fringe suburban properties, together with the rent we have achieved double digit returns. Way outstripping term deposits.

Tenant selection and good property managers help minimize risk. You should treat investing as a business, whether shares or property. Expect occasional setbacks with either tenants, repairs, as part of business learn to deal with it. Cover risk with insurance and buffer money.

I see leaving money in term deposits as more of a risk. I could not save in a year the gains we have made annually in property.

Thanks for the replies and food for thought.

So from what I'm reading, capital gains pretty much outweigh the potential negatives overall?

Now, I'm no economist, but I know that the benefit of capital gains only comes into play when you actually sell the property, so it's the rents you have to rely on year in year out for your direct passive income.

Capital gains look good on paper though

erink said:

So from what I'm reading, capital gains pretty much outweigh the potential negatives overall?

Now, I'm no economist, but I know that the benefit of capital gains only comes into play when you actually sell the property, so it's the rents you have to rely on year in year out for your direct passive income.

Capital gains look good on paper though

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We bought a bundle, waited for values to go up, sold a few, paid off the rest with the profits and now live off the rent.

The Y-man

erink said:

Now, I'm no economist, but I know that the benefit of capital gains only comes into play when you actually sell the property

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Oh I don't know. Refinance, buy more property or a few shares with it......

You may find that there are a lot of things you don't 'know'.

erink said:

When you think back on your investments OVERALL, are you happy with the fact that you bought IP's, or do you find yourself frustrated or perhaps barely breaking-even financially at the end of the year because you're always repairing something or chasing a delinquent tenant?

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Over the past 10 years I have purchased or purchased shares in three different IPs. One is now sold so between myself and my investment partner we have two. I am very happy with all my purchases. I self manage my properties but pay agents to find me tenants. In 10 years, I have only had 2 problem tenants and neither of those were found by agents I paid to find me tenants. I do count myself very lucky that I have had really great tenants that looks after my properties and left them very clean and in very good condition. The worst thing a non-problem tenant did was not clean the carpets on exiting. Nothing to get excited about.

Apart from that, I have seen amazing captial growth in the two retain properties since purchase. I now have a nice chunk of equity in those properties that I can borrow against to fund further investments. Equity you can borrow against is like money in the bank... not just something that is nice on paper. That's my experience. I know others have not been as lucky as me.

The Y-man said:

We bought a bundle, waited for values to go up, sold a few, paid off the rest with the profits and now live off the rent.

The Y-man

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Question Y-man
How many properties did you have to purchase and what area and how many years was buy and hold as I am curious as this is what I am hoping for,I have 5 IPS only 2 in 2013 and held 3 properties for about 8 years,2 in western sydney and 1 in regional my growth on all three has been about $280k so not there yet ,

Macca446

macca446 said:

Question Y-man
How many properties did you have to purchase and what area and how many years was buy and hold as I am curious as this is what I am hoping for,I have 5 IPS only 2 in 2013 and held 3 properties for about 8 years,2 in western sydney and 1 in regional my growth on all three has been about $280k so not there yet ,

Macca446

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I think this is where the experience of reality (not saying by choice, but in our case i suspect by sheer pot luck) diverts from the theoretical - namely between "timing" and "time in".

I used to believe in the "time in" line, but the longer I see the market, the "timing" seems to be incredibly important.

For example, if you purchased the first IP's in 1998-2000 Melbourne inner suburb they would have well and truly doubled (or more) by 2008.

So buying a $150k 1BR in an inner suburb back then with 80% LVR (120k loan), by 2007-2008 were looking at $350k+. You sell one, you have $230k cash, you pay down the loans on 2 other similar properties. You get $250 pw rent, so 2 properties gets you $26k pa.

If you need $50k pa to live on, you needed to have done the exercise with 6 such properties (and be able to hold them for those years).

Now here's the biggie - could this have been done over the past 8-10 years in the same suburbs? I doubt it - because those same 1 BR apartments that were $350k in 2008...... they're still $350k!!

Hence my interest now in the whole "timing" aspect of it.

The Y-man

erink said:

Capital gains look good on paper though

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It does look good. And you'd be suprised that, the several mil of equity from the capital gains, feels good too.