Wednesday, October 17, 2012

Property newbie to property "investor" in 2 weeks!

You can read my thoughts on the Melbourne property market in this earlier post on my blog (June 2012):

Melbourne Property Crash

Note that since that writeup, although prices have bounced a few percent higher over the last 3 months (according to RP Data Daily Index), the fundamental situation is unchanged, as is my opinion on price direction over the next few years (Melbourne likely to see around 30% fall in nominal prices from the peak).

Some recent updates include: Stocklands Managing Director said today that this was the worst new housing market he has seen in 20 years, new blocks are selling at roughly 1/3 of the volume seen over 2009-2011, stock on market remains well elevated, rental vacancy rates are still higher than other capitals & mortgages are still being discharged faster than new loans being created resulting in the total number of loans in Victoria falling...

Further to that, these figures from RP Data's last monthly update continue to paint a grim picture:

- Yields remain very poor at 3.6% for houses and 4.4% for units
- Although prices have seen a bounce they are still -3.8% YOY
- Time on market similar to same time last year when prices were falling
- Vendor discounting (from advertised price) at -7.6%

So it made me wonder... just who would be buying in the Victorian market given the poor fundamentals and further correction that's likely over the coming years?

I stumbled across a thread on a popular Australian property investing forum and thought I would share some quotes from it (a couple are shortened, skip to the "TL;DR?" heading down the page if you want the cliff notes).  My emphasis in the quotes.

The user who starts the thread lists the following in his signature on the site:
"26 years old. Debt free. Earning $63k a year. $60K in savings. Buying in Vic."
He starts a thread on October 1st, 2012. The start of his property investment journey...
This thread will be departing shortly. Stopping at all stations and then terminating at my first Investment Property.
That's the plan anyway...

I'm going to use this thread to keep track of each step I take in buying my first investment property (fingers crossed).
Hopefully you can help keep me on the right course, as this will be my first property and it's all very foreign to me.

Maybe this will come in handy one day to someone else looking to buy their first property. At the very least it should keep me accountable and on the right track.

Sooo, please come along for the ride! I'm going to need all the instruction I can get.
A few days later (October 4th) and he is taking his first steps to becoming a property "investor":
Meeting with the broker today and will keep this thread updated as I go along.

On the flip side though, I could go with my gut against what the experienced investors advise and fail miserably. That would probably be considerably more painful!

Either way I'll be sure to do all my homework before making any serious decisions!
Next day (October 5th) he reports in:
Anyways... I met with Peter yesterday and left feeling pretty comfortable with the whole process. He walked me through, step by step, the entire process from borrowing to settlement.
My situation is pretty straight forward. Peter doesn't think there will be any issues when it comes to borrowing. A quick appraisal had some banks willing to lend up to $500k, which is a pretty scary thought.

I was thinking around $300k would be a comfortable loan for my first property. Even without tenants I could make the repayments, though obviously not ideal.

(I'm still tossing up what sort of loan structure to use though. But that's something I need to figure out)

Now it's a matter of researching areas and getting out and seeing what is available!

Next stop...
Buckle up. 
A loan for $500k would be almost 8x the yearly income this individual brings in. I thought lenders were more prudent these days?

Same day another user asks how he is going to pick the areas he is investigating, the response:
I've devised a system which I think will work. It involves a map of melbourne and a dart...

Really though, I'm not sure.

I'm thinking of 2 bedroom units/townhouses at $300k. Something with a bit of land but hopefully not too far from the city.
To be honest, I have no idea yet. Lots of time on and researching/reading around here.
Little did we know that his idea of "lots of time" was just another 1.5 weeks.

Another 4 days pass (October 9th):
After a few recommendations and some more research I have been looking at Bendigo a little closer.

Some points I've either read or been told:

The vacancy rates are reportedly extremely low.
The railway and highway construction/improvement in past years has made commuting more efficient.
Construction on the new hospital is a good sign. $600+million over the next 4 years .
Has shown good growth over the last 3 years.
Melbourne's high property prices are driving more people to look elsewhere.
The available rental properties are no where near enough to meet demand (read 10:1).

I spoke to Ben (Belu) earlier today and he was extremely helpful.
I also called a number of local Property Managers to see if they could offer any insight on the area, as I'm not from around there.
They all seemed to have similar opinions. The general consensus being that demand is very high and that it's difficult to really pick a bad area. Anything close to the CBD was recommended. Golden Square and Kangaroo Flats were both popular choices, as were a few areas near the university as well as up north near the hospital.

I guess the next step is probably to arrange a trip to Bendigo and have a look around with one of the real estate agents at what's available?

So far things seem to moving smoothly, albeit slowly.
From knowing practically nothing about property to hunting for one in a little over a week and this guy thinks this journey is progressing slowly?

Note the property managers response: "Demand is high, no bad areas, BUY BUY BUY", seems like a fair and unbiased opinion he would be getting here...

Almost a week passes with no update, then (October 15th):
Took a trip up to Bendigo on Friday. I hadn't been there since I was a kid, so really had no idea what to expect of the place.

I was pleasantly surprised. I thought the city had a really good 'vibe', the people were all very friendly and there were good signs of growth and plenty of money being spent.

I met up with Ben who spent his whole morning driving me around and inspecting different properties/areas. Ben is a top bloke and I would definitely recommend anyone considering investing (or living) in Bendigo should give him a call.

We looked at 5 or 6 properties, all in my price range and all in different areas so I could get a feel for what was available.

I have a meeting booked with my accountant before I make any decisions/offers. But I feel I'm definitely getting closer!
Note that Ben is a real estate agent, not a buyers agent, so all the properties will of course be on their books.

And then just today (October 17th):
I made an offer on a property yesterday. 3br 1bath house in Quarry Hill, Bendigo.

My offer was not accepted, but some negotiations done by the agent and we came to a deal. $272k, 45day settlement, and 5% deposit. Subject to finance, building/pest inspection and access for letting prior to settlement.

The wheels are in motion!

Was all very surreal, but it's settling in. I felt like I didn't have a clue what I was doing, which was (is) probably true.

But, I didn't want to sit on the sidelines any longer. Plus I was pretty happy with the property/location and general outlook of Bendigo.

So I met with Peter (Sage Lending) to get the finance underway a few hours ago.
Still wrapping my head around everything. I was after a guarantor loan. Peter recommended Bank Of Melbourne. We're looking at a $286k borrow, split into 2 loans 80/20. Both interest only, 30years, variable (5.75%).

I have the 20% in savings already, so I can release my parents from liability at any stage.

Ummm, now I'm just getting the paperwork sorted. Then getting a look at the contract before it becomes unconditional I guess.

It all seems fairly simple, but also very complicated at the same time...
Why the parents as guarantor when he has the cash buffer? Don't rope them into your mistakes!

Running the numbers, $272k purchase price (only 1% off asking price), $11,390 would be payable in stamp duty, but if a 5% deposit is being paid then I'm not sure how the loan comes out to $286k? I imagine there is a fat lump of Lenders Mortgage Insurance (LMI) being borrowed in there somewhere...

When queried on the rental return:
Rental is estimated at $280 - $295/week.

Which, if my calculations are correct*, should be 5.3% yield at the lower end and 5.6% at the upper range.

*there's a good chance they are not correct
Let's hope his concern about the calculations is only a joke (worriedface.jpg). If we base the return on his loan amount (instead of purchase price) then he will only be returning 5-5.3%. Given that his loan is 5.75% before taking into account property management fees, untenanted periods, landlord insurance, council rates and more, he is likely to be a fair whack out of pocket each week. Not to worry though, because he HOPES he can claim depreciation on the renovations:
It's a low entry price for the area because the land has been divided with plans to build 1 unit out back.

So I'm not getting the full block, but hope this wont effect capital gains too significantly.

I'm also hoping the renovations will mean I can claim a decent amount of depreciation.

October 1st - Complete property investment newbie
October 4th - Meets with broker and offered up to half a million dollars
October 9th - Resorts to looking in Bendigo because Melbourne prices too high
October 15th - Travels to Bendigo and looks at 5-6 properties
October 17th - Offer accepted on property 1% under asking price ($272k)

Zero to property investing hero in a little over 2 weeks!

Sometimes the property investment forums have level headed users advising those new to the game, but it seems in this case they are going to let this guy forge ahead with a lot of back patting, rather than suggesting that he give a little more thought to his plan, region of purchase and specific property purchased... I will be sending this individual a private message shortly with some thoughts on his decision to purchase.

Any thoughts? Throw them in the comment section below.

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  1. Its different here

  2. On what basis did he believe that Melbourne was too expensive? Were the yields too low, or was it the dwelling price to income ratio? Did he compare these metrics with Bendigo?

    Sounds like it was more about finding somewhere that suited the loan size he was after.

    1. Good observation (that size of loan seems to be dictating purchase location)!

      Location should stack up on its own merits, not be chosen as it fits within a predetermined budget.

  3. Do not take an interest only loan - pay the $60K as a deposit and avoid the LMI.

    IO Loan's are a disaster - I mean they can be ok for businesses or developers but for someone buying an investment property it is crazy.

    1. I think interest only loans have their place, but definitely agree on the deposit to avoid LMI.

  4. BB - yes they have a place but imo not on a long term asset (unless it's pos geared arbitrage type situation) - if the guy is focusing on neg gearing's tax shield I'd be arguing that spending a dollar to make 30 cents isn't the best strategy!

    Given the way P&I loans amortize Id advise the guy to go P&I and absolutely hammer it in the first few years.

  5. 30c out of the Dollar is not bad. Why my original calculations where indicating recovery of about 15c to a $1 lost....
    Need to redo my maths?

    As to topic, well it's OK to have fun and trial to venture at this pace as long as you can afford to take a loss. I do not think he really can, based on finances he indicated.
    I got the feeling he is going to get lucky (developer comes in and purchase it of him) or be a casualty. With second been the most probable outcome.

  6. I've worked in Bendigo Hospital. Most of the medical staff are on short term rotations of only a few months duration, and are provided with decent hospital subsidised accommodation. I can't speak for other industries, but as a regional health area, it offers little in career progression which is unlikely to change despite the ongoing hospital renovations. I recall a number of houses within walking distance from the hospital which had been on the market for length periods. I fear this new investor may find himself in a predicament if things don't go as planned.

    1. While I don't know the Bendigo market, I think the yield given the risks of a regional purchase is quite low (points to an inflated purchase price). Hopefully any losses suffered are not greater than the cash he has saved.

  7. There is certainly no shortage of residential properties for lease in Bendigo! A quick flip through the 'Bendigo Weekly' will show this. There is however a real shortage of tenants with both the means and intent to pay rent in full and on time. That fact aside, even with 100% payment of rent the managing agent will be taking a hefty chunk, tenants will be leaving 'unexpectedly' and there will almost certainly be periods when the property is vacant. The severe slump in the residential property will almost certainly turn into a full blown crash. The unique set of demographics factors which played a major part in inflating the almighty house price bubble are now clearly working in reverse order to turn the current severe slump into a full blown crash. This, BB, is not 'Schadenfreude' on my part. I believe that many baby boomers in particular have placed a single, massive losing bet on residential real estate.

  8. i think this poster is just an undercover real estate agent trying to drum up positive advertisement for his area.

    1. Possible I guess, but given the length of time the poster has been on the forum and other questions/threads they've started this seems unlikely.

    2. BB, and I mean this facetiously, You ARE kidding me No? He makes a hefty financial decision as a "newbie" in a matter of weeks on the advice of another "newbie" called Peter who's experience is in IT. (see below) and you believe that he is not a troll??? could it just possibly be that the blogger IS Peter luring in business?? I could name you other troll sights filled with sock puppets doing the same. Strangely enough based in the same city.

      Mortgage broker
      2009 – 2010 (1 year)

      Software Engineer
      Adacel Technologies
      June 2000 – June 2004 (4 years 1 month)

      Software Engineer
      2000 – 2004 (4 years)

      Software Engineer
      Westinghouse Signals

      March 1999 – May 2000 (1 year 3 months)
      Software Engineer

      Directory Technologies
      1997 – 1999 (2 years)

    3. Oh, and may I add that this "Peter" attended Ballarat and Queens Anglican Grammar from 1977 – 1990. Bendigo is close to Ballarat is it not? The irony