Investors Edge Finance Blog

It was the winter of 1998, I remember it like it was yesterday, I’d just added another two terrific properties to my investment portfolio. My mate “Billy”, not his real name, was aghast, he said he just wouldn’t be able sleep at night with such a debt.

A Lifetime’s Work Wasted

Fast forward 12 years and despite earning a six figure income for a decade “Billy” is a financial bind. He called me for a coffee.  It was sad to see him so despondent. Aged 60 and divorced he is now living in a rented flat with the last remnants of his wealth, an 8 year old sports car and $140,000 cash to which he’s desperately clinging.

“Billy” mentioned he was selling his car and leasing a brand new $52,000 sports car. Now I was aghast!

The Final Nail

Now earning just a fraction of his former income, “Billy” was about to commit to a $1000 per month on top of $1300 pm rent, a lifelong obsession with cars was continuing.

Instantly, I knew that if he went down this path, he would be locked into the rent trap forever. Desperately I searched for the words save him from himself.

“Billy” I started, “if you buy this car you will be committed to $2300 pm!”

“No problem” he interjected, “I can easily afford the repayments”.

An Epiphany

“Well, if you can easily afford it, why don’t you buy yourself a home or an investment property?” I pleaded. “In 7 years it could be worth nearly double rather than buy a car that will lose 75% of its value in that time”.

I could see in his eyes that he was having an epiphany. “What, do you mean I can afford to buy myself a house?” he stuttered, “What would this mean for me”.

The Strategy

I explained that if he bought a house for say $400,000, he could borrow $320,000, take the shortfall from his savings and put the balance into an offset account and be nearly $800 per month better off than staying in the unit and buying a flash new car.

He hesitated for a moment as the words sunk in, “but, what about my car?” he said feebly.

I said, “You’re 60, you don’t need another brand new sports cars, put the money into a 2nd hand Camry.”

“I don’t know if I could afford the repayments, what if my income dropped” he finally said fearfully.

Securing His Future

“Your rent now is $1300 pm, let’s say it increases no more than 5% pa, within 7 years you’d be paying over $1800 pm and you own nothing.” After some quick calculations I added, “On your present income you could easily have repayments on a property down to around $1400 pm by then.”

The Realisation

I explained how his $52,000 car would only be worth maybe $15,000 while his property could easily be worth $650,000, a gain of around $250,000.

Finally, after 12 years, I could see his thinking was starting to shift as he the realised that this may very well be his last chance to finally get into property investment. If he didn’t act quickly and decivisely the conseqences really could be frightening.

“Billy” called me a few days later, he was the most excited I’d seen him in years, he was diligently searching for his first investment property, he’d found a 2nd hand Mitsubishi 380 and, albeit reluctantly, was advertising his beloved sports car.

“Billy” is well on the way to a more comfortable and secure retirement.

Free Consultation
If you or one of your friends aren’t sure what you should be doing, because everyone’s circumstances are different, don’t hesitate to call me on 03 9509 8911, we just might be able to save you from making a mistake and put you on the right path.

Andrew Gardner
Financial Architect
03 9509 8911

2009 was certainly a very, very interesting year!!

We started the year in the grips of a Global Financial Crisis that some feared would see the whole world plunged into economic oblivion. You may recall “Professor” Steve Keen, for example, took every media opportunity to frighten us with his dire predictions of economic calamity, predicting property prices would slump 40% .

Of course, “Mr Doomsday” was way off the mark again.  Meanwhile the counter-cyclical visionaries jumped in and snapped up bargains and watched their portfolio values swell.

“Green Shoots”

Regular speaker at our monthly Platinum Group sessions, Jeff Oughton (economist) told us of the first signs of economic ‘green shoots’ he was picking up at the May session, when he returned in July he was positively glowing with promises of a strong rebound which is exactly what happened as Melbourne’s amazing property market staged a stunning recovery.

Staggering Property Rebound

Some of our clients have seen their property values soar by as much as a $100K in the latter part of the year, staggering growth as demand outstripped supply, not even 3 consecutive rate hikes could curb buyer’s insatiable appetite for property. It seems the six months lull in the market created so much tension we could cope no longer and dived headlong back into the market and our love affair with property resumed with gusto!

I understand “Professor” Keene did sell his property, so I guess he’s renting… and watching the value of his rented home boom. Wouldn’t you love to be his landlord!

We can now look forward to an even more interesting year next year as the forecasters try to predict the “post first home buyers grant bonus” era, will the market settle and grow at a more sustainable level or will the buying frenzy continue, I’m leaning towards the former.

Rate Hikes

What was inconceivable just six months ago became a reality in October when the Reserve Bank embarked on an almost unprecedented campaign of rate hikes where we watched aghast as two increases more followed in consecutive months, no-one can remember the last time the RBA pushed rates up in three consecutive months.

Of course, not content with 75 points (0.75%) the banks felt compelled to add to the pain with Westpac taking top billing with its own 45 point (0.45%) bonus hike, Mr Swan was not happy and Mrs Kelly has been defending ever since!!

What make these rises all the more notable is that they occurred just 12 months after the RBA dragged rates down at historically fast levels of 100 points (1%) at a time until they sank to 50 year lows producing a cash rate of just 3% giving us access to rates as low as a little under 5%.

But, of course the banks couldn’t cope with that because people started to lock in rates as low as 4.99% just this time last year so in the second quarter the banks started pushing their fixed rates up at such a frantic pace it soon became untenable to lock anything in.

As we wind up for Christmas we are sitting on a cash rate of 3.75% and retail (the rate you can access) of a little over 6%, still pretty good rates actually.

Residex Report

I have also included a Residex Report that reveals some very interesting property investment information, particularly for the Melbourne market, for example:

1. The old adage that you buy houses for growth and units for yield is dispelled as units outstripped house price gains over the past 12 months while they almost matched houses over the past 10 years
2. Melbourne is judged the best Australian capital city to invest in for risk/return
3. Continued accelerated property growth has out-stripped rental growth forcing yields down from the mid 7%’s in 1999 to the mid 4%’s today, but what property investors have lost in yields is little compared to the huge capital gains they’d enjoyed, particularly in Melbourne where even flats have doubled in around 7 years over the past 10 years.

Useful Tools

Finally, we are working on a new research tool designed for property investors to help them find the very best property. We will be releasing this tool early next year.

Free Consultation
Don’t forget, if you want to review your circumstances and plan for the coming year, you are invited to call Andrew on 9509 8911 for a complimentary 45 mintues consultation.

On behalf of the team here at Investors Edge, I wish you and your family a very merry Christmas and a wonderful new year.

Our very best wishes,

Andrew, Helen, Tony and Heather

A very excited client called me recently with the best investment opportunity he’d ever seen (in his very short investment career).

He’d just been to a property seminar (red flag!) and had been told all about this “fantastic” investment vehicle called “Student Accommodation”. A brand new property (yet to built actually) located just 3 km from the CBD, 6.5% yield on a 5 year lease and all this for just $299,000. “Wow, what a buy,” he enthused!  What a buy indeed! ‘Sam’ had just discovered the ‘booming’ student accommodation market!

So, is student accommodation a “boon” property investor’s dream or a “boom” that could blow up their face?

Supply Vs Demand

My experience with student accommodation pushes it to the bottom rung on the success ladder and even lower for an off-the-plan property. Typically this type of ‘investment’ is fraught with danger. That’s a bold statement, but the fact is student accommodation fails just about every sound investment test; they are incredibly easy to buy (red flag, no competition, over supply), almost impossible to sell, tough to finance and too often, loss of value. Let me explain.

How to have them fight for your property

The best property you can buy is one you can sell to an owner occupier who will “fall in love” with it. The best of those properties are ones that will appeal to high income earners because they can afford to compete against other keen buyers to “win the right” to buy your property resulting in a potentially much faster sale at a much higher sell price. Student accommodation has zero appeal to home owners.

Properties that appeal to high income earners will be located close to highly paid jobs (eg inner suburban). The properties with the most appeal will be houses, townhouses and low/medium density (< 8 flats in a block) and like a good red, with some age on its side; in fact the older the better (starting in the early 80’s and older).

They couldn’t buy even if they loved it!!

The problem with student accommodation (and serviced apartments, hotel rooms, Defence Force housing etc) is that an owner occupier cannot buy it even if they did fall in love with it because the property will have a long term lease that prevents occupation by the owner.

Just try and get out of it!

So, what is your exit strategy, who can you sell it to?  Only another investor and that immediately shrinks your available market by 70%. And since the vast majority of property investors buy suburban flats, townhouses and houses you reduce your pool of interested investors to the few investors who ‘fall prey’ to the same clever marketers that introduced you to the concept. And that is where on-selling gets extremely tough.

You are now competing against the huge & costly marketing power of the project marketers who have access to a never ending list of brand new properties to sell.  You lose on three fronts, marketing power, budget and substantial supply over demand.

Pay through the nose!

You also are at risk of paying sometimes way too much for the property at purchase because these properties appeal to such a tiny segment of the real estate market. Because the marketers have to spend such huge sums on marketing, advertising and agents’ commissions the extra costs are simply passed on to the buyer, you!

Huge competition, but it’s against you!

So, what does it mean that you have to compete against the marketers. Instead of paying the local real estate agent 2.75% commission, these specialist agents charge up to 8%, and instead of spending say $5K on a single page glossy in a real estate book or a colour ad in the local paper, you need an entire high quality, multi page brochure spruiking the tax benefits, cashflow, yield etc.

The marketers talk about the superior yield, maybe 6.5% compared to 4.75% for a quality flat in the inner eastern suburbs, but they never mention the high maintenance costs (furniture replacement every 5 years, extra wear and tear from students that come and go), management fees etc. And what happens when the lease does expire, they hold all the cards, they write they lease and they set the lease, they have complete control. In some cases, you may be compelled to renew the lease if the majority votes in favour of an extension. You have no control.

The Golden Rule

One of my golden rules, if you buy anything that is “packaged” you will pay a premium. The glossier the brochure, the less the substance or what I call “intrinsic value”.

How to do it right and make a killing!

If you really do want to invest in student accommodation, create the product yourself and save heaps and make even more.

Find yourself a 4 or 5 bedroom suburban house close to a university (eg Melbourne’s Frankston, Burwood, Clayton etc), install internet, a desk, chair and bed and then you can charge each bedroom out at $100 to $140+ (that’s up to $560+ pw for a 4 bedder).

Partition the lounge room and get another bedroom, maybe two. Some shrewd investors even put in a transportable home or bungalow in the backyard and boost their income even further. Imagine 6 rooms at say $140 pw per room for a total rental income of $840pw. That’s over $43,000pa which could represent a return of 7% or more. And when it comes time to sell, restore the house to its original condition and enjoy the normal capital growth for that area.  What more can you ask for, high income and good capital growth.

When accommodation is tight, these kids even pay for their room when they go home for the holidays! But, don’t forget, either you have to manage the rent collection or pay someone to manage it. That might mean providing a room return for managing the property. That’s if you want to manage 5 or 6 students, that is but at least you will get a great, real return on your investment.

Advice from the Master

Here’s a tip from the richest and most successful investor in the world, Warren Buffet, “Investing is simple, but not easy.” The message, keep it simple, buy intrinsic value just like the professional, long-term property investors do and you give yourself the very best chance to outperform the market.

Complimentary Consultation

If you need assistance with your portfolio, contact Financial Architect, Andrew Gardner on 03 9509 8911.

Be a Winner

Every major event creates winners and losers, the global financial meltdown is no different. The winners will be those in a solid financial position, secure income, access to finance and the street smarts to exploit the opportunities provided by the losers.

Both the Government and the Regulators are providing every possible resource for those who can, the ‘winners’, to move into the market and take full advantage of the opportunities.

The RBA shocked the market with a rate cut of a full 100 points (1%) bringing the best rates down to around 7.85% after most banks passed on about 80 points - fantastic news for property investors. In the past few days, almost as surprisingly, a number of the banks have slashed their rates by up to .25% bringing the best rates down to around 7.62%.

The Federal Government’s stimulus package gave families and pensioners extra cash to spend, doubled and tripled the first home buyers grant and guaranteed bank deposits.

Fortune favours the brave

So, what does this mean for property prices?

Well the short answer is, broadly, nothing… yet! Auction clearance rates are still well down.

But it’s a very different story for the savviest property investors who are starting to creep quietly back into the market, picking up some of the best bargains in a decade. I’ve already started to see evidence with a number of clients uncovering great deals in the past few weeks.

The first picked up a brilliant flat with little competition while another found a great little one-bedder yielding an amazing 5½% and another found a similar one-bedder yielding 5 1/4% - when was the last time you saw Inner Melbourne returns like that? 2001! The fourth client picked up a great 3 bedder $150K under 2007 prices, again in an inner Melbourne suburb.

Get ahead of the market

So, what does this mean for you?

Along with my panel of property experts I am convinced there is every chance that those who bite the bullet, (and the window of opportunity is closing), will get a rare chance to pick up properties at near decade best value and then ride the crest of the wave as prices start to surge as investors pour back into the market chasing the rapidly rising rents caused by historically low vacancies.

Spurred on by higher rents and lower interest rates, I expect momentum to build with the first home buyers followed by the “real price-drivers”, owner occupiers buying on emotion, to push prices higher again which could draw the investors with “herd mentality” into the market to create even greater competition and generate stronger price growth.

Now this is not going happen overnight I believe it will take some time for prices to really kick, but I believe the biggest gains will be seen when confidence starts to build, probably when positive trends are detected in world financial markets.

Get Quality Advice

Needless to say this action is not right for everyone; you need consider your circumstances; for example, the security of your employment, your cashflow, your equity position and your capacity to manage another property.

A word of caution; even in these times, good buying is not universal. Before buying get good “independent” advice to ensure your buying is prudent, responsible and really does represent good value. A recent example was a client who was persuaded by the promoters of ‘positive cash flow’ properties to buy “under-valued” houses in south west Sydney and “cash in on the growth to come”. Sadly, real growth isn’t predicted for years as the number of foreclosures in this mortgage-belt continues to mount.

As always, successful investing is dependent upon good buying decisions and good buying decisions are dependent on good advice/support.

Free Consultation

For your free 45 minute consultation, call Financial Architect, Andrew Gardner 03 9509 8911, he has assisted hundreds of investors make very sound, prudent investment decisions over many years, he can help you too.