Nervous First Time PI

[shaker]

Hi
I am a first time PI who has been browsing PropertyTalk for the last few months to pick up as much info as possible about property investment. Great site -excellent resource! I'm about to take the plunge but am very nervous about a) the property i'm considering putting an offer in on, and b) putting an offer in during current market conditions. Thoughts on both issues would be greatly appreciated.

a) property is in akld (an ex state house). am v.comfortable with its location - has real capital growth potential if the market doesn't crash and burn. Purely a capital growth (long 10+ year investment) venture. I have a 50k deposit and plan on putting an offer in at 410k. Property is subdividable. Would obviously have to top up the mortgage repayment from rent received to a reasonable amount.

b) My understanding of the market (for a long term investor such as myself) is that the nature of the property is going to be largely determinative of how much capital growth occurs (i.e steer clear of CBD apartments). Hence, have targeted a property in a supposedly up and coming suburb with a subdividable section. However - is it a bad time to buy? Is it best to keep working on getting a bigger deposit together and hope house prices fall further before entering the market (potentially a safe bet with how things are looking at the moment...?)

Any thoughts appreciated.

Nervous 1st time PI

[Mark_B]

However - is it a bad time to buy? Is it best to keep working on getting a bigger deposit together and hope house prices fall further before entering the market (potentially a safe bet with how things are looking at the moment...?)

I have to admit I am a little confused by the wording in your post.

You infer that prices are already falling in the area you are looking at.

To which I can only ask - are you really expecting to buy this property and then face negative equity?

I'm not saying it doesn't happen (because sometimes it does), but you don't often hear people openly discussing that it could happen with their latest purchase.

If you do believe this property is a potential falling knife, then let it fall (and certainly don't try to catch it). Catching falling knives (waiting for house prices to fall further) is a strategy best left to:

a) bona-fide experts,

b) those with millions of dollars in capital who can afford to risk some of it, or

c) gullible lemmings with neither of the above two traits and only a double-digit IQ who are fresh from whatever semi-religious seminar they just attended.


If, otoh, this property is still gaining in value (even slightly) and you are confident in your research (good medium-long term demand for lots in the area), then grab it.

Buying houses on subdivdable sections (development sites) is a great strategy and - assuming the area is a good one - will ensure you get more CG than if you had just bought a house on a single lot.

M

[shaker]

Mark
Thanks for the reply - on reading my post again, it is definetly a little ambigious. What I meant to say was "if the property market in general continues its recent slow growth or even goes backwards" (as some seem to be predicting).

The suburb that I am looking at has experienced slightly higher growth than the Akld average over the last 6 months.

Cheers

[Orkibi]

Hi And welcome,

In short answer for your question:

is it a bad time to buy? Is it best to keep working on getting a bigger deposit together and hope house prices fall further before entering the market

It Is always good time to buy the right property at the right price .

Re bigger deposit, that will affect your cashflow how negative would it be , and your LVR.

But if you think of saving for 1-2 years and then get in ? then I would say get in now as it is good time to buy right !
Just make sure you sort things out that you can afford the negative gearing.
IMHO
H

[Orkibi]

The suburb that I am looking at has experienced slightly higher growth than the Akld average over the last 6 months

which suburb is it ??

[JohnL]

Work out how much you are losing each year. Then look at the likely capital growth.

Unless you are reaonably confident that your area is going to miss the 'slump' then I would wait until the next boom has started.

No one has a crystal ball which does make it difficult, but I don't see any reason to be losing money when the house isn't going up. Obviously, once you have been through a boom, you have plenty of equity and rents will have gone up a bit, you ride out the next slump.

Of course there are many other ways to make money in property and some will work well during the coming years.

John

[RentMaster]

If you have worked out the numbers, and the negative cashflow is something you can easily handle, then now might still be a good time.

The problem with over-analysing the situation, its that you might never actually do anything just in case next month is better than this month. At some point you have to take that leap of faith.

However as the market is clearly not leaping along, just make sure the cashflow situation is safe. Consider some what-if worst case type scenarios. If the worst case still works financially, then now if fine.

[Dood]

right time????

Well to answer your question i will refer to what dean says and that is " it is NEVER a bad time to buy a good deal" so if the deal works for you then regardless of what the market is doing..grab it so long as you are happy with your due diligence!! Good Luck

[Monid]

Personally I'm with John, why buy a growth property now if you think it is going to drop in value? In any case if you were going to do this, I would ensure that you had enough equity in the property to ride out at least a 10% drop in values just in case.

Good luck
David

[freezinhot]

What about trying to buy under value to create equity, surely in this market there are opportunaties to do this, buy well, add value and add your own equity. Therefore if the market does fall you have at least a head start on it.

This only from what I have learnt from others who are buying like theres no tomorrow.

FH

[Monid]

What about trying to buy under value to create equity, surely in this market there are opportunaties to do this, buy well, add value and add your own equity. Therefore if the market does fall you have at least a head start on it.

This only from what I have learnt from others who are buying like theres no tomorrow.

FH

Without wanting to sound like I am attacking at least some of those who are currently buying like there is no tomorrow, thinking about it one of the peculiarities of a boom is that someone who acts like an idiot in other markets, i.e. buys everything up to the barest point of their resources and stretching leaving no fall back does the best, whereas a more cautious investor doesn't make nearly as much. However if they don't amend their buying ways in a slump my suspicion is that that the fool will end up catching enough knives to slay the golden gooses they picked up in the boom, where as the cautious investor will continue to slowly but safely accumulate wealth.

Cheers
David

[Julian]

Why are you buying the property? What will the purchase do for you, financially?

$360k loan at 10% on interest-only loan will cost you $36,000 pa. That's almost $700 per week, and that's not paying any capital back. On a 30 year loan it will cost about $730 a week. On top of that you will have rates, insurance, R&M, vacancies, management fees, legal costs, valuation costs etc. The market is not exactly looking poised for continuing growth.

So how is this purchase going to benefit you? If you are buying it with the intention of subdividing it and selling it off then there are GST and tax issues.

To me it looks like a get-poor-slowly scheme. I hope it's not and I wish you well if you go ahead, but it's certainly not what I would be doing right now.

Julian

[JohnL]

The question was from someone buying their first PI.

Someone with a large portfolio, good cash flow and multiple strategies (or a good cash flow business) would probably always be in the market.

I really don't see any benefit in buying a negatively geared property now, if its your first. Some would call this speculating rather than investing, if you were hoping for capital gain in your particular suburb, during a slump!!!

This is just a general comment. If the house was under 80% of its market value and close to being cash flow neutral, it would probably be worth while - maybe!!!!

At the end of the last slump, it was relatively easy to buy between 70 to 80% of registered valuations. And this was after the boom had started in the central suburbs.

If you plan to be reasonably agressive, you need those 80% or less buys (or be able to add value) so you can recycle your deposits.

One reason to buy one or two now (if you plan to be agressive) is to start gaining the experience. This is also helpful for future lending as having a 'proven' track record can be a factor in the lenders decision making. This is not a strong reason for making a serious cash flow loss now.

John