Rules for Purchasing IP's

[The_General]

It was brought to my attention in a recent post how important it is to have a clearly defined set of rules when purchasing IP's.

My rules were pretty murky at best. So I have been trying to figure out exactly what I want out of my first IP.

This is what I have come up with:

1. Property must be CF+
2. Must be at least 3 bedroom
3. Must be house, flats or home and income
4. Must be in a reasonable location. For those of you who know Dunedin the areas I am looking at are North Dunedin (student rentals), St Klida, St Clair and also Wakari.
5. Must yield 10% or very close to it
6. Must be brought below market value

How do these rules compare to yours?

[ivanw]

I would add

a. Must be able to add value and increase rents.
b. 20% equity at purchase.

[xris]

Hello TG,

Rules are important, I agree. How do you decide if a property is cash-flow positive?

xris

[Ivanhoe]

Hi!
few comments:

1. Property must be CF+

pre-tax or after-tax? Your point of view or bank's (they will generally use unly 75% of rent)

3. Must be house, flats or home and income

Too broad, and rules could be different for each. Home and income - or dual income? Should it be legal dual-income? What are the local counsil requirements?

4. Must be in a reasonable location. For those of you who know Dunedin the areas I am looking at are North Dunedin (student rentals), St Klida, St Clair and also Wakari.

"Reasonable" - it's not fact, it's opinion. Do you want location with high rental demand or high capital growth? What period will you look at to calculate CG? (10 years? not 3 I hope)

5. Must yield 10% or very close to it

Yield is not exactly good indicator. Cash on cash return will give better idea about the property I think. I ended up NOT buying 9.5% yield in Chch because it will tie up all my capital for a long period of time. Ended up buying property @ around 8% but after redecoration I can refinance ALL my capital - givng no money down deal and decent return too.

6. Must be brought below market value

I was looking for exactly same sort of property until Dean (pooomba) opened my eyes - you miss out on heaps of deals trying to get both (return/discount). If you can - great, but normally it's either/or. So you take care of LVR with below market deals and add value and use equity to get high-yielding deals. Going is MUCH easier this way. Another thing - for buy-an-holds it's not below "market value" it's below "registered valuation" value - buy Ron Hoy Fong's DVD, he explaines this idea there (as RM does during their property seminars)
Cheers

[Dean@Massiveaction]

Hi General. May I suggest that to come up with decent rules you first need specific goals. PArticularly timeframing your goals is important as this directly affects your rules.
For example if you wanted to build sufficient passive income to retire in 2 years you would have entirely different rules compared to someone who wanted to build a portfolio for retirement.
When I started investing my rules were $50 per week pos cashflow pretax, 15% below valuation, Auckland only. My rules now are totally different as I've achieved my earlier goals.

[The_General]

How to create a plan??

May I suggest that to come up with decent rules you first need specific goals.

So if my goal was (for example) to make $70 k a year passive income within 10 years.

How would I go about calculating how many properties/how much equity I would need?

What figure should I used for CG etc?

Excuse my ignorance!!

[Josko]

Hi The General,

Ivanhoe makes some very good points on your rules so revise and take the suggestions into account.

The answer to your last question is also there as Ivanhoe puts it,

Do you want location with high rental demand or high capital growth?

If you are looking for high rental wich is what your stated goal is about, taking pooombas rule of $50.00 per week cashflow pretax it will take you about 28 properties to get there in ten years.

Now you can work backwards from there.

Cheers,

[Dean@Massiveaction]

Hi General. You need to "ask better questions" of yourself. As Ivi points out you can do the numbers as he suggests but you will find that you will change your rules and abilities as you invest. Don't get too hung up on how many properties. What you are after is either passive income or actual cash. They will be your guide. When I started investing i was afraid of trading so I was only going to do buy and holds. This meant that potentially I needed 30 properties to achieve my passive income goals. However as I gained more skills I now do a lot of trading which generates profits that enable me to have lower mortgages so I only need 6 properties to have the same cashflow.
So number of properties isn't a goal. $$ per week in so many years is a goal. The number of properties will change as you go along.

[LondonKiwi]

Mine are:-

(1) Must be inner City / Fringe suburb
(2) Must be Gross Yield of 6.5% or above
(3) Must be made of low maintenance materials
(4) Must be in Target tenant area - Professional
(5) Must be townhouse or free standing house - No apartments
(6) Must have garage


LK

[The_General]

Ivanhoe makes some very good points on your rules so revise and take the suggestions into account.

Totally agree, thanks Ivanhoe your points have really got me thinking.

[The_General]

You need to "ask better questions" of yourself.

Fair comment.

[Dean@Massiveaction]

Hi General. Please forgive me if that came across as arrogant. Most definitely not my intention. I was actually trying to remember a quote I'd read so didn't think enough about my wording.
I think what you are doing to try and get things right is great!!!

[The_General]

Hi Pooomba. I did not take your comment as arrogant and I do appreciate any advice I receive. Cheers

[MareeM]

The lights go on

"Don't get too hung up on how many properties. What you are after is either passive income or actual cash. They will be your guide." Pooomba

Hey that definition really helped me. Click. Lights go on. Thanks Pooomba. I realise now I'd been trying to do both (which is why I was getting confused).

[MaryJ]

Yield is not exactly good indicator. Cash on cash return will give better idea about the property I think. I ended up NOT buying 9.5% yield in Chch because it will tie up all my capital for a long period of time. Ended up buying property @ around 8% but after redecoration I can refinance ALL my capital - givng no money down deal and decent return too.

Hi Ivanhoe, I wonder if you would mind walking us through that 8% deal of yours in Christchurch?
Cheers
Mary