Investing in Property – What Is the Best Way to Buy Rental Property?

Investing in Property

What is the best way to buy rental property?

The question you need to ask yourself is – Am I buying this property as an investment?

Now this sounds like a pretty stupid question, right? But in reality, many people (myself included) have made a purchase decision on the basis that they love the “property” not the “investment.”

What do I mean? Well you have to stop and ask yourself do I really love investing in property or do I just love to own property. Many have purchased an “investment property” on the basis that they “liked” it, rather than because they had calculated it would provide a great return.

When investing in property you should always run your numbers through a property investment calculator before deciding whether to even look at a property, let alone buy it!

My first CBD apartment – aka “Investing in Property for Fools!”

I’d always wanted to own a piece of the CBD. Growing up as a kid I loved visiting the “city” to look at the skyscrapers and imagined coming here for work like my Dad did each morning. Sure, I was investing in property. I was investing my emotional security in a property location! So you can see quite clearly that it was an emotional, rather than a hard headed decision to buy a newly complete one bedroom unit back in the early 2000s. It was just something I’d always wanted to “have.”

I remember driving around the inner city with a well known property spruiker looking at projects he was involved with. Of course his level of involvement was as a master salesman. A unit became available for approximately $230k. As a young couple my wife and I discussed the pros and cons and I decided against the advice of my wife that this might not be such a great idea.

At the same time another unit had become available in the inner city block of apartments that I was currently living in. It was available at a similar price. My wife counselled me to consider this as an option. My “adviser” had discouraged me on the basis that I would be putting all me eggs in one basket. There was some truth to this advice so I followed my “dream” of an apartment in the “city”.

When I went to the office to sign the papers I remember being advised that the original unit was no longer available, but a different one on a higher floor was, at a higher price! I said OK, No problem, like we Aussies tend to do. Then I was presented with the option to purchase a “furniture package” for an extra $20k. This would “guarantee” a rental return of 8% to me for the first 2 years of my investment. I hadn’t previously considered this, but of course I said “Yes”and was told what a wise choice I had made. (Of course this made me feel good about myself!)

The truth was I bought the unit not on the basis of its potential financial return but its immediate emotional return. I never did end up living in it or even spending a single night there, although I’d often wander past and gaze up at my balcony and wonder how “cool” it would be to live here.

In fact the property was a complete drain on my bank balance due to the high costs associated with the common areas including pool and gym equipment. The rent never paid for the outgoings and I lived in hope that the price would go up so I could make a “paper” profit at least!

Now some time later I did end up selling the unit for around $300k, so it was far from a complete disaster. In the end I was very glad to sell and call it even. In reality the cost to me was an opportunity cost. What else could I have been doing with my money?

I looked recently for sales data on the city block in question and found a similar unit sold for $355k, approx. 10 years after my initial purchase. Currently in the inner city block I was living at, prices are over $650k. Remember that 10 years ago these properties were selling for approximately the same price. If I had listened more to my wife and less to my own emotion I might have ended up $300k better off!

What did I learn? I learned that whilst it’s great to listen to “advice”, be aware that sometimes advice might be just a little biased! I’ve learned to trust my own instincts more and weigh advice against what I already know to be true and reasonable. The reason I liked the apartment in my own block was that it was located well. It was quiet, had views, was close to city, walk to tram, bus and train and there was no high-rise in the vicinity. The area couldn’t be quickly re-developed and units added. In short, the amenity was desirable and there was not going to be any new properties added in the foreseeable future. This meant there was a cap on supply.

In the city here is not a cap on supply. There are numerous developments under construction at any given time. I’d be more than happy to live in many of them. But I wouldn’t buy then as an investment! Unless they were in a landmark building of some sort there is no scarcity value in them. They can be replaced easily.

If one of your neighbours wants to sell and needs to move quickly, guess what. They set the price for your unit. You have virtually no control over the market. No matter what you do to your own living space the whole value of the block will be determined by factors outside your control.

Investing in Property for cashflow or for growth?

Let’s be honest. Most of us are investing in property because we think that prices are very likely to go up! On the other hand we all know about “negative gearing”. In essence it means we can write of our “losses” on our investment against other area of income. I don’t disagree with the concept, we ought to be able to weigh our profits against our losses and pay tax on the net result. BUT, if all we own are “investments” that are make a “loss” and we’re offsetting that against a “gain” from our job, that’s not really smart investing is it?

Sometimes a property might be increasing in value at a greater rate than we could expect to make as a cash income from our investment. This is not always the case as you can see from my experience in the Melbourne CBD. But at what point does this cease to be a valid reason for deciding to invest of even “keep” and existing investment? Steve McKnight from PropertyInvesting.com once said something very illuminating at an event I attended. Basically he said we ought to do an audit of our property portfolio every year and re-assess whether we ought to hold or sell each property!

Seriously. I never thought I was going to sell anything – Ever!

Early on in my property journey I’d decided I was going to “Accumulate” property. Buy and never sell! That was my motto. Once I’d paid down the loan I would be sitting on a nest egg and having rent more than cover my outgoings.

But consider this! Real world example -

My unit in inner Melbourne right now would be worth about $650k and yet it might command a weekly rental of around $480. That’s about $25k rental annually.

The yield is therefore 25k/650k annually or 3.8% of the value.

Setting aside things like mortgage repayments, there are still fixed costs on any property – In my case they include for the last financial year:

  • Council Rates $820
  • Water $945
  • Insurance $302
  • Owners Corporation $1660
  • Agent fees $1815
  • Repairs $890
  • Total fixed expenses for the year $6430

This reduced the total income to ($25000-$6430)=$18570

Now my actual annual return is 18.5k/650k = 2.9%

Of course costs like Agent fees and Owners Corporation are not always applicable but they serve to show that in the real world the actual return can be a lot less than a simple headline figure.

If I include my interest costs (which still exist) I must deduct another ($150000*6%)=$9000 from my income.

This reduced the total Real income to ($18570-9000)=$9570

Now my actual annual return on the asset value is 9.5k/650k =1.5%

Should I Sell this property?

There is no right or wrong answer. Sometimes I say yes and my wife says NO! Sometimes I say No and my wife says NO! Do you see a pattern here?

There is no right answer because everyone has different needs, has different skills and is coming from a different base and most importantly – We all want different things! It depends on your circumstances, your family situation, the personalities of you or your partner and your goals in life.

If our main goal in life was to increase our cash on cash return or all our assets then it would be a no brainer to sell up and invest elsewhere (assuming I could expect a greater return than 1.5%!) Having said all that I still love property, and I love investing in property.

It’s quite possible to love the idea of property without loving investing in property. In fact most property that you’ll “love” will probably be pretty darn useless as an investment. Don’t be confused.

Would I choose to invest $650k of my actual cash in this investment right now of it were available for sale? Probably not! – So why am I still keeping it? I love it and plan to live in it.

This is a question only YOU need to ask yourself and answer on a case by case basis. I’ve looked long and hard at my own situation and decided to keep for now based on family reasons, NOT investing reasons.

Review every property every year

For every investment I currently hold I review the property and make a decision based on the real numbers, not a fantasy of what I’d like to see happen.

  • That’s why I decided to sell my apartment in the Melbourne CBD.
  • It was “Costing” my money to hold, and NOT growing in value anything like I’d hoped it would. So I cut it off.
  • It was why I needed to sell my first home out in the “burbs”.
  • It was why I made a similar hard decision to sell a property in inner city KEW that was returning a reasonable cash return, and well located but had ZERO capital growth over ten years.
  • It was one of the reasons I sold a great apartment in Sydney’s North. I had improved it and added value. It was time to take my money off the table.

Your relationship with a property needn’t be a marriage for life. There’s no compulsion to “stay together” till death do you part!.

What about Cashflow positive real estate?

I love cashflow positive property and investment strategies. So Yes, I look to see where the cash if flowing and see how I can get if flowing towards me.

Think! Are you buying for lifestyle or for investment? What return are you hoping to achieve? Only when you can answer these questions honestly are you ready to take action!

Until Next time,

Penny Stock Investing Doesn’t Have To Be Scary

If you truly want to get your stock investor friends talking and excited, possibly in a bad way, raise the topic of penny stock investing. At the very least, your conversation won’t be dull. Don’t be surprised if a few disagreements or debates break out. This should not be surprised. After all, penny stock investing is one of the least understood forms of investing in the market. Too many people equate it with shady companies, dead companies, or ‘forgotten’ companies. To many investors, the term ‘penny’ in penny stocks make them think that this particular equities market is not worth their time and bother. Well, that’s their loss… and more potential profit for you and others who bother to understand what penny stock investing is all about and how to make money from it.

Let’s get one thing out of the way-penny stock investing is still stock investing. The only difference is the level of regulation, the size of the market, and the prices of the stock involved. Still, regardless of how you look at it and what point of view you have, penny stock investing is still stock investing. Keep that in mind. The same general principles of equity investment still apply. Those principles never go away even though penny stocks often involve less volumes, lower prices, and very little analyst attention. With that out of the way, another key point also needs to be made: you can make great money through penny stock investing. You just need to know what you’re doing. Keep the following tips in mind so you can get a better idea about stock investing.

Getting away from the shadow of pump and dump scams

The main reason many seasoned investors are scared or skeptical about penny stock investing is the threat of ‘pump and dump’ scams. These scams involve speculators scooping up a huge block of a cheap stock. The scammers then issue press releases or get involved in all sorts of awareness raising schemes that bring more investor attention to the stock. In extreme (and illegal cases), they make all sorts of false or misleading claims regarding the company behind the stock. Due to the fact that the stock is lightly traded, any upward movement in its price makes for eye-popping appreciations. This creates a snowball effect as the speculators publicize the handsome increases in the stock’s price and more investors get in on the action. As a result, the stock’s price continues to spike up. In fact, in many classic pump and dump situations, the short-term gains are nothing short of amazing. Well, this party has an unhappy ending when the stock’s price bursts and crashes down when the speculators dump their holdings. Just like with any stock, when other investors see the downward trend, they unload and this pushes the price even lower. At the end of the process, the speculators make off like bandits and legitimate investors walk away with a loss or hang on to nearly worthless stock. Situations like these make many investors wary of penny stock investing. Thankfully, pump and dump schemes are exceptions and not the rule in stock investing. The good news is that you don’t have to automatically suspect pump and dump schemes when considering penny stock investing. Are they a threat? Sure, but with the right training, you can spot them a mile away and avoid them. Instead, you can focus on genuine penny share opportunities.

It’s all about finding hidden penny stock gems

In many ways, penny investing is not much different from trading in regular stocks. It is all about finding hidden gems. You need to find stocks that have a decent enough upside value that you can trade them over the medium to long-term. The first step in finding hidden gems in penny stock markets is to realize that not all penny stock companies are ‘loser’ companies or worthless companies. There are many reasons why companies trade on the pink sheets or bulletin boards. Each company has its own particular reason. You need to examine these companies on a purely individual basis. Only when you do so, can you realize the fundamental and real value each company brings to the table-if any. You still have to look at financial statements. You still have to look at market positioning. You still have to look at the fundamentals to tell which are diamonds and which are chunks of coal. The good news is that once you identify companies worth investing in, you can easily take a position since the company’s stock price is so low.

Momentum plays in under appreciated markets – time to invest

Believe it or not, there are momentum plays available even in penny stock investing. That’s right-you can make money in high volume, volatile stocks by playing momentum. While many investors think that momentum invest in stocks during momentum to reduce your chance of being scared trading happens only with regular stocks, they are truly leaving money on the table when they overlook penny stocks. The great thing about momentum penny stock investing is that you can buy in cheaply and make money on volume. Of course, you need to buy stocks that have the right level of volatility and trading volume.

Getting in on the next big thing can reduce fear

Another key factor you need to appreciate when considering penny stock investing is that there are genuine stock trends in pink sheet stocks. These are real companies that were down on their luck for a long time and finally are managing to get their corporate acts together. These are more common than you think-and they make for great stock buying opportunities. You literally get to ride a company’s rise to recovery. Once the company full recovers, it might get acquired and your holdings might explode in value.

Make no mistake about it, penny stock investing is not for the faint-heated due to all the negative buzz about there regarding this type of stock investing. Still, from a purely fundamental perspective, there is very little separating penny stock investing from regular stock investing. You need to do your research. You need to spot pump and dump scams from genuine opportunities. And you need to know when to get in when a penny stock is poised for some quick and dramatic upward movement.