Question (paraphrased slightly)
How does a normal person on a normal salary get to a position where they can accumulate multiple properties purchasing negatively geared properties?
What a great question! And one everyone should ask himself or herself prior to starting to accumulate property.
Step 1: Work out what each property you’re looking at will cost you on a case by case basis. The best way to do this (I think) is to read Jan Somer’s investment books on residential property and formulate a spreadsheet (excel is great for this) which takes into consideration all estimated expenses (land tax, insurance, property management fees, marketing, estimated maintenance, body corporate, interest and more) and then factors in any tax and depreciation benefits and works out approximately how much that property will cost you to own per week.
Step 2: If your goal is to accumulate lots of properties, the closer to neutral and positively geared properties you can find, the better. That’s easier said than done in many markets, but I think the best way to find these properties are:
- Look at lots of properties and do lots of research
- Get a property manager (not a sales agent) to give you a rental prediction on any property prior to you making an offer
- Don’t be afraid of making cheeky / low offers. If you’re worried about offending the owners of the properties, just remember, they can always say no. But if you don’t offer them anything, they never have the chance to say yes and you usually have little idea about their circumstances or motivation.
- Revert to step one and work out your numbers (all of them including EVERY expense)! The most common mistake I find these days comes down to basic math. If you’re paying $350,000 for a property and it’s renting for $350 per week that’s NOT a 10% return!
Step 3: Talk to your account about the best entity / people to own the properties under. For you it might be in one partner’s name or in a family trust, but work out what’s going to get you the best protection and the best tax benefits. You might also want to talk to your accountant about getting the amount you are taxed at your main place of employment decreased on a regular basis rather than getting a larger return at the end of the year – this can be great for cash flow.
Step 4: Maximise your rent by:
- Finding a great property manager who will get you top dollar
- Staying on top of regular market rental increases
- Looking at ways to increase the rental return on properties (if a tenant is prepared to pay extra for different heating, a carport, new carpet etc: work out your sums!)
Unless you work towards the above steps you may find it hard to accumulate more than a couple of properties as your cashflow will be depleted. Perhaps this is why around 80% of Australian investors only own one investment property!
Now of course there are lots of other strategies, but what I’ve outlined above is a fairly simplistic strategy for buying and holding residential property long term.
Of course, this information is general and should not be construed as financial advice. Consult your accountant for information specific to your circumstances.
Monday, December 7, 2009
Question (paraphrased slightly)