Returns on real estate

[Stan 101]

I was up here at a few open houses from 2 bed units to 4 bed homes of varying levels of opulence in Townsville today and noticed all real estate agents were really pushing home the concept of "great rental returns" and "great cashflow returns."

one example was $260k two bed unit, 80 square metres, no carport or garage, external laundry at the front of the unit masonry block wall with no plaster inside (common up here). Body corp $400 per qtr(inc sinking fund), rates $900 per half.
Rent = $190 - $200.

Now I'm no accountant but to my eyes that is one ordinary return. I was hearing people comment on the Real Estate agent's assumption about the great return and they were agreeing amongst themselves. Now captial growth is always an option but after the stellar performance on these properties up here in the last 3 years, one has to wonder where it peak. Last month unit sales actually dropped in Townsville.

I stood looking at this one particular place and was approached by the real estate agent and asked what I thought about this great little investment. Being out of earshot of all others there I suggested it was not a great investment at all. It was a terrible investment based on yield and was given a right dressing down by said agent!

Where is everybody else at in regard to rental returns? Doesn't the real estate agent have a duty of care to not mislead potential buyers?

In almost the 12 months I have been up here I have learnt that for me personally, Townsville is living in it's own little bubble and it would be good to see a debt ratio per household based on Townsville post codes.

Please comment at your leisure.

cheers,

 

[numbercruncher]

Thats awesome for realestate 260k investment for 6600 p/a return.

260k in bank account only gets 21k p/a return.


Or we could fully finance the unit for a loss of only 19k p/a

 

[battiwallah]

To use Stan 101's example, and supposing you could borrow the $260k at 9%, your interest costs would be about $23k. Add to that the levies, rates, insurance, management fees, and you're up for more than $25k in annual expenses. Your rent is about $10k. You are looking at a loss of around $15k per year. If you are on the highest marginal tax rate your real loss is about $8,700 (ie - if you can negatively gear).

So you would only enter this investment if you were really confident that the capital gains would offset this loss. That means you have to be confident that the appreciation will average out better than about 3.3%pa. This will get you to break even. You will need a lot more than that to make a profit and cover your risk.

There are a lot of hassles in owning property, such as lousy tennants, building problems, fire compliance upgrades (I've had the lot). If I had my time over again I would avoid direct property ownership. It's a headache.

But that's just me...

 

[Tysonboss1]

I was up here at a few open houses from 2 bed units to 4 bed homes of varying levels of opulence in Townsville today and noticed all real estate agents were really pushing home the concept of "great rental returns" and "great cashflow returns."

one example was $260k two bed unit, 80 square metres, no carport or garage, external laundry at the front of the unit masonry block wall with no plaster inside (common up here). Body corp $400 per qtr(inc sinking fund), rates $900 per half.
Rent = $190 - $200.

Now I'm no accountant but to my eyes that is one ordinary return. I was hearing people comment on the Real Estate agent's assumption about the great return and they were agreeing amongst themselves. Now captial growth is always an option but after the stellar performance on these properties up here in the last 3 years, one has to wonder where it peak. Last month unit sales actually dropped in Townsville.

I stood looking at this one particular place and was approached by the real estate agent and asked what I thought about this great little investment. Being out of earshot of all others there I suggested it was not a great investment at all. It was a terrible investment based on yield and was given a right dressing down by said agent!

Where is everybody else at in regard to rental returns? Doesn't the real estate agent have a duty of care to not mislead potential buyers?

In almost the 12 months I have been up here I have learnt that for me personally, Townsville is living in it's own little bubble and it would be good to see a debt ratio per household based on Townsville post codes.

Please comment at your leisure.

cheers,

It really depends on your investment stratergy,

It's true you can expect an average return from property especially units and apartments in the short term, however

The way I look at investing in property is that a property is an inflation hedged income stream, Meaning that even though your property won't give as good a cash flow return as a cash investment, it will provide you with an income stream of about 5% that grows with inflation mean while your capital ( the value of the property ) should also increase over the years by atleast inflation, So you are getting a 5% return and your capital is protected from inflation.

Not to mention that if you are invested in a growth area your investment growth and cashflow should out pace inflation.

 

[Tysonboss1]

Thats awesome for realestate 260k investment for 6600 p/a return.

260k in bank account only gets 21k p/a return.


Or we could fully finance the unit for a loss of only 19k p/a

you could say the same about 90% of the shares in the stock market,

And the alot of the stocks that do provide a decent cashflow are property based,.... go figure

 

[wayneL]

you could say the same about 90% of the shares in the stock market,

And the alot of the stocks that do provide a decent cashflow are property based,.... go figure

There may be other non-transparent returns involved with some of those shares, but from an investment perspective a good point. Without the prospect of capital gains/earnings growth, most shares are doggy doodie at current prices.

The question for the RE investor at the moment, is whether there there will be price and/or income growth in the medium term... and whether value may improve in the short to medium term (ie pricefalls).

 

[Doris]

I was up here at a few open houses from 2 bed units to 4 bed homes of varying levels of opulence in Townsville today and noticed all real estate agents were really pushing home the concept of "great rental returns" and "great cashflow returns."

one example was $260k two bed unit, 80 square metres, no carport or garage, external laundry at the front of the unit masonry block wall with no plaster inside (common up here). Body corp $400 per qtr(inc sinking fund), rates $900 per half.
Rent = $190 - $200.

In almost the 12 months I have been up here I have learnt that for me personally, Townsville is living in it's own little bubble and it would be good to see a debt ratio per household based on Townsville post codes.

Please comment at your leisure.

cheers,

Stan 101...
I spent a week in Townsville a few weeks ago (holiday) trying to help a daughter find a 2 bed/2bath furnished unit to rent as she'd been seconded to work there until December. They were $450 to $650 a week! Take off $90-130 for unfurnished. And there were only four apartment blocks with vacancies! We were told there were 3000 units currently under construction there. I would believe it from what we saw!

At the airport, I met a woman whose husband worked in a mine 300km south of Mt Isa and worked one week on and one week off when the company flew him home. It seems this is the reason for the bubble there. It's cheaper for the mines to fly them 'home' and their families are happy. In this scenario the mine also paid their unit rental.

It took another two weeks of living at the Quest for her to find one she wanted... a 'bargain' at $460 a week... in time for her husband to join her.

Perhaps the lower end of the market is austere but a 'normal' unit pays quite well I thought.

Maybe not though when the new 3000 units come onto the market!

 

[Tysonboss1]

The question for the RE investor at the moment, is whether there there will be price and/or income growth in the medium term... and whether value may improve in the short to medium term (ie pricefalls).

Thats right, and every one always has a different opinion on this, One thing is though if you take a ten year approach no one would probably disagree that property returns and growth will not atleast match inflation.

Given that a property is returning say 5% and the capital is protected against inflation then in my book thats a good thing to have exposure to in a portfoilio,... especially when you take into account that the capital growth is compounded year by year before it is finally taxed at a 50% discount when you sell it.

Secondly If you are astute with where you invest then undoubtedly you will be able to benefit from growth that exceeds inflation so it is even better.

Personally I invest in Property and shares as well as my own businesses so I am not anti shares or some sort of perma bull which I have been called before.

What I do believe however is that alot of people that have been bagging property don't understand that stratergy behind it, and miss alot of big points when they over simplify things and make rash assumptions.

 

[WaySolid]

Stan 101 the requirements for getting a sales certificate in real estate is not much more than having a pulse, so take that into consideration when weighting investment advice from this source.

I'm not a fan of units myself, prefer holding the dirt beneath them. In the long run what's up top is merely a distraction.

There were people who made fortunes in property during the last recession, though not from buy n hold on it's own nescessarily, but from value add which is one of the truly great things about this asset class.

 

[Stan 101]

thanks for your comments, all.

There is much better investment return in the RE market right now. There are places 1.5 hours out of Brisbane that are gross positive. They aren't falling off trees, but they are around if you are patient. It just seems from an outsiders point of view that the mentality of Townsvillians is to "buy buy buy" whatever the cost in the hope this extraordinary capital growth will continue. It also seems locals are satisfied with mediocre returns in the market based on perpetual BS from the estate agents.

Doris, it seemed from what I saw the higher priced units i town $750k etc are getting worse returns that my initial example. Glad you daughter found a home.


REgards,

 

[Tysonboss1]

Townsville is living in it's own little bubble and it would be good to see a debt ratio per household based on Townsville post codes.

Please comment at your leisure.

cheers,

I have never Invested in townsville, and have only limited research on the area, However, When I'm investing in property I want to invest in a area that has a stable and growing economy with plenty on employment.

Townsville meets this criteria,as Townsville has several large external income steams.

Townsville has a large Defence presence being both an Army and airforce base which will support the rental market as well as provide jobs in many service industries and for defence civilian roles,... added to this about twice a year you have large amounts of USA soldiers and sailors spending millions of dollars during R+R time while they are in townsville on training exercises.

Townsville also has alot of tourism related income which again provides jobs.

Townsville also benefits from queenslands mining sector, so all up I think townsville is a dynamic regional centre tat has alot going for it.

 

[Tysonboss1]

thanks for your comments, all.

There is much better investment return in the RE market right now. There are places 1.5 hours out of Brisbane that are gross positive. They aren't falling off trees, but they are around if you are patient. It just seems from an outsiders point of view that the mentality of Townsvillians is to "buy buy buy" whatever the cost in the hope this extraordinary capital growth will continue. It also seems locals are satisfied with mediocre returns in the market based on perpetual BS from the estate agents.

Doris, it seemed from what I saw the higher priced units i town $750k etc are getting worse returns that my initial example. Glad you daughter found a home.


REgards,

All areas are different, Looking at return alone is not really a good idea.
You have to look at the big picture and suit your investment to the outcomes you are tryingto achieve.

Remember there are markets within markets and they all have there own pros and cons and move at different rates, and have varying cash flow returns.

For example a beach side apartment with water veiws will probally cost more and provide less cashflow than a ground floor apartment in a back sreet in an outer suburb,... how ever the value of the beach side apartment will grow faster as the water veiws become more sort after,... so the lower cash flow will be offset by the growth upside.

I guess what I am trying to say is that you have to learn the factors that affect property growth,... Property is not a simple asset class, even within one town there can be up to 10 different markets....

I have been actively investing in property for seven years and have read countless poperty books, and spend alot of time understanding how cities grow and studying the nature of cashflow vs growth, and after 6 years I am still learning,.... all I can suggest is for you to try and look more deeply into the property market than simply comparing rent to price.

 

[wildkactus]

Stan 101,
I see the townsville unit market as being gone, they are getting to expensive for what they are and also they are building to many especially in town and on the strand. It was good IMO about 2 years ago. the best returns I have found are in Houses.
I have several in South Townsville, Railway Estate, a couple of reasons, the area is becoming one of the inplaces and the blocks of dirt are big enough to sub divde, which I have done.
(This is my main MO with property, find a twist to add value ie subdivide, renovation etc)

The future as I see it for townsville should be good, an expanding economy for a few more years yet, funded by the mines out west, the military expansion, plus to a smaller degree the tourism sector.

There is good money to be had in property you just have to find it.

(By the way I lived in the ville for a few years before coming to HK)

 

[adobee]

I am a realestate agent ..

In my opinion i dont think there is to much wrong with the agent saying the return is great (if in his opinion) and it may be compared to what else he has for sale.. the main thing I expect / have a problem with is people mis quoting the actual rents for vacant apartments. . ie saying its great and rents for 260 a week is fine if 260 is the market rental and you can do your sums.. saying its great and can rent for 385 pw when its really 260 and people factor there sums on this then that is dodgy with a capital d.. I have to agree that alot of agents are stupid.. this guy probably isnt dodgy just thick.. i have met alot of people who think that if the price is $260k and the rent is $260pw they are getting a 10% return..

In general I am seeing around 3% to max 4% net returns on sydney property when sold (factored on a normal market rental not a furnished or holiday rent etc).. however i am seeing an easy 10-20% growth in rental per annum in the city and fringe suburbs..

 

[Aargh!]

Personally I have a problem with RE agents voicing their opinion of investment potential. RE agents are not qualified to give financial advice. They are in a position to influence and persuade to meet their own personal gain. Now I call that a conflict of interest

 

[xoa]

If unsustainable price rises are sustainable, then real estate is definitely a good investment.

 

[wayneL]

There were people who made fortunes in property during the last recession, though not from buy n hold on it's own nescessarily, but from value add which is one of the truly great things about this asset class.

I think this comment requires some more input; in the stock threads this would be put down as a ramp.

Why and how did these "people" make fortunes in the last recession? And what do you consider to be a fortune?

There is more to it than just value adding, as I knew several "value adders" that came a cropper in the early nineties through going about it the wrong way.

 

[Tysonboss1]

If unsustainable price rises are sustainable, then real estate is definitely a good investment.

Who's saying unsustainable,.... even with increases in cashflow and capital only matching inflation there is a benefit to property.

 

[WaySolid]

I think this comment requires some more input; in the stock threads this would be put down as a ramp.

Why and how did these "people" make fortunes in the last recession? And what do you consider to be a fortune?

There is more to it than just value adding, as I knew several "value adders" that came a cropper in the early nineties through going about it the wrong way.

I guess it was a ramp.

A well know example would be Peter Spann. A fortune might be financial freedom, whatever that means to a person.

Agreed that you can lose money in real estate as well as make it.

 

[ROE]

Pick up a copy of Weekend AFR and read what it really mean being a landlord
it's not as rosy as many made it out to be.