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REAL ESTATE Am I missing something here? Apartments

Inphinity

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My partner and I are looking to enter the real estate market, and due to financial situation it seems we really can only look at apartments for around $130k - $150k. What we have found, is that with a 20% deposit, we can find several apartments nearby that we could purchase and, at market rentals, return slightly more than it would cost us (taking into account all mortgage repayments, body corp fees, council levies etc). I believe capital growth is typically quite a bit less than a property that has actual land - but is there any reason we should avoid doing this? Are we better off looking outside our local area and finding cheaper houses/townhouses in smaller towns in a similar price range?

thanks
 

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randallg99

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Aug 9, 2007
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From your post, I assume you are interested in long term ownership for cash flow...

There are several schools of thought creating a financial cash flow system utilizing real estate. The one that appears most popular among the RD crowd is creating a monthly rental that covers all expenses should suffice. A newer (to me) train of thought is to buy undervalued properties (for whatever reasons - condition of edifice, demographic shift, local economic conditions, etc...) and hold them for a period that will supercede any monthly cash flow model.

While there are risks to either model, I can probably offer a couple of rules I have lived by in my dealings with real estate ownership.

1. Never, ever buy real estate that cannot sustain itself and at least pay you. This is one rule I have lived by and I owe this one to RK. There are some people who live by the 1% rule and quite frankly, this is crazy. It is way too much do dd, own and operate a real estate property only to make a small chunk of change. Besides, in a down rental market, you will be safer with a cushion of good, solid cash flow. Use a cash flow model that uses conservative values, such as a higher than normal vacancy rate, repair costs and higher tax increase rates, etc... to ensure a solid cash flow. If it is a break even after using conservative values, then searching for a better deal is prudent.

2. Be safe. Do not use exotic financing. Some people justify their financing tactics to own real estate because they believe in the long run, they will have a nice cash flow machine. But, reality has recently set in and while many people are OK with walking away from their properties, their credit worthiness has deteriorated to the point that real estate ownership will be cost prohibitive in a tightened lending market. To stay alive in this market, you had better be able to make sure you can cover your nut in any case scenario of ARM resets, etc... I have only used 15, 20 and 30 yr fixed mortgages.

3. Again, credit to RK- you make the money on the property when you buy it. What people ask for their properties is entirely different than what people pay for them. ;-)

4. The first 3 rules listed are important for long term real estate ownership, but SteveO has taken time with me to elaborately describe his experiences of which I will attempt to follow. Unfortunately for me, I am heavily involved in another business which requires more attention than allows, but nontheless pursuing this avenue for acquiring more properties is one of my intentions. SteveO, please correct me if I am wrong, but simply put, his theory of real estate ownership is evaluating an economically oppressed area and determining the market value of that property if it was in an economically viable area. The difference in price on an apartment building that is undervalued (for whatever reason) versus a building that is fairly valued will vastly supercede any cashflow model.

To answer your question, looking outside your local area could probably be considered, but perhaps a different tactic should be employed.
 
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Inphinity

Inphinity

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Aug 20, 2007
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Auckland, NZ
Thanks so much for the detailed reply. Yes, we are looking for a "start" to a medium/long-term gain. Perhaps if I gave some more specifics on the particular situation we're looking at, as I think it fits much of what you're described.

It's a simple 1-bedroom place, which we've had valued at $155k. The owner is prepared to accept our offer of $139k. It is not currently tenanted, but I have someone prepared to sign a tenancy agreement at a median market rental for the area that would, after all costs of ownership, return about $20-$25/week to us. It isn't much, to look at like that - and what we're concerned is whether it is too small an amount for it to be worthwhile doing?
 

andviv

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It may be small amount for an investment... but if you see it as an accelerated Masters Degree in RE then it is worth every penny and minute you put in this deal.

Now, here are some other questions just to help you think of some other alternatives:
- Can you get a property like this with a 10% down payment instead of the 20% you are using for your calculations?
- Even better, can you think of ways of getting it with 0% dp?
- Could you buy it and then instead of renting it, do a lease/option so you get at the same time a renter AND a buyer?
 

SteveO

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The first 3 rules listed are important for long term real estate ownership, but SteveO has taken time with me to elaborately describe his experiences of which I will attempt to follow. Unfortunately for me, I am heavily involved in another business which requires more attention than allows, but nontheless pursuing this avenue for acquiring more properties is one of my intentions. SteveO, please correct me if I am wrong, but simply put, his theory of real estate ownership is evaluating an economically oppressed area and determining the market value of that property if it was in an economically viable area. The difference in price on an apartment building that is undervalued (for whatever reason) versus a building that is fairly valued will vastly supercede any cashflow model.
Great answer to the post. There is a little more to add here.

I like to see that the economic improvement wheels have already begun and that there is job growth happening. It seems to take most apartment owners a lot of time to figure out that improvement is happening.

Many owners will still operate decently in bad markets. But, the ones that are not managed well stand out like a sore thumb. These are the ones that I look at once the seller becomes motivated.

Back to the original post:

I am assuming that you are not from the US. Perhaps Australia? Our typical term for multi-family for rent is apartments. You are basically looking at buying a condo and renting it out.

If capital gains are what you are looking for, it will be tougher to plan for this increase. The only advice I would have here is to try to buy well below market price.
 

Russ H

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SteveO's theory of real estate ownership is evaluating an economically oppressed area and determining the market value of that property if it was in an economically viable area
Which makes it sound like SteveO is recommending buying props in bad areas and calculating how much they'd be worth if they were in a *good* area. Problem here is, many bad areas never will become good areas.

Hey, Steveo-

Just to clarify, based on my evening half-drunk conversations with ya, I thought you looked primarily for mis-managed properties in fringe areas (where the neighborhoods were improving).

The keys here being:

1. Mismanagement = lower yields/cashflow
2. Fringe Neighborhood = lower rents, can be higher if property is upgraded

Your ways to create a cashflowing MONSTER:

1. Increase occupancy/lower interim vacany rates DRAMATICALLY
2. Slowly increase rents as overall tenants and property improve.

****

I could very well have mis-remembered this, though, as I was possessed by spirits at the time: :smx6:

So let me know if I got it wrong, K?

Thanks :thankyousign:

-Russ H.
 

SteveO

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Hey, Steveo-

Just to clarify, based on my evening half-drunk conversations with ya, I thought you looked primarily for mis-managed properties in fringe areas (where the neighborhoods were improving).

The keys here being:

1. Mismanagement = lower yields/cashflow
2. Fringe Neighborhood = lower rents, can be higher if property is upgraded

Your ways to create a cashflowing MONSTER:

1. Increase occupancy/lower interim vacany rates DRAMATICALLY
2. Slowly increase rents as overall tenants and property improve.
You are correct. I don't always look for fringe areas but it is a bonus.

-The mismanaged properties are key.
-Good area decent property are preferred.
-Improving locations are preferred but not required.
-Improving metro market is a must.
 

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