Market Comment – Monday November 9th 2009

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The Melbourne property market retained its resilience over the weekend. 81% clearance rate for auctions has been reported by the REIV with 600 private sales, giving us a reported total of over1000 properties sold last week.

For the third time in the last month I have seen allusions to property spruikers in the press. The Henry Kaye’s of this world that preyed on people many years ago. You do not have to pay thousands of dollars to attend seminars to make good money investing in direct property.

In simple terms, property makes the owner money in two ways; rental yield and capital growth. This is very similar to buying shares where you get a dividend if the company has performed well enough and you get capital growth if the share price goes up. As we have seen in the past 2 years this does not always happen with company shares but growth has occurred with residential property.

An average property investor needs about 26% deposit to get into a direct property investment. This is because the bank will lend 80% of the value of a property and the on-costs (stamp duty, solicitors fees, loan fees etc) add up to around 5.5% + 0.5% for contingencies. This does not have to be cash in the bank. In fact it is usually equity in their own home. Equity is the difference in the value of your home and what you currently owe the bank.

Let’s say you have a property worth $500,000 and you owe the bank $250,000. You have $250,000 worth of equity in your property. The bank will allow you to use up to 80% or $400,000. Therefore, you have access to $150,000 that the bank will loan you.

If we purchase a modern 2 bedroom flat in Elwood for $500,000 plus on costs of $30,000, the bank will lend us $400,000 against the actual flat and the other $130,000 against our existing home. We know the rental return on a modern flat in Elwood is about $20,000 p.a. The bank interest (interest only loan) will cost 31,800 ($530k x 6%), we have owners’ corp. fees, rates, minor maintenance and property management fees totalling about $5000. (1% of property value). This means we have approximately $36,800 outgoing and $20,000 in income. This is a difference of $16,800 each year. An average modern apartment in Elwood will have a depreciation tax deduction of approx $8,000 p.a. and then you will get a tax deduction on the last $8,800. An average wage earner will get about a 30% deduction. This means you will be out of pocket approximately $6200. And this is easily covered by the bank overdraft on your initial home. This is known as negative gearing of property. So to purchase and hold a $500,000 property it will cost you just over $6000 in the first year and less each year as the rent goes up.

If we look back over the last 30 years of valuer general data in Victoria, we can see the top third of suburbs have doubled in value about every seven years. If we look at the above example in seven years our property will be worth $1M and it will have cost us 7 x $6000 = $42,000 to hold assuming no rental increase in seven years. We then deduct what we owe to the bank ($530,000) and we are left with $1M – $530,000 – $42,000 = $428,000. You now have over $400,000 equity which you can use to borrow for another property as well as your growth of your own home (now worth $1M).

This is not “rocket science” nor is it “property spruiking.” This is just simple smart investing and utilising unused equity in your own property.

We do not charge you $10,000 for this information, nor do sell you anything. Anyone interested in purchasing property in Melbourne can call us for a free no obligation meeting to discuss this or any other property matter.

Ian James

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About the author

Ian has been operating his own businesses for more than 25 years. During this time the self taught lessons of building the business, dealing with staff, suppliers, clients and economic woes have been invaluable. Ian is a fully licensed Real estate Agent, a member of the REIV and registered with the Business Licensing Authority.

Buying property is not just sticking up your hand and outbidding your rival. It is an emotional, fiscal and psychological decision that needs to be planned and well executed. Ian is usually involved in over three hundred property negotiations per year; ranging from the $250,000 first unit purchase for a young couple to multiple million dollar residential developments. Ian's business background and endless numbers of negotiations make him one of the industry's leading negotiators.

Ian is married with two adult children, living in Patterson Lakes. He is a keen fisherman when weather and business allows the time.

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