Positive gearing on a $150,000 dollar property? Good or bad idea

snoopdogg on 06/06/2020 - 02:16
Last edited 06/06/2020 - 02:17

Hey guys,

Is my thinking flawed? It just sounds too good to be true. I have 50,000 for a house deposit and see a property like this: https://www.domain.com.au/31-grateley-street-elizabeth-grove…

It takes in $195 per week. My repayments would be something $100 per week according to the mortgage repayment calculator.
So each week I can make $95 dollars on top of my salary whilst pay off a mortgage.

Whats the catch? I know there will be costs associated with repairs etc but I want to look at this from a very easy to understand and general viewpoint.

Alternatively I can buy an expensive home and take on a $600,000 mortgage in the hope of capital gains. I am not clever enough to know if there is a clear winner here..

What do you guys think? Thanks in advance!

Financial

Comments

  • lfsantosl on 06/06/2020 - 02:32
    +2

    Just keep in mind that real estate is an investment like any other in the market, so there are risks attached.

    Also, how much you pay for a real estate agent?

    You’ll see this 95 aud/ week go away pretty quickly when the house is empty and you’d still need to pay mortgage, pay real estate to bring another tenant, legal costs of kicking someone out if you have to, etc.

    Think that if you buy stocks (low maintenance funds) you’d make probably about 50 aud / month without most of the landlord responsibilities, and if you have the financial ability to add 100 aud/ week in that fund and leave it there for 30 years you’d be probably much better off (making money in interest instead of paying interest to banks!)

  • dcep on 06/06/2020 - 02:36
    +2

    rates, bodycorp fees, rea fees, ….

  • snoopdogg on 06/06/2020 - 02:45

    But the 600,000 property would also have the same problems no? I should have prefaced this thread with the fact that I am thinking about buying my first property and was mostly sold on the idea of buying a $600,000 property with the idea of capital gains. But would like to explore and consider the idea of positive gearing on a cheap property.

    I get that there are fees, but so would the 600k property.

  • Ughhh on 06/06/2020 - 02:55
    +7

    Elizabeth Grove SA 5112

    Yeh nah. I take it that you don't know much about the area since you're from Canberra?

    • Diji1 on 06/06/2020 - 10:11
      +2

      Don't listen to them, they haven't worked out that most people in Australia are poor so there will be strong demand for housing in that area.

      • Ughhh on 06/06/2020 - 10:25
        +2

        Don't listen to them, they haven't worked out anything about this area.

        Is op renting out as an investment or as a charity?

        If charity, there are plenty of homeless tenants who would love to stay, no guarantee of payments though.

        • belesci on 07/06/2020 - 13:12

          Couldn’t stop laughing. Having a tenant doesn’t mean you receive rent ;)

    • Vialz on 09/06/2020 - 00:41

      Its just an insurance claim waiting to happen… could be a good investment

  • ssquid on 06/06/2020 - 02:58
    +3

    First thought: the house is that cheap because it would be a money pit.
    Second thought after looking at the photos: yep. Roof looks dodgy, huge crack in the lounge room wall, more faults in the kitchen ceiling… and it looks like the current residents came from a much larger property so I wouldn't expect them to stay long-term.

  • whooah1979 on 06/06/2020 - 06:19

    What do you guys think?

    Why are you thinking of investing in a property when the s&p 500 is closing in on its pre covid highs?

  • Ocker on 06/06/2020 - 08:02
    +7

    The property is being offered for sale at the same price it sold for 12 years ago. That will give you some idea of the investment potential.

    • capslock on 06/06/2020 - 09:43

      This could mean that it is undervalued and due for an increase soon.

  • thepigs on 06/06/2020 - 08:49
    +3

    offer $120000. if they say yes, freak out and run away, or buy it and never tell your friends.

  • ihbh on 06/06/2020 - 08:59
    +1
    1. Factor in other costs apart from just interest, including maintenance and depreciation (the accounting/tax allowance is an estimate - e.g. they'll come a time when you have to repaint the place, change the flooring, maybe the ceiling etc.).
    2. You're using your $50k in the calculation - need to earn a return on - try to see if positive gear after all costs and you are effectively funding with 100% debt. Another way of looking at it is if you had a $149k deposit, would it be easier to make it positively geared?
    3. The BIGGY - interest rates currently at their all time low. Do you reckon they'll stay at this level for ever? What happens when interest rates double and more? Yes, you can increase the rent a bit, but tenants can't afford to pay double, etc.
  • capslock on 06/06/2020 - 09:21
    +1

    I think the positives are that it is unlikely to drop in value since it's so cheap already and it will be relatively easy to pay off the loan and you will then have an income source for life.

    A $600,000 house will take much longer to pay off and capital gains is still not guaranteed.

    • mskeggs on 06/06/2020 - 09:31
      +2

      Income source for life if you can find a tenant. Otherwise you own an empty house in a not-very-glamorous location that you need to keep secure.

  • HeWhoKnows on 06/06/2020 - 09:32
    +4

    OP hasnt factored in:
    council rates
    water waters
    home building and landlord insurnace
    agent fees
    vacancy factor (may 2 weeks per year)

    Then its fairly obvious it will need a new kitchen and bathroom sooner or later and how much more rent would that bring in?
    A cheap kitchen and bathroom will set you back 2 to 3 years rent!!!!!
    Thats zero income for up to 3 years
    Alternatively if the improved rent is maybe $20pw how long is that going to take to make up the cost of the kitchen and bathroom?
    Say $25,000 cost divide by 20 = 1,250 years !!!!!!!!!!!!!!!!
    And who pays for the lawns and gardening?

    $195pw is not much rent at all. About $10K p.a.
    So you can see it would take very little to wipe out a large part of that.

    Another example
    How water system $1500
    Repairs and maintenance on a house can cost a bomb

    And if its brick-veneer have you checked for termites?
    It might be cheap because its infested with termites

    Alternatively if its double brick (that would be good) check out that big crack in the wall in the living room. Good reason to get a building inspection.

    And what about the area?
    Is it a cheap area with housing commission or low grade residents?
    Thats what cheap rents attract !!!

    I also noticed its a stones throw from an airport.

    Properties offered cheap with cheap rents are cheap for a reason

    • Webber000 on 06/06/2020 - 17:22
      +2

      1,250 WEEKS
      (24 years)

    • Vialz on 09/06/2020 - 00:56
      +2

      Airport isnt that big of a factor its mainly for them small planes. Cant say ive heard them living in this area.

      But yeah chuck the suburbs in and surrounding in google.. ull see why its cheap.

  • TheBilly on 06/06/2020 - 09:36
    +1

    The amount of good deals I have seen on the computer that turned out to be duds in real life. If you're willing to spend $200,000 spend $500 on a flight and accommodation and go down there house hunting for a weekend. Take a look at this house and the area. Take a look at some others also to make up your mind. Take a look at your potential tennants, the people in the area that will be renting it etc. Go to the local shops.

  • HeWhoKnows on 06/06/2020 - 09:39

    Elizabeth Grove SA is a very cheap area but this one is easily the cheapest.
    Not much on the market there but rent of $195 for a 2 br house appears to be good for the area so not much scope for any rent increase

    The area has only experienced 27% capital growth since 2014 during BOOM TIMES or 4.4% pa. which is tiny compared with other areas.

    So not a great investment area.
    Little prospect for capital growth
    Little prospect for rental growth

    If you can push the price down to $120 to cover the cost of a new kitchen and bathroom though you could be onto a winner

  • idjces on 06/06/2020 - 09:52

    I want to look at this from a very easy to understand and general viewpoint.

    General rule of thumb is 50% of rent will cover all the outgoings. So essentially you are planning to deposit $50k to break even on cashflow. Then you are gambling on some sort of capital increase, which is usually outside of your control (unless, you're very good at selective renovations that return more than they cost)

  • Trying2SaveABuck on 06/06/2020 - 09:54
    +1

    +ve gearing is always a good investment - all investment have risks though only invest what you can afford to lose

  • Donaldhump on 06/06/2020 - 12:21
    +1

    just my 2 cents,
    cheap propery generally attract shit quality tennants, the sort that will throw poo on the ceiling and split (real life experience)

    I was always impressed at how solid it had become

  • Seraphin7 on 06/06/2020 - 13:48
    +1

    Whats the catch?

    Elizabeth Grove. That's the catch.

  • Team Ozgiftcards on 08/06/2020 - 15:00

    Well.. heres some questions to get you thinking:

    What's it worth?
    What's the medium price in the area for a 2 bed, 3 bed, 4 bed property?
    What are the days on the market in the area - this will determine how quickly you can get out?
    Can you do 'something' to the property to increase value / refinance / go again? (e.g. renovate / add bedroom / subdivide)
    Is it an area that the bank will lend?
    Have you done feasibility? What's your breakeven?
    What's your plan with the property? (hold/flip?)
    Lastly, can you afford to lose this money?

    microburbs, investar are some websites to start researching answers to these questions.

    Visit some coffee shops / visitor center / police station and ask if there are any streets or area that you should avoid at night.

    Managing managers, tradies from interstate could also something to think about.

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