I Buy Houses E-Book

Paul Do

• Herausgeber: John Wiley & Sons
• Kategorie: Fachliteratur
• Sprache: Englisch

Seitenzahl: 486

Veröffentlichungsjahr: 2011

Beschreibung

Are you sick of attending open inspections every weekend in a fruitless search for the right property? Do you want to know more about the property-investing market and how it can make you money? I Buy Houses is a comprehensive handbook that will have you buying, managing and selling property like an expert. Paul Do explains how to build a property portfolio using research, rather than legwork, allowing you to invest in the best properties in the most effective way. His tried-and-tested SYSTEM T framework is perfect for beginning and experienced investors alike. In this insightful book you will discover: * how to determine the right time to buy * why buying a property every year is the wrong thing to do * why some people are better off renting than buying * why selling should be a last resort * why other property investing strategies are no longer effective.

Leseprobe

Contents

Acknowledgements

Introduction

Part I: Real estate basics

Chapter 1: Advantages and disadvantages of real estate

Advantages of real estate

Disadvantages of real estate

Chapter 2: Characteristics of the real estate market

Location

Land

Houses vs apartments

Owner-occupiers vs investors

New vs old

Architectural styles

Median prices

Part II: System T™ 29

Chapter 3: Security

Return of investment

Return on investment

Declining long-term demand

Operational risks

Overextending

Protecting your wealth

Excesses

Chapter 4: Yield

The power of compounding

Capital growth

Rental income

Growth vs income

Buying vs renting

Chapter 5: Spread

Out-of-phase markets

Building a property portfolio

Chapter 6: Time

Time in the market

The real estate cycle

Timing the market

Chapter 7: Equity

Deposits

Piggybacking

Say no to ‘no money down’

Other uses of equity

Chapter 8: Magnification

Magnification ratio

How much can you borrow?

Types of loans

Choosing a loan

Refinancing

Paying off your debts

Types of gearing

Servicing a property

Chapter 9: Tax

Income tax

Capital gains tax

The effect of tax

GST

Stamp duty

Land tax

Chapter 10: Bringing it together

Part III: The buying process

Chapter 11: Pre-approval

Chapter 12: Research

The 80/20 Principle

When to buy: the Buying Zone

Where to buy: drilling down to suburb level

What to buy

Bird’s-eye view

Local information

Agents

How much to pay: recent sales

Chapter 13: Inspection

Online inspections

The four key questions

Open inspections

After the inspection

Chapter 14: Valuation

Professional valuations

Agent valuations

Automated valuations

DIY valuations

Valuer-General valuations

Last sales price

Pre-purchase vs lender valuation

Chapter 15: Getting to yes

Buying strategies

Private treaty sales

Auctions

Chapter 16: Closing the deal

Holding deposit

Exchange of contracts

Conveyancing

Settlement

Part IV: Managing your properties

Chapter 17: Property management

Tenancy laws

Property management functions

Advantages of using a property manager

Choosing a property manager

Keep good records

Review your property portfolio

Chapter 18: Renovations

Structural renovations

Cosmetic renovations

Extensions

Chapter 19: Property development

Buy land and build

Dual occupancy

Small-scale developments

Chapter 20: Selling

Avoid selling if possible

Sell if long-term demand declines

If you get a great offer

When to sell: the Selling Zone

How to sell

Part V: Making money in real estate

Chapter 21: Common real estate investing strategies

Negative gearing

Motivated sellers

Positive cash flow

Renovation

Value

Chapter 22: How I make money in real estate

Yield vs costs

Buy when market value < intrinsic value

Chapter 23: The development of a property investor

Appendix: Comprehensive buying example

Glossary

Resources

Index

First published 2009 by Wrightbooks

an imprint of John Wiley & Sons Australia, Ltd

42 McDougall Street, Milton Qld 4064

Office also in Melbourne

Typeset in 10.5/12.6 pt New Baskerville

© Paul Do 2009

The moral rights of the author have been asserted

Reprinted September 2009

National Library of Australia Cataloguing-in-Publication data:

Author:Do, Paul.Title:I buy houses : the property investor’s handbook / Paul Do.ISBN:9781742168494 (pbk.)Notes:Includes index.Subjects:Real estate investment − Australia.Dewey Number:332.63240994

All rights reserved. Except as permitted under the Australian Copyright Act 1968 (for example, a fair dealing for the purposes of study, research, criticism or review), no part of this book may be reproduced, stored in a retrieval system, communicated or transmitted in any form or by any means without prior written permission. All inquiries should be made to the publisher at the address above.

Google Map: © 2008 Google − Data Map © 2008 Map Data Sciences Pty Ltd, PSMA

Cover image: © Shutterstock/Matt Trommer

Cover design by Brad Maxwell

Microsoft Excel charts reprinted with permission from Microsoft Corporation

Disclaimer

The material in this publication is of the nature of general comment only, and does not represent professional advice. It is not intended to provide specific guidance for particular circumstances and it should not be relied on as the basis for any decision to take action or not take action on any matter which it covers. Readers should obtain professional advice where appropriate, before making any such decision. To the maximum extent permitted by law, the author and publisher disclaim all responsibility and liability to any person, arising directly or indirectly from any person taking or not taking action based upon the information in this publication.

To my parents, Anthony and Wendy Do, who instilled their values in me.

Acknowledgements

My sincere thanks go to the team from John Wiley & Sons and their business partners. In particular, I would like to thank Kristen Hammond, my acquisitions editor, who not only knows a good thing when she sees it, but provided valuable feedback on the draft and project managed the book. Thanks also to Michael Hanrahan, who worked tirelessly to edit and lay out the book.

Finally, and most importantly, special thanks go to Amy Thai for being my biggest supporter and encouraging me to get published.

Introduction

I wrote I Buy Houses because family and friends were always asking me for real estate advice: ‘Should I get into the property market now?’, ‘How do I buy a property?’ and ‘How much should I pay?’ When you look at the approach that most people use to buy a property, they attend open inspections every weekend for months on end, and eventually they get fed up and buy anything. They spend a lot of time and effort, but it is the wrong approach. I spend the bulk of my time at my desk; I focus on research, not inspections, and achieve a more effective outcome while expending much less time and effort. In this book I’m going to show you how you can do this too.

In addition, there are the things that family and friends should have asked me about real estate but didn’t. Most people do not understand how real estate works as an investment or how to make money with it. They think the way to make money in real estate is to buy below market value, or buy a run-down property and then renovate it and flip it for a profit. No, I make money in real estate by spending time in the market, and augment my returns by timing the market.

Who is this book for?

The people who will find this book useful are divided into two groups. Firstly, there are the people looking to buy their first home. None of the real estate investing books provide a detailed ‘how to’ guide to buying a property. I include a step-by-step guide to the buying process — with a comprehensive example of one of my recent purchases — to address this gap. The second group are property investors, both new and experienced. Other real estate investing books mostly focus on finding motivated sellers or positive-cash-flow properties. However, the market conditions for these strategies no longer exist. Instead, I explain my value approach to investing in real estate, a strategy that is universal, timeless and makes common sense, but also requires hard work. When I say ‘hard work’, I mean that it is not palatable work for many people. In terms of physical effort, it actually requires much less time and effort than most other strategies.

Who am I?

What are my credentials for writing this book? Well, I don’t have a ragsto-riches story to tell. What I do have is nearly 20 years of experience investing successfully in the real estate and stock markets, combined with the rigour of a corporate background in pricing and financial analysis. Why is this important? Well, firstly I am equally successful investing in the real estate market and the stock market, therefore I do not preach real estate all the time. As you will see later on, this is very important because there is a right time to buy real estate and there is a wrong time, and the difference can mean having a profitable portfolio of properties working for you or struggling to hold and service an overpriced property.

Secondly, I am a property-investing expert. I have bought and built many houses, in different states and over a number of cycles. So I know the boom times when most novices mistake luck for skill, and the down times when they question the merits of investing in real estate, and how to deal with both.

Thirdly, because I have invested successfully in the real estate market for so long, I know what works and what doesn’t. For example, I have found that if you cannot get a standard loan then you are probably better off renting rather than buying a property.

Finally, I was a senior manager in a large corporation and I have an MBA, so I know how to manage businesses profitably, and investing in real estate is a business. For example, I explain how it is usually the boring things that make me money, while the ‘sexy’ things often cost me money. In addition, my background in pricing and financial analysis has helped me to understand how real estate price cycles work, how to manage them and how to take advantage of them, and I will show you how to do this too.

I buy houses...

I Buy Houses is divided into five parts. ‘Real estate basics’ forms the foundation for the rest of the book and will bring new readers up to speed with the fundamentals of real estate. Next, I explain my SYSTEM T™ investment framework that forms the foundation of every buying and management decision I make with my real estate portfolio. Then I go through ‘The buying process’ in detail (with a comprehensive example provided in the appendix). I follow this with a section on ‘Managing your properties’, which covers property management, renovation, some advanced material on property development, and selling. Finally, I wrap up with ‘Making money in real estate’, including the common real estate investing strategies, how I make money in real estate using the value approach, and the stages of development of a real estate investor.

I started writing this book 10 years ago when I began to make some decent returns in the real estate and stock markets. As I grew, so did the book, and it has been a work in progress ever since. Over time I found that investing became quicker and easier, and it was then that I realised that I had mastered the principles of successful investing in the real estate market. These principles form the basis of my SYSTEM T™ framework, my buying process and how I manage my properties, and they will act as guideposts on your investment journey.

I wish you all the best with your investing.

Paul Do

Sydney

December 2008

Part I:

Real estate basics

Real estate has created more millionaires than any other form of investment because it provides high returns over the long term and most people have a significant investment in it. Australians have one of the highest rates of home ownership in the world, and as a result many are becoming millionaires as their homes increase in value.

I have included the basics on real estate in this section as this forms the foundation for the rest of the book. Even if you are familiar with some of the material, I recommend that you still go over it for completeness. Here I cover the advantages and disadvantages of investing in real estate, the different characteristics of the real estate market, and the important concept of median prices.

Chapter 1

Advantages and disadvantages of real estate

Over the years, I have found that the easiest way to make money from real estate is to maximise its advantages and avoid the disadvantages (where possible). The main advantage of real estate is that it allows you to borrow a lot of money to fund the purchase due to its high security. Real estate also offers high returns over the long term, and there are many other advantages that we are also going to look at in this chapter. The main disadvantages are high transaction costs, high holding costs, low liquidity and lumpiness, which mean that taking a long-term view with real estate is essential.

The main advantage of real estate is that it allows you to borrow a lot of money to fund the purchase.

Advantages of real estate

The advantages of real estate include high returns combined with high security that allows investors to borrow more. Let’s have a look at these and the other advantages of real estate.

Leverage

You can borrow more to fund real estate than you can any other asset because of its high security. This allows you to have a bigger asset working for you, so you can achieve your financial goals faster.

Returns

Over the long term, real estate has returned around 10 per cent per annum in capital growth and rental yield, before holding costs (see ‘High holding costs’ in the next section). This return is comparable to shares but is more than bonds, cash and inflation. It is important that the long-term returns from real estate are higher than the returns from bonds and cash, because it means that the returns from real estate exceed your borrowing costs over the long term. It is also important that returns from real estate exceed inflation so that you can at least maintain your standard of living.

Security

Unless you overextend yourself, it is very difficult to go bankrupt with real estate because there will always be demand for shelter. It is this security that affords high leverage.

Familiarity

An often-overlooked advantage of real estate is that everyone is familiar with it as an owner, renter or boarder. The more familiar we are with real estate as an asset class, the more likely we are to invest a meaningful amount of money in it for the long term. Most people are less familiar with shares and, therefore, have less money invested in this way.

Forced saving

Another advantage of real estate is that it forces disciplined saving through leverage. People with a large mortgage tend to refrain from splurging on things they do not need until they have reduced or paid off the mortgage. When you start on your investment journey, the amount you save is more important than the returns you make. Over the long term, the returns you make become more important than the amount you save. Through the power of compounding (see below), investors who start early can invest less but still be in a much better position financially than those who start later.

Table 1.1 shows the power of compounding when you start early. Mary invests $100 each year from the age of 21 to 28, a total of $800. John, on the other hand, invests $100 each year from the age of 28 to 65, a total of $3800. Assuming that both Mary and John are able to earn a return of 10 per cent per annum, at retirement Mary will have a portfolio worth $2730 more than John’s ($42 775 versus $40 045), despite investing $3000 less than John. The reason for this is that by age 28 the return from Mary’s investment exceeds the investment and return John makes each year ($114 versus $110, and then $126 versus $121, and so on). So in effect Mary is investing more each year than John is.

Table 1.1: the power of compounding

Value add

Real estate has the added advantage (that shares do not) of allowing you to add value through refurbishment. For the experienced investor, cosmetic renovations as simple as tidying up the yard and repainting can add thousands of dollars to the value of a property. This can be important when you are starting out and have limited funds and the value of your time is lower. However, I have found that this advantage tends to be overrated because people forget to take the opportunity cost of their time into account.

Disadvantages of real estate

Real estate also has some disadvantages, the main ones being high transaction and holding costs and lumpiness.

High transaction costs

The round trip cost of buying and selling a property can be around 10 per cent of the property’s value (see ‘Transaction costs’ in chapter 4). This is significantly more than the cost of buying and selling shares, which — depending on the size of the order — is only around 0.2 per cent for a round trip.

High holding costs

The holding costs of investing in real estate can be around 20 to 30 per cent of the rental income each year (see ‘Holding costs’ in chapter 4). In contrast, the costs of investing in shares are much lower, and are mainly research-based.

Lack of liquidity and lumpiness

The lack of liquidity and lumpiness are significant disadvantages of real estate. It can take weeks or months to buy or sell a property, as opposed to a few seconds for blue-chip shares. In addition, real estate is hindered by its lumpiness — you have to buy or sell the whole property, and not just, say, one bedroom. These disadvantages can be mitigated by planning ahead and taking a long-term approach, such as adopting a buy-and-hold strategy as opposed to a flipping (or trading) strategy.

Inefficient market

The real estate market also has the disadvantage of being inefficient, unlike the stock market. In an efficient market, prices reflect all available information. This does not happen in the real estate market for two reasons. Firstly, information on specific properties is not widely available. Two-tier marketing, where out-of-area investors are charged a much higher price than locals, is an example of this. Secondly, even if the information were available, many buyers (especially owner-occupiers) would still transact with their hearts instead of their heads.

Since the real estate market is inefficient, the buyers that do the most research will achieve the better returns. This is one of my two key investing principles, the other being you should only buy real estate when market values are less than intrinsic values (see ‘Fundamental analysis’ in chapter 6).

Chapter 2

Characteristics of the real estate market

The real estate market can be described in a number of different ways. Each characteristic provides an insight into how the market works and how to participate in it. The most commonly considered characteristic of property is location. The real estate market can also be classified according to land, houses and apartments, type of ownership, property age and architectural style of houses.

Let’s have a look at each.

Location

Unlike the stock market, the real estate market is location-dependent. The state economy drives the property market in each state. For example, while the Sydney real estate market peaked in 2003, then declined and moved sideways until 2008, the Perth market rose strongly off the back of the mining boom during this period. Furthermore, different states have different stamp duty and land tax rates (see chapter 9), and council rates vary from suburb to suburb.

Most of Australia’s population resides in the capital cities in each state. The biggest capital cities are Sydney, Melbourne and Brisbane on the eastern seaboard. Perth, on the western seaboard, is catching up rapidly due to the strength of the mining boom, although this slowed down in 2008. Sydney is the most expensive Australian city measured on a house-price-to-income multiple, as it is a global coastal city that dominates its geographic location, like New York and London.

Within a capital city, properties are divided into concentric rings radiating out from the central business district: the inner, middle and outer rings. Prices typically start to rise in the inner ring, and then this ripples out to the outer rings. Satellite cities are suburbs within a capital city with significant business districts. In Sydney, they include Parramatta to the west, Chatswood to the north, Hurstville to the south and Liverpool to the south west. In Melbourne, they include Dandenong to the south east and Werribee to the south west. Satellite cities provide job opportunities, which is a significant driver of house prices. Outside of the capital cities are the regional areas.