How changes in value affect buyers, sellers, homeowners and investors

Transcript
“Hello and welcome back to daily buying tips, I’m Dean Berman from Berman Buys.


Today we’re going to talk about how changes in value affect buyers, sellers, homeowners and investors.

We’ll on the surface this may seem relatively straight forward.

For buyers decreasing values are good as property becomes more affordable.

Increasing values are good for sellers, homeowners and investors as prices rise.

I think there’s more to it than that.

If you buy a property for a lower price than it was before.

Does this mean you had to sell for a lower price as well?

Not if your a first home buyer!

But besides first home buyers, doesn’t it just become relative.

i.e. if you sell in a rising market, you will most likely buy in a rising market i.e. it counterbalances itself.

i.e. make money on the sale, but lose money on the buy.

Where are homeowners and investors in all this?

If they don’t plan on selling anytime soon, then it doesn’t have a massive bearing.

Except if they are planning on purchasing more property in the market or using the collateral in the there houses for something.

Then it has a bearing as they will have less equity or collateral in a falling market, but they will likely be buying something that has also fallen.

It’s relative!

But if they aren’t planning on doing anything, then it basically becomes paper differences.

I think a question we always ask is?

Is it a good time to buy or sell or hold.

Maybe instead.

What are we planning to do?

i.e. if your holding onto the property for 10+ years, is very different to someone looking to renovate for profit in 6 months.

Maybe we need to work out our goals before we look at the market.”

Why some renovation projects make money and some don’t

Transcript
“Hello and welcome back to daily buying tips, I’m Dean Berman from Berman Buys.

Today were going to talk about why some renovation projects make money and some don’t.

There’s a variety of factors which I believe causes a renovation project to add value.

Possibly the most important factor, is what you pay for the property at the start.

If you spend well above what the property is worth, then it will be harder in my opinion to make money from the renovation within a short timeframe.

You’ll be trying to re-trace your steps.

Only to find it’s really hard to skimp on the quality as it will usually show in the end.

The second factor is time.

The longer a property is usually held, the easier it is too make money from a renovation due to time and likely market movements.

Think about it, if you had bought a property in 1995 for $500,000 and now it’s worth $1.5m, a renovation project is the cherry on top.

Paying too much for the materials and labour can damage your profit potential.

It’s very easy to get caught up emotionally in a renovation.

Remember to stay objective and realise if you are just trying to make some money, what you spend counts.

It’s a different story if you plan to occupy the property.

The final factor I believe has a bearing on how profitable a renovation is, is the uniqueness of the renovation itself.

If the property is like every other one, then it’s not that different and catching.

But when the renovation is exciting and makes the space enjoyable to live in.

Then that can truly add value.

Pisa in Italy is very famous for one thing a leaning tower.

How can you make your renovation unique?”

Rentvesting and first home buyers

Transcript
“Hello and welcome back to daily buying tips, I’m Dean Berman from Berman Buys.

Today were going to talk about why ‘rentvesting’ can help first home buyers.

For those who have never heard of the term rentvesting.

Don’t be alarmed.

It simply means you continue to rent, while you invest in property.

You may think how is that even possible?

How can you afford to pay rent and a mortgage at the same time?

It is actually possible.

This strategy is ideally suited for those renting in prime locations, but can’t afford to buy in that same location.

So instead of waiting 5 or 10 years to buy.

You start to build a portfolio in the meantime, whilst you continue to rent where you like.

I’ll give some brief numbers for simple understanding.

Let’s say you pay $400 per week in rent.

Assuming no vacancy, an investment property costing $500,000 will likely cost you about $100-$150 per week to hold.

Therefore you would need a minimum of $500-$550 per week to rent and invest.

This doesn’t take into account living expenses such as food, travel etc…

On top of that you would need the deposit (usually 10-20% of the purchase price) and stamp duty to purchase the investment.

One of the key benefits of this idea is you buy in locations which will likely outperform where you live.

At the same time you diversify your future investments, taking advantage of differing growth cycles.

Then when your ready to purchase your own place to live in.

You can either sell some or all of the investments.

Or hold onto them and borrow against their value.

Either way, it maybe a great idea for those wanting to keep your lifestyle, whilst getting onto the property ladder for the first time.”

How long a property takes to go from being negatively geared to positively geared

Transcript
“Hello and welcome back to daily buying tips, I’m Dean Berman from Berman Buys.

Today we’re going to talk about how long a property takes to go from being negatively geared to positively geared.

Firstly, most properties are negatively geared when they start out.

This means you spend more on the property than you receive in income.

The opposite is positively geared.

Meaning the property effectively pays you to hold it i.e. the income generated is greater than the cost to hold the property.

Historically, as time goes by, rents usually increase.

Based on estimated SQM Research figures.

In Sydney this has been approximately 25% over the last 10 years.

31% for Melbourne.

13% for Brisbane.

On a $500,000 Sydney property this would be about $9 per week, per year.

Another thing you will often hear, is your property yields 4%.

Only to think to yourself, I have no idea what that means!

Well, I’m here to try and explain what a yield is.

It’s a term used to describe the percentage return you will receive based on your purchase price.

For example, a 4% yield on $500,000 purchase price means $20,000 return per year.

Or a rental of $384 per week.

Let’s assume the interest rate for your mortgage you have is at 4.5%.

Which means you are paying $22,500 per year in interest repayments to the bank.

This means you are $2,500 out of pocket or $48 per week.

There is also council rates, fixed water rates, property managers fees, maintenance, potential strata rates and other miscellaneous costs.

For simplicity, let’s assume these all come to $5,000 per year.

This means you currently earn $20,000 per year with no vacancy.

You currently spend $27,500 per year on expenses.

Therefore you currently are $7,500 per year out of pocket or $144 per week.

What happens over time is rents usually increase.

Let’s assume at a rate of 2.5% per year or $9 per week, per year for simplicity and to help in your understanding.

In year 2 this $144 would go down to $135.

Year 3 $126.

And so on until it becomes positive in year 18.

This basically drawn diagram shows, shows how a property becomes cash flow positive or positively geared in year 18, meaning the property is effectively holding itself in this example.

There are variables like interest rates which fluctuate both up and down which can affect the cash flow.

So too can rents.

In some years they won’t increase as quickly as these figures and depending on the location of the property there can be times of vacancy.

But this example has more been provided to help you understand how over time your investment property can become positively geared.”

The two things which make up total returns in property

Transcript
“Hello and welcome back to daily buying tips, I’m Dean Berman from Berman Buys.


Today we’re going to talk about the two things which make up total returns in property.

When you invest in pretty much any asset class, there are usually two ways you can make money.

This is the same in property.

The first is through cash flow or income.

In property this is called rental returns.

In business this is usually called revenue, income or sales.

It’s pretty much all the same.

When you build a portfolio you can treat it like a business and your revenue is your rent received from your tenant.

The scarcer and more desirable the property you own in the rental market, will generally increase your returns.

The second is called capital growth.

In business this is the appreciation of the company as determined by the start of the years valuation and end of the years valuation.

Once again all pretty much the same outcome.

To understand how much the asset is worth.

Changes in a properties value is the result of changes in demand and supply.

To much demand and too little supply, prices increase, and vice versa.

Re-zoning, renovation, subdivision, extensions etc…can increase capital growth in property.

So too can increased population, more jobs, more amenities such as new cafes, shops and high demand schools to name a few.

Like in business you want to increase your income and valuation of your asset.

In turn increasing your total returns which is rental income + capital growth.

If you experience a 4% rental yield and 5% capital growth.

You will have experienced 9% total returns for that particular year of ownership.

The reason why property has been so successful for investors is the compounding affect caused by the leveraged asset.

Hopefully you can see there’s more than just one way you generate returns with property.”