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An Unconventional Way to View the Property Market

I am going to discuss an interesting way to look at real estate investing that may be a bit unconventional to most property investors.A while ago, I watched a video by Charlie Munger, who is well-known as the business partner of Warren Buffet and his famous quote “Tell me where I’m gonna die and I’ll make sure I don’t go there.”In this video, Charlie who was 83 at the time, shared his life time of wisdom to make him a billionaire with a group of university graduates who are about to start their career.There is one particular statement that really interests me; he said “You are not entitled to an opinion unless you can state the arguments against your opinion better than your opponents can.”I find this statement quite profound but very difficult to apply in real life, I thought I would put it through some of the opinions widely circulated within real estate investment and see how it goes.Before I am entitled to an opinion of “how useful Charlie’s statement is”, the counter argument of “how useless it is” can be something like the following:
We are all entitled to our own opinion about anything, regardless of whether it is right or wrong, it doesn’t really matter what other people say.
Sometimes an opinion can be completely wrong, but still workable in life. “The earth is flat and still” is a good example of this, completely wrong, but workable! Wouldn’t it be more workable to think that you are walking on a still and flat surface than a rotating ball?So for the rest of the article, allow me to focus on how useful I think Charlie’s statement can help us as real estate investors.What I have done is, go back to look at some of the tenets of real estate investment that we have taken for granted without examining the opposite arguments, then see if we can learn something from it, and more importantly see if we can discover investment opportunities most people miss because they fail to see the other side of the story.I found the most common opinion about real estate investing is: Land goes up in value because of its limited supply so buy properties where land is of limited supply!If you look at the property performance in Australia since 1996, good quality established suburbs all share this land scarcity factor, they all perform very well according to this tenet. For example, while building cost is increasing 3-4% a year tracking CPI, the land value has increased as much as 12-14% a year, which averages out a 10% growth for a property over the last 15 years.It is very easy to not question the opposite side of this opinion when the facts are overwhelmingly supporting this argument.What if we follow Charlie’s suggestion, the counter argument can be something like: “Land goes down in value because of limited supply, don’t buy properties where land is of limited supply.”I must say when I first wrote this down, I thought to myself this must be considered crazy by anyone with any common sense in the investment industry, it is just utterly against anything we have been told about investing in property.The only reason I didn’t stop there was because of Charlie, he didn’t become a billionaire by being stupid, he must see tremendous value in this counter argument exercise to spot investment opportunities most people miss. So I ‘forced’ myself to see under what circumstances this counter argument could make sense.Interestingly enough, it didn’t take too long for me to see that this counter argument not only has its value, but it could also help us discover investment opportunities most experienced property investors miss in today’s market.Let me explain.It is obvious that land appreciation was the main driving force behind the property price growth in the last 15 years. But property prices are ultimately capped by how much income people have for qualifying for a mortgage, this is more so in today’s lending market where releasing equity without income support has become increasingly difficult.So you can almost say over the longer term, we should see something like:Income Growth = Property Price Growth (which can be broken down to Land & Building price growth)So if Income Growth is 3%, and Building Cost Growth is 3%, then Land Price Growth should also be 3% to make this formula work over the longer term. E.g.Income Growth (3%) = Property Price Growth (3%) [Land Price Growth (3%) & Building Cost Growth (3%)]However, in the last 15 years, our Income Growth is tracking along the Building Cost Growth, which is around CPI (3-4%), but the Land Price Growth has been 12-14% per year. So you have something like:Income Growth (3%) < Property Price Growth (10%) [Land Price Growth (12%) & Building Cost Growth (3%)]You can see the Land Price Growth has been much faster than Income Growth. When investors look at where to buy, they bought in areas where Land Price Growth has been 12%+ per annum, usually in established suburbs where land supply is very limited. And it has worked for them in the last 15 years (between 1996 till now).The question is “how long can the gap between Income Growth and Land Price Growth last without the Land Price Growth being forced to slow down?”Graphs of the Melbourne median house price between 1978 and 2009 show property prices have grown much faster than income for a long period of time till 1990 (reflected by the mortgage repayments of a median house taking up too larger a percentage of an average income), Property Price Growth then stopped for about 5 years to wait for the Income Growth to catch up.These graphs show a similar phenomenon is looming if you move your attention towards 2009.So I can see the counter argument “Land goes down in value because of limited supply, don’t buy properties where land is of limited supply” makes sense when the Land Scarcity factor has been over sold for too long to the point that land value was severely over priced. In other words, Land Scarcity can be the main reason why investors can make good money, but it can also become the main reason why investors may make less money or even lose money.Before we all rush to abandon the traditional high growth areas, we all know that there is a shortage of supply of properties in comparison to demand, so property prices are likely to continue to go up for a while. The traditional strong growth areas didn’t become high growth areas for no reason.After a period of flat performance (such as 1990-1996), they will always bounce back and accelerate the growth, so I personally think they will always be good areas to hold your properties for the longer term.The question is where you should be putting your money to work intelligently over the next 5-7 years to make the best return with the lowest risk?Right now, if you buy an old house in a traditional strong growth area within 20km of CBD in most major cities, you are expected to pay $700k+ with a gross rent of 2.5-4%. Some of these properties were worth only $200k-$300k less than 10 years ago.In contrast to these areas, you can still find property prices around $350k to $400k within 20km of CBD, whether they are houses in some transition areas (areas that are being re-zoned for residential housing) or lower price apartments in the more established areas, gross rent can still be around 4.5-6%, with the taxman helping the cash flow the first 5 years if the property is reasonably new.Let’s look at an example.Let’s say you have the capacity to buy up to $800k worth of investment properties, your wage is $100k pa, and you can borrow 100% plus stamp duty and costs at 7.5% interest rate, because you have equity from other properties.Let’s compare the following two possible options using Melbourne data as an example:Option 1:
If you buy 2 x $400k properties, two brand new houses, $200k building and $200k land, in a transition suburb 17km from Melbourne CBD.
Achievable gross rent currently is 4.6%, we may assume a potential growth for the next 5 year is at 9.4% per year (Melbourne’s average for the last few decades) due to its relatively lower price in comparison to Melbourne’s median house price of $550k and its distance from the CBD.
So 5 years later, each of these properties will be around $627k.Option 2:
If you buy 1 x $800k property, an old house of 25 years, $200k building and $600k land, in an established & traditionally high growth suburb, also 17km from Melbourne CBD.
Achievable gross rent currently is 3.5%, we may assume a slightly lower growth at 6.5% for the next 8 year due to its relatively inflated land value after a 15 year great run.
So 5 years later, this property will be around $1.1m. (Please note that a $1.1m home in the same neighborhood at 7.5% interest rate, will attract a $83k mortgage repayment per annum, which is coming out of a family’s after tax net income.)So let’s look at the following diagrams to compare the Cash Flow of the above two options.Option 1 (2 x $400k):$75/week or $4k/year out-of-pocket the first year. A total $19k out-of-pocket for the first 5 years. (see below table)Now – Property Value $400,000Year 1 – Property Value $437,600, Cost per week to hold $75Year 2 – Property Value $478,734, Cost per week to hold $97Year 3 – Property Value $523,735, Cost per week to hold $82Year 4 – Property Value $572,967, Cost per week to hold $65Year 5 – Property Value $626,825, Cost per week to hold $45Option 2 (1 x $800k):$489/week or $25k/year out-of-pocket the first year. A total $113k out-of-pocket for the first 5 years. (see below table)Now – Property Value $800,000Year 1 – Property Value $852,000, Cost per week to hold $489Year 2 – Property Value $907,380, Cost per week to hold $465Year 3 – Property Value $966,360, Cost per week to hold $436Year 4 – Property Value $1.029m, Cost per week to hold $405Year 5 – Property Value $1.096m, Cost per week to hold $375Let’s compare the total money made over a 5 year period by simply using: capital gain + cash flow.
Option 1 (2 x $400k):Capital Gain ($627k x 2 -$400k x 2) + Cash Flow (-$19k x 2) = $416k.
Option 2 (1 x $800k): Capital Gain ($1.1m – $800k) + Cash Flow (-$113k) = $187k.On top of that, the stamp duty difference was: $43k – $7k x 2 = $29k.So Option 1 is better off than Option 2 by: $416k + $29k – $187k = $258k. This doesn’t include the following two major factors in favor of Option 1:
Easier finance:it is much easier to get 95% finance for a $400k property, and almost impossible or too expensive to do the same for a $800k property. In other words, option 1 needs less money from you!
Lower risk:the risk for a $400k property to lose $100k in value is a lot less than an $800k property in the current heated market condition. In other words, option 1 is lower risk for your money.Before I rush to claim “Option 1 is better than Option 2″, I need to see under what circumstances Option 2 will be better than Option 1, if I were to follow Charlie’s teaching “You are not entitled an opinion unless you can state the arguments against your opinion better than your opponents can.”So the argument for buying a higher price old house in an established suburb for investment purpose in the current market condition is that good suburbs will always be in high demand, and rich people get richer quicker. One can never underestimate the long-term potential of those high growth suburbs even when they may experience some temporary slow down coming off a long period of strong growth. These suburbs may ‘lose the battle’ over the next 5-7 years against the up and coming transition suburbs, but they still have what it takes to ‘win the war’ over a much longer time frame.Can you see the power of applying Charlie’s teaching on just one of the tenets of property investing? The benefit can be enormous when we apply this to other areas of our lives, such as relationship, work, values, moral standards and spiritual beliefs, it can teach us to avoid extreme ideology and be more accepting to people who are different from us.

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An Unconventional Way to View the Property Market

I am going to discuss an interesting way to look at real estate investing that may be a bit unconventional to most property investors.A while ago, I watched a video by Charlie Munger, who is well-known as the business partner of Warren Buffet and his famous quote “Tell me where I’m gonna die and I’ll make sure I don’t go there.”In this video, Charlie who was 83 at the time, shared his life time of wisdom to make him a billionaire with a group of university graduates who are about to start their career.There is one particular statement that really interests me; he said “You are not entitled to an opinion unless you can state the arguments against your opinion better than your opponents can.”I find this statement quite profound but very difficult to apply in real life, I thought I would put it through some of the opinions widely circulated within real estate investment and see how it goes.Before I am entitled to an opinion of “how useful Charlie’s statement is”, the counter argument of “how useless it is” can be something like the following:
We are all entitled to our own opinion about anything, regardless of whether it is right or wrong, it doesn’t really matter what other people say.
Sometimes an opinion can be completely wrong, but still workable in life. “The earth is flat and still” is a good example of this, completely wrong, but workable! Wouldn’t it be more workable to think that you are walking on a still and flat surface than a rotating ball?So for the rest of the article, allow me to focus on how useful I think Charlie’s statement can help us as real estate investors.What I have done is, go back to look at some of the tenets of real estate investment that we have taken for granted without examining the opposite arguments, then see if we can learn something from it, and more importantly see if we can discover investment opportunities most people miss because they fail to see the other side of the story.I found the most common opinion about real estate investing is: Land goes up in value because of its limited supply so buy properties where land is of limited supply!If you look at the property performance in Australia since 1996, good quality established suburbs all share this land scarcity factor, they all perform very well according to this tenet. For example, while building cost is increasing 3-4% a year tracking CPI, the land value has increased as much as 12-14% a year, which averages out a 10% growth for a property over the last 15 years.It is very easy to not question the opposite side of this opinion when the facts are overwhelmingly supporting this argument.What if we follow Charlie’s suggestion, the counter argument can be something like: “Land goes down in value because of limited supply, don’t buy properties where land is of limited supply.”I must say when I first wrote this down, I thought to myself this must be considered crazy by anyone with any common sense in the investment industry, it is just utterly against anything we have been told about investing in property.The only reason I didn’t stop there was because of Charlie, he didn’t become a billionaire by being stupid, he must see tremendous value in this counter argument exercise to spot investment opportunities most people miss. So I ‘forced’ myself to see under what circumstances this counter argument could make sense.Interestingly enough, it didn’t take too long for me to see that this counter argument not only has its value, but it could also help us discover investment opportunities most experienced property investors miss in today’s market.Let me explain.It is obvious that land appreciation was the main driving force behind the property price growth in the last 15 years. But property prices are ultimately capped by how much income people have for qualifying for a mortgage, this is more so in today’s lending market where releasing equity without income support has become increasingly difficult.So you can almost say over the longer term, we should see something like:Income Growth = Property Price Growth (which can be broken down to Land & Building price growth)So if Income Growth is 3%, and Building Cost Growth is 3%, then Land Price Growth should also be 3% to make this formula work over the longer term. E.g.Income Growth (3%) = Property Price Growth (3%) [Land Price Growth (3%) & Building Cost Growth (3%)]However, in the last 15 years, our Income Growth is tracking along the Building Cost Growth, which is around CPI (3-4%), but the Land Price Growth has been 12-14% per year. So you have something like:Income Growth (3%) < Property Price Growth (10%) [Land Price Growth (12%) & Building Cost Growth (3%)]You can see the Land Price Growth has been much faster than Income Growth. When investors look at where to buy, they bought in areas where Land Price Growth has been 12%+ per annum, usually in established suburbs where land supply is very limited. And it has worked for them in the last 15 years (between 1996 till now).The question is “how long can the gap between Income Growth and Land Price Growth last without the Land Price Growth being forced to slow down?”Graphs of the Melbourne median house price between 1978 and 2009 show property prices have grown much faster than income for a long period of time till 1990 (reflected by the mortgage repayments of a median house taking up too larger a percentage of an average income), Property Price Growth then stopped for about 5 years to wait for the Income Growth to catch up.These graphs show a similar phenomenon is looming if you move your attention towards 2009.So I can see the counter argument “Land goes down in value because of limited supply, don’t buy properties where land is of limited supply” makes sense when the Land Scarcity factor has been over sold for too long to the point that land value was severely over priced. In other words, Land Scarcity can be the main reason why investors can make good money, but it can also become the main reason why investors may make less money or even lose money.Before we all rush to abandon the traditional high growth areas, we all know that there is a shortage of supply of properties in comparison to demand, so property prices are likely to continue to go up for a while. The traditional strong growth areas didn’t become high growth areas for no reason.After a period of flat performance (such as 1990-1996), they will always bounce back and accelerate the growth, so I personally think they will always be good areas to hold your properties for the longer term.The question is where you should be putting your money to work intelligently over the next 5-7 years to make the best return with the lowest risk?Right now, if you buy an old house in a traditional strong growth area within 20km of CBD in most major cities, you are expected to pay $700k+ with a gross rent of 2.5-4%. Some of these properties were worth only $200k-$300k less than 10 years ago.In contrast to these areas, you can still find property prices around $350k to $400k within 20km of CBD, whether they are houses in some transition areas (areas that are being re-zoned for residential housing) or lower price apartments in the more established areas, gross rent can still be around 4.5-6%, with the taxman helping the cash flow the first 5 years if the property is reasonably new.Let’s look at an example.Let’s say you have the capacity to buy up to $800k worth of investment properties, your wage is $100k pa, and you can borrow 100% plus stamp duty and costs at 7.5% interest rate, because you have equity from other properties.Let’s compare the following two possible options using Melbourne data as an example:Option 1:
If you buy 2 x $400k properties, two brand new houses, $200k building and $200k land, in a transition suburb 17km from Melbourne CBD.
Achievable gross rent currently is 4.6%, we may assume a potential growth for the next 5 year is at 9.4% per year (Melbourne’s average for the last few decades) due to its relatively lower price in comparison to Melbourne’s median house price of $550k and its distance from the CBD.
So 5 years later, each of these properties will be around $627k.Option 2:
If you buy 1 x $800k property, an old house of 25 years, $200k building and $600k land, in an established & traditionally high growth suburb, also 17km from Melbourne CBD.
Achievable gross rent currently is 3.5%, we may assume a slightly lower growth at 6.5% for the next 8 year due to its relatively inflated land value after a 15 year great run.
So 5 years later, this property will be around $1.1m. (Please note that a $1.1m home in the same neighborhood at 7.5% interest rate, will attract a $83k mortgage repayment per annum, which is coming out of a family’s after tax net income.)So let’s look at the following diagrams to compare the Cash Flow of the above two options.Option 1 (2 x $400k):$75/week or $4k/year out-of-pocket the first year. A total $19k out-of-pocket for the first 5 years. (see below table)Now – Property Value $400,000Year 1 – Property Value $437,600, Cost per week to hold $75Year 2 – Property Value $478,734, Cost per week to hold $97Year 3 – Property Value $523,735, Cost per week to hold $82Year 4 – Property Value $572,967, Cost per week to hold $65Year 5 – Property Value $626,825, Cost per week to hold $45Option 2 (1 x $800k):$489/week or $25k/year out-of-pocket the first year. A total $113k out-of-pocket for the first 5 years. (see below table)Now – Property Value $800,000Year 1 – Property Value $852,000, Cost per week to hold $489Year 2 – Property Value $907,380, Cost per week to hold $465Year 3 – Property Value $966,360, Cost per week to hold $436Year 4 – Property Value $1.029m, Cost per week to hold $405Year 5 – Property Value $1.096m, Cost per week to hold $375Let’s compare the total money made over a 5 year period by simply using: capital gain + cash flow.
Option 1 (2 x $400k):Capital Gain ($627k x 2 -$400k x 2) + Cash Flow (-$19k x 2) = $416k.
Option 2 (1 x $800k): Capital Gain ($1.1m – $800k) + Cash Flow (-$113k) = $187k.On top of that, the stamp duty difference was: $43k – $7k x 2 = $29k.So Option 1 is better off than Option 2 by: $416k + $29k – $187k = $258k. This doesn’t include the following two major factors in favor of Option 1:
Easier finance:it is much easier to get 95% finance for a $400k property, and almost impossible or too expensive to do the same for a $800k property. In other words, option 1 needs less money from you!
Lower risk:the risk for a $400k property to lose $100k in value is a lot less than an $800k property in the current heated market condition. In other words, option 1 is lower risk for your money.Before I rush to claim “Option 1 is better than Option 2″, I need to see under what circumstances Option 2 will be better than Option 1, if I were to follow Charlie’s teaching “You are not entitled an opinion unless you can state the arguments against your opinion better than your opponents can.”So the argument for buying a higher price old house in an established suburb for investment purpose in the current market condition is that good suburbs will always be in high demand, and rich people get richer quicker. One can never underestimate the long-term potential of those high growth suburbs even when they may experience some temporary slow down coming off a long period of strong growth. These suburbs may ‘lose the battle’ over the next 5-7 years against the up and coming transition suburbs, but they still have what it takes to ‘win the war’ over a much longer time frame.Can you see the power of applying Charlie’s teaching on just one of the tenets of property investing? The benefit can be enormous when we apply this to other areas of our lives, such as relationship, work, values, moral standards and spiritual beliefs, it can teach us to avoid extreme ideology and be more accepting to people who are different from us.

Posted in Uncategorized | Comments Off

An Unconventional Way to View the Property Market

I am going to discuss an interesting way to look at real estate investing that may be a bit unconventional to most property investors.A while ago, I watched a video by Charlie Munger, who is well-known as the business partner of Warren Buffet and his famous quote “Tell me where I’m gonna die and I’ll make sure I don’t go there.”In this video, Charlie who was 83 at the time, shared his life time of wisdom to make him a billionaire with a group of university graduates who are about to start their career.There is one particular statement that really interests me; he said “You are not entitled to an opinion unless you can state the arguments against your opinion better than your opponents can.”I find this statement quite profound but very difficult to apply in real life, I thought I would put it through some of the opinions widely circulated within real estate investment and see how it goes.Before I am entitled to an opinion of “how useful Charlie’s statement is”, the counter argument of “how useless it is” can be something like the following:
We are all entitled to our own opinion about anything, regardless of whether it is right or wrong, it doesn’t really matter what other people say.
Sometimes an opinion can be completely wrong, but still workable in life. “The earth is flat and still” is a good example of this, completely wrong, but workable! Wouldn’t it be more workable to think that you are walking on a still and flat surface than a rotating ball?So for the rest of the article, allow me to focus on how useful I think Charlie’s statement can help us as real estate investors.What I have done is, go back to look at some of the tenets of real estate investment that we have taken for granted without examining the opposite arguments, then see if we can learn something from it, and more importantly see if we can discover investment opportunities most people miss because they fail to see the other side of the story.I found the most common opinion about real estate investing is: Land goes up in value because of its limited supply so buy properties where land is of limited supply!If you look at the property performance in Australia since 1996, good quality established suburbs all share this land scarcity factor, they all perform very well according to this tenet. For example, while building cost is increasing 3-4% a year tracking CPI, the land value has increased as much as 12-14% a year, which averages out a 10% growth for a property over the last 15 years.It is very easy to not question the opposite side of this opinion when the facts are overwhelmingly supporting this argument.What if we follow Charlie’s suggestion, the counter argument can be something like: “Land goes down in value because of limited supply, don’t buy properties where land is of limited supply.”I must say when I first wrote this down, I thought to myself this must be considered crazy by anyone with any common sense in the investment industry, it is just utterly against anything we have been told about investing in property.The only reason I didn’t stop there was because of Charlie, he didn’t become a billionaire by being stupid, he must see tremendous value in this counter argument exercise to spot investment opportunities most people miss. So I ‘forced’ myself to see under what circumstances this counter argument could make sense.Interestingly enough, it didn’t take too long for me to see that this counter argument not only has its value, but it could also help us discover investment opportunities most experienced property investors miss in today’s market.Let me explain.It is obvious that land appreciation was the main driving force behind the property price growth in the last 15 years. But property prices are ultimately capped by how much income people have for qualifying for a mortgage, this is more so in today’s lending market where releasing equity without income support has become increasingly difficult.So you can almost say over the longer term, we should see something like:Income Growth = Property Price Growth (which can be broken down to Land & Building price growth)So if Income Growth is 3%, and Building Cost Growth is 3%, then Land Price Growth should also be 3% to make this formula work over the longer term. E.g.Income Growth (3%) = Property Price Growth (3%) [Land Price Growth (3%) & Building Cost Growth (3%)]However, in the last 15 years, our Income Growth is tracking along the Building Cost Growth, which is around CPI (3-4%), but the Land Price Growth has been 12-14% per year. So you have something like:Income Growth (3%) < Property Price Growth (10%) [Land Price Growth (12%) & Building Cost Growth (3%)]You can see the Land Price Growth has been much faster than Income Growth. When investors look at where to buy, they bought in areas where Land Price Growth has been 12%+ per annum, usually in established suburbs where land supply is very limited. And it has worked for them in the last 15 years (between 1996 till now).The question is “how long can the gap between Income Growth and Land Price Growth last without the Land Price Growth being forced to slow down?”Graphs of the Melbourne median house price between 1978 and 2009 show property prices have grown much faster than income for a long period of time till 1990 (reflected by the mortgage repayments of a median house taking up too larger a percentage of an average income), Property Price Growth then stopped for about 5 years to wait for the Income Growth to catch up.These graphs show a similar phenomenon is looming if you move your attention towards 2009.So I can see the counter argument “Land goes down in value because of limited supply, don’t buy properties where land is of limited supply” makes sense when the Land Scarcity factor has been over sold for too long to the point that land value was severely over priced. In other words, Land Scarcity can be the main reason why investors can make good money, but it can also become the main reason why investors may make less money or even lose money.Before we all rush to abandon the traditional high growth areas, we all know that there is a shortage of supply of properties in comparison to demand, so property prices are likely to continue to go up for a while. The traditional strong growth areas didn’t become high growth areas for no reason.After a period of flat performance (such as 1990-1996), they will always bounce back and accelerate the growth, so I personally think they will always be good areas to hold your properties for the longer term.The question is where you should be putting your money to work intelligently over the next 5-7 years to make the best return with the lowest risk?Right now, if you buy an old house in a traditional strong growth area within 20km of CBD in most major cities, you are expected to pay $700k+ with a gross rent of 2.5-4%. Some of these properties were worth only $200k-$300k less than 10 years ago.In contrast to these areas, you can still find property prices around $350k to $400k within 20km of CBD, whether they are houses in some transition areas (areas that are being re-zoned for residential housing) or lower price apartments in the more established areas, gross rent can still be around 4.5-6%, with the taxman helping the cash flow the first 5 years if the property is reasonably new.Let’s look at an example.Let’s say you have the capacity to buy up to $800k worth of investment properties, your wage is $100k pa, and you can borrow 100% plus stamp duty and costs at 7.5% interest rate, because you have equity from other properties.Let’s compare the following two possible options using Melbourne data as an example:Option 1:
If you buy 2 x $400k properties, two brand new houses, $200k building and $200k land, in a transition suburb 17km from Melbourne CBD.
Achievable gross rent currently is 4.6%, we may assume a potential growth for the next 5 year is at 9.4% per year (Melbourne’s average for the last few decades) due to its relatively lower price in comparison to Melbourne’s median house price of $550k and its distance from the CBD.
So 5 years later, each of these properties will be around $627k.Option 2:
If you buy 1 x $800k property, an old house of 25 years, $200k building and $600k land, in an established & traditionally high growth suburb, also 17km from Melbourne CBD.
Achievable gross rent currently is 3.5%, we may assume a slightly lower growth at 6.5% for the next 8 year due to its relatively inflated land value after a 15 year great run.
So 5 years later, this property will be around $1.1m. (Please note that a $1.1m home in the same neighborhood at 7.5% interest rate, will attract a $83k mortgage repayment per annum, which is coming out of a family’s after tax net income.)So let’s look at the following diagrams to compare the Cash Flow of the above two options.Option 1 (2 x $400k):$75/week or $4k/year out-of-pocket the first year. A total $19k out-of-pocket for the first 5 years. (see below table)Now – Property Value $400,000Year 1 – Property Value $437,600, Cost per week to hold $75Year 2 – Property Value $478,734, Cost per week to hold $97Year 3 – Property Value $523,735, Cost per week to hold $82Year 4 – Property Value $572,967, Cost per week to hold $65Year 5 – Property Value $626,825, Cost per week to hold $45Option 2 (1 x $800k):$489/week or $25k/year out-of-pocket the first year. A total $113k out-of-pocket for the first 5 years. (see below table)Now – Property Value $800,000Year 1 – Property Value $852,000, Cost per week to hold $489Year 2 – Property Value $907,380, Cost per week to hold $465Year 3 – Property Value $966,360, Cost per week to hold $436Year 4 – Property Value $1.029m, Cost per week to hold $405Year 5 – Property Value $1.096m, Cost per week to hold $375Let’s compare the total money made over a 5 year period by simply using: capital gain + cash flow.
Option 1 (2 x $400k):Capital Gain ($627k x 2 -$400k x 2) + Cash Flow (-$19k x 2) = $416k.
Option 2 (1 x $800k): Capital Gain ($1.1m – $800k) + Cash Flow (-$113k) = $187k.On top of that, the stamp duty difference was: $43k – $7k x 2 = $29k.So Option 1 is better off than Option 2 by: $416k + $29k – $187k = $258k. This doesn’t include the following two major factors in favor of Option 1:
Easier finance:it is much easier to get 95% finance for a $400k property, and almost impossible or too expensive to do the same for a $800k property. In other words, option 1 needs less money from you!
Lower risk:the risk for a $400k property to lose $100k in value is a lot less than an $800k property in the current heated market condition. In other words, option 1 is lower risk for your money.Before I rush to claim “Option 1 is better than Option 2″, I need to see under what circumstances Option 2 will be better than Option 1, if I were to follow Charlie’s teaching “You are not entitled an opinion unless you can state the arguments against your opinion better than your opponents can.”So the argument for buying a higher price old house in an established suburb for investment purpose in the current market condition is that good suburbs will always be in high demand, and rich people get richer quicker. One can never underestimate the long-term potential of those high growth suburbs even when they may experience some temporary slow down coming off a long period of strong growth. These suburbs may ‘lose the battle’ over the next 5-7 years against the up and coming transition suburbs, but they still have what it takes to ‘win the war’ over a much longer time frame.Can you see the power of applying Charlie’s teaching on just one of the tenets of property investing? The benefit can be enormous when we apply this to other areas of our lives, such as relationship, work, values, moral standards and spiritual beliefs, it can teach us to avoid extreme ideology and be more accepting to people who are different from us.

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An Unconventional Way to View the Property Market

I am going to discuss an interesting way to look at real estate investing that may be a bit unconventional to most property investors.A while ago, I watched a video by Charlie Munger, who is well-known as the business partner of Warren Buffet and his famous quote “Tell me where I’m gonna die and I’ll make sure I don’t go there.”In this video, Charlie who was 83 at the time, shared his life time of wisdom to make him a billionaire with a group of university graduates who are about to start their career.There is one particular statement that really interests me; he said “You are not entitled to an opinion unless you can state the arguments against your opinion better than your opponents can.”I find this statement quite profound but very difficult to apply in real life, I thought I would put it through some of the opinions widely circulated within real estate investment and see how it goes.Before I am entitled to an opinion of “how useful Charlie’s statement is”, the counter argument of “how useless it is” can be something like the following:
We are all entitled to our own opinion about anything, regardless of whether it is right or wrong, it doesn’t really matter what other people say.
Sometimes an opinion can be completely wrong, but still workable in life. “The earth is flat and still” is a good example of this, completely wrong, but workable! Wouldn’t it be more workable to think that you are walking on a still and flat surface than a rotating ball?So for the rest of the article, allow me to focus on how useful I think Charlie’s statement can help us as real estate investors.What I have done is, go back to look at some of the tenets of real estate investment that we have taken for granted without examining the opposite arguments, then see if we can learn something from it, and more importantly see if we can discover investment opportunities most people miss because they fail to see the other side of the story.I found the most common opinion about real estate investing is: Land goes up in value because of its limited supply so buy properties where land is of limited supply!If you look at the property performance in Australia since 1996, good quality established suburbs all share this land scarcity factor, they all perform very well according to this tenet. For example, while building cost is increasing 3-4% a year tracking CPI, the land value has increased as much as 12-14% a year, which averages out a 10% growth for a property over the last 15 years.It is very easy to not question the opposite side of this opinion when the facts are overwhelmingly supporting this argument.What if we follow Charlie’s suggestion, the counter argument can be something like: “Land goes down in value because of limited supply, don’t buy properties where land is of limited supply.”I must say when I first wrote this down, I thought to myself this must be considered crazy by anyone with any common sense in the investment industry, it is just utterly against anything we have been told about investing in property.The only reason I didn’t stop there was because of Charlie, he didn’t become a billionaire by being stupid, he must see tremendous value in this counter argument exercise to spot investment opportunities most people miss. So I ‘forced’ myself to see under what circumstances this counter argument could make sense.Interestingly enough, it didn’t take too long for me to see that this counter argument not only has its value, but it could also help us discover investment opportunities most experienced property investors miss in today’s market.Let me explain.It is obvious that land appreciation was the main driving force behind the property price growth in the last 15 years. But property prices are ultimately capped by how much income people have for qualifying for a mortgage, this is more so in today’s lending market where releasing equity without income support has become increasingly difficult.So you can almost say over the longer term, we should see something like:Income Growth = Property Price Growth (which can be broken down to Land & Building price growth)So if Income Growth is 3%, and Building Cost Growth is 3%, then Land Price Growth should also be 3% to make this formula work over the longer term. E.g.Income Growth (3%) = Property Price Growth (3%) [Land Price Growth (3%) & Building Cost Growth (3%)]However, in the last 15 years, our Income Growth is tracking along the Building Cost Growth, which is around CPI (3-4%), but the Land Price Growth has been 12-14% per year. So you have something like:Income Growth (3%) < Property Price Growth (10%) [Land Price Growth (12%) & Building Cost Growth (3%)]You can see the Land Price Growth has been much faster than Income Growth. When investors look at where to buy, they bought in areas where Land Price Growth has been 12%+ per annum, usually in established suburbs where land supply is very limited. And it has worked for them in the last 15 years (between 1996 till now).The question is “how long can the gap between Income Growth and Land Price Growth last without the Land Price Growth being forced to slow down?”Graphs of the Melbourne median house price between 1978 and 2009 show property prices have grown much faster than income for a long period of time till 1990 (reflected by the mortgage repayments of a median house taking up too larger a percentage of an average income), Property Price Growth then stopped for about 5 years to wait for the Income Growth to catch up.These graphs show a similar phenomenon is looming if you move your attention towards 2009.So I can see the counter argument “Land goes down in value because of limited supply, don’t buy properties where land is of limited supply” makes sense when the Land Scarcity factor has been over sold for too long to the point that land value was severely over priced. In other words, Land Scarcity can be the main reason why investors can make good money, but it can also become the main reason why investors may make less money or even lose money.Before we all rush to abandon the traditional high growth areas, we all know that there is a shortage of supply of properties in comparison to demand, so property prices are likely to continue to go up for a while. The traditional strong growth areas didn’t become high growth areas for no reason.After a period of flat performance (such as 1990-1996), they will always bounce back and accelerate the growth, so I personally think they will always be good areas to hold your properties for the longer term.The question is where you should be putting your money to work intelligently over the next 5-7 years to make the best return with the lowest risk?Right now, if you buy an old house in a traditional strong growth area within 20km of CBD in most major cities, you are expected to pay $700k+ with a gross rent of 2.5-4%. Some of these properties were worth only $200k-$300k less than 10 years ago.In contrast to these areas, you can still find property prices around $350k to $400k within 20km of CBD, whether they are houses in some transition areas (areas that are being re-zoned for residential housing) or lower price apartments in the more established areas, gross rent can still be around 4.5-6%, with the taxman helping the cash flow the first 5 years if the property is reasonably new.Let’s look at an example.Let’s say you have the capacity to buy up to $800k worth of investment properties, your wage is $100k pa, and you can borrow 100% plus stamp duty and costs at 7.5% interest rate, because you have equity from other properties.Let’s compare the following two possible options using Melbourne data as an example:Option 1:
If you buy 2 x $400k properties, two brand new houses, $200k building and $200k land, in a transition suburb 17km from Melbourne CBD.
Achievable gross rent currently is 4.6%, we may assume a potential growth for the next 5 year is at 9.4% per year (Melbourne’s average for the last few decades) due to its relatively lower price in comparison to Melbourne’s median house price of $550k and its distance from the CBD.
So 5 years later, each of these properties will be around $627k.Option 2:
If you buy 1 x $800k property, an old house of 25 years, $200k building and $600k land, in an established & traditionally high growth suburb, also 17km from Melbourne CBD.
Achievable gross rent currently is 3.5%, we may assume a slightly lower growth at 6.5% for the next 8 year due to its relatively inflated land value after a 15 year great run.
So 5 years later, this property will be around $1.1m. (Please note that a $1.1m home in the same neighborhood at 7.5% interest rate, will attract a $83k mortgage repayment per annum, which is coming out of a family’s after tax net income.)So let’s look at the following diagrams to compare the Cash Flow of the above two options.Option 1 (2 x $400k):$75/week or $4k/year out-of-pocket the first year. A total $19k out-of-pocket for the first 5 years. (see below table)Now – Property Value $400,000Year 1 – Property Value $437,600, Cost per week to hold $75Year 2 – Property Value $478,734, Cost per week to hold $97Year 3 – Property Value $523,735, Cost per week to hold $82Year 4 – Property Value $572,967, Cost per week to hold $65Year 5 – Property Value $626,825, Cost per week to hold $45Option 2 (1 x $800k):$489/week or $25k/year out-of-pocket the first year. A total $113k out-of-pocket for the first 5 years. (see below table)Now – Property Value $800,000Year 1 – Property Value $852,000, Cost per week to hold $489Year 2 – Property Value $907,380, Cost per week to hold $465Year 3 – Property Value $966,360, Cost per week to hold $436Year 4 – Property Value $1.029m, Cost per week to hold $405Year 5 – Property Value $1.096m, Cost per week to hold $375Let’s compare the total money made over a 5 year period by simply using: capital gain + cash flow.
Option 1 (2 x $400k):Capital Gain ($627k x 2 -$400k x 2) + Cash Flow (-$19k x 2) = $416k.
Option 2 (1 x $800k): Capital Gain ($1.1m – $800k) + Cash Flow (-$113k) = $187k.On top of that, the stamp duty difference was: $43k – $7k x 2 = $29k.So Option 1 is better off than Option 2 by: $416k + $29k – $187k = $258k. This doesn’t include the following two major factors in favor of Option 1:
Easier finance:it is much easier to get 95% finance for a $400k property, and almost impossible or too expensive to do the same for a $800k property. In other words, option 1 needs less money from you!
Lower risk:the risk for a $400k property to lose $100k in value is a lot less than an $800k property in the current heated market condition. In other words, option 1 is lower risk for your money.Before I rush to claim “Option 1 is better than Option 2″, I need to see under what circumstances Option 2 will be better than Option 1, if I were to follow Charlie’s teaching “You are not entitled an opinion unless you can state the arguments against your opinion better than your opponents can.”So the argument for buying a higher price old house in an established suburb for investment purpose in the current market condition is that good suburbs will always be in high demand, and rich people get richer quicker. One can never underestimate the long-term potential of those high growth suburbs even when they may experience some temporary slow down coming off a long period of strong growth. These suburbs may ‘lose the battle’ over the next 5-7 years against the up and coming transition suburbs, but they still have what it takes to ‘win the war’ over a much longer time frame.Can you see the power of applying Charlie’s teaching on just one of the tenets of property investing? The benefit can be enormous when we apply this to other areas of our lives, such as relationship, work, values, moral standards and spiritual beliefs, it can teach us to avoid extreme ideology and be more accepting to people who are different from us.

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Keep These 5 Rules in Mind for Successful Commercial Designing

Who doesn’t want an excellent commercial design? Excellent commercial design is important to maintain the reputation and brand image of the company. As it is said, the first impression is the last impression, a good impression always attracts potential customers. It’s obvious no one would ever love to walk in a congested environment with bad lighting.

Bad design and interiors deteriorate the productivity of the employees. It can be a confusing task when planning a commercial designing project for the first time, hiring expert Commercial Architects Melbourne can be the best option to know about the latest trends and perfect matching designs.

This blog is about some basic rules to consider for making the commercial project successful.
Keep structures versatile

When it comes to transforming any commercial space, focusing on convertibility and keeping office interior decor versatile can be the best option. It can be done by implementing a versatile structure to spaces such as cafeterias, offices, and many more. Everyone gives preference to comfort hence, focusing on spatial and versatile design will help to complete commercial designing projects in an optimal way.

Consider the latest technology implementations

Technology plays a supportive role to enhance the commercial designing project. Moving forward with the latest technology is important to execute any business smoothly because technologies make the work much easier and comfortable for the employee as well as organizations. Implementing centralized and decentralized digital control is much needed in any commercial design.

Keep office aesthetics updated

Good aesthetics and interiors impact the overall representation of the office and make the place functional and attractive. Hire a reputed designer for modern d├ęcor and furniture ideas. Hiring a designer reduces half of the project stress and helps to meet the contemporary fashion and latest trends. They can help to choose the perfect theme that blends well with the office decor, atmosphere, and colour.

Provide personalized space to prevent congestion

Majority of customer prefers personalized space such as different seating to seat comfortably and do the personal work. Personalized space is one of the crucial factors for customer-based service offices such as hotels and cafeterias to provide an ambient and comfortable place.

Always keep safety first

Safety is the central feature of every construction and designing project. Hence, it’s the high-priority factor to keep the aesthetic and functional safety at the working place. It can be compromised for interior decoration and design purposes but it’s not at all affordable to compromise for safety purposes.

Following the above useful ideas can easily help in the successful completion of a commercial designing project in a safe and pleasing way. In today’s, modern construction, reliability, and comfort is also an equally important factor.

Final words,

It’s important to hire the experienced Building designer Melbourne to make the commercial designing project worthy. Hope the above rules helped you to scale up your interior designing projects with a better outcome. Follow the above tips for any renovation or remodelling project and surely you will get award-winning and achieve a better office experience.

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How Long Should A Laptop Battery Last And How To Increase the Battery Life

No matter how expensive your laptop is, its battery won’t last more than four years. According to experts, a new laptop battery gives you as many as 1,000 cycles. In other words, you can charge and recharge the battery up to 1000 times. However, many factors play their role to increase or decrease the lifespan of a laptop battery. For instance, the material used for producing the battery substance. So, if you want to ensure that your battery stands the test of time, given below are some of the tips that can help.

1. Install a good battery monitor

If you are looking for an alternative, you can choose from tons of third-party utilities. Basically, the software programs help you monitor your laptop battery. These programs have no compatibility issues with any type of laptop.

Using these tools, you can find out which programs are using most of the battery power. You can then close the unwanted programs to save battery power.

2. Install maintenance apps

You can use some manufacturer-recommended maintenance tools for maintaining your laptop battery. Based on the type of your battery, you will receive different suggestions. Apart from this, your operating system will come with a built-in utility that can help you keep an eye on your battery condition.

3. Maintain your device temperature

You should try your level best to ensure your laptop maintains its temperature. In summer, electronic devices tend to heat up, which negatively impacts the life of the battery packs.

Therefore, you should make sure that there is a little bit of space between the bottom of the device and the table you have placed your device on. Besides, the ventilation system of your device should be working properly. For this purpose, regular cleaning of your device is quite important.

4. Don’t use maximum brightness

When your screen brightness is at maximum level, your device will use the maximum power. So, turning down the brightness is the first thing you can do to save power. Also, it is not a good idea to keep the brightness at max level as it can have a negative impact on your eyesight.

So, by following these simple tips, it will be easier for you to extend the life of your laptop battery.

5. Change the power-saving settings

Before you do anything, go into the power options of your laptop. If you are using Windows operating system, you can go to the control panel to access the power options. The control panel can be accessed from the Start Menu.

Some users have MacOS. If you are one of them, you need to access Energy Saver, which is found in the System Preferences. If these values are set to default, your computer will use the least amount of power.

So, what you need to do is make small changes to the settings so that you achieve a balance between power and performance. For best performance, there is always the choice to connect your device to the AC outlet.

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The Best Ways I’ve Found To Make Money Online From Home

Have you been looking for a way to make money online without having to know much of the internet stuff? Wanting to work at home but don’t know how to do it? Here is the key gem: Between all the tricks on joining the craft beer movement, opening a gallery or being a tour operator, you will find clever advice that anybody can apply to make money online quickly.

The most basic way to make money online is through affiliate marketing. It is really easy. Basically you set up an ad for someone she is selling something and when they click through and buy it, you make money! Simple enough if you have no technical skill at all. Here are some simple tips on how to earn using affiliate marketing:

Drop-shipping is one of the most useful methods. You select a product in which you believe there is a demand and then drop-ship it to your customers in small quantities. You make money from the difference between what the stock costs and what you sell it for. For this method, it is important to note that you may need to make space for your inventory on your premises or perhaps wait until you have a build of an inventory before you can start drop-shipping; but the advantages make it a good choice for those seeking to make money online from their spare time.

Paid surveys are a great way to earn some extra cash. These can be accessed easily and there are many sites where you can get paid from spending your spare time. There is one site, though, which is said to pay $200 a week for twelve weeks straight – you can’t beat that kind of money making potential. With paid surveys, it is important to note that the sites are generally scams, and that you need to do some research to ensure you are making good money making opportunities.

Finally, a passive income generating method that can bring in money on autopilot is eToro’s Forex trading. This works by allowing you to invest on a demo account and earn money from the performance of the currencies being exchanged. The best thing about this system is that it allows you to do virtually anything and still see profits coming in. eToro has an average starting price of less than $50 and can generate an income of five figures in just a few months.

These are the best things I have found for making money online from your home. Though none of them are as good as, say, a paid-online course, they are much more affordable and can provide a valuable education to start earning money immediately online. With just a little research, you should be able to find a legitimate opportunity to get paid to learn the basics of making money in the currency markets. This is a truly remarkable opportunity.

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Finding the Best Business Idea For Your Home Based Business

How many home based business opportunities are available to you? If you want to make money online at home, you really have many options to choose from. The big question is – which one will give you the biggest chance of success? Is there a ‘one size fits all’ answer? The simple truth is that not every opportunity is right for everyone, and not every opportunity will bring you the greatest amount of profit.

So, what are some home business ideas that can make money online for you? The quick and dirty answer is: the one that best suits your particular set of needs. Make a list of your priorities, including a high income; a low-risk schedule; freedom; flexibility; work-life balance; independence; something in your range of skills and expertise; and interesting work that you have an interest in… You can take this list with you and talk to people who are working from home on the same things that you would be considering. Chances are that you will find some great niches that fit your standards and your desires.

But what if you want to get started right away? It’s easy to think that you can jump into a new business idea and be successful immediately, but this often isn’t the case. It takes many different things to make sure that you will be able to get through the hurdles and actually make it to a point where you are seeing profit. If you don’t work at it slowly, you will be setting yourself up for failure. Here’s the lowdown on some different things that you should consider as you create your own business idea:

First, you need to think about what you have to offer. If you don’t have any ideas as to what to do as a freelance writer, a lowdown on finding a niche is very important. Many beginners go into this completely clueless. But if you know that you have a skill that others are desperately seeking, you may be able to provide them with the service they are looking for without having to spend much time building up a website or getting traffic to it.

Another thing to consider is what kinds of products or services would best fit a niche that you would like to get started in. In this case, the lowdown on finding the best business idea for you would include taking a look at what you love to do and what you can offer others. If writing is not your strongest point, but you love to get creative, consider freelance data entry. Freelance data entry does not require a lot of startup capital, but you still need to have the skills that will allow you to be successful in this area. The best lowdown on finding the best business idea for you is to simply start looking at what you like to do and what you can offer others.

There are many other areas of freelance writing that you can explore in order to make the most out of your home based online business. Freelance writers are in high demand online. If you have the skills that are needed to do well in this field, there is no reason that you should not be able to find a great home-based online business that will give you the income that you want.

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Earn Money Writing From Home And Never Run Out of Ideas

Is it your dream to work from home as a writer and earn money from everything you write? That was my dream for years, and 20 years ago it became my reality.

One of the hardest things at first was to come up with ideas of what to write about. I started by doing freelance writing and I also set up my own website and I wanted to write and publish books. It was all a great plan, but it meant coming up with thousands of ideas.

At first I didn’t think it was possible, but it turned out that not only was it possible to come up with endless ideas for writing, but I ended up with notebooks full of ideas because I had more than I could ever use at once.

And I’ll tell you 3 things that helped.

1. I write fast. Once I’m into writing an addictive story or an interesting article – or series of articles, I get into a writing ‘flow’ and can write for hours. I never stop and second-guess myself. I just keep writing because fast writers are mega producers and never have time for writers’ block.

2. The more I write and the faster I write, the more writing ideas I have. Productive writers always get an abundance of ideas as they write. When I’m immersed in my writing, my creative mind goes into hyper-drive. Even if I started with only one or two ideas, once I sit down and start writing the ideas start flowing. And it doesn’t matter what I write. Even if I’m journaling or copying out someone else’s writing by hand (just for practice), it inspires ideas.

3. I love to write. Most days I’m excited and motivated to sit down and write. I hurry through other chores I have to do so that I can get to my desk and write.

At first, being a writer was hard because it’s not easy to work from home with no boss, no set hours and too many distractions. But once I got a writing routine, I found that once I sat my backside in my chair and started writing, it was easy to ignore everything and motivation arrived and kept me going.

So if you find yourself longing to write but stuck for ideas, just sit down and start writing. Write anything even if it’s just nursery rhymes you were taught as a kid, or open a book and start handwriting it out.

And if you’re like me you’ll find that even on days when you think you don’t feel like writing and the ideas just won’t come, sit down and write anyway, and before you know it you’ll be overloaded with ideas.

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