Hi all,
Since discovering this website and forum a couple of days ago my mind has been in turmoil. So much great advice and so many people willing to share it. It’s great!
I had always thought that the only way to get started in Property investment was to use the taxman’s help – so this has been a real eye-opener. I have procrastinated long enough – it’s time to act. But before I do I have a couple of questions:
1. How do you define “positive cashflow” – is it purely nett income or do you factor in principle repayments? If it is purely income less expenses then is an interest-only loan the way to go. If so you require capital growth to take care of inflation, etc, and from what I’ve read on this site CG and +ive CF are hard to combine. Therefore I’m slightly confused. (sorry it’s a bit of a mouthful!)
2. As I’m currently working O/S, I would need the help of a broker, agent, whatever. I have heard that there are people who specialise in representing purchasers in property deals, but how do I find them, how much do they do and how do I know if they’re any good? Has anyone else had experience with this type of arrangement and if so, any feedback, advice, etc.
Thanks in advance,
Dan [8D]
Hi Dan
In relation to 1. unless I wanted to be in debt for a long time, pay heaps of interest to the bank, and not actually own very much, I would always take out a P&I loan when buying a property chosen for its cashflow. If you don’t you could end up owing as much on the property as it’s worth. Your only benefit will have been a source of income for a while. To keep this income stream going, you will need to find a spare hundred thousand or so for the principle. Not for me, I’m afraid!
There are alternative techniques (eg putting the excess after you’ve paid the interest into a sinking fund) to make interest only work. I have seen this recommended by more agressive capital-gain oriented investors.
But for my part, I would rather a genuinely positive property, where the rent is enough to cover costs, interest and big chunks of the principal so I can get it paid off in 10 years and not 30. If you buy properties that follow the 11 second rule (or close to it if you pay a karge deposit) this should be possible.
Then you can use 100% of the income from Property 1 to pay off Property 2. Once you’ve done this, it should be possible to move from 4 to 8 properties with about the same amount of risk that it took to move from 1 to 2 as you’re using two rents to pay off one property each time.
That’s my strategy, and I still haven’t settled on Property 1. But I can’t see why it won’t work. But it would need at least 15-20 years to work properly.
So to answer your question, genuine cashflow positive is enough income so it pays a P&I loan, preferably with enough left over to pay it quickly. Some people (eg Margaret Lomas) use big tax breaks (most principally building depreciation) to improve cashflow and even make a negative property positive. This works on new, expensive apartment blocks, but is less significant for older places. Nevertheless I would still aim to buy a post 1985 place to get it.
Peter
Dan,
There are many different aproaches and they all are valid. My personal feeling re interest only and P/I is that it is relatively futile to try to pay of a large loan in small chunks. For example to pay off a 100,000 loan with principle payments of 2,000 a year would take 50 years ( not taking into account the compounding effect ), but you see my point even if it took 20 years its still a looong time. If buying Capital growth focused property the idea often is to end up with a 200,000 property and still have a loan of 100,000, so you have equity gain of 100,000.The less principle you pay the better your short term cash flow But the more principle you pay the better your future cash flow.So if your cash flow can afford it it is good to pay of principle. Having said all that I do pay of principle as I can afford it buy having some loans interest only and one main one P/I. If at any time I decide, I can reduce the payment level. With positive cash flow focused property paying of principle is not essential but it does saveguard you against intrest rate rises and improve your long term cash flow prospects.Every positive cash flow property adds to your income regardless of wether or not its paid off, but paid off is better than not paid off. Its often a matter of paying off vs expansion.Trying to pay of a loan $ by $ is not using leverage whereas epanding you portfolio is.
Re the buyer advocate. We all have trusted people we deal with but buying site unseen to me is a massive risk. Especially if your relationship with the buyer is purely business and is the first time you;ve used them. You can use people to find property for you but you need to evauate it yourself.
MJK
I.O. rates are the best as interest is the only component of your repayments that can be deducted from your taxable income.
Repayments on a P&I loan are 99.99% interest anyway in the first 10 years or so of the loan. It’s only towards the end of the loan that you actually start to repay any principle.
If you want to reduce the principle, you are better off going into the bank with some $ and saying “please pay this off the principle on my loan.”
The best way is to get I.O. and maintain your repayments at the same amount even if %rates do fluctuate. Anything extra that is not paying the interest automatically goes towards the principle.
Quentin is basically right. However, the structure depends on whether you have a non-deductible home loan or not.
With a loan on your PPOR, use interest only for IP’s and put extra payments into an offset a/c against the home loan. This has the same effect as paying off the principal, but the money is immediately available for further investments.
If you don’t have a non-deductible loan, then you could pay off the principal of deductible loans and then redraw for further investments, but with redraw charges this may be more expensive than using a Line of Credit.
I/O loans can be fixed or a LOC, depending on where you think interest rates are heading.
See also this thread: http://www.somersoft.com/forums/showthread.php?s=&threadid=7655 from another forum.Terry
Finance
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