Hi Steve.
Bought your book and enjoyed reading it. Very informative. It covers a few things I had not taken into account which leads me to my first question.1/ Re: CGT and depreciation. I am not buying to sell, but eventually for sound reasons I may need to do that. You give an example that depreciation is only a deferment of tax and I understand the way you have justified that. But if you keep the property for more than 1 year (as I would be planning to) you would only pay tax on 50% of the depreciation benefit, and possibly at a tax rate which is less than when the benefit was obtained. Therefore (assuming you are in the same tax bracket) there is still a 50% benefit in any depreciation claimed. Am I right in this assumption?
2/ Re: P&I or IO loans. I am not sure what your reason is for preferring P&I loans (other than forced savings for those who can’t save). In both cases you pay the interest, in one you are forced to pay some principal also, in the other you can bank the same amount of the principal in an offset account with the same end result. In IO you can withdraw your extra money, in P&I you can access the extra equity and use it in the same way, but it is easier to be able to access cash. Have I overlooked some advantage with P&I.
3/ Although prices have risen a lot, for the sake of this example wouldn’t it be better to have one house rather than four for a total of say $200k value and assuming rental +ve cash flow was $60 a week in total either way. By buying four you would have 4 lots of conveyencing and potentially 4 times the maintenance/repairs.
4/ Positive cash flow of $15-$20 per house: A lot of people appear to be only getting $15-$20 per week. Is it worth the risk for this amount considering a minor repair or maintenance issue could swallow the entire years income in one go. And what if interest rates went up just a little, you would end up negatively geared. Or if you were unlucky to have a vacancy of 5 weeks and normally received $200 a week, there goes your annual income basically. From what I have read on this forum, in magazines and on other forums, there are a lot of people in this borderline situation. Have I missed something, I’m trying to take a lot in all at once?
Thanks
RenoLet me give you my perspective which probably is not the same as Steves.
1. Too late in evening for me this one.
But if you claim depr you reduce the cost base of property and pay more CGT later. But to me thats ok as a deduction now is better than CGT later.2. Me I prefer IO but I am growth oriented and prefer cash flow. For ve+ properties it would be good to make principal pmts so you can buy more properties as you reduce the principal.
3. Me – I prefer to have one property not 4. I work full time so I dont need 4 times the time and effort that one good property provides.
4. Agreed. Not worth the effort in my view at the moment in 2004. They all say there are opportunities around, you just need to find them. But I am not selling a concept, book and training.
If you get no reply – you could post the entry to the 0-130 properties Forum.
I was just passing though and thought I might give you a couple of things to think about.
3) The point of having 4 houses instead of one big one as you used as an example is that it minimizes your chances of losing. Say for example you had a vacancy rate of 5% for your sort of houses. With one house your chance of having NO income is 5%. But with 4 small houses, assuming same total cashflow overall, you have .05*.05*.05*.05 (0.000625%) chance of having NO income. Also another thing to think about is you’d expect maintenance on 50k properties to be a lot smaller than that on a 200k property, so at least you’re not hit with a big bill all at once [:0].
4) I know some people do end up in trouble with interest rate rises, but one thing to consider at least is that rents will rise with interest rates, due to supply/demand – ie. rates rise, so less people buy properties, so therefore they rent instead, meaning an increase in the rental demand, so rental prices go up.
Also I think I remember in Steve’s book, that in his calculations he always budgeted for a little expence called “maintenance and repairs”.
Anyway, buying houses for the $15-20/wk cashflow isn’t the strategy i’m going to use. I’m going to take the approach of creating value in houses, and then buying a big cashflow asset (not necessary property)Originally posted by secretgnome:I was just passing though and thought I might give you a couple of things to think about.
3) The point of having 4 houses instead of one big one as you used as an example is that it minimizes your chances of losing. Say for example you had a vacancy rate of 5% for your sort of houses. With one house your chance of having NO income is 5%. But with 4 small houses, assuming same total cashflow overall, you have .05*.05*.05*.05 (0.000625%) chance of having NO income. Also another thing to think about is you’d expect maintenance on 50k properties to be a lot smaller than that on a 200k property, so at least you’re not hit with a big bill all at once [:0].
Good explaination [:o)][:o)]
THERE IS ALWAYS A BETTER WAY!
Originally posted by secretgnome:Also another thing to think about is you’d expect maintenance on 50k properties to be a lot smaller than that on a 200k property, so at least you’re not hit with a big bill all at once [:0].
secretgnome,
I have to disagree here. Newer properties (more exxy, negative geared ones) do not require the same level of structural maintenance as older properties. Let’s look at a 5 year old house or a 70 year old house. The latter *may* need restumping, rewiring, etc etc. Of course, not all old houses are in poor condition, but try finding a 50k house these days (mid/post boom) that doesn’t need substantial work.
kay henry
equity should grow quicker with 4 properties.
depreciation puts more postive c/flow in your pocket.
equity seems to be the best way of makin a quid u certanly cant save a million dollars working day to day.qaulity property i think is the g o.I agree with Kay Henry on this one. It pays to be realistic about repairs no matter what the cost of the house.
If it has a roof, it may need repointing
If it has walls, it may need re-painting.
A hot water cylinder will cost the same no matter the cost of the house.
Termites do not discrimnate between price brackets!
Often repairs come in the most unexpected fashion (such as our IP driveway that got washed away in the first flood ever to hit that area). Storms can hit anywhere, we lost every electrical appliance by being hit with lightning – including garage opener, all televisions etc etc. Not to mention the streets sewerage coming through another one of our houses and the council ‘condemming’ it. (But then, I always knew I attract natural disasters!!!)And sure, things get covered by insurance but there is always an excess.…maybe I shouldnt have any IPs at all!
cheersI have some serious doubts about +ve geared props long term too. I think once every 10 years they’re worth it (just before a boom). Buy ‘em ride the boom for a while and take your cg’s and move on with the profits…………isn’t that what Steve did?
Thanks everyone for your comments. I would still like to get Steves comments so will post on 0-130 properties.
Sunshie – with such a positive name, how do you attract so much bad luck. Where do you live by the way – not that I am superstitious!!!Reno
a slightly different opinion with beerboy, in him saying “equity should grow bigger with 4 properties”. I am not sure this is the case in 2004 (assuming we are using the example stated about buying 5X4 $50k properties).
Generally, the rule (in 2004) is that the lower the price, the greater rental tield, but the less CG. That’s the risk. For more expensive properties, you often get less % yield, but more potential for CG (location location location). That’s the risk there. So with exxy props, you get less money in your hand, but hopefully more money when (and if) you sell, or more equity to play with if you don’t sell but prices rise. Of course, there is no guarantee of prices rising either- even with exxy props
And with cheaper props, you are relying on the weekly income, but, in 2004, your property MAY not rise (although it may). hehehe…Sometimes it’s all about gut instinct and what you feel comfortable with.
Enjoy your real estate foray, reno!
kay henry
Hi Beerboy,
The single biggest determiner in increasing equity is location, location, location which creates a supply and demand ‘imbalance’ which leads to increasing growth.
The trick is to identify these more desirable localities, buy and then wait (or add value) while the property grows in value.
Counter to this is the need to maintain a rental income so there are some benefits to having your money distributed across more than one property to reduce the risks associated with ‘no tenant’.
At the end of the day it is about choosing a strategy that works for you in consideration of your particular set of circumstances.
For me I would much prefer to have a single $200K property in a ‘city’ than 4 X $50K out in the sticks.
Derek
And with cheaper props, you are relying on the weekly income, but, in 2004, your property MAY not rise (although it may). hehehe…
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