Could someone explain to me how the process works if you want to buy an IP, renovate it and rent it out, and use the equity as a replacement of income if you are looking at property investing as a full time profession ? I can see how you can live off the money if you buy, renovate and sell (obviously taking into account CGT). I have heard of Line of Credit loan allows you to use the equity from your IP ? Is that right ?
Love the website thanks for the help so far
CSI 1
Gday, My Partner & I recently bought a property for $79,000. we borrowed $100,000 spent approx 10,000 which included a very small wage for our labour. This amount paid for paint interior & exterior, tiles for bathroom & kitchen, new tapware & also new carpet throughout. When the reno is complete we hope to have taken the value of the property at very least to $130,000. A new Valuation should be carried out immediately to provide to your bank / broker with your next application for Equity loan. The loan we have set up is an interest only payment that the $150pw rent covers & some, fixed for 5 yrs. Meanwhile the extra Equity provides for your next Deposit, or remains on the balance of the loan to keep payments down. It can easily get away from you if not carefull on expenditure i’ve found. Less is more so to speak!
Originally posted by browny76:we borrowed $100,000
<snip>
we hope to have taken the value of the property at very least to $130,000.
<snip>
Meanwhile the extra Equity provides for your next DepositWouldn’t that equity be ($130,000 * 80%) – $100,000? I make that $4,000. Is this right? I too am trying to learn this works.
F. [cowboy2]
F
thats correct if you go to 80%.
Terryw
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Originally posted by browny76:Gday, My Partner & I recently bought a property for $79,000. we borrowed $100,000 spent approx 10,000 which included a very small wage for our labour. This amount paid for paint interior & exterior, tiles for bathroom & kitchen, new tapware & also new carpet throughout. When the reno is complete we hope to have taken the value of the property at very least to $130,000. A new Valuation should be carried out immediately to provide to your bank / broker with your next application for Equity loan. The loan we have set up is an interest only payment that the $150pw rent covers & some, fixed for 5 yrs. Meanwhile the extra Equity provides for your next Deposit, or remains on the balance of the loan to keep payments down. It can easily get away from you if not carefull on expenditure i’ve found. Less is more so to speak!
Sorry this is slightly off-topic; [offtopic]
That seems like a very, very good appreciation in value over a short time. What do you base the estimated re-valuation on? By the way; assuming the re-val comes in at $130k, your ‘available’ equity is $4k as Foundation said. Not enough for a deposit any time soon.Is this a boom area that no-one else knows about?
A word of caution; in this current market of little growth and rising interest rates, many areas are not going up in value much; if at all, and quite often minor cosmetic renos like the ones you mention only improve the value of the property by the cost of the renos; or worse; not as much.
What has a comparable renovated property in the immediate area sold for in the last 2 months? This will tell you what your place may be worth.
To answer CSI 1’s question;
Many builders live by doing “speccies” and buying, renovating and selling. The problem is many never accumulate any assets or wealth as they continually sell the asset to live off. They are highly trained guys in the industry – not part time amateurs like you and I with no qualifications. They can do it better, faster and cheaper than us.
I don’t know of many, if any, who buy renovate and rent out, then live off the equity, especially at the start of their careers.
You can eventually do this, but you need to have enough property increasing in value to allow you to use the equity (you are really only borrowing the equity) without eating into your LVR (Loan to Value Ratio). Once your LVR gets up to 80% many lenders lock the vault on your lending, and with good reason – risk (for them). Some will go higher, but I think this is very dangerous for you.
For example;
you own $3 mill of property and owe $2 mill. The portfolio is either cashflow neutral or positive. Of course, this occurs after several years of investing. This is an LVR of 66%. (This is fairly healthy from the banks perspective) – the lower the percentage the better for you too; you can borrow more to invest with but that’s another thread.Most banks will allow you to borrow up to 80% of the properties’ value, less any existing loans. 80% is $2.4 mill – $2 mill = $400k available equity.
Now, assume your property portfolio goes up in value by 5% per year. $3 mill x 5% = $150k. So if you use none of your equity for 1 year, your nett worth increases by $150k to $1,150,000. Your available equity goes up to $520k.
But you need to use the equity to live off, so in the next year you borrow $75k of your equity to live on. Even though you have spent this money, your nett worth has increased by $75k (not including extra interest on the $75k you spent – $5,625 @7.5%).
So, you can’t hope to live on the equity/rent from your properties until you reach this sort of level of wealth. The good news is that once you do, and as long as you don’t live extra extravagantly, you couldn’t spend all your equity. It will continue to outpace your spending.
Don’t quit your day job just yet.
Cheers,
Marc.
[email protected]“we get sent lemons; it’s up to us to make lemonade”
Gday Re Off Topic Marc.
Get off your computer mate & get out in the real world! The way in which we have made such profit is the original purchase price of the property being below the market value to begin with. Secondly we have aquired the skills to perform said tasks through perserverance, learning & persistance. $40,000 may not be enough for a deposit in Sydney but in sleepy South Australia you would discover that enough for maybe 10. More examples are the first property I aquired at a price of $48,000 in 2000. Within 3 years the Council Valuation went to $73,000. I quickly set about re-financing the original loan for another $20,000. With that I PAID A BUILDER $8000 To Re-Roof the house with new Verandah,gutters & fascias. Paid for paint & other materials including Beer & BBQ’s for mates lending a hand. In 2006 I sold that Property for $147,000. The first Investment Property my Partner & I aquired for $75,000. the original loan for that Property was also $100,000. It needed extensive work to wet areas which consisted of completely ripping up the foundations with a Jack-Hammer that we hired for a day & PAYING A PLUMBER to re design & install waterpipes & runoff. New foundations were laid by a CONCRETER & the new Framework for the building was constructed by a BUILDER with my assistance. Weatherboard Cladding was used on the Exterior which a mate & I fitted also cement sheet on the interior. After painting the building inside & out (a monkey could paint marc!) total cost of reno was $20,000. The new Bank Valuation ( less than market value) was set $137,000. $37,000 of which consisted of Equity in our next loan for a Property purchased shortly thereafter. All the houses are rented out & paying for themselves. So Marc for this OFF TOPIC it seems to be working well for us. Not all number crunching, it actually means getting up from your computing machine & getting your hands dirty!!! ONYA WALLY!hi browny
my partner and i have done almost the exact same thing as you. We bought a house for $110,000, in total spent $1500 and in total approx 1 week doing minor reno (paint etc.)
we are lucky that i was a painter and now i am on my 2nd trade( plumbing ) i know a lot of guys in trades and it is amazing how far a bbq and some beers will go.
sorry to digress
Now we rent the same house for double what the mortgage is. This is starting to replace our income with passive income, which we hope to generate enough to enable us not quit, but cut back our time we have to be employed by other people.
Just remember beers and bbq’s is great but it all cant be going in one direction other wise your mates will get a bit over it. help each other out, Whats the use of having all this free time later on down the track if all your friends are still stuck at work
Isn’t SA great !
Nicko
Originally posted by browny76:Gday Re Off Topic Marc.
Get off your computer mate & get out in the real world! The way in which we have made such profit is the original purchase price of the property being below the market value to begin with. Secondly we have aquired the skills to perform said tasks through perserverance, learning & persistance. $40,000 may not be enough for a deposit in Sydney but in sleepy South Australia you would discover that enough for maybe 10. More examples are the first property I aquired at a price of $48,000 in 2000. Within 3 years the Council Valuation went to $73,000. I quickly set about re-financing the original loan for another $20,000. With that I PAID A BUILDER $8000 To Re-Roof the house with new Verandah,gutters & fascias. Paid for paint & other materials including Beer & BBQ’s for mates lending a hand. In 2006 I sold that Property for $147,000. The first Investment Property my Partner & I aquired for $75,000. the original loan for that Property was also $100,000. It needed extensive work to wet areas which consisted of completely ripping up the foundations with a Jack-Hammer that we hired for a day & PAYING A PLUMBER to re design & install waterpipes & runoff. New foundations were laid by a CONCRETER & the new Framework for the building was constructed by a BUILDER with my assistance. Weatherboard Cladding was used on the Exterior which a mate & I fitted also cement sheet on the interior. After painting the building inside & out (a monkey could paint marc!) total cost of reno was $20,000. The new Bank Valuation ( less than market value) was set $137,000. $37,000 of which consisted of Equity in our next loan for a Property purchased shortly thereafter. All the houses are rented out & paying for themselves. So Marc for this OFF TOPIC it seems to be working well for us. Not all number crunching, it actually means getting up from your computing machine & getting your hands dirty!!! ONYA WALLY!O.K browney,
Firstly, you nothing about me, how much I know, what my nett worth is or anything.
Secondly, based on your amount of posts, you are VERY new to this forum and should treat people with respect until you get to know them a bit better.
I was, in fact, trying to offer advice based on experience. I do not know you, or know how much experience you have, and I always assume that when people ask for help on this forum that they may not have a lot of knowledge. Many people come on this site with little experience and are about to make mistakes that we more seasoned “wallys” try to save them from.
Obviously you have taken offense and that is too bad, but this forum is about helping others by offering our advice and expertise – it’s not a pissing contest.
I was concerned that maybe your numbers were wrong and I apologize for that assumption, but even our esteemed “Foundation”; a veteran of over 800 posts thought you had got your figures wrong as well.
The way the post was worded gave me the impression that you had “recently” bought the property. This had the sound of being in the last few months. You said you paid $79k and borrowed $100k. If the re-value is, as you say, $130k then the way we read it is that your “usable” equity from this deal is only $4k, but you are talking like you are going to use the full equity ($30k) to buy again. Maybe there was something missing in the translation.
Good to hear you’re doing o.k. Maybe I can learn something from you in future posts.The reason why I sit on my computer being a “wally” so often is because I am financially free ( I still work from time to time but it is by choice – isn’t that what we’re all after?) and don’t need to go out and paint like a monkey anymore.
I like to help others; it’s my way of giving back to others what I have gained from an industry that has been very good to me.
Cheers,
Marc.
[email protected]“we get sent lemons; it’s up to us to make lemonade”
Now, Now boys…keep it nice!!
Actually Browney “LA Aussie” has got his hands dirty before, so perhaps you’d like to read his story on our website called “Lemons” which he won a prize for.
Back to the original question though, the problem that we’ve faced with the bank is if you sell a property, even for a substantial profit, they ignore this, until you have a proven track record of a few years. Problem is you need to eat in the meantime.! So I’d suggest unless you have substantial equity, keep your day job, do a few trades to create a good history and then look at cutting back your day job in a couple of years.
AmandaBS
http://www.propertydivas.com.au
FREE online Property Resources“It is better to be inconspicuously wealthy, than to be ostentatiously poor…”
I have never been on forums before February this year. I have learnt heaps from your posts and experience in my short time on this forum Marc. As experienced builders with plenty of experience, I did agree with your analogy about the making money in some areas at the moment, so I also understood your reply to be one of concern with the figures that were posted (that were in error it seems).
This highlights one problem with forums that I have had to get used to; there is plenty of room for misunderstanding when you are not experienced in writing concisely as it leaves room for the reader to fill in the gaps.
I am not picking on anyone’s grammer, as I have been guilty of it myself (refer to avatar). In my enthusiasm to help others when I first joined, I quickly learned
– that if you are not sure about a question you should ask for clarification.
– If it appears someone has misunderstood your post, don’t take it personally until you have clarified the facts again with them.
– That everyone, including experienced tradesmen like us, can learn something off people who have never hit a nail on the head.
– that, unfortunately, I will never be able to write a short post for fear of being ‘bombed’. LOLSo relax browny he was only trying to help and I am sure that you will be able to contribute in a valuable manner to many people on this forum.
Julie Fisher
Daryl Fisher Homes.[happy3]Gday again. Good stuff Nicko, thanks. I enjoy the opportunity to divulge in these matters with PEOPLE IN THE KNOW, & is always interesting reading the different stories & situations people find themselves in. Fixing houses Im good at, conversing on the computer not so good! Reckon I’ll leave it to the EXPERTS as it is time consuming stuff eh Marc? Nevermind! CSI I wish you well with your endevours. To other Esteemed forum Contributors my aplogies for dirtying an otherwise usefull tool with Attitude! Guess its just part & parcel with Blue Collar Middle Class types as myself!
Hi csi
in my posting the thing i was trying to get across was that the only way i think you can go full time was when you substitute your income with a passive income.
i suggest reading such books as rich dad poor dad and steve’s first book (0- 136 properties i think ) they out line what it means to become finacially independent and opened my eyes a fair bit
Originally posted by browny76:Gday again. Good stuff Nicko, thanks. I enjoy the opportunity to divulge in these matters with PEOPLE IN THE KNOW, & is always interesting reading the different stories & situations people find themselves in. Fixing houses Im good at, conversing on the computer not so good! Reckon I’ll leave it to the EXPERTS as it is time consuming stuff eh Marc? Nevermind! CSI I wish you well with your endevours. To other Esteemed forum Contributors my aplogies for dirtying an otherwise usefull tool with Attitude! Guess its just part & parcel with Blue Collar Middle Class types as myself!
I think you’ll find that most people on this forum (including me) are blue collar middle class with no money from their parents to help them. We all just work hard and help each other.
It doesn’t give us an excuse to have attitude and disrespect.Cheers,
Marc.
[email protected]“we get sent lemons; it’s up to us to make lemonade”
Originally posted by browny76:Fixing houses Im good at, conversing on the computer not so good! Reckon I’ll leave it to the EXPERTS
Hey Browny, don’t go yet please! I’m dying to know – are you going to sell this property or hold on to it? How long (and approx how many man-hours work) did it take for you to increase the value from $79k to $130k? If selling, how much $$$ are you going to clear, if holding, how much equity $$$ are you going to tap? What’s your next move – rinse and repeat or go big? Given the original question (how to go full time), these are important.
Thanks in advance,
F. [cowboy2]Hey Foundation..
is mrs browny here responding to your question. Basically took a months worth of full time work. And having the skills and expertise to do the jobs required. This is our fourth house worth of complete renovation, (structurally as well as cosmetic) so we are getting quicker and more skilled. Oh and it was woman power as well as man power!!! We are planning to sit tight on our properties at present as we see this as a long term investment. However if it would suit to sell then we would. As far as moving towards living off of this pasive income, we are trying to remove the small home morgage we have and lessen the current loans we have on investment properties whilst still aquiring more. At this stage we are looking at a five year plan to be able to reduce the hours needed at paid work, but that might lessen if we are able to build our equity at the rate we currently have. If we were to sell we would currently clear $40 000 as we still have $10 000 floating unused on this property. As far as going big no we are quite happy on the angel islington side of the monopoly board.
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