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Interesting post – following with interest.
I’m in a similar situation (2 x Perth IP’s -ve geared on one on interest only and +ve on another P&I) with their market value rocketing along on double digits year on year – i will have a strongly significantly cash flow +ve portfolio very soon (also in high growth areas which is nice). My strategy hasn’t changed but geez it looks tempting. I have decided not to sell (so far) but will keep asking the qustion. What puts me off selling is the question that follows soon after – if I sell where is the better deal coming from and that’s where I get stuck. I have enough equity to buy another two when I find them so for now will hang on for the ride.
Thanks for the feedback.
This house used to be our POR and we paid most of the mortgage off when we were living in it so it is cash flow positive currently. That doesn’t mean we aren’t thinking about selling it. Not so sure it is a great use of capital…..
We have built into the contract 6 monthly rent reviews (even though it is a 2 year lease which I wouldn’t change), we have used the reviews and incresaed rent each time, although only slightly ($10 or so). I take your points about the property manager – they should have spotted this before (I will take this one on board).
I am still not clear how you come up with your suggested rent incresaes though. These look like ‘stabs in the dark’ or ‘about this will do’ tyoe of approaches. Does anyone have any quantitative risk vs. reward techniques / methodologies. In the industrty I work in we use very specific quantiative risk – reward methods which help determine just how much risk is worth in $$ terms.
Ramping the rent up to full market value and not taking into account the quality of tenants wouldn;t in my opinion be a sensible thing to do. No amount of insurance or good property managing can offset the crap that you still have to go through (even if you are insulated) with bad tenants.
Cheers,
Thanks for your feedback Derek and Stargazer.
I set this up about 6 months ago thinking this was a great idea. I guess I should have know better – if it seems too good to be true it probably is! I will pursue a second opinion.
Beforee I do and to make sure I understand this ……..
If I used the LOC to pay the IP’s IO monthly payment and then paid the LOC’s monthly interest from the IP’s rental income (hence my LOC would not accumulate interest) then this would be OK?The problem here I guess is that the LOC IR is higher than my PPOR IR and hence I am worse off not better off. Is this all correct???cheers
AndrewThanks Steven,
My IP has an interest only mortgage. I am claiming the interst on the IP mortgage and the interest accrued on the LOC (which is only paying interest off the IP mortgage) as deductions against income.
This does increase the loss but it’s all tax deductible and allows me to pay down my non-tax deductible PPOR IO mortgage much faster.
I ran this past my accountant (who is ex-ATO) and he said that it is fine as long as you don’t use the LOC for anything other than expenses against the IP that are truly tax deductible (e.g. maintenance and IP interest payments).
Do you think I need a second opinion?
I have a similar situation to this in Perth and have structured it as follows:
– PPOR has $270k equity and $80K PI mortgage
– IP has $380k IO finance
– IP interest payments are being made by a LOC (which I am not paying off)
– All rental income from the IP is channelled to pay down the PI mortgage on my PPOR.
– I also make voluntary payments to the tune of the difference between the net incoming and outgoing on my PI (it’s -ve geared) to my PPOR IO mortgageMy justfication for this is that the LOC interest rate is only marginally higher than the PPOR mortgage, the PPOR mortgage interest is not tax deductible and the IP mortgage interest is. At our current rate I will have paid down our PPOR mrtgage in 12 months. We will then work at paying off the LOC and setting up an offset account in addition of course to looking to extend our IP potfolio.
I would be interested in other peoples thoughts to this structure..
Andrew
Look at the bright side PurpleKiss – there is no wear and tear being inflicted!!
My insurance compay will insure an un-occupied place after the set period if I call them, advise them of teh situation and pay a little extra premium. Have you asked your insurance copmany whether they will do the same?
I would worry more about vandalism of the empty proerty than not having insurance.
We have a company mangaing two places (unfurnished houses) in Perth, WA for us. I think their fee structure is a little high, but they have done a very good job so far so am reluctant to change. They charge as follows:
– 9.9% of total incomings (such as letting fees, rents etc.)
– $10 / month – postage and sundaries
– $55 / quater – routine inspection reportOn top of this we have letting fees and advertising for new tenants which usually wipes out a months rent. Not to mention any repairs that may crop up. The PM ortganises all payment of bills, rates, insurance etc. and organises all repairs (with a pre-determined authorisation limit).
All this adds up pretty quickly. Having said this. I value the spare time I do have (which is not much); too much to take this job on.
Look forward to some more experiences in this thread…….
I agree with the general theme of the replies so far – this really has to be your decision and it depends on your lifestyle choices etc. Putting money into your own home is not dead money as it builds equity which can be used later to finance IP’s. However, rent money is dead money from day 1. Having said that you can be better off renting as opposed to buying in low rent areas (as compared to purchase price) such as some areas in Australia (e.g. Perth) if you get the right deal AND you use the rest of your money to invest from day 1. The biggest trap people fall into is say they want to invest, rent a property and then spend the rest and never quite get to investing. At least buying your own place forces you to pay it off (and build equity and hence save). Your own house doesn’t have to cost you lots of money. Just like an IP, if you chose carefully it can be quite cheap to own a home.
This is an interesting topic, one which I am generally confused about the advise. Until you own your own home outright you will never achieve financial independence. Why put this off?
Additionally if structured correctly you can pump all generated cash into your own home and maximise your IP portfolio tax deductions (through LOC’s) which brings you forward much faster. A cash flow analysis will show you this quite quickly.
Thanks for the constructive input. Robert I understand where you are coming from with the CoCR calcualtion – thanks for the patience.
I guess am I having trouble with the principal of the calculation because the calculation revolves around a choice you make (e.g. equity based or cash down) both of which change the output but don’t change the fundamentals of the investment – that is whether it is a good investment or not (just because you turn an IP cash flow +ve or make the ROI huge doesn’t suddenly make it a good investment).Not wanting to be too painfull……
With the opportunity cash flow calculation (NPV) I think you are suggesting that you use all monies used (that is monies borrowed as well as cash / equity that you inject) – this however assumes that the bank woud lend you the same amount of money to invest elsewhere (which we know is not true). Hence how can we do an opportunity cost calculation when there really are no other opportunities for that same sum of money the bank is lending you (for example if you were to go and buy shares instead they would lend you much less than the 80%).Thanks Lucifer)au and Steve.
I have read pages 60 and 61 and that is what got me thinking about this in the first place. Thanks!
Once you have determind that a particular person(s) are suitable (i.e. you have determined why you need/want a partnership, what you expect to gain from it, how you protect the interestes of one anothere etc.) what tools are available to create one? Can it simply be done with a letter of intent? Should you set up a new company? What other methods are avilable and what are the pros and cons of each?
Has this been discussed on the forums before (I couldn’t find it) and/or is there a good reference that talks this through. Or is this best down one-on-one with a solicitor?
Thanks,
AndrewThanks for the couple of comments. Whilst I agree the forumas are only a guide, used incorectly they can be very misleading.
On question 1….
I tend to agree with Lucifer_au on the CoCR question because whether you have physically injected cash or not is really irrelevant, it has locked this equity up and hence it can not be used for any other venture. Similary, if you use equity instead of cash your ROI would be infinite which is strictly not correct either (as you have put at stake another asset and hence it is your starting invetment).On question 2….
When you, ‘The Mortgage Advisor’ say “For opportunity cost calculations, you would consider the returns on the whole lot as opposed to investing elsewhere or doing nothing.” are you suggesting that your cash flow on purchase day is -(cash injected+fees+loan) whilst on sale day the cash flow is +(sale price-loan outstannding-fees) or -(cash injected) and +(net sale proceeds)? The first usess the total capiutal employed whilst the second uses only the cash outlay. They give very different answers.Thanks,
Andrew
