Forum Replies Created
Hi Patrick,
Smart move to ask first – especially re Fixed Loans – they can bite, and bite hard, if you are not fully conversant with them.If it were me, I would be staying Variable IO with Offset account, and pay down nothing off the loan. What you WOULD have paid can be saved in the Offset account, then removed to be Deposit/Costs on your next PPOR (or on another IP if your plans go that way) without reducing deductability.
Others on here will no doubt be able to add more, and with more authority too. Watch out for their replies….
Benny
Hi Angela,
Minus expenses it would be neutrally geared.
Cool !! So it is paying for itself then.
The “where to next” is the question you appear to be asking. And that is quite a complex question, so not one to rush to answer. Have a think of what your major goals are – e.g. to be able to have partner retire within 10 years, or reduce working hours/days per week in 5 years, etc.
This Queenstown IP sounds like a good start, in that it is not costing you to hold it. But what of its future? Here’s a few questions for you to ponder :-
1. What happens if Interest Rates rise by (say) 1%? Will you still be able to keep it?
2. What is the “feel” for Queenstown? Is it a booming city – i.e. growing at a good pace?
3. Is the area (suburb) that your IP is in a growing suburb? e.g. infrastructure spending – roads, trains, buses, schools being upgraded/built?
4. What are the effects if you were to change your P&I loan to IO? (Did you read the link re the differences, and did it make sense to go IO for you?
5. Can your IP be “reno’ed” or upgraded to allow you to 1) add Equity, and/or 2) lift rents?
6. If 5. is Yes, how much will this cost, and will you need to borrow to accomplish this? (You have Equity to be able to do this.
7. Does NZ give investors any Tax relief for providing housing?Once you have a few answers that fit with you, run your ideas by someone familiar with financing to get their take on things. There are several Mortgage Brokers on here (some of whom are also Financial Advisers) and their input would be very worthwhile.
You are in good shape right now – don’t be in too much of a rush to move on, but do move on….. Keep on reading, thinking, asking, and meeting until the situation can be SEEN to be one that works for you. Maybe another purchase like this one, or maybe something entirely different.
Question – how much will going IO save you per week based on Interest Rates right now?
Benny
Hi Little1,
Congrats on starting out with IPs, and welcome to this place too. You’re in a good place !!
Gearing is all to do with leverage (think of the gears on a bike, or a manual car). If the Income is equal to Expenses, then it is neutrally geared. If Income is less than Expenses, then it is negatively geared. And Income greater than Expenses, then positive.
Aside from that, you may be eligible for Tax relief (in Australia, losses are able to be claimed for Tax relief for Investment Properties – I don’t know about NZ). Taxes returned to you can derive a positive cashflow from a negative geared IP.
So, where are you? Let’s take your comments one at a time :-
The house was $440,000 we paid a 100,000 deposit, it’s rented for $600 per week, repayments for mortgage are $980 per fortnight. Is this neutrally geared?
Mortgage cost is $490 a week, and Income is $600 a week – Income is $110 a week greater than expense. It is positive geared at this point, but the other expenses need to be taken into account.
Do the rates, insurances, etc come to MORE than $110 a week? If they are less than $110, it is positive geared still.
I don’t know if we have equity in this property (I don’t understand equity, borrowing, interest only loans)
Equity is Value today minus Mortgage. You should have $100k Equity at least (your Deposit). If you have owned it for some time, the values in the area might have increased too. What would be its value today do you think?
Re IO vs P&I, most investors prefer IO. To get a quick primer on the subject (and a few other useful points), do check this link :-
https://www.propertyinvesting.com/forums/general-property/4349450Sounds like you are paying Principal and Interest rather than Interest Only. Have a read – there are several pointers that would give you a good grounding in several somewhat complex subjects. After that, come on back and let’s talk some more.
Benny
Hi Adam,
Has anyone mentioned yet a less attractive but more realistic option? You purchase a negative cash flow property in a high growth area
We certainly have heard of it – look for articles or threads on “Negative Gearing”. It is a workable strategy for some, especially when combined with other +ve geared investments in parallel. It is also possible to have a negative geared yet cashflow positive IP, which might be what you are referring to.
Many though, when starting out, are on lower wages, so a cashflow positive investment is necessary – hence the focus on these forms of investing.
Benny
Hi exposed,
FYI, I don’t know Oscar, or CDC. All I do know is that you seem to be acting like Oscar has taken your lunch money or something. What IS your point?And I, Benny, was just attempting to open the discussion on WHY Oscar might have chosen to sell for a lower price. And to show that his original projections don’t appear to be “off the planet” as you seem to be inferring. That’s all. Just trying to bring a bit of reason back into the thread.
What’s YOUR agenda, exposed? Like I said, you appear to be marking Oscar pretty hard – over SOMETHING !!!
Benny
Hi exposed,
Wow, you are one hard marker – and your choice of words in several places won’t do you any favours either. I’m with TraceyB and others who see a lot of value in what oc1 shares on here.On a quick look-around (assuming you have the correct address – it does look like oc1’s photos, so let’s say you are right), I don’t see a lot wrong in what oc1 has posted :-
COMBINED TOTAL (LAND & CONSTRUCTION): $606,500
The units would have a combined value of about $840,000 in today’s market. I reckon these will take about 4 months to knock up if all goes well. They are about 70m2 each in living space and single story. Rents would be around $850 pw. I’m sure the figures will vary as they normally do.
From the realestate.com listing for 7 Edith, there are some useful facts – the first is the Median price for 2bd units in that area – it shows as $279k (times 3 is pretty close to $840k don’t you think???). It also says the median rent for same is 5.4% (which, on that median price, this comes to $290 a week (times 3 is $870 a week).
The ONE thing you seem to be hitting on is the Sold Price. To me, it looks like Oscar has been using valid data to plan the whole operation. If indeed, ONE has been sold for $238k, then that doesn’t automatically mean the other two will go for the same price as well, does it??
Perhaps there was “more to it” if it did sell for $238k – who knows just what happened for that one to sell $40k under median. Could it be a “quick sale price” that allowed Oscar to un-encumber another property completely for some reason? Or perhaps he sold it at a “special deal” price to a friend. Who knows !!
Even in a worst case scenario, Oscar is likely to end up with an unencumbered asset and an income, even if sold lower than expected.
Speaking of deals, it sounds to me like you are making a big deal out of a projection that is pretty much in line with the market. And denigrating one who is willingly sharing the ins and outs of his projects for others to learn from.
What are you sharing, exposed? How about sharing some of your story, so we can learn a little about you?
Benny
Hi AM2778,
I am not currently looking for more, but I have previously held IP’s in these Eastern suburbs. I find there are many things to like about most of these ‘burbs. First off, these appeared to have been significantly developed around 20 – 30 years ago. This means there are really good, settled areas with facilities long in place. i.e. the train line visits most of these suburbs, schools are well established, as are shopsand properties are “generally” more middle class than other areas.Development continues today, with some older homes and/or farms being replaced (especially those with Bay views). My investing style was more “buy, hold, and reno over time” – and these areas suited my style. Our places had really good capital growth between 2000 and 2007. Some was manufactured (reno’s) but much was, I believe, the overall growth in values in these areas. Post GFC, there was a huge slow-down, but that was nothing to do with individual suburbs.
It is a general area I would not hesitate to go looking in again – but of course, I would need to “start from scratch” when looking again now. I do like the “feel” of much of that area. Pick your places with good fundamentals, and I’d think they won’t let you down.
Other useful attributes include :-
1. The usual “Eastern suburb desirability” for those who drive to work – when working in the CBD, the Sun is in your rear-view mirror when going both to and from work each day. (This is a big deal, as anyone who lives in a Western suburb knows !!)2. The recent (two years ago?) upgrading of the M1 over the Gateway bridge(s), and the more recently completed roadworks at the Southern end of the Gateway arterial, has led to MUCH easier access for these suburbs to the major road networks.
Let’s see what other members think,
Regards,
BennyHi Raist,
Good on you for adding your thoughts re Penalty Rates. I can certainly see your point of view there, and agree that this could/would have an effect on many workers. And yes, any change there would directly affect their discretionary income.On the other side of the coin though, in this 24/7 world we live in, the payment of double and “two and a half times” rates are a WHOPPING uplift that employers must pay, or they just cannot open on some days.
IF these rates were lessened, the employer might well be able to open, and even be able to employ more people. Any lessening of the “average” income (through lessening of those huge penalty rates – e.g. maybe make time-and-a-half the max allowable) would work its way through the system, likely leading to lower costs for many things too (including housing….). More people earning a less amount would help the economy by providing more people with a bit of discretionary income, while lessening the “Centrelink” burden on the Govt. It may also allow small companies to open on days when they currently cant, thus providing more paid days for those who can work them.
The supply/demand curve would be altered – but with more workers, that could lead to an overall better outcome, couldn’t it? It is a huge subject – and there are likely many angles to this debate. Let’s hear some more…..
JMO, (just my opinion), and thanks for putting yours out there too, Raist,
Benny
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Benny.
Hi Snowlionz,
Also, how is land tax calculated? Is it market value of the home minus the cost of replacement of the home or is it calculated differently?
I can only answer for Qld (NSW might be different) – up here, the Land Tax is paid as a percentage of the UCV applied to the land (that is the Unimproved Capital Value – the supposed value of the land if nothing was built on it – found on our Rates Notices).
The more you own, the higher the rate of Land Tax. Also, in Qld, the Land Tax rate is higher for a Company or Trustee than for an individual – $2million of land would cost $21k a year for an individual, but $29.5k for a Trustee.
Check out the NSW Office of State Revenue site for what applies to you,
Benny
Hi PS,
As Jamie pointed out in another thread, we are an Australian based forum, and some of the answers given are specifically Australian-centric. However, the comments may hold some clues for you.Based on the questions, you are obviously quite new to the role. I’d be suggesting you find someone else in your area who is alrady doing it successfully, and learn from them. You might need to cut them in on some commissions as a sweetener, but they may already have all of the answers, and their help will likely speed you on your way and prevent you “doing your dough” on some deals through inexperience.
Good on you for having a go though – I wish you all the best,
Benny.
Hi Chris,
THank you for providing that ‘blow by blow” solution to your posted question. JUst tried it for myself, and yep, works beautifully. Well done,Benny
Hi Yuley,
There have been changes made recently that make things better than before. Previously, we could go back or forward just one page at a time, or to first or last page.The recent change now allows us to move forward or backward up to 4 pages at a time, as well as going to first or last page. So, a big improvement over “what was!”
Benny
Hi Ronnie,
So using the same example if I was to put a 20% deposit on a $600,000 property ($120,000) does that mean I have instantly a equity of $120,000 and be able to use it to invest in another property?
You are sort of correct – but wait, there’s more….. :p
To be able to use ALL of that Equity, you would need 100% loan AND extra cash/savings/Equity to cover purchase “costs” of another place.
Consider this – if you source finance on this place that has $120k Equity, and the financier allows a 90% LVR, then they would lend up to $540k (90% of $600k) – but you already owe $480k, so only $60k is USABLE Equity ($540k – $480k = $60k). But if you can get 100% Loan, then yes, $120k is available.
In the “usual world” (Mums and Dads) Equity growth happens over decades. e.g. they bought a place in the 80’s, paid $100k for it at the time. They would have been paying down a loan of $80k, and it would’ve hurt back then. By the 90’s it would likely have doubled (so, $200k) and doubled again by the “naughties”, to $400k. Maybe today it is worth $600k. Thirty years later, they have $520k Equity, plus whatever they have paid off the mortgage (probably the full $80k by that time).
Maybe they chose to utilise some spare equity in the 90’s to buy one investment property? With their $100k house then worth $200k, and needing just a $50k deposit to buy a $250k house, the Equity would be there (after just 10 years). They could have done it again in the 00’s too – as long as they could handle the DSR (Debt Servicibility Ratio) side of things. No problem with LVR (Equity) though.
As an investor though, we endeavour to “manufacture” Equity so that it grows more quickly – a reno, development, distressed buy, change of use, creative investing, etc. If we simply bought and waited, a positive outcome is virtually assured. Endeavouring to increase Equity brings its own reward, but also its own extra risk.
The above is also a good clue for those who “wonder why an Interest Only Loan can ever be a good way to go”. Using the above example, I would be thrilled to owe just $80k on a property worth $600k (I had owned it for 30 years, and had always just paid IO). Money saved by not paying down principal might’ve been buying another one (or two, or twenty) over that 30 year period.
I branched away from your initial question – hope the extra thoughts helped,
Benny
Hi Deza,
It can drive you nuts – but don’t let it. First off, I’d say to check what you can of their words (e.g. call, or have a friend call, asking questions about “availability of houses for rent” – get as much data as possible, even invite them to post you stuff). What I am thinking is to determine the rental vacancy rate – how many homes available vs their total rental role.Chcek for values, rents, in that town using Online sources. See how much you can glean from that data. Check out the value of the property (to see if the first agent is having you on re its value). etc, etc Maybe even call the other agents to glean what you can. Ask if they have properties (like yours) available for rent, and how much?
Turn your aggro into action and see where it leads you…. Good luck,
Benny
Hi postup,
I’d like to ask what your due diligence involves actually – is that history on the property, depreciation schedule, flood reports, pest inspections, what else?
Those items you list are a good start. Due diligence is all about finding out as much as possible (especially the stuff NOT covered on paper in a contract). So due diligence should be done on finance (all aspects of it), your advisers (if you don’t yet have a trusted team), council planning (in case they propose to resume part of the land you are about to buy – eeek!!), etc, etc.
Write down everything that crosses your mind about this place you are planning to purchase, then consider all aspects of it – think of “all you need to know about it as an owner”. Think of how you could do “due diligence” on each aspect. e.g. is it the right fit for your target market? Is your target market likely to “move” into the future? Will this place still be viable if that were the case?
I think Steve has some kinds of checklists that he created some time back. As I don’t recall them, I don’t know just how detailed these might be, but they are bound to be useful. Or there may be lists already on forum somewhere. They could even be in books…..
Maybe someone in the know can point you to these? I’m struggling….. sorry.
Benny
Hi bla,
Sounds like a great start – and, in addition to the other worthy replies, have you had a trawl through this thread?It may be one you have seen earlier. I like it because it is not that old – it shows how a young bloke had worked his way up from a small wage to a property millionaire. Enjoy. The pages shown are hard to read, but maybe you can buy a back-issue of the mag to get all of the good oil. Or make of it as much as you can – the numbers particularly are worth investigating,
Benny
Hi Glen,
If chasing +ve cashflow, this one isn’t it, surely?Currently renting for $455
Body Corp is $1500 per quarter
Rates $250 per quarter
Water $200 per quarterEven without Insurance, Maintenance and any RE fees, the fees shown above are costing $150 a week !! *Eeeekkk!!* That’s one helluva impost right there. Not looking like being +ve geared unless Purchase Price is WAY SOuth of $410k
Benny
This has been the loose advice from a few accounting type friends, who believe if you primarily operate as a developer, then you do not pay CGT. I will pay, however, income tax, of which a Company is capped at 30%.
Hi JimBo,
That is how I believe it works too – but then, I am NOT an adviser of any sort, so this is truly just an opinion.Benny
Hi Richard,
Would you expand a little on this please :-Wouldn’t be buying in Morayfield in a month of Sundays.
Care to share?
Benny
Hi Jamie,
Personally – I prefer land. You can do more with it and don’t have to deal/pay for pest body corp fees.WHen I first read that, I thought “Why you were ONLY buying land?” But I think in hindsight you were referring to buying a house (on its own land) over a unit, yes? (My choice too, BTW).
Benny
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