Have to agree with Dazzling from his prior post(s) (Dazzling I know I’m sometimes mean to you for your tell-it-like-you-see-it approach, but in this case you have my full support [] ).

I agree with Dazzling that net yield can be a good indicator of cf status… by the time you get down to net income what’s left? The debt payment. As Dazzling says, you can compare the ratio (or %) on the net yield against the cost of debt (face or effective, your choice). Just a straight comparison if deposits aren’t making the principal amounts non-comparable.

I don’t think yield is a concept fraudulently borrowed from commercial investing. With both types of property you can take effective gross rent and whittle it down to NOI; apart from who pays for the variable outgoings it’s much the same process.

Maybe Brahms is referring to the loosely-worded “cashflow positive” scenario in which a negatively geared property gets a serious cashflow boost from pro-rating fat depreciation benefits – in that case the +ve or -ve cf status of the property would depend to a degree on the purchaser’s financials.

Tell me if I’m wrong but I thought Steve’s whole point in his books etc is that for a property to count as a genuine contributor to the investor’s cashflow position it needs to meet and exceed its expenses from its rental income.

Bob

My first home ever was rented to students when I bought it and I have also discussed with investing buddies whether a purchaser could let a tenant fulfil the obligations of the FHOG in lieu of the actual proprietor of the property (i.e. you).

I was advised by people, as Derek has noted, that checks are made. Some may be real estate urban myths but I have been told that checks include:

– checking that the name on the phone account and name of the owner are the same
– matching addresses to records at the offices of local property managers
– checking that electricity, gas etc are actually being consumed at the property

If these checks are random, then maybe you could get away with it. But that makes your idea akin to gambling, which is not a habit to cultivate if you’re going to be an investor. I personally chose, on the advice of some folks (salespeople in the Investor’s Club actually, so they’re not all bad) to keep it all squeaky clean in the eyes of the law and the state revenue dept. Just easier that way, plus it makes the following year’s tax return more interesting than usual. Sonya, Derek, depreciator and Mortgage Hunter have given similar advice it seems, i.e. keep your nose clean.

What’s wrong with keeping it tenanted for most of the year and moving in for 6 months afterwards? Is it a real dump or something? (if so, don’t ask Dazzling for his opinion, he’ll give you a serving of “get off you’re ar$e” in no uncertain terms!)

Don’t forget, Kiyosaki has stated in one of his books that making money legitimately is too easy to bother with illegal strategies.

Bob

Yes depreciator of course they are. Perhaps the wilful expenditure of surplus cash is impressive sometimes… I’ve seen wads of cash put to some pretty fantastic uses. (*drifts into hazy reverie…*)

ANYHOO, the points made about super are very, very true. But this rent v buy argument has been raging for ages, and economists and experts will continue to offer different perspectives on it. Here’s one now… our property finance lecturer once said to us, “How would you like to get a practically guaranteed 6.5% return on your money? Easy, make extra repayments on your home loan.” Ok it’s not as black and white as that, but an interesting point.

I like our PPR. It’s a wonderful opportunity to show various government organisations how generous we are.

Bob

Great post indeed WASP. Here’s why I am not in an IP right now:

I am selling my PPR and my fiance and I have found a nice place we want to move into so buying the new subject to sale of the old (RE agents… some of them are shocking).

Yes I could have taken equity from the old place and gone into some investments but instead we went for the old “lifestyle choice” (read: spent money instead of making it). Nasty part of the story is we dumped all our equity and a lot of our serviceability into the new place. NB: stamp duty is a killer in WA! The upside is we love where we are moving to, we have a plan to reduce OSB on the loan at an accelerated rate and we’ll get growth on a decent base which is tax free when we sell. Not the Kiyosaki way I know.

So free cash right now is not our forte. On that basis, and in the spirit of WASP’s first post (at least my interpretation), I am certainly on the lookout for someone with cash and some money left over at the end of the month who would consider partnering with me on a reno job… you bring the cash, I’ll do the grunt stuff. Have a couple of mates with faith in me who might stump up some dough on such a deal.

My experience in property includes: a) I used to sell off-the-plan IPs with -ve gearing and depreciation and the whole shooting match (till I realised it was the Dark Side [vamp]); b) I’ve studied property at uni; c) I used to work for a guy who did reno and flip deals (as his project co-ordinator); d) now I work for a property finance group and we get finance for folks who want resi IP’s, commercial IPs, and developments.

Let me know if you’d like to beat my two mates to the punch!

Bob

Wow, awesome to see visionary sandgropers leading the way in this area. If there’s room in this co-operative that’s being suggested, I’d like in as well!

What’s a little -ve cf between half a dozen people?

Bob

gr, thanks for reminding me of the original point of the post. I think we all got off track there (the entertaining side topic notwithstanding).

[anxious]

Bob

Wow, what a really long post! I was spellbound too, quite a lot of opinions and angles to read about. Poor Michael Yardney got a pounding from the suspicious among us and you have to admit Michael, you did actually spruik a little:

Then there was all that stuff about “I don’t need to advertise my services, the workshop only has a few places left”. I’ve sold property (and the associated strategies) too and that is a classic line! It sounds like one of those billboards in front of a residential development site, no wonder people got a bit sus. Mind you it doesn’t help when you also pull out the old “thanks for coming to the $60 seminar, now let me tell you about the expensive one”…

Which is all well and good I guess – hell, if you have a business, promote it. Caveat emptor and all that stuff. Just don’t expect, in this country, on a forum like this, to avoid being grilled when you do.

Now I’m going to subscribe to your update thingy and have a look for myself. I trust that the material is going to be a good balance between tidbits of actual investing/developing information and invitations to spend more money you.[wink] To be fair, I’ve never seen one of your seminars and I hope people really do feel like they get more than their money’s worth. I’ll check out the dates of upcoming events and see if I can pop along.

Also to be fair, yes you do have to spend a little to get the knowledge to even feel confident to dip your toe. Sounds like most attendees are pretty satisfied but even totally unethical characters can get testimonials easily enough – I know, I have been involved with one.

I guess it’s up to the individual to decide if it’s all BS or not, it’s your money as they say. If you behave like a sheep, you’ll get shorn. I guess investing, and especially property, is just like that sometimes.

Bob

P.S. Michael just a little point… on $100,000 income you would not lose half to tax… the Australian PAYG system works on a sliding scale and you pay 48.5% tax on the dollars you earn above $62,500 and 43.5% for any part of your income that is between $52k and $62.5k. For all the income you earn below that, you pay the same amount of tax as the rest of the worker bees. Most of us non-accountants don’t care for such details but I think it looks better to be more accurate than less. Ghod I really am quite anal. [sick]

kp, I think gr is referring to the example from his reply to moony:

“780” would seem to refer to GRV less a developer’s return (expressed as a % of GRV) as per a reverse static feaso. So if he got the lend of $750k then yeah, that’s almost 100% TPC. Not too many banks or funds are going to lend that high, so maybe that would explain the private lender and the 11% rate. You’d probably have to put up the equivalent of a small village in real property security to get away with a loan like that though.

I would suggest the loans are not 65% on TPC or gr would go to a bank and get an all-up rate of 8% or less. It could be 65% of on completed value, which on $1.2m would be (surprise) $780k. He can do this because the profit is so big. A lend on the basis of project cost wouldn’t cut it so instead you lend on the basis of completed value which is a fair way ahead of costs and a bigger lend.

Similarly, 65% on GRV $9m will be $5,850,000 – or enough to cover land of $2.5m and build of $3.3m.

Clear as mud? [blink]

Bob

The old due diligence again. SO important.

Thanks for the story GR; a timely reminder, like you say, to budding developers. It requires more attention than many people think.

Bob

PS 11%? Youch! What was wrong with the bank?

Dazzling;

Enjoyed the longhand version of your perspective – some good points and well put.

Bob