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90 day bank bill rates have been found to be a good indicator of cash rate directions. @ 16/10/09, the rate is 3.91%, so a 50 basis point rise on the cash rate may not be out of the question in the near future.
A common strategy for property investors is to have a mortgage over their principal place of residence and then seek additional finance for an investment property. As the investment property generates tax – assessable income, the interest on the loan used to purchase the property is tax – deductible.
As the PPOR does not produce income, the interest is not tax – deductible.
Therefore, the strategy is to maximise the tax – deductible interest charged, as this can be used to offset other tax – assessable income, whilst at the same time the PPOR mortgage is paid down as quickly as possible as this interest isn't tax – deductible.
If the investment property loan was a P&I loan (principal and interest repayments), over time the amount of interest charged would reduce and therefore lessen the tax deduction.
As for how they work, the major lenders usually offer interest – only credit for 3 – 5 years. After this time they may reassess the whole deal and ask you to begin paying P&I, however in practice they don't seem to care if the payments have been on time and the underlying security is sound and may offer another 3 – 5 years of interest – only.
I think you have to be less skeptical when you're reading books and just take them on face value and get what you want from them. The positive cashflow methods detailed in Steve McKnight's "0-130 properties …" are just one of several methods of investing in property, as are John Reed's (who I haven't read).
If you read Steve's book, you will find that when he originally started out in investing, the strategies of negative gearing and pure 'buy and hold' were commonplace (as they've always been), but when he thought about it, they didn't stack up for him. I don't think it was so much that he thought they were bad strategies, more that he was looking for a positive cashflow to replace his employment income and therefore allow him to stop working. This is where you need to work out what your goals are and then investigate strategies that might get you there.
The benefits of negative gearing are the simplicity of the strategy: you pretty much just find a place that you think will appreciate in value, have a tenant pay some of your loan repayments and then just wait. The risks are as you know, a falling or flat property market and interest rate rises.
If your goal is similar to Steve's, then negative gearing won't work for you because you will need another source of income (most commonly employment) to plug the funding gap between rent and loan repayments.
Positive cashflow properties are out there, but they are not very common, or should I say easily found and they take a lot more finding and structuring than simply logging on to domain or realestate.com.au and expecting to pick up one. As Steve said, positive cashflow properties are made, not bought and this is why he used wraps and lease options extensively.
As far as whether or not to buy John Reed's books, even though he's overseas, you may still learn something.
Richard will hopefully answer. But as for 6. a), yes you can move in and act as if you own the place (within limits!) once the VF contract is settled. From what I have read, the vendor retains the title on the property until such time as he/she's paid out by you, however your solicitor will place a caveat on the property to stop the vendor refinancing the property or selling it behind your back.
7. Banks are alot more wary after the Credit Crunch (which is basically what that means, everyone's too scared to lend money), so it's unlikely they'd offer 95% or 100% finance nowadays. Traditional finance, ie through banks, is cheaper than doing a vendor deal but cheaper finance is useless if you can't access it!
Steve McKnight's books and others gives you an insight on this.
From what I've read in that:
1. Steve was offering finance at 2% above standard variable rate – higher for ex-bankrupts etc.
2. You won't need a special property lawyer, my solicitor who does the usual solicitor stuff does them. But the main thing is you want to find someone who has done vendor financing contracts before and a lot of them.
3.I think a standard loan term of 25 – 30 years may be doable.
4. A good solicitor should let you know about this. If the vendor defaulted on their side of the deal, then it would all end up in court I would expect.
5. You certainly can and I think in some states the vendor is required to provide this to you by law.
What is the possibility that say 3 – 5 years into the contract you can get traditional bank finance? I know some vendor financiers structure the deal assuming that the purchaser will pay them out in full after this time. Of course, doesn't have to happen that way but just to let you know what the other side might be thinking.
Bear in mind too that the two ways a vendor picks up profit on the deal is to sell you the property at a higher interest rate on the finance than he/she's paying and also increase their purchase price by 10% or so to you.
