Hi Craig,

The only real way to illustrate this is by taking an example and seeing what the difference is. Lets assume the following for the purposes of the illustration (based on your numbers above):

Income – $75,000

Property Purchase Price – $540,000 (House and Land)

Property Rental Income Yield – 5.59% p.a.

Annual Vacancy Rate – 0%

Depreciation claimed @ 2.5% of 50% of the value of the property (Div 43) & F & F claim @ $4000 p.a. (for the purposes of the illustration) 

Annual Rates, R & M, Insurance, Rental Management Fees & Annual Loan Costs – $5,504

Interest Rate – 4.99% p.a. (Int Only)

Income – $30,186

Interest – $21,538

Expenses – $5,504

Tax Return – $2,472

Net Cash Flow – $5,616

If you were to go and put the $100,000 into an offset account and reduce your loan the investment outcomes would look like this (assuming the same variable inputs as above):

Income – $30,186

Interest – $17,047

Expenses – $5,504

Tax Return – $988

Net Cash Flow – $8,623

As you can see, you are approximately $3,000 per year better off from a cash flow perspective if the $100,000 stays in the offset account. If that $100,000 was to be invested in say a term deposit at 4.5% (Investec who give the best rates at present), you would make $4,500 p.a. but then have to pay tax on the earnings at your nominal tax rate, which would make you worse off than investing it in the offset account.

In actual fact you would be better off buying another investment property with the $100,000 and still having a positively geared portfolio as well as a second property with the potential to grow at 6%p.a. + for the next 15 years.

If you want to know any more about your exact situation, let me know and I will be able to model the scenario's for you. 

Harry,

A few others have correctly outlined that the first port of call is ordering a valuation for your IP so you know where you stand if it is sold and what debt you would have remaining against your PPOR.

If you mail me the address of your property, year it was built (approximately), condition of the property (below average, average, above average, way above average), then I can send you a valuation to use as a guide so you can come up with a strategy. 

If they continue to treat you like that at the NAB, I would suggest you simply tell them you are going to refinance immediately (assuming you haven't defaulted on loan payments and have some equity in the properties) and watch them change their attitude pretty quickly. As Richard said, it is nonsense that you are unable to order a valuation for a property that they have security over.

Hi Kylie,

There are a few amazing opportunities in the Brisbane market at present, and of course now is a prime opportunity to get in as there are still quite a number of apprehensive people about the region. Fundamentally there are a few extraordinary x-factors that make the Brisbane market a prime target for investment right now and some of those are:

Redevelopment of the RNA show grounds in Fortitude Valley ($2.9 Bn redevelopment – currently in progress)

Proximity to the Brisbane CBD

Multi-national businesses moving from the Brisbane CBD to the inner fringe of the CBD (cheaper rents, and placing themselves in a position to capitalize on the gentrification of Bowen Hills/Fortitude Valley)

Upgrade of the East – West Arterial Road to the Airport reducing commute times to the airport from the Brisbane CBD significantly

5000 additional employees to be put on at the Brisbane Airport in the next 10 years

Upgrades and expansion of the Royal Brisbane & Womens Hospital – 7000 additional employees to be put on in the next 5 years

Infrastructure upgrades to inner city rail stations

An abundance of educational facilities (uni's & schools) within a 5km radius of the CBD

The price point of many units in the Brisbane CBD that enable SMSF investors to comfortably buy into the area as investors ($400,000 purchase allows a SMSF with $120,000 to buy in)

Strategically, I think Bowen Hills or Fortitude Valley are the best suburbs in that area to take advantage of these fundamentals over the next 5 to 10 years. The areas are perfectly located in relation to the RNA show ground redevelopment, proximity to the Brisbane CBD (1km), Proximity to all forms of transport (rail, bus and ferry), proximity to multitudes of employment, proximity to educational facilities and access to the airport. In fact you can't get into the Brisbane CBD without going through Bowen Hills and Fortitude Valley (if you are driving). Given that the airport will employ so many people in the coming decade, these areas will become prime targets for employees to reside.

From an investment perspective, the area is really a no-brainer over the long term (think Redfern in Sydney 10 years ago vs now).

Lastly, at present Fortitude Valley is currently considered an ugly duckling making it the perfect time to be buying in. Once the RNA development starts to come to fruition and people realize what amenities are available at their doorstep, the prices will move reasonably quickly. 

If the question is whether you should finance your investment properties stand alone or using cross collateralisation?

Using the information you have supplied, in that you have a 20% deposit for each property, you should set up each property with one loan. That is, the security the bank takes will be on that property only. In the event that a default on the loan occurs and the bank calls in its security, you only have the property the loan is associated with at risk of being sold. In the situation where the property is cross collateralized (both properties secure the loan(s) given by the bank), the bank may choose which property(s) to liquidate in order to satisfy the outstanding debt. This is a much less beneficial situation for any investor. Not only that, under a cross collateralised loan position, if you decide to sell a property in your portfolio in the future to release some equity, the bank may decide to apply the equity to the remaining loan in order to reduce your overall LVR against the property(s).

An example may be that you have 2 properties in your portfolio worth $900,000 with a debt against those properties of $600,000 or a 66% LVR. From first glance that would appear as though you have $150,000 equity in each property. However if the loans are cross collateralised and you sell one for $450,000, the situation then looks like this:

Remaining Asset Value – $450,000

Remaining Loan – $150,000

LVR – 33%

You would then have to apply to the bank for a line of credit against the remaining property in order to extract any equity from the portfolio. This is obviously very restrictive in what you are able to do with your money going forward.

Having a 20% deposit for each property will also mean that you won’t need to pay Lenders Mortgage Insurance. That is also a beneficial cost reduction for the accumulation of your property portfolio.

If you have any other questions, just ask and we will do our best to answer it in a non-complex, jargon free format.

Take care.

Hi Getafix,

I have now developed over $50M worth of property over the past 8 years (including 1 large $23M) and can offer this advice:

There are many skill bases you require before even contemplating development, especially one the size you are considering. Some of these can be summarised as follows:

Negotiation Skills (Most important)

Design Knowledge (Equally Important)

Market Knowledge – So a unique product may be created and released into the market for sale/lease with multiple exit strategies to explore if things don't follow plan (which the rarely do)

Building and construction knowledge

Knowledge of Law

Knowledge of Finance and Accounting

Knowledge of Marketing

Town Planning/Environmental Law knowledge

These are the very broad areas of knowledge you require as a bare minimum before you would consider "diving" in. So many people think they can outsource all the above by engaging consultants, and that they will just "take care" of your interests. This IS NOT the case, unless you have the knowledge and skills to drive them in the direction the project requires in order to achieve a favourable outcome. The most dangerous thing you can do is read one of the many generic books on the market that brush over the core skills required and make you believe you can do it on your own. A seasoned, skilled developer (like any professional) gains their knowledge and skills over many years, if not decades. Lastly on this point, if you don't intricately know anything about a particular discipline of a development, how can you go and hire of engage the correct professional to fill that void? What questions do you ask to ensure they are the right person for the job? How do you know what terms to include in any agreement that is to be executed with the consultant?

The other thing to consider is that when undertaking a development as a one off, you are unable to spread your overheads across multiple projects, which in effect make the exercise unviable. For example, a construction contract (prepared properly) will cost around $15-20K, a sales contract will costs around $2-3K alone to have prepared etc etc etc (I could list the fixed costs for various expenses all day) If you look at these costs as a percentage of the total cost of an 18 unit development vs a 100 unit development, it quickly adds up to ensuring the project isn't viable.

In summary, setting up all of the infrastructure to run 1 project as well as making all the mistakes along the way that you will inevitably make as a result of inexperience will ensure the project fails financially unless the market booms to cover all your mistakes. No business in the world succeeds by outsourcing every skill required to make it a success. You simply have no control over consultants and are at their mercy at all times. You can't run to the courts and take legal action against a company every time they don't perform and if you withold payments, you end up spending more money on legal expenses whilst the lawyers engage in letter wars.

If you think you want to be a developer, start with a very small, lower risk reno to see if you can make that a success (your 6 town house project is way too big to start with too) You will learn how to deal with councils, contractors, agents etc etc by doing this and then be in a more powerful position to decide how you proceed with this property (other than asking others on here what to do, that quite frankly, in the majority of cases, have probably never engaged in a development before either)

Anyway, good luck with whatever you decide. Your situation is a common one, and if you do some research you will find that construction/property services have one of the highest failure rates of any business sector.

So what I am saying is that you will answer your own questions as you become more sophisticated and gather more experience.

Quite frankly, you will be far better off investing in areas with very sound investment fundamentals and holding onto the properties for 2 property cycles. This is how real wealth is created. Unless you are planning to become a developer as a career and planning to do everything you can in order to succeed, the odds are very much stacked against you. It's no different to me taking a course on heart surgery and reading a few books on how its done and deciding I want to do a heart by-pass surgery in a few months. To become an expert at something, you need to spend 10,000 on it.

I could write much more about the very basic necessities of what are required to be successful in development, but you can contact me if you want to ask anything further.

Hi Flowergirl,

On the face of what you have said, it is categorically a repair and not a capital works deduction. You aren't able to replace the damaged pipe with a steel replacement these days, so replacing it with a copper pipe and claiming a deduction as a repair would be a very unlikely outcome to be challenged by the ATO.

I have quite a number of investment properties and have done the very same thing in the past. The thing about deductions and accounting interpretations is that, as Washington Brown pointed out, they are so open to various interpretations depending on who you speak with. I would definitely use the repair method claim and you will find that will be the last you hear of it. The ATO isn't particularly interested in challenging people over a $2,500 claim that can logically be argued as either a repair or a capital works deduction.

Hi James,

To illustrate how unrealistic these timeframes are, think about the following:

Generally when you purchase a property (not including the time it takes to locate and agree on all terms within the contract), the settlement is generally 6 weeks after the contracts are exchanged. This basically means you have to exchange a contract the day you take possession to a new purchaser (fully renovated, I assume) in order to meet the 3 month timeframe you are talking about.

In addition you will also need to set up the infrastructure to manage the process, plan, budget as well as engage contractors and consultants along the way (for the first one anyway) required to complete the renovation.

There is no doubt that a skilled investor renovator can make money in any economic climate, however you will have to be realistic about your cash position and your ability in order to make any money consistently, let alone $25K per property on your first deal. I would be budgeting for a loss on your first few deals until your knowledge, project management ability and experience increases.

It also appears as though you are intending to outsource every facet of the process, this will ensure you don't make a cent by doing this (in the timeframes you are hoping for).

Anyway, goodluck with whatever you end up doing.

Wardy.

Without looking at the detail in detail, I would not recommend this path without some serious consideration. Think of what you were doing 4 years and 10 months ago and how your perspective on life/business may have changed in that period to the present.

There are many variables that would need to be considered before you remotely entertained anything like this. For starters:

What happens if someone can't/refuses to pay the mortgage at some stage for any reason?
What is one party wants to sell and the other wants to hold and the one who wants to hold doesn't have the money to purchase the other out?
What happens when there is a stalemate with a decision that needs to be made, who is the determining party, and if it's a third party, who is that and what experience do they have to be making decisions on property?
What is your exit strategy and when do you decide to take a loss if that eventuates?
What happens in the case of a dispute?

I could go on for a long time with these questions, however you should get the gist of what I am getting at.

I have worked with JV partners on deals and performed large developments on my own ($25-50 million deals) and had to learn through the school of hard knocks about poor JV agreements. On the surface JV's always seem a way to fast track your wealth, however reality is that many deals end up in the court rooms, which of course benefits only the lawyers. (Check out http://www.austlii.edu.au and type in joint ventures to see all the cases relating to JV's gone sour) .

Wardy