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Help me understand. If I am an investor that keeps 80% LVR, yet uses negative gearing and depreciation etc to result in a positive net cashflow, am I still a target of this? I think yes, but am confused.
As far as I can tell, this will only cause a temporary drop in prices as;
Investors back off and try to put their rents up faster, with varying effects. The numbers won't stack up as well. (Except in mining areas where speculation will accelerate)
The quick owner-occupiers will take up the slack and the prices will go back to where they were.
Large developers still have the same costs to build, so new houses aren't going to be any cheaper. No extra supply.
Small developers usually leverage negative gearing to help their cashflow so they are going to back off. Causing a small decrease in housing supply. Especially in "in-fill" areas around CBD's where many state governments are trying to accelerate development.(Thus driving rents up further)
The "slow" majority of owner-occupiers will be too slow, by the time they buy the prices will be back where they were.The only real winners will be;
The banks for reasons already stated. (Although I think they make alot of money "by-proxy" through investor rent income. We take the risk of full recourse, the renters and bank do not.)
The government. They will claim a victory for the working class man, which is absolute nonsense because rents will be higher and prices back to where they were. CBD regions will be worse due to the slowdown in "in-fill" development.This happens, I invest more overseas (equities and property) more aggressively. Simple. That can't be "good for the nation."
Shape wrote:Long term…. This involves setting up the right loan structure. 1. PPOR set up with Offset account 2. All IP set up as a basic loan on an IO ( interest only – important), with no connecting "accounts" 3. All rent + all income goes into PPOR offset 4. All repayments and bills for PPOR and IP also comes out from this PPOR offset. 5. All tax returns + bonus also goes into PPOR( you get the drift…) 6. Always do a depreciation report. And if you wanted to be a bit more pedantic and aggressive you could add in step 7. ( a bit of self control) 7. All bills and living expense paid off by a interest free credit card, balance paid off in full before interest is charged ( allowing the extra cash to sit in the offset for 45 days)
This is my loan structure almost exactly. Works a treat, I love it! Including the pedantic part, number 7. Except, I am still a bit confused about exactly when to pay the credit card out. I normally just clear last months balance at the end of the month. If I wanted to stretch out to the 45 days, does this mean I pay the minimum balance by the due date and then the remaining 15 days later? (Not meaning to hi-jack the thread)
Best case study ever!
Darn. There goes the borrowing to lend to trust option.
I wish I was close to positive after tax! Quick sums tell me I need to raise at least an extra $550 per week to make up the shortfall across the current portfolio if I can't claim borrowing interest. Even at an optimistic average 10% p.a. rise in rents across the board, I am looking at 5 years. (Give or take depending on interest rates) Of course, I will be adding further properties into the mix as I go, and they are likely to have a similar timeframe. Eventually the older positive geared ones help to pay off the newer positive cashflow ones and the whole portfolio tips to positive geared and accelerates away from there. 13 years is the conservative estimate, assuming all goes well. If it goes really well, much sooner. At which point I go part-time or free-time, thus taking away the income tax created by PAYG. Now, if I am making enough money off my investments to be paying tax when I am not working, I am happy to pay for it. Why? Well, I have reached the goal I set out to achieve.
If someone can show me how this same cycle can be accelerated with a trust structure, I am all ears. Seems to me it might, at best, match the current outcome.
Of course, if I start developing or selling, things have changed and the structure needs to change to match.
The asset protection is interesting, but not compelling. I spoke to a few lawyers and accountants, all of them tell me, "you can do it if you want, but I cannot see a real need." A couple of "trust-centric" ones said I may like to consider it after a few more properties. Most said they had never seen any PAYG employees get chased through their investments and were familiar with the "it does happen" argument.
So I think I will do it, I just need to make the numbers work to match with the asset protection "piece of mind".
As for state land taxes. Don't you just setup multiple trusts? Chan and Naylor push this as a core benefit over individual ownership.
Ahh, but if I had a DT, i wouldn't get the negative gearing and thus no positive cashflow. (Of course, I could borrow and then lend money to the trust, but I haven't found someone that can walk me through how this looks in 5,10,15 years.)
And HDT's appear to be a minefield for tax and bank lending.
I can only see a trust making sense for me under these circumstances;
1) Positive geared property (which is 5+ years away for me. Except if I buy in the US, which could happen sooner rather than later)
2) I intend to sell i the short-medium term. Which I don't. Long-term I don't want to either.
3) I move into a self-employed, business owner and/or a job where I have a reasonable chance of being sued.
4) I am an idiot –> No/poor/wrong liability insurance. Or not managing my properties correctly.
5) I become a developer. I don't and it falls into a similar CG category to (2).Other than that, trusts seem to be just a drain on time and cashflow due to the extra management time/cost. Which is a damn shame, because between absorbing Trust Magic (Dale GG), Chan & Naylor and Michael Yardney trust stories, I initially thought they were an absolute must. That's how the rich do it, right? Well, sort of, is the real truth. Most of them didn't start out that way. the trusts and fancy structures came later.
Great info. I will PM you for that other forum.
I love reading and will hunt down those books you posted.
Thanks guys. I was thinking of this type of setup as being reasonable. It maintains a clear separation, description and payment of duties;
– Temporary position employment contract. Includes list of duties, hourly rate, payment frequency
– Maintain timesheets showing hours. Signed off on a monthly basis by both parties
– My wife maintains a separate bank account for this income to be paid into on a monthly basis.
– 1 hour per week per property
– Rate equivalent to junior property manager or book keeper. Maybe $25 per hour.Let me know if you think this is a bit light.
tballard wrote:3. I've been trying to follow Margaret Lumas' strategy in the 20 Questions book. I'm finding question number one very time-consuming, She says to do a search within your price range of the entirety of australia, and keep any suburbs or towns within 20-30 minutes of a centre of at least 50k. For the other people out there who are using this strategy, are you all literally just going through the suburbs one-by-one, seeing how far it is from the nearest urban centre and then making the decision of whether or not to keep it? Surely there is an easier way! I've been trying to find a real estate search engine that lets you search within a given radius (e.g. 30k) of a city, but have not much luck. What is everyone else doing? Cheers, TI will tackle this question because I have walked exactly the same path.
I don't do the statewide search anymore. I tend to have areas I am already interested in based on accumulated experience and constant reading of trends. I occasionally subscribe to the Ryder report as one example of getting an idea on areas to start looking. However, I haven't bought in an area he has recommended yet.
Specific mechanics of using your browser to search (I recommend firefox over IE);
1. In a second tab, have google maps ready. Very simple way to get the idea of a radius. You can see multiple suburbs at once.
2. In a third tab, have whereis.com.au ready. Great way to confirm and get a different view. Gives you a great way to see amenities, schools, hospitals, main roads, parks etc etc.
3. Have additional tabs open with the following;
investsmart.com.au (suburb profiles)
sqmresearch.com.au (vacancy rates)
rpdata and other sites you need for cross-referencing.In general for your searching;
– I spent many, many hours following 20 questions approach. After a while I found my own short cuts and my own way to do things that vastly cut down the search time.
– The other thing you find is that you get to know many, many areas all over Australia. At any one time, I have about 10-15 areas that I am keeping my eye on. Usually because the fundamentals of the area are great but I haven't found a specific place in the specific area I like yet that passes the detailed numbers test. Even after I find them and make an offer, someone is willing to pay more and my numbers don't stack up. Good for them, I just move on.
– Be patient. It is slow at first and requires lots of "dedicated study". Pay attention and keep your eye on the goal and you will get there.feel free to ask more questions, as I get time I am happy to share my thoughts.
ummester wrote:emptyvessel,
we were obviously thinking of different hats:)
With your hats I'd be blood coloured – dark red, or black red:)
Hehe. I reckon you should change that avatar you have. Give the Bear a dark red hat! It would look hilarious!
BTW, first time I saw that avatar I laughed my head off. A year or two down the track and I still giggle. What a juvenile
Thanks Terry.
I can see some key differences here to what we are considering. I am not an expert, of course, but these things seem obvious;
1) The number of properties being managed. 4-5+ versus 1 with the Browns.
2) No other employment or businesses, like a "fish and chip shop" are involved. This made the Brown case very dodgy because his wife did not get paid for her work there.
3) The sums of money that this Mr Brown claimed were ludicrous. $25,000 for wages and $35,000 for super contributions were always going to raise alarm bells.The fact that an employment contract is not necessary was a particularly useful piece of information. All the same, I think that writing one up would make things much clearer.
The fact that I find this interesting is disturbing! Maybe I should have been a tax lawyer afterall? Nah…they work too hard.
ummester wrote:emptyvessel wrote:I find it interesting that "bears" have this almost fanatical need to be right. It is in almost every post by a person that identifies themselves as a bear. They also tend to be "black-hat" or "critical" thinkers that are fantastic at finding statistics, graphs and interpreting the numbers. Obviously to support their negative sentiment. Many seem to take offense with so called "bulls" that have made good money, for whatever reason, be it dumb luck or smart investing. No matter how positive the market sentiment, the bears seem to always be posting about how and why they predict a collapse. Any mild decrease in any portion of any market is always considered to be the "beginning of the end". The bears also tend to congregate in "packs" to support their negative views. It is almost like a negative gravity well that sucks more into it.As for the "bull" posters, they on the whole just seem to be "glass half-full" positive-types. They don't seem to need to be told they are right. It is almost like they don't care about being right, they just keep being positive and investing. They quote some statistics and graphs to support their way of thinking, but it often tends to lack any real independent substance and is often picked to pieces quite well by the "black-hat" bears. The "bulls" also don't seem to take any notice of the "bears" with their well-reasoned and logical arguments. They do seem to take delight in poking fun at the bears and getting them up on their "high horse" soapboxes to pontificate. They also seem to be getting independently richer. But this could just be the positive language rubbing off on the rest of us.
Then there are the vast majority that swing on a personal pendulum between being bullish and bearish. They don't really know which way things truly are going at a macro level, but they are trying to do the best for their own personal wealth creation. They do tend to read the bear posts and wonder if they are right, but hope they are wrong. They read the bull posts and hope that they are right and can emulate their success, positivity and and creativity. I am on the "bull-faction" of this group I reckon. The bull part comes from being incredibly positive about my individual success no matter what the macro or global market is doing.
Thanks for bothering to read this if you get this far. I just felt like sharing my observations.
You know the only difference between a black hat and a white hat is which side you are looking at them from, right?
Scenario – MS hacks Sony. Blackhat to Sony, White hat to MS.
Then Sony hacks MS – the colour of the hats don't matter, it's understanding the whole game that does.
Small adjustment in perception for you my learned bear;
My reference to "black hat" was the Edward De Bono type described in "Six Thinking Hats"; http://en.wikipedia.org/wiki/Six_Thinking_Hats#Black_hat_.E2.80.93_Being_CautiousI have a tendency to wear the blue and green hats by nature. When I am "down" I tend to wear the "black-hat" too much.
The economic world is a set of intertwined chaotic systems. All very, very imperfect and largely unpredictable except in terms of long-term trends. Much like the weather. I am very happy in your belief that you understand this game. I do not believe in your belief. The game doesn't seem to care.
Marie123 wrote:EVYou know, it probably sounds stupid, and we all know that fear and greed don't get us anywhere when we speak about financial independence but one reason for selling is so I can diversify a little to reduce my risk. All my money is tied up in property… bar 10k. I feel that property prices in Australia are going down – in the long term. I would rather get the money I have earnt now considering my property hasn't increased in value for quite some time. If I could invest it in a better suburb, or even half in passive income then I would feel like I have made some money and been able to keep it. Perhaps I haven't thought the market through well enough.
I definately like the sound of the 1% properties, I want to buy closer to the city this time around, though. It's even harder to source them there.
Can I ask what state you reside in?
CheersFair enough. you have your reasons. My advice is to make sure they are based on rational analysis rather than being emotionally driven. Most of our decisions are emotional by default, it is the way our brains work. Try to override that natural reaction with the boring logical analysis. Your fears may be validated, but then again, they may not.
I reside in Queensland. Invest in QLD and NSW. Looking in all states. I don't care where my fruit trees are located as long as the sun will shine, they get enough rain and the soil is good!
EPI_Den wrote:Hi all,I'm particularly impressed at the way emptyvessel has gone about describing the path to becoming a property investor – well done!
Thanks for the vote of confidence. Although it looks like I planned it precisely from the beginning 10 years ago, it just seems that way in hindsight.
The plan has really "evolved" or "crystallised" out of a constant desire and effort to become financially free. I now have a core plan that I view as my "equity engine" and am constantly evaluating "upgrades" that can help me (and my family) reach the goal faster. My golden rule: the "upgrades" are never allowed to slow the core "equity engine" down or break it in some way. This really comes down to risk assessment and hard numbers analysis. As well as asking "does this feel right"? My gut/intuition plays a key role too! So does my missus to cross-check my thinking.
Just keep planting those seeds, water them every single day, even if you can only spare a drop. One day you have a bunch of seedlings, the next you have trees and then you have an orchard full of mature trees bearing fruit for the picking. (I have visited this visualization so many times that I can now walk through the orchard, pick the fruit and "almost" taste it.)
Nathan, you are a champion. Go son!
MrDarcy wrote:But im currently Greedy as most others are Fearful!
EV
Thanks for the reply, I still wonder how you went house > units > commercial/other?
Was this a suggestion by the Property Buyer?
Im glad your happy with his advice its good to know for future reference..
As for the US property, keep us posted!
Couldn't agree more. I am a contrarian by nature. I can't help but get greedy when others are fearful. I am almost compelled to do so by some sort of unstoppable internal force. Almost.
Houses/units –> I don't really care which as long as the numbers stack up. Buyers agent had nothing to do with these.
Commercial –> My missus suggested it back before we started investing. We looked but had no idea what to do, so it seemed too risky for us. We went back to houses/units because they are familiar. Recently my missus poked me about commercial again when we were discussing all the options we had available. So I started reading a few forums. Around the same time, my Buyers Agent asked me if commercial interested me recently after we had a discussion about all sorts of other residential options. They know we are deciding on what steps to take over the next few months, so acted like good advisors and suggested the option. I am still considering it, but there is alot to learn. I am not in a rush to pull the trigger on anything, but I am on the right thing in the next few months.On the US thing, I found a couple of interesting blogs that others may find useful;
http://www.buyingpropertyinusa.net/
http://howtobuyamericanproperty.com/I am thinking of subscribing to the latter for a month or two. I am just so curious to see if this process really can work well for me. I will cancel my bigpond movies subscription to cover the cost.
I find it interesting that "bears" have this almost fanatical need to be right. It is in almost every post by a person that identifies themselves as a bear. They also tend to be "black-hat" or "critical" thinkers that are fantastic at finding statistics, graphs and interpreting the numbers. Obviously to support their negative sentiment. Many seem to take offense with so called "bulls" that have made good money, for whatever reason, be it dumb luck or smart investing. No matter how positive the market sentiment, the bears seem to always be posting about how and why they predict a collapse. Any mild decrease in any portion of any market is always considered to be the "beginning of the end". The bears also tend to congregate in "packs" to support their negative views. It is almost like a negative gravity well that sucks more into it.
As for the "bull" posters, they on the whole just seem to be "glass half-full" positive-types. They don't seem to need to be told they are right. It is almost like they don't care about being right, they just keep being positive and investing. They quote some statistics and graphs to support their way of thinking, but it often tends to lack any real independent substance and is often picked to pieces quite well by the "black-hat" bears. The "bulls" also don't seem to take any notice of the "bears" with their well-reasoned and logical arguments. They do seem to take delight in poking fun at the bears and getting them up on their "high horse" soapboxes to pontificate. They also seem to be getting independently richer. But this could just be the positive language rubbing off on the rest of us.
Then there are the vast majority that swing on a personal pendulum between being bullish and bearish. They don't really know which way things truly are going at a macro level, but they are trying to do the best for their own personal wealth creation. They do tend to read the bear posts and wonder if they are right, but hope they are wrong. They read the bull posts and hope that they are right and can emulate their success, positivity and and creativity. I am on the "bull-faction" of this group I reckon. The bull part comes from being incredibly positive about my individual success no matter what the macro or global market is doing.
Thanks for bothering to read this if you get this far. I just felt like sharing my observations.
Well, all my rents have gone up and they are still under the market rate.
I want the dollar to stay high until I have invested my US funds in some good bargain basement US property with high yields.
Then I want it to crash like a lead a lead balloon. Clean up and catch the up cycle over here.
xdrew wrote:I love making comparisons to the fruit and vegetable market .. or the fish market
(they are both good examples of markets at work)So … in the off season .. its harder to find a perfectly shiny apple … with no marks or bruises … for a low price. Well .. it still is possible to find one .. its just now a lot harder than the times when you have lots of fresh fruit available to the market at a good low price.
In that same way, in the property market post boom, you'll still be able to find your positively geared properties. It's going to take a little more legwork .. and a bit more bargaining, but not only are they out there .. as the market sours in some areas .. gradually there will be more good deals out there than .. average ones.
Thats where you want to be .. armed with cash or equity so you can rush in at a moments notice .. plonk a deposit down .. and get the good deals. So if you are being smart now .. you should be either frisking around for the positively geared properties a little harder, or starting to put a little more into your loans so you have a little less liability and a little more equity for when you approach the banks later on .. for the bargains. Or even .. GASP .. doing both !!! How creative is that !!!Just like the fruit market .. when times get tough you may not be able to find exactly what you want on the market .. as people hold out for a better price. But again … like the fruit market … the best deals dont happen on the market floor anyway. Be creative .. be belligerant .. be a dealmaker. And you'll be surprised at what deals there are out there.
Time to get out all those books on how to negotiate properly. They actually DO have a use.
Thanks xdrew. You have a way with concepts and words that appeals to me. And inspires.
joeandchels wrote:Hi all, What do you guys think about the possibility of finding positive geared property in the current market, or does the market itself not change the fact that positive geared investments exist? There is no secret that property prices are at a all time high, in my opinion we will probably see a crash in prices in the following years as did other countries have following a "bubble". But the price of rent has not increased at the same rapid pace, hence making it more unlikely to find a property capable of returning a net positive cash flow. I would like to know if anyone has recently seen any properties for sale, that given the 11 second rule in 0-130 properties would produce a net positive cash flow (in case you haven't read the book its divide the rent by half, then multiply by 1000… eg 300/2 x 1000 = 150,000 is the price you should have bought to be a positive cash flow). If the property still for sale, could you point it out eg realestate.com.au….. I recently bought an apartment, and if rented out it hits the mortgage pretty much exactly. But then I have to take into consideration the market management fee, body corp etc… So in essence its still a negative geared, but I felt like this is virtually as good as the market is right now? My initial guess is that todays market does not permit positive cash flow properties. Thoughts? JoeResponding this time to your original question.
Yes, there are positive cashflow properties to be had. All over the place. Even in capital cities. You just need to search very very hard and be ruthlessly methodical with your number crunching. That's what I do. But only in large regional centres. I haven't found them in my price bracket in the capitals are renno's, which I haven't got the time, skill or contacts to do. If interest rates go up again, I reckon a few will start appearing for me.
There are even positively geared properties to be had, but I reckon these are only in mining towns, tiny country locations. Not my cup of risk tea. My properties will go from cashflow positive to positive geared over time. I can wait.
Make sure you are 100% certain that you understand the difference between positive cashflow and positive geared. And then purely negatively geared (which I would more accurately describe as negative cashflow).
