I had a similar situation as your IP B before and after allowing it with 5 years to prove itself in terms of rental yield & growth,
both have shown interior and disappointing performance so I decided to get rid of it with a break-even exit overall.
I think you need to have a realistic time horizon and draw that line deep in the sand. The asset is either performing or not and let it
guide your decision moving forward.
Thanks for the great article and explanation of the borrowing strategy. Can you please shed some lights on the following 2 questions:
1. Do this statement “to maximise the borrowing potential far beyond what any one lender would allow” risk putting the borrower in
an over leveraged position? Does the lending (or should I say borrowing from my perspective) structure and different lender’s
stress test calculation pretty much takes care of that already?
2. Is this lending (borrowing ;-)) structure best implemented with multiple borrowing entities instead of in the same individual names as
per your example? Other than the often talked about land tax & asset protection advantages, is there any specific reason why this
lending/borrowing structure should be done one way or another?
I have Vogue Domain Living built our house and and impressed with the workmanship and the overall process & experience.
They may not be the cheapest but look up their website to check their past projects for yourself to decide: vdl.com.au.
I’ve been recently challenged with this ruling by accountant when I describe what I plan to do to provide temporary cash flow relief.
My plan is NOT to compound interest but the following:
1. Organise a LOC against the IP itself when it has built enough equity
2. All rental income of IP goes to PPOR loan offset account
3. All IP loan interest comes out of PPOR loan offset account
4. All other misc expenses related to IP (council rate, insurance, water rate, accounting fee, repair, maintenance, agent fee, etc)
to be funded by LOC. Every month LOC interest only is paid for from PPOR loan offset account
5. At end of each FY -OR- when- LOC limit is reached, full balance be paid off from PPOR loan offset account
6. Repeat above
In none of the step above, I compound interest on interest with sole intent to pay down PPOR as I am still paying for the short fall
between gross rent and interest.
But I was told that it may be deemed illegal and bordering breach of TD 2012/1.
I dont understand but disagree as I am only deferring expense payment until as late as EOFY then reset entire LOC balance to 0 so immediately I can claim deductible from tax return.
Is there a problem with above ?
Do I need a new accountant ? :-)
Hi RYF
Shoot me an email and I can send you our Turbo charge your Property Portfolio PDF as well as an API article I did on retiring and living off rental income.
Unless the debts are paid down you will be relying on the rents increasing to provide an income to live off and 3 certainly won’t be enough.
It is not the number of properties that matters but the quality of the overall portfolio.
Cheers
Yours in Finance
What size development is it? ie how many units. If it’s a resi based loan the DA will not provide an increased value. In some cases a commercial val will, but it comes down to the overall picture on end construction vals, peak debt etc.
I mean Debt Servicing Ratio (DSR), ie how well you can service the debt payment, which hinges on your cash flow a lot.
Every lender has different calculator, so may be good to approach a reputable broker to assess your position to set expectation to
begin with and understand what product best suits you.
Hi Corey
I have an old house for few years of which equity has grown quite a bit.
If I organise LOC to finance a reno, is that considered capital improvement?
– If so, will it be better to consolidate the original loan and LOC into a larger loan so there is capital cost rebasing for CGT purpose further down the track if I need to sell it?
– If not, is it possible to capitalise the cost to form part of a higher cost base?
Buying commercial property in the US is easier than residential. In many cases you can still get non recourse finance. That is where the loan is taken against the property rather than the people taking out the loan. However we have just bought a 26 unit complex for 1.3 million nd you can by a 6 unit complex for around $350,000 to $400, 000 with returns of around 8 or 9 % net. happy to discuss
Hi Nigel
Do deals with above performance still available? Where or who I can enquire more about them?
Do you hedge your forex risk?
Not exactly what I was after but hey since you have raise that suggestion how does Steve’s fund compare with Sentinel Group ones?
Any performance comparison or fund benchmark as a guide?
I agree with the comment of buying as often as you can.
The strategy will not be too different from people buying IP to pay off PPOR sooner.
Think of it this way the simplified process:
If you need to buy N IP to pay off 1 PPOR
Then you will need to buy N x N IP to pay off the original N IP
It then comes down to DSR .. which is almost the one single biggest obstacle for most people.
BTW this approach has less to do with property than it has with correct financial structuring that you will need to seek prof advice
from expert.
This reply was modified 8 years, 6 months ago by fxdaemon.
All depends on the municipality you are in really.
In my case, I’ve done the subdivision first to have two blocks with each large enough for individual new dwelling that doesn’t require the
usual full DA requirements. The beauty with this approach is that although subdivision approval was granted by council, the process itself
is not considered complete before final compliance is granted. I didn’t have urgency or deadline to beat for compliance issuance which means
the title remains as one with no increased council rate or land tax.
I took my time to build my home on the child block while leaving the existing dwelling on parent title/block tenanted. During this
construction period, I only had one council rate and one land tax for the parent title to worry about.
I am now in the process of applying for a DA for duplex on the parent block after both subdivision and title split are completed.
Hi,
Is any commercial lender out there who can do the following:
1. 100% LVR based on a strong lease, ie 10+ year lease plus options.
2. Lending based on valuation of CP instead of the usual case of lower of valuation and contract price.
3. Highest LVR for non-recourse loan.
Hi experts,
I am starting out on CP myself and seem to have run into some common problems and will like some advices from the experts.
1. Most CP are going for auction these days and despite commercial being commercial there are still people bidding down the yield
to level that I have given up. So how/where can you still source/find good CP for yield and growth potential?
2. Like someone mentioned already the $2m – $3m is probably a good range due to lack of competition. But does that not become a challenge
when it comes time for me to sell, assuming if I have enough $ to get into CP in that range to start with? So as a vendor/seller, how
do you deal with the lack of buy side competition?
3. Doing due diligence on the tenant itself is as important as the property, if not more so. Is there anyone out there who provides
tenant due diligence as a service, including its business strength, growth prospect, profitability, cashflow, debt etc? I am not
talking about publicly listed company so some of the above data may not be easily available.
4. Once I have started off on a small CP, how to I scale it up into the $2m-$3m range CP with blue chip investment with quality tenant
or what many always coin the term national or international tenant? Is there a scale up blue print when it comes to CP investment?