Forum Replies Created
Kay, I’m still battling to follow your logic.
Are you saying you stash excess funds into one IP at a time, THEN you use the equity for the next one, only once paid off?
7 years is a very long time between investments.
I also put excess capital into my loans, but only to draw on it when I find the next IP, not to pay off.
Glenn
I think you put your finger on it, Kay.
This is exactly why I only lasted 8 months as a PM. I tried really hard, but dealing with the “public” and being between owners and tenants – both complaining, was tough. Good experience gained though.
The tenants felt the rent was too high, the place needed renovation, paid late. The owners needed their money yesterday, tenants trashing the place, expecting PM to be a handyman too etc.
You need a really thick skin to be a PM. However, a good PM will do well.
Glenn
Sorry Kay, I’m trying hard to wrap my head around your approach, but it is really hard for me.
Paying IPs off is a snails approach to growth, but certainly less risky. You do this because you want to own your property outright?
While you use the banks money, don’t let the obligation of repayment give you sleepless nights. The bank only loaned the money because the investment is so secure – which is why they only give you 80% of the value, and then also try to force you to sign your life away in a surety [now that is one to worry about]. Worst that can happen, is you give the keys of the IP to the bank, as it is “their” property.
Your equity can be converted into rolls of cash [cigar] so I see it as the same thing = my money. [oops, not your equity = my money, as good as that would be – that’s how a wife sees it]
The only property I’m paying off rapidly is my PPOR for tax reasons, however, I still use it as collateral for other loans.
Interestingly, Kay and DD both admit that you’re happily running with -ve properties. I think there are very few +ve cashflow deals out there with folks own equity (deposit) invested in them, according to the 0% deposit standard. If that were the case, then it would mean that there are a whole lot of really stupid (or desperate) sellers and plenty of really clever buyers. Not in this shark tank!
Glenn
I’m interested in hearing the general opinion on this issue of poor PMs in general. Being on foreign shores, I’m intrigued that in the first world economy of Oz there seems to be a problem with PMs, or am I mistaken because we only hear of the complaints.
I have my own poor PM problems here and it is a case of the better the devil you know. I was a PM myself for 8 months and was not too good at it, so left.
So,….. some of my queries are:
Are PMs in general bad? If so, why?
Do investors have too high or differing expectations?
If good PMs are in short supply, surely a market exists for good PMs? So then why is that market gap not being satisfied?
How many folks are there that are happy with their PMs? Any praise and happy stories?
etc.Perhaps there are some PMs out there who could enlighten us on their problems with service delivery?
Looking forward to many opinions on this one…
Glenn
Hi Dingles
I just have to jump in here too. This is one of my points of view in a debate under another thread! See https://www.propertyinvesting.com/forum/topic/10276.html
In the forum +veCF is loosely used and is a relative term where the deposit can range from 0 to 100% to achieve +veCF. However, this compares apples with lemons for analysis and folks seem to ignore the fact that the deposit is actually part of your cash flow.
Glenn
Hi Everyone and Kay
I’m back online after a trip investigating other folks IPs in the Eastern Cape of South Africa (B&B, Self catering, property market etc) with my family. Isn’t this property investment business great – a holiday turns into a clandestine business trip which is also tax deductible and my wife only briefly rolled her eyes.
I agree with Kay, I won’t get general agreement. I’m looking more to bounce my ideas out there and see what comes back, and the learning process is great. The object is not to convince each other, but to trade ideas and often we can happily agree to disagree.
I still believe that:
1) The OPEN definition of +veCF is misleading, because some folks conveniently forget that their deposit is part of the cashflow.
2) A -veCF which turns +ve in the near term can be a worthwhile investment, so using CF alone as an analysis tool is potentially dangerous.However Kay, I’m intrigued how you can ignore the deposit and use yield the way you do. For me, yield is return on the cash I invest. The purchase price is leveraged and OPM is not my money (YET) until realised thru sale or refinance. The deposit is certainly my cash that I could have invested anywhere or spent. Personally I don’t like Yield at all. In my neighbourhood it results in frighteningly small numbers that sound like I’m going nowhere, yet the reality shows otherwise.
Glenn
Rob
In note your indignation at my 11% interest rate.
I’m in Namibia, Southern Africa, where the environment is a “leetle” different to yours, hence the strange foreign customs on interest rates.
However, I am of the opinion that there is a basic relationship to the overall investing scheme of things. Our rates are like this:
Interest: 10-13%
Inflation: 6-8%
Property capital appreciation: 7-10%+ (my experience)In general, wherever you are, these interest rates are related, so if interest rates go up, so does inflation and vice versa. These things may seem strange in Aus when you’re used to single digit inflation figures. We’re just glad that we’re out of double digits. Zimbabwe is learning to live with 3 digit inflation, thanks to Bob. We bought our house when interest rates were about 18%, now were down to 10.25, talk about relief. The house is paid off 10 years, while we took out a 20 year loan.
As the world gets smaller, there are common standards for various things, driven mainly by common issues such as the internet. Time that the world economy started standardising a little….. so we can invest further afield with lower risk.
Gnight
GlennHi guys
I’m in the firing line….. which is to be expected. Thanks for all the comments, some replies:Firstly, you would be mad to get a loan over 20 years. This creates too much of a burden. Second, why would you make P&I payments?A longer term improves the cashflow situation. As the tenants are paying it off, I’m smiling. Unfortunately I am in a P&I only environment too, but that is easily changed by re-financing. I’d love to have an interest only loan over 99 years!
You also forgot to mention that to obtain 100% finance on an individual property, it will cost you a lot more – ie: between 2.5 and 3.5%.Good point, this would have to be taken into account in the analysis.
“A true definition of a +CF IP should be….”
A while back we had here ‘the true definition of a millionaire should be’…….
opinions ranged, and nobody could agree. *yawn*There’s no way are all going to agree, but I value the debate, cause I gain in learning all the way.
perhaps no money down with a CF surplus is a holy grail, because it means ‘infinite returns’This seems to be what beginners fret about when they hear about CF+. They wonder if those CF+ stories are true, however, if the definition of CF+ means I can put down any deposit I want, then ANY deal can be made CF+, even a bad one. If it means 0% down, then is CF+ a holy grail? Infinite returns is what we are aiming for.
think that this is a key to the whole concept of CF+ve – you can keep going. Is it better to keep going and have 20 percent equity in the deal, or stop – because you can’t find enough deals easily that break even on 100 percent lends, or – even more frustrating, you can find ’em, but the bank won’t lend you 100 percent?I agree totally. The criteria is not whether it is CF+ or CF-, it is about returns, as Physics said
It’s the return on that deposit that counts, or to use Steve’s terminology, ‘cash on cash return’I would rather have a small -VE than tie too much capital into a deposit (Yes, if I can get it).
The objective is maximum returns – which means lowering deposits, increasing income, reducing finance payments and outgoings, not necessarily CF+ or CF-.How much capital deposit was used to buy those 130 IPs? If one had to put (say) 20% down on all IPs, how many can you buy this year?
Looking forward to it!……
Hey, want to buy a farm in Africa……? No hi-tech here either.
Seriously though, you can get a piece of desert beachfront view, 3 bedroom, 2 bathroom, garage for about $160,000 with about a 20% return from rental. Your risk is the exchange rate which has been a roller coaster the last few years, but right now with the world in turmoil, we seem to be peaceful. Bit too far away, eh?
No chance of a suicide bomber in Southern Africa (or Oz for that matter) unless they are specially imported.
Keep on looking.
Glenn
OK, brace yourselves, here it is…..
Much has been written about the value of positive cashflow (+CF), or positive gearing on an investment property. Cashflow, however, is subject to the time value of money, so looking at initial CF is a short-sighted view. The deposit payment made by a purchaser on an investment property is often ignored in the CF calculation.
Consider a hypothetical case for demonstration purposes:
$100,000 Purchase price
4% Inflation (applicable to rental and
outgoings but NOT finance payments)
$645 Net monthly income (rent less outgoings) excluding finance paymentsLet us consider two financing options here, both at 6% interest over 20 years:
Case A: Zero deposit = ($716) monthly payments
Case B: 20% deposit = ($573) monthly paymentsThis means that (in terms of the definition often bandied about):
Case A is CF negative at $645 – $716 = ($71) and therefore BAD[glum]
Case B is CF positive at $645 – $573 = $72 and therefore GOOD[smiling]
This definition of cash flow glibly ignores the $20,000 CASH deposit.Looking at the actual annual CF, reveals the following:
Annual Cash Flow
Year Case A Case B
0 $ 0.00 $ -20,000
1 $ -550.69 $ 1,168.74
2 $ -228.83 $ 1,490.60
3 $ 105.90 $ 1,825.33
4 $ 454.02 $ 2,173.46
5 $ 816.07 $ 2,535.51Converting this to cumulative CF, results in:
Cumulative Cash Flow
Year Case A Case B
0 $ 0.00 $ -20,000.00
1 $ -550.69 $ -18,831.26
2 $ -779.53 $ -17,340.66
3 $ -673.63 $ -15,515.32
4 $ -219.60 $ -13,341.86
5 $ 596.47 $ -10,806.36This shows that the –CF investor in Case A has actually earned about $600 after 5 years, while in Case B with +CF the investor is still about $11,000 out of pocket. This demonstrates that –CF (by the broad definition used) is not necessarily a bad thing.
Many start-up property investors might believe that you need a deposit in order to start, or that you have to find a +CF property. However, if the –CF is manageable within your monthly personal cashflow situation, then one does not need the capital and the negative cashflow is not necessarily bad.
As property is generally a long-term investment, a long-term analysis tool that takes the time value of money into account is required. Internal Rate of Return (IRR) provides just such a tool.
IRR over 20 years shows that Case A has a return of about 62% while Case B has an IRR of 19% (assuming capital appreciation at inflation rate over the 20 years as well). This also demonstrates the advantage of leverage by using OPM.
Which returns me to my initial question of at what deposit level do we consider a property investment positive or negative? By the definition used above for Case B, I can make any property investment cash flow positive by increasing the deposit and ignoring the fact that the deposit is part of my cash flow.
A true definition of a +CF IP should be one where there is zero deposit. Everything else means we are trying to fool ourselves and comparing pears with apples.
Whadayasaynow?
Glenn
Hi LifeX et al
I think we agree that the objective is to limit deposits.
What I am getting at, is that +ve, -ve and COCR are “short-term” quick methods that provide some indication, but do not really provide a reliable longer term view of any IP.
Also, +ve or -ve as thrown around on this forum seems to be a relative term. If an IP is +ve with 0% down – great! Then that should be the definition. However, anything with a deposit >0% starts becoming relative, because downpayments are actually cash, and they are seriously negative!
I’m working on an example that will compare a +ve and -ve scenario, and show that the -ve CF scenario is actually a better investment.
However, sorry to say I’m leaving for a weekend with the family at one of my IPs on the beach [biggrin], so bear with me. Around mid next week I’ll try to post it here so my argument can be ripped to shreds.
Enjoy the suspense…..
Glenn
Hi Steve
Originally posted by SteveMcKnight:Hi,
Just remember that depreciation is tax deferral, not tax saving.
In my opinion, technically tax deferred is tax saved because of the time value of money.[wink2]
Glenn
I’m still flogging this donkey:
Can I consider a property investment cf+ at what deposit level?
0%, 10%, 20%, 30%…… at 100% everything is cf+. So where is the cut-off point?Is there a definition out there?
If I can find an IP with 0% down AND it is +ve CF from day 1, then (in terms of what I am reading all over the forum) I am a wise property investor with an eye for a bargain and worthy of much acclaim.
If I find an IP and I finance it with anything higher than 0% down (say even 100%), then in terms of income and expenses I can achieve +ve CF – but now I have cheated! [evil4]
The downpayment is also CASH folks. I took some of my CASH and I tied it up in the IP. Much rather take that CASH and spread it about – and yes, spend some on those many -ve CF IPs every month.
What I am trying to establish is that, IMHO, +ve CF is a RELATIVE term. I think we need to agree that a consistent definition is that a +ve CF IP must be with zero downpayment.
If I tie up 100% downpayment (or less) to be able to cry out “I have a +ve CF property that earns me $50/week”, then I’m being silly.
If one looks at the overall investment return (such as with IRR) using cashflow over a longer period (than this week or year), then a -ve CF IP turns +ve at some future date, as a result of inflation and fixed repayments.
Am I right or am I right?
So, is 0% down the TRUE definition of +ve CF?
Really enjoying the debate!
Hi Mcwong
I agree with Kay. Life, business and investing is risky. Successful investing is about managing your risk.
If you’re looking for the basic rules to wealth creation (and avoiding the excuses) read “The Richest Man In Babylon”.
Glenn
Hi Fern
Sounds like a good little “passive” business you’re doing there, and you even have the space to develop more.
I’m amazed that web advertising alone has got you this far. We’ve been doing smalls advertising mainly, most locals don’t really rely on the web (yet).
Our advantage is we have relatively cheap labour for cleaning, so it is easier perhaps for us to use OPT (Other People’s Time) in the form of an agent while using OPM.
Well done, you obviously find it rewarding.
Thanks for the useful contributions to this (flogged to death ongoing) topic.
Russ, anything close to the sea cf+ I have not discovered yet – so it is good to hear about it. Will just have to try harder.
My one question remains though.
Can I consider a property investment cf+ at what deposit level?
0%, 10%, 20%, 30%…… at 100% everything is cf+. So where is the cut-off point?Is there a definition out there?
Glenn
Hi Pisces
Points taken, which is why we’re considering relocation options. Still a tough choice. You’re right about living in a dream world. When one is on the inside the downhill slide is gradual and we adapt to the changing circumstances – more electric fences, higher walls etc.
However, in the land of the blind, the one-eyed is king. We’re in a pond with very little competent competition, which means good opportunities.
For example, RSA companies understand the risks of Africa, which explains why RSA companies are doing extremely well expanding into the rest of Africa. Most infrastructure development (roads, railways, construction, cellular telephony, IT) in Africa are being undertaken from RSA boardrooms.
Of course incidents like 911 and Spain show that the sky can fall on your head almost anywhere.
I’ve had 3 family members relocating to Canada (all left again) only to try somewhere else, then somewhere else…. It appears Canada was just too cold and too highly taxed for them to replicate their business success.
See you guys in Oz for Christmas. We certainly won’t be the ones to switch the lights off here.
From the above I’m interpreting the general trend to be:
+ve Cashflow IPs generally don’t show much capital growth.
-ve Cashflow IPs have brighter prospects of capital growthI’m still in the dark as to WHEN one can define a deal (ito % money down) as +ve or -ve….? If I put down 100% it is bound to be +ve, but not much leverage there.
Anyone managed to buy a beachfront property that ended up with +ve cashflow from the beginning?
I have had a request for more info on IRR. I am going to “doctor up” a spreadsheet that I have used might explain better how one could use it.
If anyone is interested, mail me and I’ll send it to you once I have knocked off the rough edges – no guarantees that I don’t have any major flaws in the spreadsheet, and it will not have a structure relevant to your environment.
Tschuss
GlennHi Pisces
So far so good here. We are linked to the RSA Rand on a 1=1 basis with our Namibian Dollar, and have freedom to transfer as we wish to RSA. We are in a common customs union with RSA, Botswana, Lesotho and Swaziland, so rules about foreign transfers are similar.
However, we live in fear of our country going the way of Zimbabwe because of similarities such as: a) commercial farms are owned by whites (including many foreigners)
b) our government openly sympathises with Bob Mugabe of Zimbabwe, while not yet taking the same route, although a Minister recently announced that the Government was going to expropriate farms of farmers who mistreated their workers.There is a lot of debate on the land issue, which is a highly emotional rather than rational matter. Being election year we are awaiting trouble as politicians abuse the land issue. Needless to say, farms are not the number 1 investment at the moment. Farms must be offered to the Government to purchase first, who so far do offer a market related price.
How to get money out 101 (not all entirely legal, but apparently used):
a) Go on holiday and take your annual allowance N$750,000 with you and pretend to spend it.
b) Have friends/family visit, give them local currency and they deposit in your offshore account.
c) Buy as many luxury goods before you emigrate – to the extreme – import a luxury car, export same luxury car.We have a great climate with plenty of space and authentic african game (less than 2 million people- which might explain why you have not met ny of us yet – we’re rather scarce – possibly even endangered). So far we’re living in paradise, apart from the threat of violent crime. Our friends who have emigrated to Australia say the best thing is you can breathe easy – no fear of being highjacked at the traffic lights, armed robbery, rape, housebreaking etc. Still worth a visit though.
I must learn to be more brief, but hey, I type with all 10 fingers.
