Forum Replies Created
- DraconisV wrote:Marc, you have summed it up great there.
But i'm a bit confused about this one;L.A Aussie wrote:5. Rent return at least 1% higher than current interest rates for better cashflow.So, what I get from this is that you want a rental yield(return??) 1% better than interest rates. Ok, so say interest rates were 7.5%, you would want and 8.5% yield or $8.5K rent on a 100K property per annum.
Hmm, how do you acheive this?
You have said that you can increase the rent by renovating, thus also producing more equity.So this will push the rent up, but not the rental yield by much.So where do you invest.
I live in Sydney, I will be investing in Sydney, I don't think I am adventurous enough to venture out. Maybe after a few IP's I can venture out.Back to that interest/yield thing, in sydney I'm calculating yields of like between 3-5%, I don't know how your getting these 8.5% yields.
Kind Regards,
Christopher Fife.Hi Chris,
I was referring to the rent return rate (yield) being 1% higher than the Loan interest rate. For example a $200k property with a weekly rent of $326.
At the moment, the yields around most of Aus, and certainly the Capital Cities, are woeful, and I won't buy in those places. Who says you have to buy in places like Sydney? The area is still over-priced in most cases and rent yields will be years in catching up. That means slow cap growth and bad rent returns for years; no thanks. The entry level is also too high generally in those areas, meaning the rent return is even worse; quite often the higher priced the property; the worse the rent returns are, and the hit to the hip-pocket is too high. I am not a slave to my I.P's and don't wish to be, but there are some who are happy to cop the neg gearing and hope for the cap growth. I've been there and done that and it's no fun – especially when the property doesn't go up in value after 3 years.
Of course, you can negotiate a property price down, and increase the rent to achieve the desired percentage, but it will most likely be in regional areas. A run-down property quite often has below market rent due to it's condition and there are quite often long-term tenants in these places who haven't had much of a rent increase during their stay which contributes to this scenario, so to purchase a property like this with 'vacant possession', do a quick re-paint and re-carpet etc, then put in new tenants at current market rates can achieve a sgnificant rent increase. It requires more D.D and knowing the area for values and market rents etc.
There have been numerous posts recently quoting good returns, so they are out there, but you have to look harder and further a-field. I'm afraid the days of buying "off the shelf" cfp's are gone, and we have to be more creative.
If you add the above scenario to a property that you can sub-divide and build on, you can sell the existing building after a reno, (or keep it for a time) and use the funds to pay down the loan on the new building, eventually owning the newer building almost outright, with good rent returns and excellent depreciation from the newer building and fixtures/fittings.
In fairness, you also have to be realistic and be prepared to adapt and evolve your investment strategy too. For example, if you are happy to accept 3.5% yield, then you won't even look for an 8.5% yield area. I only look for these areas, therefore I can find something near it without much effort. The hard part is satisfying the other criteria I set out in my first post. If I can't satisfy these criteria I don't buy. In the last 12 months I reckon I have looked at over 1,000 properties that didn't qualify – that's only 3 per day. This is done on-line, and I have bought sight-unseen before so don't have a problem doing that from over here.
I would rather not buy, than buy an investment that is going to under-perform, or worse, cause me stress and problems and not go up in value as well. Now that's bad.
There are plenty of people around who simply buy because their money is burning a hole in their pocket, who are told by agents and the media that "it's a 4% yield; that's a good return for the area". That's the statement of an un-educated investor.
So Chris, adjust your parameters and aim higher in rent yield and start looking further away.
To decide where to start; start with what you want to get out of it.
Do you want good cashflow, or are you happy to go neg geared and hope for cap growth?
Your decision determines what you look for.If you want cashflow, then you must look at things like rent return, outgoings on the property, depreciation for tax returns BEFORE cap growth prospects. I like to get both, so I want more than this.
If you want cap growth and don't care about the neg gearing, you look at things like demographics, immigration into the area, is the population rising or dropping, is the area going through a resurge of renovations and upgrades, are there any council plans for public services and developments such as better roads, a new freeway or train line, a new shopping centre/s, cinemas, parks hospitals and schools. All these things mean progress and expansion, demand for rental properties and cap growth follows.
I drove through Berwick in Victoria about 4 years ago, and saw very little population, compared to the infrastructure in place. There were a lot of new take-aways and a big shopping complex being built, 4 lane roads being constructed, new houses and the Monash freeway was being extended. Good signs; it was as though there was a "gearing up" for the population that was to follow and it has.
We bought a place that has since doubled in value. It was neg geared, but had good depreciation to soften the blow.
So, start running the numbers, check the council activity and go for a drive and study the area. What is happening? This will help you form a plan.
This scenario sounds similar to that of a parcel of shares in the stock market that don't return a great deal of dividend, but keep going up in value. You know there will be a correction at some point in the future, but how long do you hold on while the price keeps going up?
I like Warren Buffet's quote: "I made a fortune out of buying too late and selling too early".
B y the end of this year you will have made approx a 400% return on your money in only 18 months according to your prediction.
I think that is a pretty good return, and as you say; the party may end soon.
Most people can never pay off $100k on their home loan; you have the chance to do that and it is the biggest financial burden anyone can have as the interest is not tax deductible.
I'd be selling around the end of the year (or even now), pay off the home loan and use the equity for more investments that have good tax benefits and the chance of good income and cap growth.Thanks for that Jon, but the sort of thing I was hoping for was the selection process and steps that client of yours used. He obviously has a good plan and sticks to it and has become very successful.
His shortfall is quite big; any idea how he funds that? For most people that is half their nett wage or maybe even more.Good comment from Jon regarding condition as per the age of the property, and worth keeping in mind when making offers.
We bought one of our past PPoR's with a building inspection done. The house was built in 1926; an authentic, period Californian Bungalow – beautiful. Even had the plate rails and wood panelling down the hallway, but hadn't been renoed for several years. On the surface, it looked good.
The report came back with a few defects – all relatively minor, but the guttering was not good, and the inspector (from Archicentre) said that given it's age, the property was in good condition. Before he said that, as I was reading the report, I was thinking; "my God, the house is a wreck!"
Since then, we have always had reports done, and I make a point of having a discussion with the inspector to get his comments and make an informed decision. If the building is not in "fair and resonable condition" relevent to it's age, we make an offer with a discount to cover the repairs and our reasons for the request, or for the Vendor to do the repairs before settlement.
Most Vendors will opt for the discount, or simply refuse; not many will actually do the repairs for you; they just want to sell the place and move on.
Every time the Govt gets involved in trying to influence the Property Market either of 2 things happen:
1. They try to improve affordability and there is a surge of interest and the boom occurs (F.H.O.G).
2. They try to stifle the market to improve affordability or curb the investors and a slump occurs (1987 cancellation of neg gearing benefits).Either way, it is good for me; rising prices is good for my equity and rent returns as people can't afford to by so more renters out there, or a slump means I can go shopping for some cheap properties. Go Johhny, go! (or Kev! – god I hope not).
My prediction;
Liberal wins; steady as she goes as has been the case for 10 years or so. Johnny is annoying, but a very smart politician and has steered the Country quite well so far.Labour wins; higher interest rates and housing slump. This is because their focus is on the 'battlers'. They keep giving them handouts, and of course, they just spend it on crap, a deficit occurs, inflation rises so the interest rates must follow to curb the inflation, affordability plummets yet again and bingo! recession and slump.
For Building Inspectors, try ringing Archicentre, or do a google search for building inspectors in your area, or find a few in the white pages and ring them.
Keep in mind that these guys are ususally busy and might not get to do your inspection for several days.Also, get a copy of the Section 32 (or Contract of Sale) and take it to the Solicitor to go over before hand.
Don't make a bid until the auctioneer is about to call "3rd and final call" for the first time. Usually they go in to consult with the Vendors at this point, then they come out and continue. Don't be afraid to call out whatever increments you want in the bidding. Agents don't like it, but you are allowed to do it.
Go to as many auctions as you can before the day to see what goes on.
Be aware of dummy bidders who will bid continually up to around the reserve price, then suddenly drop out without any warning.
Finally, if you really want the property, and can afford the price, and you know the value is right, make a good offer before the auction day. Some Vendors will be happy with this and accept your offer, others think that their property is in demand and hold out for the auction in hope of a better result.
Once it happens to a high ranking cabinet member it will all stop. Until then….
Absolutely doondoon.
If the unit is newer (built after 1987) there will be good depreciation for the tax returns as well. Talk to a good accountant about your strategy there.Positive Cashflow AFTER TAX differs from POSITIVE GEARING (sometimes called positive cashflow) this way:
Positive Gearing is where the rent is more than the total holding costs of the property. The profit is pre-tax so the profit is taxable. The holding costs are tax deductible and can be used to minimise the tax bill, but normally there is not much chance of minimising your Personal Income Tax with properties like this. Of course; you are making a profit which is a good thing.
Pos Cashflow after tax is a property that initially is negatively cashflowed, or negatively geared (the cash expenses are more than the rent income), but after the "on-paper" deductions such as depreciation are considered in the tax return, the end result is that the rent plus tax return is more than the cash expenses – the cashflow is positive after tax.
The property is therefore positively cashflowed, but because it was initially neg geared there is no tax bill, so the profit is tax fee.To create this situation there needs to be good on-paper deductions from the depreciation on the building and fixtures/fittings. Generally, properties that are built after 1987 are the best for this purpose because the Govt allows you to depreciate the construction cost of the building at 2.5% per year for 40 years from date of construction. The fixtures and fittings all have different depreciation "lives".
Newly renovated older properties can also be good for this purpose as well, but you need to have a list of the reno costs for the tax accountant to be able to apply the depreciation to your tax return. A Quantity Surveyor is usually engaged to prepare a Depreciation Schedule, which is then given to your accountant for the tax returns.There are other factors involved in arriving at this result, such as the interest rate, the rent return, the holding costs, your income and tax rate situation, how much cash deposit you are using, and you need to run the numbers on each property to be able to work it out. With a bit of practice, you can guestimate the likelihood of a prospective property being C.F.P.A.T before you buy.
Personally, I look for properties between 5 and 15 years old ( built after 1987) as they are usually constuctionally sound, but needing a reno of some sort. This gives me good on-paper deductions because of it's younger age, as well as the renos that I will do. These properties are often cheaper to buy due to their condition and can be "value added" more easily through the renos to create more equity more quickly, and also improve the rent return. The combination of all these things is a very powerful wealth accelerator.
If you are considering another property, then this is what I would suggest, rather than a straight out neg geared property, and then your high income will be free to pay down the debt on your PPoR if there is debt there, or do whatever.
Don't impact your lifestyle and become chained to neg geared properties. There are many high income earners who are slaves to their properties (and their jobs) simply because they wanted to pay less tax. That makes no sense to me.
Hi Primer,
you can convert the existing PPoR into an I.P (we are doing it while in the USA), but after you do this, the money you borrow from your existing PPOR to buy the new PPoR CANNOT be claimed as a tax deduction.
The ATO looks at the PURPOSE of the loan when assessing the tax deductibilty of it, so you would not be eligible for any tax breaks in that scenario.
Of course, the holding costs and any loan interest you still have on the existing PPoR (which is now an I.P) will be tax deductible.You have 3 options:
1. Keep existing PPoR, convert to I.P and rent out. Because you have little debt on it, it will probably be cashflow positive (good). You will have to pay tax on this profit, but you can minimise most of it through your tax deductible holding costs of the property. The nett profit will be paid directly onto the new PPoR loan to decrease that debt.
2. Sell existing PPoR, use funds to buy new PPoR, which will leave new PPoR with less debt. Then access available equity to buy and I.P (or more). Then interest on the equity borrowed from new PPoR and the new I.P loan, plus all holding costs on the I.P are tax deductible.
3. Keep existing PPoR, convert to I.P, buy another I.P (can be used as PPoR at a later date) and find a nice place to rent yourselves. This way, the loan on the existing PPoR and the new PPoR (which is being used as an I.P) will be tax deductible, along with all the holding costs. In most cases, this is cheaper than a loan on you own PPoR (in your case maybe not as the PPoR is almost debt free), and will accelerate your wealth building considerably. Most people won't do it as they are emotionally attached to their PPoR and have to live in it.As per option 3, if you move into the new PPoR for a period of time before you turn it into an I.P (I'm not sure what the period is – maybe 6 or 12 months), you cannot claim any of the interest etc as it is your PPoR, but when you move out and use it as an I.P you can do this for up to 6 years before you become liable for any Cap Gains Tax if you ever decide to sell it in the future.
The first thing to do is never buy a neg geared property. Anyone can do that. You will find that many investors only ever buy one or two properties because of the cashflow drain, and many more sell their I.P's either to realise a profit, or because the drain is too hard and never buy again.
It is better to buy less properties, but buy only cashflow positive ones in cap growth areas (or at least have the likelihood of cap growth) so you can keep on accumulating without hurting the hip pocket, and the cap growth keeps increasing your wealth as you go.
Neg gearing is a short-term strategy you use while you wait for cap growth to occur, or while you are renovating before a flip etc. Of course, there is an element of gambling to that because no-one can predict the cap growth or final sell price of the flip.
You can arrange for your Property Manager to pay all your bills on your behalf out of your rent, and you get the rest deposited into your account.
Are your properties pos cashflowed AFTER TAX, or both neg geared?
Are the properties constructed after 1987? Have you had Depreciation Schedules prepared on them? They can make a BIG difference to your cashflow.Cheap is relative.
There are plenty of cheap places to buy in Aus, but many are not worth looking at due to other factors.
I would be more concerned about the numbers:
What is the rent demand and return, the vacancy rates, the prospects for cap growth (job opportunities, infrastructure, population growth), outgoings (if there was a building), can you get Property Management , repairmen, are there services such as water, gas, public transport, cost of building etc.I have to agree with Tyson ;
the whole point of investing is to make money, get rich, retire from the rat race and save the world with your riches (at least that's my goal). No-one ever went broke making a profit.
You are in a better position than about 95% of the world population;
You are high income earners,
You have an I.P,
It is a pos cashflow one.
Most people are none of the above, so take this opportunity to accelerate your wealth. Use as much of your high income as you can afford towards saving for further investment through either paying down your investment loans and/or saving deposits for the next one.
If you really want to minimise tax, look for a cashflow positive AFTER TAX property for your next one. This is where the profit on paper is after the tax return is done, so you still get the deductions, and the profit, but not the tax bill.I witness the "dumbing down" of society every day over here. The problem is; over here it's perpetrated by the Govt and Media (via the Govt and special interest groups). Scary place. Land of the brave; Home of the free – not.
Devo,
you're outta line. Instead of saying CRAP, you should be asking; "how did you do it and can you help me do it?"
I know a guy in L.A who owns 30 apartment buildings. He employs 2 full-time realtors just to look for properties for him.
Just because you haven't done it doesn't mean it hasn't been done.What you are talking about there is "flipping". Widely glamourised on tv, but a little harder than you think.
Make sure you do it in a rising market otherwise you will end up doing a lot of work for little profit. If you buy, renovate and sell within 12 months of purchase, after buying and selling costs have been factored in, you will pay Capital Gains Tax on the whole profit, at your Income Tax Marginal Rate. If you sell after 12 months, you will only be taxed on 50% of the profit, but then you have holding costs to consider.
The other major factor is finance. It's very hard to get good finance without any savings or without a work history. Maybe a Lo-Doc loan, but with higher interest rates, Mortgage Insurance – these cut into the profit as well.
I suggest you get a job, start saving like mad, watch the markets so you know when to buy and get very educated about property investing through books and/or forums. Some seminars are o.k – not the $4,000+ ones. If you see a seminar you'd like to go to; ask us here about it and we'll give you the heads up about it.
Maybe source a professional flipper or trader, spend some time with him/her and learn the secrets first.
If youj buy and never sell there is no such thing as a downturn.
Become a big fish in your own pond first.
With $800k you could potentially buy about 15 or 16 x $200k properties with a 20% deposit and costs and borrow the rest. Or, buy about 6 or 8 of them, put in a bigger deposit and have them all pos geared anyway. Of course; servicability may be an issue, but you can see my point.
The rent returns on properties of that price range are very often far better than the two you mentioned in your first post, you will spread your risk of vacancies, lulls in cap growth etc, and your exposure to property that could increase in value is exponential.
With two properties paying cash for them, you will get good rental return, but will pay lots of tax on the profit and only have $770k gaining cap growth.
With the scenario I mentioned, you could have potentially up to $2mill or so of property gaining cap growth, and the properties (if well selected) would be cashflow neutral or even cashflow positive after tax.
