Hi Brad05,

If you use equity in your PPoR as a deposit on the I.P then your mortgage payments will go up as you are using loaned funds instead of cash as the deposit.

Your total finance for the I.P will be higher, which will affect your cashflow from the I.P's. This is not necessarily bad, but you need to factor this into the number crunching.

It is a known fact that in most cases it is financially better for people to rent a house themselves rather than own a house, and put the difference in funds between the rent and the house mortgage into investments (unless they own their house outright).

The problem is, most people have a psychological barrier with renting and owning I.P's and not living in their own home. There is a very strong emotional attachment to the PPoR for most. If you can overcome that barrier you are on the way. The other problem is that most renters never put the difference into any investments – they just spend it.

In your case you already own a PPoR (which is a type of investment in itself) that has gone up in value. Well done!

I would not sell this as you now have one I.P if you move out and put in a tenant. You can then access the equity you have to buy another I.P.

If you sell your PPoR, you will have selling costs, and lose the future cap gain on your property. It is not always a step forward to sell your property to buy another.

Incidentally, the way you work out your USABLE equity is;
The Banks will lend you 80% of the current house value, minus any existing loans.

So, your position is:
$380k x 80% = $304k + $20k deposit = $324k
Existing Loan is $295k
USABLE EQUITY = $29k (add to that any funds you have put aside)

There are some lenders that will let you use up to 90% or even 95% of your PPoR equity, but I believe this is very over-exposed and dangerous. Remember that lenders will say "yes", but it is not them putting their house on the line.

Hey Gary,

Can I ask you why you elected to use this structure to purchase your I.P's? Is it because you have a business partner?
What are the benefits? Can you still take tax deductions on your personal income tax?
How does buying as a company impact on your personal income tax
How does it work – what is the process to buy?
What are the disadvantages if there are any?

Hey Billy;

good name. I think  "ophelia" would have worked well too.

The best time to reduce debt on loans; even investment loans; is… ALWAYS.

I know some people say to never pay off the investment debt because it is tax deductible, but you still have to service the loan and be a slave to your real estate if it's neg cashflowed. If you've got a chance to turn a neg to a pos by paying down some debt, then take it I say.

Less interest to pay means improved cashflow, serviceability and equity for further investing.

If the profit tips the I.P you keep into pos, then you can redraw and go again. The goal should be to acquire as many pos cashflow properties as you can, that also grow in value, so you can retire from the rat race sooner.

If your finances are o.k, ie; good serviceability, good LVR, then invest again.

Unless you can find another project that offsets the neg property with a pos cashflow, I would rather see you with one property that doesn't strain the finances and is fun to own, than two properties that you will struggle with and have stress.

As an agent you would know that the commissions are negotiable. Maybe you need to have a mini commission auction amongst the agents – tell them all to put in their best (lowest) offer. That'll be fun. They're all just trying it on to anyone who falls for it.

Is there any way you can use the equity from the Kal property to help fund the next project? maybe get a JV partner?

I think there is still a bit of growth still to go over there in Kal, and the rents are starting to go up. Even when it flattens out, I don't think the values will drop off all that much and it won't happen for a while; especially while China and others similar are developing and need our metal etc.

Hi S.O.G;

I agree; I am conservative at heart, and like to invest aggressively, but safety is the first concern.

I get nervous when I hear of newbie investors taking the plunge with 100% (and more) finance on property investments. This is too highly exposed in my opinion.

It is not so bad for the more experienced investors who can crunch the numbers and see the dangers to leverage this high, but even then it is not ideal.

I think your strategy is the safest way to go. I'm sorry I can't enlighten you about Bank West.

I just wonder about the catch (if any) if they are offering a higher interest rate than ING, who we have been with for years, and who I'm happy with. I haven't been putting money into the account for a while other than for my son towards his first house (gotta start 'em early). All my funds go into investment loans these days.

I mean; how can they offer the same conditions as ING and pay you a higher interest rate? What is the catch?

Hi S.O.G,

the only problem with the 4% properties between '85-87 is they are only depreciable for 25 years, which runs out in 2012.

I see where you're heading now; I would park the cash in an ING account or something like that for sure, or leave it in the shares, and try to save like mad until I had the deposit required.

The other argument is; can you find a good I.P investment that will carry an almost 100% finance with a pos cashflow after tax? Probably not.

I suppose if you could, then it still may be better to go for the I.P and use the lovely leverage, rather than have to put the cash into a high interest-bearing account until the decent deposit is saved.

Agents rates are very negotiable, despite what they will try to tell you. They will try to stiff you with 3% or something like that.

I have heard of 1% commission, but that's very optimistic.

On a deal of that size, 2% is not unreasonable. That's $18k for doing virtually nothing.

Make 'em an offer of $15k flat, with no commission below a certain figure. This way they won't try to low-ball you, but don't expect them to get top dollar either. They'll just get a sale.

Tell them to pay for the advertising as well. Don't get sucked in to paying a grand or more for ads. The buyers are already out there looking in the windows, driving the streets and on the internet.

All you need is a photo in the window, a hundred flyers for the front desk at the agent's office (which they can pay for – they'll just run something off using their computer and printer) and a photo on the internet.

One more thing; don't let them sign you up for more than 60 days to sell the place. 45 days is even better; you know they won't sit on it and use it as a window dressing for that space of time. They want a sale and they don't have much time.

Put all your requests (as above or something similar) on paper and hand it to each agent you interview. This will show them you aren't negotiating and that is the deal you are offering them. Then say nothing and watch the reactions. If anyone says they have to refer to a superior in the office, you know you are not dealing with the main guy/gal, and they will come back with a counter offer better for them of course.

One of the agencies will take it – they need listings and without them they can't make a sale and get paid.

You're right dk,

a. you do need to have a taxable income for Margaret's strategy to work, but at the end of the day if your property investing is successful and you end up with a surplus of funds which may be taxed then you have won the game – no work for positive passive income.

Unfortunately, the stats show that most property investors only ever buy one I.P, and then most of them sell it and never buy another. Neg gearing and the financial hardship it produces contributes largely to this.

b. You are incorrect however that the property has to be new or newer. It only has to be built after 1987 -20 years old as of today. You can even use older properties that have been renovated as the renovation costs can sometimes be substantial enough to afford a good on paper deduction. Newer and more expensive properties will produce bigger on paper deductions, but they are not a pre-requisite, and quite often the rent returns are so bad that the great on-paper deductions aren't enough to turn a neg to a pos. I have a property that was built in 1989 and cost me $105k, with a rent return of $220 p/w (it was $180 p/w when I bought it). This is nicely pos cashflowed, and has increased in value by over 50% in 3 years. This, to me, is an easy investment that most people should and could make when they are starting out.

c. Finding a totally positive investment for most average people is extremely difficult. For most average people right now; they are earning a taxable income, and would love to invest and can't find a property investment that doesn't make any loss at all (pos geared) in today's market. Forget Steve's 11 second rule; it is the provider of false hope these days.

Margaret's strategy offers a very workable alternative for the many normal folk who want to kick-start their investing career without the debilitating situation of neg gearing. If the average person can buy a property like the one I described above every 2 years, they will have a lot of satisfying investing experiences.

If they also pay down some debt along the way, rather than park the cash in a pathetic savings deposit account, they will have investments that cost them nothing, and make them rich. Some may even have to pay tax on their investment instead of taking a hit to the hip pocket every week.

Try looking in areas where no one is buying, then see if there is any potential for future growth and rent demand, employment possibilities and amenities, under-valued.

When properties are selling before your eyes (and above asking price) there is a frenzy going on. People buy anything they can throw a cheque at. Stay away.

With agents, the best thing to do is give them a very specific list of criteria that you want. The more broad it is, the more they will stretch the boundaries.

Hi rjm_22.

First thing; can you tell us your name or a nick-name – your posting name is a nightmare to type after 3 chardys! What about just 22?

Sorry to tell you this, but Steve's book with the 11 sec rule is all but a distant dream in Aus these days. You have to create the pos cashflow through adding value, subdividing etc. You can't simply buy it "off the shelf" any longer.

An easier (still not that easy) strategy is to buy a property that is cashflow positive AFTER TAX.

I have talked of this already on this site, and it still seems that it is not well known.

Basically, you buy a property that is neg geared initially, but through the  "on paper" deductions associated with the right type of property, the cashflow of the property ends up being positive after tax. This means you will not have to put your hand in your pocket to hold this property, and there is no tax to be paid on the profit; unlike a property that is positively geared.

There are several factors which combine to make a property arrive at a pos cashflow after tax; your personal tax rate, the rent return, the depreciation amounts, the loan interest rate; they all have an influence, but it can be calculated ahead of the purchase to ascertain whether the property will fit the criteria.

Ideally, you would buy a property in an area that has good potential for cap growth, as well as a good rent return and the on paper deductions so you can maximise your investment returns.

The building needs to be constructed after 1987 to qualify for the "on paper" deductions, and a "depreciation schedule" prepared by a quantity surveyor for the accountant to use for the tax returns.

This is the very basic over-view of the strategy. Read all the Margaret Lomas books to find out the nuts and bolts of how to do it. They are excellent.