Forum Replies Created
“Hi all
I’m not sure I agree with Marc’s definition. The positive cashflow properties I end up with are +ve without depreciation if that’s what you are talking about.”Hi Sue,
I think rod27 is saying he can’t find anything that is either positively cashflowed or positively geared based on the normal purchase price and the rent return. From what he posted it sounded as though he was looking for a ‘traditional’ property purchase that is +geared – not a wrap, or lease to buy deal, or renovate/subdivision etc.I tend to agree with him on this, and further to that I think you would be VERY hard pressed to find a straight postively GEARED property in Australia without putting in a substantial deposit.
To reiterate:
A positively GEARED property is one that has more rent coming in than there are expenses going out, and based on today’s interest rates that would need to be AT LEAST a 10% rent return with a cash deposit of some sort as well.
A positively CASHFLOWED property is one which is initially -geared, but after all factors (including tax return) are considered, becomes positive. There is no tax payable on them as they are positive AFTER tax.I haven’t seen a property (that was worth buying) with a rent return near 10% of recent times.
I would (I think we all would) be interested to hear from anyone out there who has found one, as described above, in recent times.Cheers,
Marc.
[email protected]Personally, I think some land content is a good thing over the long term as it is the land that increases in value – the building depreciates.
It is especially good from the point of view of development or subdividing the site to either sell or develop and rent etc.
That is not to say that a villa won’t do well, but I think historically houses have done better than units/villas because of the land.
If you can find a 4br house on 800sq/m that you think will go up in value, and is able to be sub-divided, and you can afford the purchase price and the neg cashflow, then go for it.Cheers,
Marc.
[email protected]Originally posted by elkam:“To be on the conservative side, I always underestimate expenses, over-estimate returns/income. It is a successful rule that I live by, and I wouldn’t quote blown up figures to ill-advise ‘simple’. “
Hello L. A . Aussie
I’m a bit puzzled. This is the second post that I have seen you say the above. The first time I just thought that you had mixed it up but now I am not sure.
Don’t you mean
I always over-estimate expenses, underestimate returns/income.
Sorry, I’m not trying to nit pick. Maybe I am missing something?
Thanks
ElkaSorry everybody – this is a typo.
You are correct elkam.What I want to do is make sure I expect more expenses than I receive; I over-estimate expenses.
I also want to make sure I get more in come than I expect; I under-estimate income.
This is part of my number crunching when I am researching a property, and it ensures that I don’t encounter an unexpected short-fall of cashflow after the purchase.
Cheers,
Marc.
[email protected]Ask for proof of employment eg; employer’s phone number and address. However, even unemployed people get rental assistance and can make excellent tenants.
Ask fo references from previous residences where they have rented if any.
You can also try and ask a local agent to do a check on the Tenancy Database. This will incurr a small fee, and the agent may not want to be bothered if they are not going to be the managing agent for your property.
Ultimately, it is hard to know what a good tenant looks or sounds like. You can’t really tell by appearances I’ve found.
Even the nicest seeming people can be a disaster, but in general most people try to do the right thing as they have to live somewhere.Cheers,
Marc.
[email protected]That’s where the due diligence comes in.
You don’t know for sure which houses are going to make a profit, but your research will help narrow down the selection.
In a nutshell, a property that is close to all amenities, not on a busy street, has the potential to have added value and bought below market value are your starting points.
The other important factor is it must be in an area that is either undervalued compared to surrounding suburbs, or is starting to go up in value because of improved infrastructure and increasing jobs/population.
Trying to reno for a profit in an area that is flat or has just finished experiencing significant boom will probably not give you a profit in the short term.
Allow for everything to cost more than you thought and take much longer to complete than you expect so there are no nasty surprises.Cheers,
Marc.
[email protected]Originally posted by marsden:LAAussie includes a factor for capital gains which is probably the historical 2 to 5% realized in the past. It is unlikely that this can be taken as a ‘given’ especially in the short term, say 10 to 20 years. It may work in selective investments but the key word is, of course, selective. In fact, the true immediate factor is probably a negative!
His ‘simple maths’ tumble in a heap when one takes a more realistic view of capital gain possibilities.Hi Marsden,
The true immediate factor is not a negative (maybe for some). If you look at the AVERAGE ACROSS THE COUNTRY for property right now, you can say the market is flat, or maybe even negative, but property is always LOCAL.
The capital gains factor I included is not even the National Average – it is less. Even if the figure was as you quote – 2 to 5%, the end result still beats any bank deposit return. Do the numbers.
To be on the conservative side, I always underestimate expenses, over-estimate returns/income. It is a successful rule that I live by, and I wouldn’t quote blown up figures to ill-advise ‘simple’. The numbers I quote are easily achievable and I’ll bet that there are several other better investors than I on this forum that do even better than I illustrated.You are correct on this point I will admit; ‘selective’ refers to various local markets that are performing badly – Sydney for example.
But it can also apply to selective areas that have done well; what about Perth, Kalgoorlie, Carrum Downs, Dromana, Frankston, (to name a few) over the last 2-3 years?? These areas where I own property have ALL gone up, and are ‘selective’ in a market that has been widely reported as being flat or negative across the country.A well selected property in the area will usually outperform the local market as well.
A realistic view of any investment vehicle is always long term, and historical, as this gives you the broad picture of how an investment vehicle has performed and how it is likely to perform in the future.
If you listen to media reports, or look at inner city Sydney or inner-city Melbourne over the last 2-3 years, I would agree. But that is the view of the uneducated and unsophisticated investor (and most reporters).
‘Simple’ has taken the ‘selective’ view and I think so have you.Cheers,
Marc.
[email protected]Hi smiley7,
you say you will be out of pocket $40-$50 per week? How much cash deposit are you providing?
I have done a very simple equation on your figures (assuming you are borrowing the entire amount using some home equity as a deposit, which is also borrowed);
At say, 7% interest, your weekly interest bill is $250 in round figures. (I would allow 1/2% more for safety).
You said the rent may be $200- $210 p/w; Let’s always work on worst case scenario and say it’s $200 p/w.
You need to factor into your rent around 20% of it to be eaten up by all the holding costs such as management, insurance, repairs, vacancy, council rates.This figure is $40 p/w.Based on these figures, which I always use and are fairly accurate (even though they are ballpark) you will be out of pocket more like $90 per week.
Of course, I have used worse case scenarios, but it pays to over-estimate expenses and under-estimate income.
I haven’t included your tax return (which is an unknown quantity), and I don’t know what interest rate you will have, so the figure may be as you say, but I wouldn’t count on that.Cheers,
Marc.
[email protected]If you are looking for a pos ‘geared’ property in Victoria using a low or no money down deal then I reckon it doesn’t exist at the moment.
You may be able to find a pos ‘cashflow’ property however.
This is different to pos ‘geared’ – it is neg geared at first, but becomes pos CASHFLOW after tax.
To find one such as this, you will need to find a property built after 1987 so you can maximise depreciation deductions on your taxable income, and you will probably need to use a larger than normal deposit as well.
It would probably also need to be a cheaper property with a decent rent return – at least 8% to get it over the line.
You can buy a report from Residex which will give you the most likely postcodes to deliver the best returns and cap growth for the next 5 years. Then you can research those areas in greater depth to find a possible candidate.Cheers,
Marc.
[email protected]Originally posted by jaydee:sorry to confuse you.i am not sure which way to go with making investing work.we can afford ip but i feel we r putting to much into it and the reason why i said do we sell our own home is to get some money behind us to be able to positive gear and buy more ip.how does anyone afford to keep buying houses unless they have alot of cash behind them.because all the fees involved on top of purchase price is a killer.
I would strongly suggest you don’t sell your PPoR to turn your neg geared property into a pos geared one. Even though you have a cashflow drain (which you can handle so no problem right?), having two properties is putting you way in front of most people in the world!
Selling costs, plus purchase costs on another I.P will eat up a lot of equity you have gained in your own house. Besides, there are other ways to improve your position.It sounds as though you are wanting to buy another property asap, but you can’t as the negatively geared I.P you currently own is draining cash which stops you from building up enough equity or cash for a deposit on another one?
If that’s the case here are a couple of suggestions you can do to free up more cash:-
1. Make sure you have a Depreciation Schedule done on your I.P to assist with the tax deductions you can claim on your I.P property.
Once you have done this and given it to your accountant, and he/she has assessed your tax position, he/she can arrange for a ‘tax variation’ on your tax return. This means that you get your tax return back every week in your husband’s pay, instead of at the end of the year. It will free up more cashflow each payday which you MUST re-invest back into your loans (PPoR loan is best as this is a non-deductible loan at the moment).
2. You can move out of your PPoR and turn it into an I.P. All of your outgoings on your PPoR (including the loan interest) become tax deductible, which also become part of your ‘tax variation’, freeing up even more cashflow.
3. If you do this, then you get another Depreciation schedule done on your PPoR to add to the tax position, which will free up more cashflow.
4. You then move into another property and pay rent. Your expenses are less as you are not responsible for normal outgoings other than the usual utilities such as gas, elec, phone, water and contents insurance. Also, you can rent a cheaper place than the rent you get from your PPoR and make even more cashflow. Many people won’t do this as they are emotionally attached to their PPoR, but if you can get past that aspect, you can accelerate your investing a great deal.
All of these strategies combined could free up considerable cashflow each week, and of course it all goes towards your two loans which are now both tax deductible. Your time-frame to when you can purchase another I.P will be shortened considerably.On the question:-
how does anyone afford to keep buying houses unless they have alot of cash behind them.because all the fees involved on top of purchase price is a killer.This is one of the skills you will develop. You don’t need a lot of cash – just equity you can access. You will learn to maximise your returns and buy properties that cost you virtually nothing or make a profit each week. It’s hard to be patient.
Cheers,
Marc.
[email protected]Originally posted by simple:Some simple mathematics here, some one please correct me here as I cannot get my head around this!
IP in our area cost for example $300K has return of $300/w minus expenses land and running cost you get about 250/week if lucky. Which is about 4.5% return on capital.
If I put the same money on my bank account I get over 6% return.
Now the big question, why would you buy IP if market is flat or growing anywhere under 1.5% ??That is very simple maths I agree. You need to know how to crunch a few basic numbers to compare apples with apples.
Now let’s look at a real comparison between a bank deposit and a property deal on say; $30k over 5 years. Let us also say I am on a 50% marginal tax rate, and inflation is 3% per year. Property increases in value at a realistic 5% per year on average (historically it is higher).
I put $30k in to a Bank Deposit @ 6.5% per year and reinvest the interest each year. After 5 years I have this result, and keep in mind I have simplified the calculations a little:-
compounding interest =$11,102
inflation = -$1,233
tax = -$5,551
NETT GAIN = $4,318 (not including bank fees).
cash on cash return of 2.8% per year. If I did nothing and put the money in a box under my bed the result would be nearly the same.
I have applied tax and inflation at the end of 5 years, but in reality, the inflation and tax would be applied at the end of every year, so the real gain would probably be less.Now, same $30k used as deposit on $300k property mentioned –
cap growth @ 5% per year compounding
purchase costs @ 6% = $18,000 (includes mortgage insurance).
rent return @ $300 per week ($15,600 per year)
allow 20% of rent for holding costs = $12,480 nett rent per year.
interest and bank fees @ 7% per year = $21,000 (I pay 6.72%).
tax return of $5k per year (not unreasonable).Result after 5 years:-
property value = $382,884.00 (cap growth of $82,884).
plus nett rent = $62,400
plus tax return = $25,000
TOTAL RETURN = $170,284.00Now, deduct purchase costs, interest and inflation of $134,486.00
NETT RETURN = $35,798.
cash on cash return of 23.8% per year.
I have not included that I would re-invest the tax return into the property loan to reduce debt. This would improve the return even more. AND, I would not buy a property for $300k with only $300 per week rent – I can buy 2 x $150k properties @ $200 per week rent each easily, so my returns are even better.
Hope this helps.Cheers,
Marc.
[email protected]They will need to leave a forwarding address with the agent for the statements etc. The agent is probably the best person to handle all of it – they can also be responsible for any rates, water, insurance etc that needs to be paid while they are away. It can all be deducted from the rent.
Make sure they get Landlord’s Insurance as well. A lot of household policies provide this now, or they can contact AAMI, St. George Bank, NRMA to name a few.
They will also need to leave an email address or contact phone number/s in case the agent needs to reach them regarding repairs or problems.
On that note, leave a $100 threshold with the agent for repairs to be done. This means that the agent can get any repair done up to that figure, but over that they have to contact the owner to get approval, unless they are happy to trust the agent to take care of all the repairs as they see fit. It depends on how much control you wish to keep I suppose.
Don’t forget to tell them that all their outgoings on the property for that period they are renting the property are tax deductible, so keep all receipts for the accountant.Cheers,
Marc.
[email protected]Hi again Mytch. I have all the time in the world to reply.
I’m here in L.A on a 2.5 year holiday while my wife pursues her career. It’s tough, but someone has to make a sacrifice!
Good to hear you have shaken off the typical consumerism we see today!! You should see L.A – it would make you cry. I know people who are earning over $100k per year who are in their mid-late 40’s and are still renting (in our apt building) and will be for life. But hey! they are keeping up with the Jones.If you buy houses ‘with your own money’ you are missing out on valuable LEVERAGE.
For example; if you spend $100k cash on one property and it goes up 10% per year, after 10 years it is worth $259k (10% compounding).
But if you use that same $100k to buy 5 properties each worth $100k – using standard 20% deposit, 80% bank loan to finance remainder, you have then LEVERAGED the $100k.
You now have 5 times the capital growth working for you.
That same $100k when leveraged, after 10 years, is worth$1,295,000
Of course, there is serviceability of the loans to be considered, but you see my point?
As for cheaper houses, they are a better choice for rental returns mainly. This is important for not maxing out my serviceability, so I can continue to keep buying without straining the cashflow. Realistically, most tenants can only afford so much, and once you get over about $250 per week the renter pool really thins out a lot. So I have elected to buy cheaper, newer (for tax benefits) freestanding or semi-detached units and houses in the lower quarter of the market – always below the median for the area. This makes it a lot easier to find tenants and buyers should I need to sell. I buy properties that the majority of people can afford to buy or rent.
Being free-standing or semi-detached is important because it means there is land content on the property, and it is the land content which goes up in value.
This is my strategy so far, and I would like to expand into apartments one day – but not just one apartment; I want to buy the whole block. Then I still get the land!Cheers,
Marc.
[email protected]I live near that area (not right now – I’m in L.A) and know it quite well.
Carrum Downs is in the ‘corridor’ between Frankston and Dandenong, and has exploded in size and value over the last 3-5 years. Buying there right now is a bit ‘missed the boat’ on capital growth I’m afraid.
Long term will be good, but I don’t think you will see a lot of growth for about another 3-5 years. There are a lot of Jennings style ‘cookie cutter’ houses popping up.
As well as that, the rent returns haven’t kept pace with the cap growth so the returns aren’t too attractive.
Maybe a commercial property?
By the way; how many beds/baths are the units, how many sq/m for building and land, car spaces/garage and what’s the price?Cheers,
Marc.
[email protected]Sorry to hear your predicament Mytch.
Here are few things you can try:
1. Are you paying interest only on the I.P? If you are paying P&I talk to the bank about restructuring the payments to I.O. This will take some pressure off, plus you only need to be paying interest on your I.P, as it’s only the INTEREST that is tax deductible, and try to reduce debt on your non-deductible debt such as car, PPoR, c/c’s etc.
2. Don’t forget to include a Depreciation Schedule in your tax return if you haven’t already done this. An apartment as expensive as yours will have excellent tax benefits from depreciation I would expect. If you haven’t had one done get it done asap and include it in last financial year’s tax return. You can use it for the previous 4 years if you haven’t included it, so you may be in for a good sized tax return which will help with the loan repayments.
You will of course re-invest all tax returns into personal debt reduction won’t you?
3. Rent out your PPoR and move into the cheapest rat infested dive you can find and make a profit off your PPoR rent. All the outgoings on your PPoR will become tax deductible as well. The combined effect will save you thousands I reckon.
Do you have a good accountant? If not, get one asap.On a more personal finance note: look very hard at your “latte factor” – the amount of money you waste every day on lifestyle and looking good.
See how much money you can save by getting rid of the ‘wanker toys’ that all 24 year old males on high incomes have (I was one myself a million years ago!) and do it REALLY tough for a year or two – no one will care I promise.
Other than that, you are stuck with it I’m afraid. You sound as though you have enough income to handle the neg cashflow? If so, try to weather the storm – the prices will eventually go back up but how long it will take no one knows.
Paying that much for an apartment with no land value (even if it is in Sydney) to me is not a good idea. The higher the purchase price the lower the rent return tends to be.
Next time go for something below the median house price; there are a bigger pool of renters and buyers in this price range, and the returns are always better. And make sure it has some land content as well.Cheers,
Marc.
[email protected]I thought it had already boomed recently?
Anyway, the local council can give you records of past sales and the prices on a particular property/ies in the area.
Also, ask a few of the local r/e agents.Cheers,
Marc.
[email protected]When you sell a property to get access to the equity you have built in it, you forego future capital growth on that property, as well as incurring selling costs and capital gains tax on the sale.
You can still access most of the equity in the property for the deposits on other properties, or even the renos on the existing property and you still have exposure to any future capital growth as well as saving on capital gains tax and sale costs.
You don’t need to sell this property to do what you want to do.Cheers,
Marc.
[email protected]Tell that to the EMRON or WORLDCOM shareholders.
You can pick any ‘window’ in time, or any share or property deal and see a fantastic result, and vice versa.
For example, we bought a house in 1998 on the Mornington Peninsula and sold it 2 years later and we DOUBLED the price of the house. My input of dollars was zero. I used equity from a previous house (which also went up in value quickly) as a deposit and borrowed the rest. That is a fantastic result.
Based on this story you would say property is great.
Meanwhile, I know a lady who owned a condo here in L.A and had to sell 2 years later for a $37k loss that she will be paying off for many years.
Based on this story you would say property is not great.
Look historically and long term to give the real comparison between shares and property.
They are both good investments, but the factor always ignored when comparing the two is the risk. there is risk in both, but in property it can be managed much more.
Were any Emron shareholders insured against loss, and did they know they were about to lose every cent they had invested? I would doubt it.Cheers,
Marc.
[email protected]Interesting. I didn’t know a billboard was property.
$2 to a house is not property investing; that’s trading – there just happens to be a house mixed up in the items.
Maybe we can get a few taxi licence holders to give us some input on those investments on this PROPERTY FORUM.
I heard Alpacas are o.k, or what about futures trading; or maybe art?Cheers,
Marc.
[email protected]Simon is spot on.
The end result is you will sell (why sell at all?) and make a profit! It’s hard to go broke doing that.
Don’t be afraid to ask silly questions. The only silly question is a question not asked.Cheers,
Marc.
[email protected]Congratulations! I hope you have a great investment experience.
If the contract of sale is unconditional there is not much you can do to force the tenant to sign a lease until after settlement.
Whether the tenant is on a periodical lease or a fixed term lease is irrelevant – they are still bound by the Tenancy Act. Depending on which State your property is in the rules can be slightly different, but not much.
If the tenants have been there a long time and have been on a periodical (month to month) lease already, then you probably don’t have a lot to worry about. This is quite common actually – we have 2 of these now and the tenants are great. The advantage is you can re-assess the rent more often, and maybe increase it. The disadvantage is they can leave at a month’s notice.
The advantage of a fixed term lease is the tenants are locked in for a set term, the disadvantage is you cannot re-assess the rent as often. In another property we have a tenant on a 2 year lease, but the rent has gone up in the area and we can’t raise ours. It’s a trade off to a degree.
From experience though, it really doesn’t matter whether the tenants are on a long or short lease – if they want to skip out and not pay there isn’t a lot you can do to stop them.
The Tenancy Tribunal will rule in your favour, but it is hard to get the money from the tenant after they have gone. The only satisfaction is they will be blacklisted and have trouble renting again.
You will probably have to make a claim through your Landlord’s Insurance to recover the money. I have had to do this once – I got the money back, but I was out of pocket a few months until it was all settled.
You absolutely must get landlords’ insurance to protect yourself as soon as possible. That also applies to building, contents and public liability insurance on the property. Even though you haven’t settled on it, you can still be liable, so do it now. You should be able to get an all-in-one policy from NRMA, AAMI to name two. Do a google search to find others.
My suggestion is to leave things as they are with the tenant until after settlement, then discuss the options with the agent. If the tenant has a good record of payment and taking care of the property, I would be letting them stay on a periodical lease to keep them happy and more importantly – staying.Cheers,
Marc.
[email protected]
