I definitely think you should be focusing on neg gearing properties that will show good cap gains for 2 reasons.
Firstly, being on a high tax bracket will bring you some tax relief, and secondly because cash flow +ive properties will further increase the amount of tax you already have to pay.
I think this is pretty obvious, so i’m not sure why AD is recommending something that isn’t beneficial for your particular circumstances. And i don’t think AD’s use of the word “wrong” to describe my suggestions is correct from the 2 reasons i have just stated.
If you invested in cashflow +ive properties now, you’d be paying more income tax.

I guess AD is saying that having cashflow +ive properties will allow you to retire earlier. But at your age, you have another good 30 years to invest in property. If you buy a fully financed IP that is neg geared and located for cap gains, you’ll find that this will turn around down the track when you have paid some principle off and your interest deductions are reduced. At this point you’ll find that you are cashflow +ive and will then be paying more tax rather than receiving a tax refund.

This exact same thing happened to me in the space of about 8 years. I bought an old Victorian house that i renovated and let out. I was neg geared and getting tax refunds back of about $4,000 to $6,000 each year. I then got to a point where i had paid off too much principle and was becoming positively geared because i had reduced the size of my loan. I was in a situation where i had more equity through a combination of reducing my loan size and cap gains.
Nothing at all wrong with being cashflow +ive except that i now had to start paying provisional tax.
So i decided to go out and borrow more money to buy another property. I then started getting tax refunds back as well as building up equity in another property.

My point is that your neg geared properties today will benefit you now, and they will also benefit you in the future when they become cashflow +ive when you want to retire earlier.
You can have your cake and eat it too! [][8]

It’s difficult to find cashflow +ive properties in the current market mainly because of the strong cap gains we’ve had recently. Rents haven’t been keeping up and that’s why cashflow is not so positive. [xx(]

Example, the last property i bought in Melbourne for $112k. That was in 1998 and after renovating it, i was able to get a tenant for $190 pw. At that point it was cashflow +ive. In fact it still is for me, but because it’s now worth $220k and the rent hasn’t changed, if i sold it the new purchaser wouldn’t be buying something cashflow +ive.

If you were to actively seek cashflow +ive properties, you’d be looking in rural areas where cap gains aren’t so easy to get.

Some things to ponder…

First thing you need to do is write down your goals for the future.
Break it down to short term (12 months), medium term (3-5 years) and long term (10 years plus) goals. Under each of these goals and time frames, write down what action is required to achieve these goals.

Perhaps if you told us more specific details such as what your property is worth, what you owe (current equity) and your gross income, we may be able to provide better information.
This will also give you a better idea as to how much you can borrow based on your equity and DSR.
See a mortgage broker to see how much you can borrow, and then look at what type of property investing you want to do. You need to decide on what niche area of property investing (buy & hold, wrap, flip, renovate etc.) you prefer and which strategy is best for you so that you can move towards that.

You say “From reading through some of the info on this site, it looks as though I am going to have to start focusing on +ve cash flow properties…”

WHY?

Only you can decide which area you’d like to invest in and what is comfortable for you.
Don’t let a forum such as this influence what is in your best interests. At your age, you should be seeking out quality property that will show cap gains and perhaps negatively gear if you’re on a high income. It doesn’t sound like +ve cash flow properties are suitable in your situation.

You have to remember that this forum is dedicated to selling Steve’s products and the emphasis is on cashflow +ive properties and wraps.

If you want really good, unbiased information from friendly people who are knowledgeable and have plenty of experience, log onto Jan Somer’s forum at:
http://www.somersoft.com/forums/

You should also be investigating what structure is best to buy your future IP’s in, depending on the strategy that you use.
It’s unfortunate that Steve is an accountant yet he won’t give people on this forum any information on what options are available, and what structures he recommends. You have to buy a product from him to get this information!

There are several excellent accountants, financial advisors and mortgage brokers who moderate on Jan Somer’s forum and provide excellent advice to specific questions.
For example, you may want to buy an IP in a trust structure and then rent it back to yourself.

Check it out – repost your question there and you will be pleasantly surprised at the response you get.

Hi walkernick,
Yes i think you’re better off investing for cap gains than cashflow when you’re young.
However if you’re in a situation where you don’t have the cashflow to service the debt, you’d be better off with something cashflow +ive or neutrally geared.
The main thing is at least you’ve made the decision to invest in propery which i believe is the best asset class to invest in.
Congratulations on making the decision to invest at your age and don’t be sucked in to buying a fancy car or anything else that is going to take up your income.
As we all know, cars depreciate highly in value and it’s important that your debt is not bad debt.
Always remember to borrow for assets that appreciate in value (like property) and not depreciate (like cars). You can always buy the fancy car down the track.
If you’re worried about interest rates rising, maybe you could consider locking in something from 3-5 years. Interest rates are at an historic low, and it’s unlikely they will be coming down much further. If they do come down any further, it’s likely that it won’t be more than .5 – 1%.
From a tax point of view, your rental income will be taxed but hopefully it won’t be that much if it’s about $2k – $5k p.a.

As far as i can tell, the 11 second solution is a 10.4% gross yield.
If you have a property worth $x and the weekly rent of $x is “double” this figure, it always works out at 10.4%. Examples:

$262,000 = $524 pw = 10.4%
$185,000 = $370 pw = 10.4%
$148,000 = $296 pw = 10.4%
$130,000 = $260 pw = 10.4%
$67,500 = $135 pw = 10.4%

etc, etc, etc.

This is a very good yield for residential which is typically about 5%, and commercial is typically 10%.
If you see a yield like this on a residential, you can pretty much bet that you will have minimal cap growth as this is the tradeoff. It’s very hard to find a high yielding property that will also have strong cap gains – especially in the current market.
However, if the yield comes anywhere about 8%, i think it’s worth a closer look.

To calculate gross yield, divide the annual rent by the purchase price, and multiply by 100.
Example:
$9,426 (rent) divided by $127,500 and multiplied by 100 = 7.4%
Don’t pass up a good property just because it doesn’t qualify under the “11 second solution.”

You can also work out the “purchase” price of a property if you know it’s income. Divide the annual rent by the yield and it will tell you what the “purchase” price should be.
Example:
Weekly rent is $145.
Annual rent is $145 x 52 = $7,540.

$7,540 divided by 5% = $150,800
$7,540 divided by 6% = $125,666
$7,540 divided by 7% = $107,714
$7,540 divided by 8% = $94,250.

Of course you should have a good knowledge of what the typical yield is in that location to work out a ballpark price.

Hope some of this helps.
Quentin

PS: Yes, you can reduce the principal on I.O loans by making payments off it. Go into your bank with the money and say “i want to pay this money off my principal“.

Scott,
I will answer your questions even though i am cynical about your reasons and some of this info has already been mentioned in this post and others.
Perhaps it will give some credence to the information i offer.

As i mentioned, i bought my first IP at age 19 in 1990 – a “renovator’s delight” in the form of a Victorian cottage in Brunswick.
Over the years, i have bought and sold property in South Yarra, Middle Park, St Kilda West, South Melbourne and Richmond.
In Queensland i have bought and sold a small block of 3 units in Coloundra (Sunshine Coast), Surfers Paradise and Labrador.
My latest Queensland purchase was an old block of 5 units with water views and only 30 metres to the ocean.
I intend to develop this property and provide basement parking, 2-3 shops on ground level, a cafe/restaurant and 6-8 boutique type apartments on top with water views.

I currently have the 5 units, another apartment in Surfers Paradise, the house in Brunswick and 2 other properties in South Yarra and St Kilda; and i just sold another South Yarra property at auction 2 weeks ago.

Yes, my property does add to my income – approximately $93k gross on property worth about $1.8m. My LVR is about 40%. Some properties are cash +ive and others are neg geared – they help balance each other out and provide me with a gross yield of about 5%.
My property is all well located and will achieve strong cap gains. I have never had a vacancy since 1990 (13 years) when i first began to invest because my properties are all in excellent locations.
As i mentioned earlier, people who rent usually work nearby and that’s why i always buy something that is in big cities, close to public transport, shops and other infrastructure like hospitals, libraries, parks etc.

Re: your post, i’d advise you to go I.O. and not P&I on your IP loans. Your cashflow will be greater, plus you can always pay some principal off seperately if you want to. As you may know, 99.99% of repayments on a P&I loan are comprised of interest, not any principal. It’s only towards the last 5-10 years of a P&I loan do you see any of your repayments reducing your principal. And of course, only the interest component of your repayments can be deducted from your taxable income.

PS: i find it amusing that you suggest “Investing in positive cash flow property is about staying ahead of the herd. Once the herd arrives it’s very hard to buy for postive returns!”
The herd has already arrived and that’s why cash flow +ive properties are in hick towns that show minimal growth. As i already mentioned, the only reason they’re getting a cap gain is because they’re coming off a low base and are considered cheap compared to cities on the east coast.

I.O. rates are the best as interest is the only component of your repayments that can be deducted from your taxable income.

Repayments on a P&I loan are 99.99% interest anyway in the first 10 years or so of the loan. It’s only towards the end of the loan that you actually start to repay any principle.

If you want to reduce the principle, you are better off going into the bank with some $ and saying “please pay this off the principle on my loan.”

The best way is to get I.O. and maintain your repayments at the same amount even if %rates do fluctuate. Anything extra that is not paying the interest automatically goes towards the principle.

Is it a unit or a house?
First you say it’s a unit, then a house, then a unit again?
Not that it really matters re your loan, but if you intend to renovate it, be aware that you cannot add as much value to a unit than a house for obvious reasons.

You can buy this unit/house if you have enough equity or cash for a deposit, AND you can also service the loan.
These are 2 seperate things that you will need to satisfy the bank with.
If the LVR is greater than 80%, you may need to pay MI as well.

Some tips for an improved forum:
1) I agree, the ability to post PM’s (Private Messages) to other members would be excellent.
Not sure why you can’t do it with this forum because it’s a standard feature on heaps of other forums i’ve visited.
Maybe Snitz don’t have that function or it’s been disabled for some reason?

2) Under member’s profile, it would also be great if you could provide some fields to enter things such as interests, hobbies and occupation to let other users provide more informative replies that are more relevant. Members could also put in their e-mail address if they chose, so that private messages could also be sent this way.

3) The ability to attach files would also be great, eg before and after pics of renovations, spreadsheets for rental management etc.

4) A function to allow users to see any posts they’ve made or responded to.

That’s it for now, but keep up the good work and let’s try and get a great forum going like the more popular ones such as Jan Somers and MSN:[]

http://groups.msn.com/PropertyInvestment/messageboard.msnw

http://www.somersoft.com/forums/

[][][8D]

Yes, settlement is when the title has been transferred into your name and ownership takes place.

However as Steve pointed out, the purchaser has a legal obligation to insure the property from the date of contract, not settlement date. This is also the case in QLD.

Capital gains is worked out from contract date of purchase and sale, not settlement date.

As far as i can tell, the 11 second solution is a 10.4% gross yield.
If you have a property worth $x and the weekly rent of $x is “double” this figure, it always works out at 10.4%. Examples:

$262,000 = $524 pw = 10.4
$185,000 = $370 pw = 10.4%
$148,000 = $296 pw = 10.4%
$130,000 = $260 pw = 10.4%
$67,500 = $135 pw = 10.4%

etc, etc, etc.

This is a very good yield for residential which is typically about 5%. Commercial is typically 10%.

If you see a yield like this on a residential, you can pretty much bet that you will have minimal/nil cap growth.

You should keep in mind that the “11 second solution” is someone’s way of calculating yield. You don’t have to be a sheep and be so pedantic about this “rule”. If it comes anywhere over 8%, i think it’s worth a closer look.
The “10.4% rule” is also only applicable with low interest rates, as it’s simply a yardstick to ensure CF +ive based on current interest rates.

To calculate gross yield, divide the annual rent by the purchase price, and multiply by 100.
Example:
$9,426 (rent) divided by $127,500 and multiplied by 100 = 7.4%

I call it the “10.4% rule”.

As far as i can tell, the 11 second solution is a 10.4% gross yield.
If you have a property worth $x and the weekly rent of $x is “double” this figure, it always works out at 10.4%. Examples:

$262,000 = $524 pw = 10.4
$185,000 = $370 pw = 10.4%
$148,000 = $296 pw = 10.4%
$130,000 = $260 pw = 10.4%
$67,500 = $135 pw = 10.4%

etc, etc, etc.

This is a very good yield for residential which is typically about 5%. Commercial is typically 10%.

If you see a yield like this on a residential, you can pretty much bet that you will have minimal/nil cap growth.

You should keep in mind that the “11 second solution” is someone’s way of calculating yield. You don’t have to be a sheep and be so pedantic about this “rule”. If it comes anywhere over 8%, i think it’s worth a closer look.
The “10.4% rule” is also only applicable with low interest rates, as it’s simply a yardstick to ensure CF +ive based on current interest rates.

To calculate gross yield, divide the annual rent by the purchase price, and multiply by 100.
Example:
$9,426 (rent) divided by $127,500 and multiplied by 100 = 7.4%

Don’t be a silly billy and pass up on something just because it doesn’t work out to be exactly the “11 second solution” or “10.4%”.