He seems to only read posts about economic doom and gloom. Lets talk about him behind his back!

Maybe he thinks a ‘wrap’ is a Lebo bread rolled sandwich. But then again, a ‘sandwich’ is something else. Lets talk about ‘KEBABS’!

The Mortgage Adviser

The disbelief that there are numerous negitve factors on ‘real’ equity seems to be leaking out into the real world in plague proportions.

The Mortgage Adviser

Hi Bob,

Basically, they are a real estate agent who demand higher commissions than most other real estate agents which results in higher prices being passed on to purchasers. They portray themselves as a ‘Club’ or as working for the purchaser. This is NOT the case. Their main income is derived from selling so they are certainly not working for the buyer. They are working for themselves!

Also, none of their current properties meet their ‘rules’ or ‘teachings’ yet they continue to advise ‘club members’ to buy them. What does that tell you?

The Mortgage Adviser

Even in that situation, the majority of the $23,000 is a principal repayment which does not belong to the the individual. It has to be repaid to the lender. It is still ludicrous!

The Mortgage Adviser

Surrey, they are arguing that the portion of capital growth you don’t take makes it worthwhile. Those who do not work in finance do not realise that your ‘real’ equity is not your ‘useable’ equity.

In any case, my arguments against this ‘structure’ were in response to Terry’s example of ‘living off equity’ and spending on non-deductible personal expenses as you had no other income. Rental income was lower than the cost of interest so you would not be able to borrow in any case unless you had a very low LVR (NO DOC) or committed fraud and lied on your application (LOW DOC). In either of these examples, you would run out even sooner.

I am still waiting for someone to respond to the cash-bond argument being considered income. I do not believe that a lender would consider a return of capital as an income in any situation especially when there is an interest expense on that capital. This is ridiculous in my mind and I have never seen a lender do it.

The Mortgage Adviser

Show them the following in simple terms…

Assume you are in the highest tax bracket (48.5%) and earn $100,000 per annum and all other things being equal…

Paying MORE interest:

Pay $1 in interest today.
Deduct $1 in interest tomorrow.
Your taxable income has changed from $100,000 to $99,999.
* $51,500 Net from $100,000 taxable income
* $51,499.49 Net from $99,999 taxable income

Your return from this dollar spent is 51 cents.

Paying LESS interest:

Pay $1 less in interest today.
Receive NO deduction for the $1 of interest tomorrow.
Your taxable income has changed from $100,000 to $100,001.
* $51,500 Net from $100,000 taxable income
* $51,500.52 Net from $100,001 taxable income

Your return from this dollar saved is 52 cents.

You are one cent better off!

NOW, if you saved interest, you would be able to use that money so add the interest on the $1 for using it for the whole year and you receive an extra 5.4 cents (assuming ING 5.4% interest rate). Take the tax off this and you are left with 2.78 cents

You are 3.78 cents better off!

If you offset this additional income against non-deductible debt, the benefits would be far greater. Also, if you are not in the highest tax bracket, the benefits would be even greater!

I hope your friend can read and understand the simple numbers presented above. Tell them to add a few zeros to my $1 example and look at the result. Also, explain to them that each NEGATIVE geared property means just that – your cashflow goes backward with each new property. You end up running out of money!

The Mortgage Adviser

I don’t know about anyone else, but I chose to work as a mortgage broker because when prices are going up, people buy. When prices are going down or not moving, people refinance and consolidate. There is some impact with numbers dropping but it is minimal to a good broker.

The market extends beyond the Northern Beaches.Also, my ‘market’ comment was not restricted to property investment. There is an investment concept called ‘diversifation’ which helps prevent the impact of a decline in one sector adversely affecting your overall portfolio. I think anyone who focuses on only one sector would be facing problems at some point.

The Mortgage Adviser

What about ACTIN?

The Mortgage Adviser

dmichie, have you heard of refinancing and debt consolidation?

Have you not seen flows of funds moving from property to the stock market when prices flatten or decrease?

There are still people making money out there because they open their other eye and look for ways to make money whichever ways markets are moving at the time.

The Mortgage Adviser

I have posted the figures for year by year… TWICE! Check the other thread.

The Mortgage Adviser