Hi,

Remember that LMI is insurance for the bank against your repayment default. Even though you pay it, you don't get the benefit. My understanding is that even if you default and the bank claims on LMI, your credit rating will remain trashed.

There aren't too many mortgage insurers, and hence the market isn't very competitive. One of the ways the previous government looked at reducing loan costs was to contemplate opening up the LMI market to more players.  I haven't heard of any developments as to whether or not this ever progressed beyond being a draft policy.

Cheers,

Hi,

ROI is popular among accountants, but I feel it is less useful for property as it does not fully price in borrowing capacity.

For example, let's look at this example:

Purchase price $200k
Cash deposit: 20%
Closing costs: $5% of purchase price; paid in cash
Annual rent: $12,000
Annual cash costs: $15,200 (includes $2,000 of capital loan repayments)
Depreciation: $1,500

The ROI would be:

Rent: $12,000
– Cash costs: $15,200
+ Capital loan pmts: $2,000
– Depreciation: $1,500
= Loss: $2,700

Cost: $200,000
+ Closing costs: $10,000
=Total cost: $210,000

ROI= -2,700 / 210,000
ROI = -1.29%

However, a cash-on-cash return would be:

Rent: 12,000
– Cash costs: $15,200
= Cash loss: $3,200

Deposit Paid: $40,000
+ Closing costs: $10,000
= Cash Down: $50,000

CoCR= -3,200 / 50,000
CoCR= -6.4%

Do you see how ROI uses asset value (not taking into account % of cost borrowed), whereas CoCR does factor in the amount of cash contributed?

Having said that, if you contribute low cash then the CoCR can be skewed.

As I said, I prefer CoCR for property deals, particularly positive cashflow calcs.

If you have trouble crunching numbers then get along to the upcoming conference. There will be plenty of help on offer.

Cheers,

Hi,

The cash-on-cash return formula is as follows:

(cash received – cash paid) / cash down

where:

cash received: rental and other income
cash paid: all cash costs, including capital loan repayments and excluding depreciation
cash down: deposit paid + purchase costs + finance costs etc + initial repairs

A quick example for you to try:

$200,000 property bought with a 20% cash deposit.
Allow 5% for closing costs (paid cash)
Annual rent is $15,150.
Rental Management 7% of rent collected
Rates: $1,500
Interest: 8.5% interest only
Other cash costs: $2,500 per annum
Depreciation: $3,100 per annum

Based on the above, what would be the cash-on-cash return?

Also, if ROI is net profit / asset value, what would be the ROI based on above?

Cheers,

**Sigh**

What spend time answering posts where people show no respect and demand action?  Yeah, that's how I'll pick posts to reply to!

There's no point convincing people that things can and are done, when they already believe that it can't.

The simple fact of the matter is that I never borrowed more than 80% of the purchase price.
 
How? Well I didn't refinance equity. And I didn't use unethical methods to obtain finance.

However I did:

* Sell property to convert unrealised to realised profits, and reinvest the difference
* Use a standard accounting structure to protect my assets
* Fully disclose all details to financiers

Enough said.

Hi,

I don't think I'm talking complete crap, as the book is based on my real life examples.

However, as you are studying the latest info and world trends, I'd love to hear your thoughts on how you think "studying perfect equilibrium and arbritrage etc etc" relates to the property market.

And while I agree that the property boom of 2000 – 2003 caused the 11 Second Solution Formula to become more difficult to apply, I don't agree that Book 1 is totally out of date. I continue to buy positive cashflow properties and invest in the same way as described in the book. Having said that, perhaps it is time for an update.

Bear in mind though, I also released the sequel in 2006 which was designed to answer your questions. There is a chapter in that book on how to find positive cashflow properties.

Finally, positive cashflow after depreciation is not what I call positive cashflow; it is positive gearing. Perhaps this is a finer point, but the assumption is that you have other income to soak up the depreciation tax shield. If you don't then the property will be negative cashflow as the depreciation created loss must be carried forward.

Margaret's books are well written and a good source of info on the topic of positive gearing.

Regards,

Hi guys,

We are out of stock, and I am in the process of rewriting it as I type. There have been quite a few changes to tax laws of late, least of which are the new tax rates.

This has had an impact on investors, although many remain unaware.

For example, the changes to marginal tax thresholds have made negative gearing less tax effective.  For instance, if you made a $1,000 loss and could get a deduction at 48.5%, then your tax 'benefit' was $485. Assuming that you now are on a 30% average tax rate (due to the thresholds increasing), then your tax 'benefit' is now only $300.

This is just one of the many things I need to update Wealth Guardian for.

The product is due to be re-released, bigger and better, in late March.

Hope this has helped shed some light on the matter.

Happy New Year!

All the best,

Hi GladysWeber,

Welcome to the forum.

"Have I found a good deal?" is a question that every property investor ought to ask! Sadly, many take the advice about what other people think is a good deal, and wind up with a lemon. I wonder how many people are sitting on a marginal deal while stories of fortunes being made happen around them.

To answer your questions:

1. A deal is a good one if it makes your required identified profit within your assessed risk parameters.
 
The four key questions to ask and calculate are: how much money down; how much money back; how much time until you get paid; how much risk. It's important to protect against greed. Be happy to make your profit within your time frame rather than looking to strike gold and become rich over night!

2. As for people whom you can contact… your accountant would be a good place to start. S/he can check your numbers and help you to identify key assumptions. Mortgage brokers and bankers are also a good resource, as they will help you assess the deal from a lending perspective. A solicitor will help you with legal uncertainties. The local council will assist with planning issues (and if not them then a town planner).  You would be very wise to get a building and pest inspection orgainsed. Finally, if you find an agent from a rival firm that you trust, ask him/her what you should look out for in the deal.

3. If your research leads you to believe you have found a great deal, then you will want to make an offer. The agent selling the property will be able to help you with what to do next, but as you seem to be starting out, don't sign or do anything without being guided by a solicitor or legal adviser first.

4. After you have signed a contract to purchase the property, you will need to leave a deposit (usually 10%, but less is best if you can negotiate it). Your solicitor will then help you with the legal paperwork (conveyancing) during the settlement period. You will need to organise or confirm any loan you may need so that the proceeds are available on the day of settlement.

Finally, if you are keen to take your investing to a higher level, and feel like getting personal mentoring from an experienced property coach (who can help you assess the deals you find) would help, check out: http://www.propertyinvesting.com/results

Cheers,

Hi and thanks for your post.

Certainly, there have been people who have participated in RESULTS who live in remote areas. For them, the distance is another factor they have to overcome in order to achieve success.

I would say that joining the mentoring program won't solve your identified problems, in fact, with more education you may be more frustrated by the limitations you have described.

My encouragement would be to get you to think through why you would like to be mentored, and how serious you are about making some big life changes to achieve your wealth creation goals sooner. Should you decide to take massive action, I think RESULTS would be a great support and guiding tool for you, as the program best benefits those who take constant action.

If you'd like to talk about this over the phone, by all means call Simon Buckingham (head coach) in the office on 03 8892 3800 during business hours (after 7/1/08).

All the best,

Hi,

Thanks for your post, and thanks Richard for the answer given.

Another option would be to buy the property in your own name, and have your wife co-guarantee the loan. That way her income would be included in determining how much you can afford to borrow, but title is in your name.

Since you are -ve gearing, there is limited use to family trusts, as losses in these entities cannot be distributed.

Some may suggest you consider a hybrid trust, however be aware that the ATO is looking at these very closely at the moment.

Normally, investment properties are insured for public liability and also house insurance. You may like to insure as a landlord if applicable (eg. to protect the income stream and also insure against malicious damage). The tenant normally insures the contents (since they own them).

Cheers,

Keep us in the loop with what happens!

The idea of using the inspection report to negotiate a lower price has wroked well for me. This is because you have a valid reason for asking for a lower price, rather than seeming to be greedy or opportunistic.

All the best,