Forum Replies Created
It sounds like a typical negative gearing investors attitude to making wealth, spend a large amount of money on some property, use up all their own disposable income to cover the interest repayments, and just hope that capital gains will make them a lot of money.
Seeing as they had to use the mum’s house as collateral, I assume they do not have much financial experience or property investment experience. So it looks like they are just putting everything they have and just hoping it works out well, which of course is the worst way of investing. I mean sure between 2000 and 2007, it was fine when prices just skyrocketed so even an amateur investor could make a lot of money without any risk. But these days you have to be more selective and careful about your investments, if the property market moves downards, then they will start struggling, if the property does not have a tenant for a few months, then again things could go downhill for them very quickly.
Even in a best case scenario, they will not get the loan under control for many years, so it will prevent them from investing further.
We started a blog to basically detail all the experiences we have with our investing, so far we have been focused on the US side of investing, we try and help people to learn from our experiences.
Feel free to look at our blog, the link is in our signature
We started a blog to basically detail all the experiences we have with our investing, so far we have been focused on the US side of investing, we try and help people to learn from our experiences.
Feel free to look at our blog, the link is in our signature
Agree with the above post,
If you plan on using the first property as your PPOR, then it will making sure you purchase a property that suits your family, both currently and probably what it will be like in the next 5-10 years as well.
If your first property will be an investment, then just look at the potential numbers, see if you can get this first property to be positively geared, either by adding equity through renovations, maybe the property has a granny flat and can provide a double income, or maybe the property is just naturally positively geared. If your first property is geared positive or neutral, then it should not impact on your borrowing capacity for your future property and should give you some more freedom.
I am definitely trying to obtain finance to purchase over in the US. Already have one property paid for in savings, but would prefer to be able to use leverage and use a loan.
Unfortunately I have found it is almost impossible to obtain traditional finance in the US, as I am sure you are well of. Personal loans are definitely an option, but the high interest rates and definitely a turn off. Your monthly repayments will be in the order of $1,365 a month? I guess if you look at it that way, your total expense will only be $81,900 or so, so not too bad really.
Have you looked at hard money lenders? They seem to be fairly popular in the US for people who cannot obtain finance through the banks for a variety of reasons, typically due to poor credit. Obviously the rate they charge is higher than the banks, but keep in mind the rate in the US is only 5% or whatever, so they may only charge 9% or something for your loan. Not too sure how difficult it is to negotiate a deal being from Australia though.
Another alternative is this mob – http://loansusa.com.au/ – I have not used them myself, they did approach me about using their service, but then the communication seemed to break down and has not gone anywhere. That being said we are not looking for a loan in the near future. But they seem to specialise in providing finance for Australians to purchase property in the US. Looking at their examples they seem to be able to provide finance at around 9% or so, so less than your personal loan. I am not sure if they have a minimum deposit required, or minimum loan amount, but it might be an option?
Let me know how everything goes, I am curious for my own investments.
Regards
That is pretty neat, consolidates all the real estate websites into one location, and I like the idea of showing the map so you can get a good perspective of how far away certain things are like train stations, schools and shops etc.
Also good if for instance you know you should avoid anything north of a particular street for example, knowing it is a bad part of the suburb, it will let you know instantly where all the available properties lie.
That being said, the US have had a similar system for a long time, and arguably a lot more powerful and useful than this, but I guess it is a start.
Your initial post had the rent increase from $330 to $350, and then later on you say it increases by $80 per week?
Taking the lower number of $20 per week I would still say it is worth it. It may take an extra 6 years to redeem the added income in rent terms, but the overall value of the property should rise by at least $6,500, so essentially you have made an immediate return on the property in the form of equity.
Of course it always depends on the current state of the kitchen, if it is a decent looking kitchen and replacing it with a flat pack or equivalent, then the added cost would not be realised in the capital gain of the property, but of course if the kitchen definitely needs rework, then every dollar spent will be worth it.
It is like any real investment, the higher the return, the higher the risk. Unfortunately figures can get a bit exaggerated when talking about some of these properties.
I mean sure a property that sells for $30,000 can rent out for $600 per month. So now you can go and say it has a 24% gross yield. But then there is the issue of bad tenants that don't pay, changing over tenants, damage to the property, things breaking down, etc etc. All of a sudden your 24% is almost gone. It is important to note that 24% may sound high, but really it is only $7,200 in this example, which as you know sometimes does not get you going very far.
It is important not to get carried away with the potential for a property in a perfect world, and try and look through the frosted glass and see the reality of the investment.
The first property I purchased was in the Fort Myers area, $50,000 cost including renovations, rents for $650 a month, so almost a 16% gross yield. Had a couple issues, but we have good tenants and nothing major, typically gets a return of 7% net, so definitely cannot complain with that. The important thing is to realise that you are not going to collect the 20%+ returns into your pocket, and our expectations were for between 5% and 10% net return, so we are satisfied with how our properties are going. But I expect a lot of others out there are very disappointed.
Hi WorldInvestor,
I had a look into the information on the Pilbara region, experts seem to suggest up to 50 years of supply left in the region. I guess this is dependent on the increase of technology to mine the areas. And also on the demand generated by the world.
There are a lot of factors involved, and I admit my assumption of 20 years was probably a bit too low, and looking at your link it seems there will at least be some social infrastructure developed there to try and build some sort of city. That being said there will still be an enormous supply of housing.
And I also agree with your point that the companies will simply start supplying their own housing with significant camps, it will definitely be cheaper than renting these places. I myself work on a mining project in QLD near Chinchilla, and the company set up a camp which houses about 1,000 people. All 1 bedroom with ensuite rooms, definitely not 5 star living but I am still not complaining. All the rooms are just demountable buildings, so they would cost very little to construct and install, and I would say provided the company has the land, this sort of set up would be a whole lot cheaper to run and maintain compared with renting out other properties for $2,500 a week.
I have always been interested in mining property, I have seen a lot of people make a lot of money getting into the property BEFORE the rents become outrageously high. But from what I can gather, there just does not seem to be a long term potential.
Looking at your situation, $600k mortgage, 7% interest rate means $42,000 in interest only repayments a year.
$2,600 per week in rent gives $135,200 gross rent return per year.Gross profit will then be $93,200 per year. Taking away tax and other fees, will assume a net profit of $60,000? I could be very wrong there but let's just stick with that figure for now.
Now you say the property is worth $1,000,000 at the time being, but this value will one day become just about nothing, obviously I do not have details of your property, but eventually the mine will be finished and you will have a property in the middle of nowhere, probably only worth $150,000 if you are lucky?
So although you are making $60,000 per year from your rental returns, the capital value of your property will slowly degenerate down to this $150,000 value. I am not sure how quickly it would go down, but saying the mines will be lasting for 20 more years, assuming a linear devaluation of value. So a $850,000 capital drop over 20 years is a yearly loss of $42,500.
So your true return may only be $17,500 per year? Still a pretty decent return, especially given the market. But if you just sold the place, took away your $400,000 profit and invested it and got a 5% net return somewhere else, that would be $20,000 return.
Like I said I am not really sure if this is how mining properties work, but it just seems like the logical way for me. And I just do not see any true value in them over a long term, unless of course you are able to get into them before the mining operations start.
This sort of property would most likely still be negatively geared for a couple of years, however it would seem it should only be maybe a couple of hundred a month at most, and I assume you would be able to cover this expense fairly comfortably.
Renovations are definitely a good way to be able to get access to instant equity, and also a reason to increase the rental return to get this property up to neutral/positive.
I was recently approached by someone representing this company – http://loansusa.com.au/
Essentially they specialise in providing finance for Australians to purchase US property. I have not gone into any details with them and have only accessed the information they provide on their webpage.
Looking at their examples they have provided, they seem to be able to offer loans with interest rates between 5.5% and up to 9.5%, with the typical rate around 7.5%. One of the reasons I was hoping to invest in the US was to take advantage of the low interest rates they have over there, but if I had to pay the same rate as an Australian loan it almost looks at becoming not worth it.
Looking at our current property, the gross yield is around 16.25% (paid $44,000 + $4,000 rehab and rents for $650 a month) which is great, but currently we are looking at a net yield of around 5.2% (that being said we had to pay $2,900 for a new air conditioner unit, I assume and hope this would not happen again for a few years at least), which would leave the property negatively geared if we were to obtain a loan. This goes against our desire to get a positively geared property portfolio, unless we were able to obtain US finance with the nice low interest rates.
Can't say I have ever heard of 'Price-to-Rent Ratio' before, but I do not see how it is any different to yield? Where the rent divided by the home value is expressed as a percentage. Essentially the inverse of what the price to rent ratio tells you.
Yields tend to increase, (or price to rent ratios tend to decrease) the lower the value of the property is. I am a firm believer that the yield of a property should typically be around 8% (this would give you a ratio of 12.5).
Anything higher than this, the renters are paying too much and anything lower, the value of the house is too high.
I guess with the return in the US, the value of the house dropped so dramatically, but the price of renting the properties remained relatively the same, giving such high yields and low ratios.
Alex,
Thanks for the kind words, the blog is s till in it's early days, hopefully over time we can populate it with more useful information when we have more experiences to share.
Jay,
I see your point. Our agent was saying she was having great difficultly obtaining finance due to not having an SSN. I guess this ties in with your reasoning, she is originally from Australia, and I guess they are concerned that if she decides to default on the loan, she can just leave the US and they will not be able to chase her for the missing money. Looks like we may be building our portfolio one property at a time, buying them outright.
Thank you above for all your help and assitance. I talked to my property manager and she basically echoed what you have said above, that it is impossible to be able to obtain finance for a foreign investor.
The only solution she suggested was to obtain a credit card with the bank account, and by doing so, build a credit rating over a year or so, and then eventually may be able to purchase a property in my personal name. This is not ideal as we would prefer the property to be in the name of our LLC, but that being said, we can always transfer it across to the LLC later.
Being able to get finance is still only a maybe, but she was suggesting that we would need a minimum loan of $200k, but this does not need to be spent all on one property, a couple of properties could be bought and we simply draw down on the finance we have been provided.
So it seems there could be a fairly long waiting period before we are able to obtain finance in the US, in the mean time we may look at obtaining finance in Australia to purchase in the US, however the highest interest rates will make this less appealing. Alternatively we may look at continuing our investings in Australia, or starting to invest in NZ.
Otherwise we can continue to just purchase properties outright with cash in the US and just save up enough in between purchases, would be a slow organically growing portfolio, but at least we would never have to worry about being in debt!
Thanks for the information Jay,
I understand not being able to finance properties for under $100k, and we were not looking at doing this, we were going to be looking at more the $150k and higher end of the market. The only reason we bought the first property for $50k was because that was all we had to invest, and we wanted to limit our risk with our first investment so we decided to start small.
We definitely do not want to go near hard money lenders, they seem to have their own rules and it is just too much risk and the return would just not be enough to make the risk worthwhile.
I guess with the difficulties in obtaining finance we may be stuck with continuing to invest in Australia and NZ, nevertheless, when I do go to the US I will try and talk to some banks and see first hand what they are able to help me out with. Most likely they will not be able to do much for us I suppose, but never hurts to ask.
Looks like I should start booking my flights soon.
Also does anyone have any recommendations on how to mitigate the risk of having a loan overseas? I remember when we did have a US bank account, we ran into an issue where we were only told by a letter in the mail that they were closing our account 7 days from the date of the letter. Since the letter took 20 days to arrive, by the time we knew, it was already too late. This is just an example of a risk, but I guess is there a bank which provides email notifications rather than postage?
You should only put an offer in for what you are comfortable paying. If that is the original offer, then by all means just submit an offer at that rate.
The worst they can do is say no? And I bet every successful property investor has had more offeres rejected than accepted, I know I certainly have (but I am definitely not successful!…yet)
As people above me have said, Negative gearing is purely reliant on solid capital gains to make any money, so you are relying on the property market increasing for you to make an income. Whereas Positive gearing you will make money as long as your property has a tenant in there.
The effect negative gearing has on your serviceability can also be too detrimental to your investment strategy and due to lack of money, it can leave yourself stalled and having to wait for your property to grow in value to give you enough to move on to your next investment. Whereas positive gearing you can literally purchase a property every day of the week and serviceability should never be a problem. OK maybe I am exaggerating that last sentence a bit, but it is definitely more possible to achieve this than buying negative geared property, where after 1 or 2 properties, you serviceability has reached its limit and you can no longer invest.
We have a property in Florida, unfortunately I cannot compare it to Atlanta, but I am happy with Florida and the market there.
That being said, there is oppurtunity in both markets, so it is more important you select the right property in either area.
