Please Advise?

Hello Ian,

Thanks for making your post and welcome to the Property Investing.Com commmunity.

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Anyway my situation is that I have enough equity in my own home to borrow 110% of an investment property. Therefore when calculating cashflow on prospective properties the loan repayments include all the costs of purchasing the property. When doing this I am unable to find anything cashflow positive. My question is this, and I guess I’m looking for a yardstick here- am I being unrealistic with my expectations? Should I be paying a deposit and/or purchase costs out of my own kick so that the actual loan is less, and overall the property is then more likely to be cashflow positive? What do you think???

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You raise a very interesting question.

I think that finding a positive geared property and also gaining a 100%+ lend is a very difficult task. The 11 Sec. solution assumes that you will contribute a 20% deposit – that is, your loan will be about 80%.

I think that the answer to your question requires that you separate your property investing into at least two distinct phases.

Phase One

Finding properties that in the ordinary course of events would provide positive cashflow based on an 80% lend.

Phase Two

Working out the best and most creative way to finance those properties.

Doing this will at least allow you to find properties that in the ordinary course of investing would be +ve cashflow.

Cash On Cash Returns

If you use 100% financing then you really can’t calculate a cash-on-cash return as it is infinity.

Perhaps a way forward is to assume that you contribute x% as a deposit and then annually adjust the amount of your deposit by your interest so that you work off an accurate denominator.

The danger in what you are describing here is that you become so highly leveraged and may be prone to a collapse in a high interest rate environment.

I think that you will be OK so long as part of your strategy also involves a plan for repaying the debt and bringing your overall borrowings down.

Perhaps look at the 100%+ financing as an interim way to get into the property and then soon after look to pump some equity in that will:

1. Improve your cashflow return
2. Reduce your overall credit risk from overgearing

I believe buying properties based on 100% lends is a dangerous strategy given the liklihood of capital appreciation becoming flat and potential interest rates rises.

Has this helped?

Regards

Steve McKnight

My wife and I went to Sean O’Reilly’s evening when it came our way. He advocated the revolving line of credit instead of using all of your home for equity support. You can then do the 80/20 loan with the interest on both being tax deductible.