I’ve invested in three properties over the last seven years, all positive cash flow and good capital gains. Even with commercial clients renting your residential property ( they’re wonderful – they do everything, keep the property in tip top condition, because they are on renting it onwards for short term rentals to their clients, and always pay on time), what I found was that the more you ‘buy’ the property, so the greater your equity either via capital appreciation, or paying of the mortgage, the lower the return, including Steve’s cash on cash return. I bought a property, fully financed, for $200, using my own home as part collateral. It was positively geared, even excluding depreciation. The return on $200 was spectacular, but, 3 years down the track, by which time our equity had grown to $40,000, mostly through capital appreciation, that net cash on cash return was down to 5%. Since the $40K was still less than 20% of the current value of the property, we couldn’t use the equity to buy something else.
Given we could put this on our own non deductible mortgage costing 6.00% out of after tax income, we sold up.
I’d be interested in knowing what you think the opportunities are as your equity increases in a property, especially when (due to , as I did, starting a 0% equity) you still don’t have the magic +20% or greater equity in the current market price (which would enable you to access the equity without selling the property.Hi Kadab1,
I am not sure that you have stated your question clearly, but will have a go based on what I understand.
Firstly, do you have a plan for your future with regard to your investment property portfolio.
Secondly, many of the advisers both on this forum and elsewhere would say NEVER Cross collaterise property. It is too risky.
Thirdly, if you had the property stand alone as a deal with the finance company then you would probably have more equity in both your own home and the property.
Hope this helps. There are ways to solve most problems. By the way probably the best place to post these sort of questions is in the general forum as you will get more replys.
Good Luck
]hi there,
>found was that the more you ‘buy’ the property, so the >greater your equity either via capital appreciation, or paying >of the mortgage, the lower the return,
no – the return is calculated on what you bought the property for, as that’s what you’re paying off (or paying outright.)
Capital gains and rental income gains added together are your ‘gross yield’ – which should get better over time if you are putting your rents up in line with inflation, and if capital growth is up not down.> including Steve’s cash on cash return.
Cash on cash return means a return on the actual amount of cash (not equity- deposit, buying costs) you put into the deal in relation to how much cash (not equity or cap growth – which is not cash!) you get out.!
>through capital appreciation, that net cash on cash return >was down to 5%.
uh uh it would be going UP not down (if you put a small amount of cash in for closing costs etc) and infinite if you’d put no actual cash in the deal. The cash on cash return is in relation to the CASH you put in way back when you bought.
i think you are just getting confused and doing the numbers as to what return you’d get if you’d bought your investment today. You might find that the deal wouldn’t be as good a return if you bought it today.
>I’d be interested in knowing what you think the opportunities >are as your equity increases in a property
i think the idea in general is to ‘leverage’ – use the equity
and /or cashflow to fund deposits and closing costs of further positive cashflow properties (i.e. income-producing assets indexed for inflation that increase in value) – and never sell the assets themselves.Sure before you wanna retire you can pay off some debt, maximising your income
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