Hi,
My first post, so here goes. Enjoyed the book Steve – and just what the girlfriend and I are wanting to do, i.e. cash flow positive strategy for property investments. Here’s our problem, and any advice is gratefully appreciated!
I own a property in Tassy – current value (valued 3 months ago) = $175,000. Mortgage owed = $102,000. My parents live there and pay $400 a month, and I pay another $400 a month off the mortgage, meaning $800 a month off the mortgage (mortgage = principal & interest, paid into off-set account). This has meant we’re pulling ahead as the payment should be around $730 per month (rate = 6.77%).
Had to move away from Tassy for work, and orginally both partner and I rented a place in Canberra and pay $300 a week. My contract ended, and now I’m in Queensland renting another place for $155 a week. You can see our payments now are $100, $300, and $155 = $555 per week in rental and mortgage. I owe my Dad $40,000. I could use the equity in the property I own to pay Dad the $40,000 back, then the mortgage would be around $980 a month. I’d have to put up M&D’s rent to say $600 a month, and I’d continue to pay $400 a month. Still negative cashflow I know.
We accumulated fairly quickly $20,000 in the offset a/c, but this was eaten into because of the nature of my work (contract) meaning I was out of work for a few months, then the move to Queensland. Currently have about $14000 available, going up by about $3500 per month. I suppose the question is – do I use the equity and pay Dad back, or use it to fund another property purchase? It gets more complicated, which I won’t really go in to, but basically Dad keeps improving the property and would want to buy it, except they are on a temp visa waiting to be accepted as residents = can’t buy an established property. Any advice on what I should do? We would sell the property to them if we could, and we’re looking at buying investment properties, plus our own place in the future. We seem to be taking 2 steps forward, then one and a half backwards. Our goal is to become financial independent, own 100 properties with passive income of $150,000pa in 6 years time, and not have the 9 to 5 (more like 8 to 6) grunge. Thanks for your patience!
Regards
PhilPhil,
Suppose you paid your dad back and the rent went to $600 per month; assuming that is the market rate – why would you want to have a $175,000 property that only returns you a gross income of $7,200 (4.1% gross). Sell the property to your parents (or anyone else) as soon as you can, then buy only positive geared property in areas with an increasing popultion. If you buy negatively geared property all your hopes hinge on capital gain. Capital gain is a bonus, but it is seldom an effective strategy for those starting out. Usually CG comes in waves and when it does come it comes for all property so you aren’t much better off when you go to buy your next property. With a personal income that fluctuates the banks may be reluctant to loan you more money for properties that are not self supporting. Re-read Steve’s book.
That said, congratulations are in order for getting to where you are, and for your planning and desire to go further.
Enjoy your journey, and don’t be too focussed on a set number of properties that are a long way off where you are at now. Break it down into bite sized chunks and work away at them. Your saving philosophy will serve you well. Continue to live below your income. If you have renovation skills it may be worthwhile utilising them to speed up the process. Good luck!
Julian.Hi Phil,
Welcome to the forum! I’m pleased you enjoyed the book and hope that you can gain some benefit from it by turning theory into action.
I own a property in Tassy – current value (valued 3 months ago) = $175,000. Mortgage owed = $102,000. My parents live there and pay $400 a month, and I pay another $400 a month off the mortgage, meaning $800 a month off the mortgage (mortgage = principal & interest, paid into off-set account). This has meant we’re pulling ahead as the payment should be around $730 per month (rate = 6.77%).Yep – but the property is negatively geared which means that you are dependant on capital gains. If this is your strategy then great… most people don’t have a strategy other than making money and as such don’t see the risk, rewards or even assumptions of their wealth building model.
Also, by having the property rented to your parents it takes on a non-financial (ie. family) feel which can sometimes cloud objective investing.
As for advice – I’d clear the debt with Dad and enter into a lease-option with them to purchase the property. They will have the status of tenants with an option to purchase once their Visas come in.
That way you turn negative cashflow into positive cashflow. Make the option fee $40,000 (ie. the money you owe your Dad) and then use the $14k to get started on +ve cashflow property (or pay down debt on the Tassie property to keep it +ve cashflow).
Well, that’s one option…
Our goal is to become financial independent, own 100 properties with passive income of $150,000pa in 6 years time, and not have the 9 to 5 (more like 8 to 6) grunge. Thanks for your patience!This being the case you need to sort out the issues before you first to maximise your investing foundation. Going forward with things as they are now will be like driving down a freeway with the handbrake on.
If you want more info on the lease-option I can probably put you in touch with someone who, for a fee, will help you with the structuring of the lease-option. Email [email protected] if you want me to do this for you (allow a few days too).
Cheers,
Steve McKnight
**********
Remember that success comes from doing things differently.
**********Steve McKnight | PropertyInvesting.com Pty Ltd | CEO
https://www.propertyinvesting.comSuccess comes from doing things differently
Hi Steve/Julian,
Thanks so much for the input and advice. I’m going to re-read sections on the lease option in the book ot try and gain a better understanding of how it works.
Re the property being negatively geared. When I bought it (2000) it wasn’t for investment, but to be my main home. Mum and Dad emigrated from the UK shortly after and have been living there ever since. With work being bad, I’ve had to come to the mainland but will go back there perhaps at the end of 2004. The girlfriend and I won’t live there (we want somewhere with more land), so in effect, it has become an investment property. Captial gains have been good, but Steve is right, it’s a really awkward situation – I can’t sell it from under my Mum and Dad (they’re retired and love the place/area). They would buy it if they could, so I guess ít’s a question of waiting for the visa, and in the meantime trying to either reduce the drain on my income or hopefully turn it into a positive cashflow situation.
One of the advantages I have is that it’s on 13 acres, and set up for horses, so I could provide an ajistment service to gain extra income.
Re negative gearing – Steve, I’m with you. I’ve recently starte studying financial planning (passing exams etc with credits!), so I understand the limitations of the strategy. FP is not my background, but I’m interested in it, if nothing else than to improve my financial position through greater knowledge.
Julian, you’re right about the 100 properties. It’s just a figure we thought we could achieve in a reasonable timeframe that would provide us with the income we want, but we’re flexible about it. We know it won’t happen overnight, and are prepared for a mix of residential, commercial, and perhaps overseas (I used to own a house in the UK and Europe, and know some of the areas well).
So, next steps for us is to look in to the lease option strategy, investigate areas such as ajistment, try and get me a job back in Canberra to reduce the weekly outgoings, bang the pennies away in the offset account, and look for properties.
We’re not doing too bad, as Supers are taking care of themselves (most of mine is in the UK and not subject to tax), and we ALWAYS pay off the credit card monthly without fail. The balance is virtually always nil, which is great, and we dont impulse buy ever. We don’t have any store cards and have nothing on the never never. Plus although we own two cars, they’re cheap to run and we paid cash so owe nothing.
We just need to get started on this strategy of replacing job income with passive, and clearing up the house situation in Tassy is the first start. Thanks for your advice. I may get back to you with some questions about the leasing option.
A quick note about horror tenants after reading your book Steve. I owned a property in the UK and rented it out to a young Mum – one kid. The agent vetted her for me and everything seemed fine. I trusted the agent with the vetting, plus inspections, andanyway, I felt sorry for the girl! Months later I got a phone call from the agent “saying that I’d better go around there. I provided the property furnished – she had put my 3 piece suite out in the back yard which was enjoying the UK weather (read rain), demolished 2 new beds and mattresses, kid had scribbled everywhere, she had wrecked the garden and taken things out of it, and the new cooker I provided was as useful as a chocolate billy. Kept all the bond but still didn’t cover all my losses. I learned from that!!
Cheers
Phil
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