Please post your comments / replies to the aritcle written in the May Insider titled ‘Multiplication By Division’.
Regards,
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
Steve,
Thank you so much.
By some strange co-incidence this month’s newsletter has helped answer the exact question I have been asking myself lately…should I sell and realise some of the capital gains I have made in the last 18 months or continue with a buy & hold (accumulate more debt) strategy.
This article really clarifies a few issues for me.
First of all it is good to hear it is ok sometimes to sell! I guess it’s common once you have read a book or two on property investing to think this is always a bad idea.
Secondly it seems very timely advice considering the current market climate. Many people have made big capital gains in the last 2 years and are concerned about securing these gains and minimising their level of debt in an uncertain market.
In my case I bought several small negatively geared properties (albeit profitable after tax) and am looking to convert my portfolio to true positively geared over the next year. Selling one property was an option I had considered but was concerned that a) I would be paying CGT and b) it was counter to my strategy.
Thanks for the working example showing how this can be actually be a beneficial situation!
cheers,
Ben CarberyHi Ben,
Happy to have helped [biggrin].
Working out the right time to sell is always a hard thing to do as there is the risk that you’ll leave profits on the table.
It’s handly to remember that no one went broke taking a profit and that greed can cloud judgement.
Regards,
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
Steve / David
Great work on achieving your new goals[thumbsupanim]We have just bought our First positive investment property (very exciting). We are in the process of a small reno, which will give us bit more capital growth??
Our next step, Where Too Now? But from reading May insider I am glad we are adding value to the propery. I also thought that we would buy / hold. We have set this up through our super and theirfore we can’t borrow[thumbsdownanim
I have just purchase WealthGuardian to help understand tax structures better, As we will need to do this outside super to have the passive income to live from [thumbsupanim]Enjoy the “forum” “insider” “book” and looking forward to your new Book.
Regards
Bill
“Knowledge is enthusiasm on fire”
Hi Steve,
I can see what your saying and I can remember you talking about this issue in your seminar.I have a few questions that I think are best presented in an example. Feel free to shoot me down in flames. The first question is,
How did you come to the figure of 80% being the amount that you needed to borrow to ensure continued growth? I understand that you were saving on paying lenders mortgage insurance at this amount, and I know that you are more exposed the higher the LVR but why 80% why not 70% or 75%?
Here is another slant on option 1.
– Re-finance and take $20 000 out from the available $32 000. This would then look like this,
– Value: $80 000
– New Loan: $55 000
– New LVR: 69% (aprox)Now do the second deal, buying a property for $40 000. Now it looks like this,
– Buy price: $40 000
– Deposit and closing: $10 000
– Debt: $32 000
– LVR: 80%Portfolio summary
– Total portfolio value: $120 000
– Total portfolio debt: $87 000
– Portfolio LVR: 73% (aprox)
– Cash left over: $10 000 (enough for another deal)The advantages of this are,
– You remained in control of an asset(deal 1) that has performed strongly in the past (i.e. capital gain) and is also cash flow positive. Plus there is a good chance that you are happy with deal 1 with regards to finding a tenant etc.– Your portfolio LVR is only 73%. Well below the 80% target
– You are minimising risk. You have an asset that is sound why not keep it and buy 2 more deals rather than sell it and buy 2 more deals?
– No capital gains trigger
Disadvantages
– Deal 1 has a lower cash flow. (I am supposing that yield is about 14% for deal 1 so after the refinance it should still be positive. If not you can still buy the second deal and leave another $10 000 in deal 1)
– If interest rates go up and you have not fixed them then you will pay more out in repaymentsOther comparisons with option 2
– Option 1 leaves us with one definite profitable investment and the available funds to purchase a second possible profitable investment
– Option 2 leaves us with no definite profitable investments but the ability to purchase 2 possible profitable investments
– Option 1 has spent $2000 (in closing costs) and leaves us with 2 properties
– Option 2 has spent $4000 (in closing costs above deal 1) and leaves us with 2 properties
– Option 1 has $23 000 more debt but option 2 has a higher LVR than option 1. (thus the debt that you do have is more exposed than in option 1. )
– Both deals allow enough money over to buy a third $40 000 property.Looking at what I have written I think that I can see a few advantages to option 1. But the biggest one for me is, why sell an asset that has performed and served you well and will remain cash flow positive?
As the market softens the value of your portfolio may drop but in scenario 1 your less exposed as your LVR is lower. In fact, you could find that you no longer have an 80% LVR position if prices fall because there is no gap in option 2.
Option 1 has an LVR of 73%, which provides a 7% gap until you are starting to move out of your target LVR.
I know that you spoke about “conditional liability for paying tax and sale costs at a date in the future when you decide to sell” but what if you never sell? Why would you sell. If you keep your portfolio protected as much as possible from interest rate rises, and there is a reasonable chance for capital gain and the property is cash flow positive, then why ever sell?
MarkyMark
Hi Steve!
Thanks for the latest insider. Very insightful!
We have a number of houses and one unit, and until recently we had a block of land that was doing absolutely nothing except quietly growing in value while everyone slept around it! We paid $19k for the block 5 years ago with the idea of building our new holiday house on it as it was a couple of house blocks away from an old house we use for the same purpose. The house cost $52k at the time. We just sold the spare block for $98,500 which will trigger a capital gain, but this has allowed us to stay out of the workforce until my wife and I complete the renovations on a few of our purchases. I wouldn’t normally look at buying land as there is no income unless you can develope it asap, however, I kick myself for not buying the three blocks that were left after we bought that one!!!!! And they are only two hours from Parramatta! Hindsight is so wonderful isn’t it….
We have a near new house and a unit on the Gold Coast. The house owes us $260k in total after constuction and land purchase, while the unit owes us around $200k with costs. The unit turned out to be a bit of a lemon and will be sold in the new financial year, but what annoyed me with it is the fact that with the research I did, I believed it to be a “NEW” unit, and it turned out to be a refurbished block!! I had a valuation that said the unit was valued at $190k. The next valuation of this unit for the purchase of the land/construction above was $150k! With what we knew at the time we couldn’t afford to sell and get out so we rode it out and now the value has climbed past the $250k mark. What annoys me is the fact that the agent who sold us this unit told us that his office only ever sells new stock. That has gone down to experience………
Now we only ever buy positive cashflow property, and until now we have always borrowed the lot plus costs. With the sale of the unit and also the sale of the house above, the resulting profit will be used to pay down some of our debt and enable us to buy even more cashflow positive property. And we can then stay out of the workforce……..the only trouble is the bank says where are your payslips…..
Maybe I’ll just have to do some part time work after all…..The cashflow is increasing, however, the equity has been growing rapidly!
Thanks Steve.
Ron.Hi MarkyMark & Ron,
There wasn’t a whole lot of science why we went with 80%… it was just a standard amount that banks were comfortable lending.
You are right to say that 70% is less geared than 80%, but the again 80% less less than 90%. I think it comes down to what you are comfortable borrowing.
To further the discussion… since that time capital appreciation has further reduced our LVR (based on current value) + we nearly always do P&I repayments to bring our debt exposure down further.
But the biggest one for me is, why sell an asset that has performed and served you well and will remain cash flow positive?Fair point provided your asset continues to perform strongly. My point in the newsletter was to consider selling assets that are underperforming. You’d be crazy to sell the gold and keep the mould.
Ron, don’t worry too much about hindsight. If values had of fallen then you’d be patting yourself on the back.
Sorry to hear about your experience with the unit. Good to see you kept your shirt on in the long run and that you have the positive outlook to see the learning experience rather than being bitter.
It looks like your investing system is working well… just avoid becoming overladen with debt until you receive a clear direction from the market.
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,
I purchased my first property 2 years ago off the plan. My intention is to begin leasing it out within the next year when I purchase my next property.
I like the idea of the multiplication strategy. I however want to keep my first property and build on my portfolio.
I do not have the capacity in the next year to save another substantial deposit and wonder whether I should utilise the equity to buy another property or whether I should wait another 18 months to save another deposit to reduce debt??
This is all new to me however I am eager to get ahead in the next 5 years, and I really get enthused about property investing.
Your story talked about how you started out with a $40k investment? Are you suggesting a good start is to buy something further out from the CBD to acquire a cheaper property to begin with, and then build on this with the multiplication strategy?
I look forward to your thoughts as I am looking forward to putting these ideas into practice!!
Thanks
MichelleM.Upton
I was having a look at Cashflow101 the Egame yesterday. Basically you do the same stratergy that you are mentioning (i.e. buy a small deal, sell assets, then buy a big deal).
That and your newsletter has certainly made me look beyond the dogma of never sell. Espically if you have a an asset that can bring a bigger return!
wilpro while super cannot borrow directly, you can still use your super to buy property (with borrowings!).
Rgds.
Lucifer_auSteve, you said you’d be crazy to sell the gold and keep the mould.
Whats your definition of mould, as Im in a dilemma at the moment?
Would you consider selling a property (block of flats)that has yielded 12.5% on purchase price and will yield 9.5% on refinance, that is in a town with little potential of population growth as mold? Population of 21,000.
If I refinance, I will have zero dollars in the deal.
Instead of being cash positive of $1300 a month, it will be $900.
Im seriously considering selling it because of the stagnant population.
Your thoughts would be appreciated.
CheersHi Darren,
How’s things?
As for considering selling… I think the question you have to ask yourself is: “Is this property performing as I expected?”
The financing question is incidential to the bigger issue of deciding whether to keep or sell.
Personally, I wouldn’t be as worried about the issue of population so long as I had strategies that covered the possibility of vacancies turning +ve cashflow into -ve cashflow.
So… to answer your question, my idea of mould is something that you know is underperforming but you hang onto it in the hope things will turn around.
What does your gut tell you on this deal?
Best wishes,
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,
Congratulations on a great newsletter…
You always seem to have a 6th sense and seem to know the things that we are thinking!
This topic was very timely for us…[party]
Very spooky!![upsidedown]
Bye,
Del
The biggest problem I see with this strategy is the tax – it no longer falls within CGT as you have now become a property trader and taxed at full marginal rates. Add on transaction costs and risk and a cooling market and and and….
Originally posted by AusProp:The biggest problem I see with this strategy is the tax – it no longer falls within CGT as you have now become a property trader and taxed at full marginal rates. Add on transaction costs and risk and a cooling market and and and….
Ausprop’s question re CGT and becoming classified as a property trader when following the Multiplication by Division strategy is scary. Really hanging out to read your comments on this question, Steve.
Cheers
Greg FHi,
My knowledge of tax is that deciding to realise a few properties would not make you a trader.
The issue of being a trader or not comes down to a question of your intent at the time of buying. Sure, if you’d only owned the property for a few months (or you decided to flip) then yes, then 100% of the gain may be classed as taxable income.
However, choosing to sell a property now in line with a documented investment plan is simply the realisation of an asset on favourable terms.
Still, it’s a valid point and something that should be discussed with your accountant.
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 and all,
First of all great book Steve, love the idea of multiplication by division – but is it still possible nowdays that property all over Australia has gone up so much?
We are new to this and are reading and learning lots before we embark on purchasing our first i/p, and just wonder whether you would have trouble in these times finding those cheap properties once you’d sold your existing i/p????
We are having trouble finding properties that even meet your 11 sec rule – let alone multiple ones to replace ones you’ve sold after they’d appreciated!!Also, I notice in your June insider newsletter, you state that “your window of opportunity to create (or change) your accounting structure is closing fast. Once the 2003-2004 financial year ends once 30 June ticks over then you will have missed the boat.”
What boat??? Is there some tax laws that are changing that you are only able to do a certain type of structuring before 30/6/04??? Please clarify for us newbies to this wonderful world of property investing and information…..Thanks again Steve and team for all the info, website, newsletter etc it is great educational tool. We are so eager to learn and purchase our first i/p but want to ensure we go in with our eyes wide open!!!!
Looking forward to response, thanks
LambsiePS Hows your baby, & hope fatherhood is treating you well!!!!!
Hi Lambsie,
The boat, so to speak, is the opportunity to make changes to tax structures prior to the end of the financial year.
Specifically, if you decided to set up a trust, it needs to be created prior to 30 June in order to receive 2003/2004 tax year distributions.
Accountants may only make use of a strutucre if it is in place prior to 30 June, and indeed tax planning is best done prior to the end of the tax year.
Family’s doing great… thanks for asking!
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 Guys,
Another important thing Steve, has trigger my mind is, if anyone is planning to purchasing any investment books, courses or materials, best to purchase them now, reason being… tax time is just round the corner and your expenses that are legit, will be claimable (only if there relevant to your current investments in place) and that the claimable expenses will be rebated back to you.
Cheers,
sisThanks Steve for advice
Its a great little property that is very low maintenance.
However, Im doing a land subdivision, and Im 100k short, thats why I need to sell. The land subdivision could potentially be a 700k – 1 mill profit. So its definately a case of multiplication by division on this one!!! And I need to be cashed up!!!
Alternatively, I could find a private lender for the 100k and keep the property, which Id prefer to do.Hello all,
Have noticed the mention of the 11 sec rule in a couple of threads.
Can someone explain what this rule is ?
Thanks, KP
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