Im looking at buying a property for around 100k with 30k down for deposit and closing costs. My goal is to build a passive income stream of 3k p/w in 8 years. Once I buy, the property will be cash flow positive by around $30pw and I have no other debts. Im tossing up between putting $500 per week of my income into paying off the house quicker and reducing the interest payable
(should pay off in just over 2.5 years) or saving up and getting a deposit on next house.1. Would it be better to use equity in first IP as deposit or save a seperate deposit or does it make no difference?
2. When, in terms of risk, would be be a good option to buy second property (aside from having enough to maintain repayments) ? SHould I partly / fully own 1st IP before purchasing the next one ?
THanks and Regards
M.Johnston
Originally posted by majoh3:Im looking at buying a property for around 100k with 30k down for deposit and closing costs.
I would only put 20k down and borrow 80% of the purchase price. This would avoid mortgage insurance and require less deposit.
Using a interest only loan with an Offset Account would let you put the extra funds into the offset plus all your income (Instead of just $500 per week) to reduce your interest expense if that is your goal. It would mean that the increasing rental income will increase your tax expense.
You will find your Offset Account will quickly accumulate a deposit for your next property. When you decide to get your next property, you can just withdraw the money and do the same again with the next property. Your deductible interest expense will increase again on the first property plus the new expense on the next property.
If you don’t have enough for a deposit but the property value has increased while you have been saving, you could increase the loan to use some of the equity as well. It is very simple to do all this if you use a good mortgage adviser.
1. Would it be better to use equity in first IP as deposit or save a seperate deposit or does it make no difference?The difference would be the interest expense. Using the above example would leave all options open. If you do not want to decrease your interest expense for some reason, deposit your funds in another account (not the Offset Account).
2. When, in terms of risk, would be be a good option to buy second property (aside from having enough to maintain repayments) ? SHould I partly / fully own 1st IP before purchasing the next one ?This question comes down to your risk profile and comfort level at higher levels of debt. Doing things quicker require higher levels of gearing and hence equate to higher risk. Do you numbers as if you had no tenants and if you are comfortable with the repayments and do not need the money for other things, there is no reason why you should not proceed.
Structuring all this is much easier than it sounds above. Sit down with an adviser – IT IS FREE!
Robert Bou-Hamdan
Mortgage AdviserHi,
Well based off what you’ve said, $30 / week for one house means you’d need 100 such houses to make $3,000 / week. Can you own 100 houses within 8 years? yes. Can you buy and hold 100 houses from the first to the last? Probably not (unless you have a huge income)The reason for this is that 100 houses / 8 years = 12.5 houses / year that you need to purchase and earn income from. Based on $5,000 closing costs per house you’d need $62,500 each year new money. So if you were on $150,000 a year pre tax income you could have a good stab at it.
The other way is to make money from real estate faster, you do this through leverage.
If you buy a property that grows quickly (maybe you renovate, or change it’s use or get planning permits, or subdivide or whatever) and then sell it to buy two houses, one that returns positive cashflow (and probably no CG as that’s the way it often works) and one that grows quickly then keep repeating, all the while as you save deposits buy more houses you might have a good shot at reaching your goal.
The point I’m making I guess is that you really need to work quite hard to (mentally and financially) achieve decent “passive” income. That is where the planning comes into it that everyone talks about. It’s not just planning “a” purchase, but more like business planning your investment process and life business. You need to make sure you clearly see what you will do with each asset.
PS: if you fully pay off an IP you no longer reap the gearing benefits that amplify your gains.
Surrey.
Originally posted by surreyhughes19905:Hi,
PS: if you fully pay off an IP you no longer reap the gearing benefits that amplify your gains.OR LOSSES!!!
Robert Bou-Hamdan
Mortgage AdviserI feel compelled to point this out. [blush2] Are you aware that your goal passive income requires ~28% per year compounding on your money? I think you will need to leverage your first born to pull this off. I say why stop there, if you leave your money compounding, you needn’t even contribute beyond the 8 years and you’ll break 10 BILLION ~40 years later. [lmao]
At that rate I can retire by 30.
Super, what figures did you use to calculate what the compounding rate would be? I don’t recall anyone stating how much they actually had to reach the 3k a week figure.
I know that I can earn $3,000 per week (gross) without working or worry with a capital base of $650,000 which is not very much for many people.
Robert Bou-Hamdan
Mortgage AdviserActually my previous calculation was based on 20k per year. My fopar, but here is the “in a vacuum” math, corrected for 25k pa.
0.28*(30000*1.28^8 + 25000*(1.28^7-1)/0.28)
= $176kSo the exclusion of taxes and expenses and the fact that this assumes no difference between rent and capital appreciation makes this the most conservative scenario I can imagine.
Now as for your scenario where you earn 150k on 650k. This is possible at, for example, 10% gearing, 7% loan cost, 8.5% return after costs. So if you are able to find 8.5% returns after cost in todays market you are an excellent investor and I do mean that!. But unfortunately, that is only 22% return on your money and falls a long way short of getting majoh3 to their goal. Remember all that +ve cash flow is also income taxable!
Before costs and taxes and if majoh3 were to truly live off the passive income, i.e. rent alone and not draw down on equity to make the 3k goal… that 28% would certainly reach into the 30%’s.
Yeah, gearing amplifies losses too. [biggrin]
But like to be positive[thumbsupanim]
My example involves no gearing and is a return of 24% gross per annum. There is a lot of great investments available in the market if you look around.
I also consider this investment to be relatively low risk.
Robert Bou-Hamdan
Mortgage AdviserYou paid 650k for assets that currently return >150k? Or you have assets currently valued at 650k returning >150k? There is a big difference.
If you paid 650k pre-boom, for assets now valued at twice that, then this is half the return.
But if you have assets at today’s value worth 650k, i.e. anyone here could pick them up for 650k (+ expenses) and get 24% without borrowing anything, then you have found the holy grail of investment vehicles.
I suggest one of the following is possible:
a) Your math is wrong, i.e. the 650k is what you paid, not the appreciated value of the assets. Or you are talking gross returns and your nets are half.
b) You truly have found exceptional investments, but, but then by the precise definition of “exceptional”, they are exceptions to the norm and our intrepid beginner investor will not have a chance of replicating their performance.
c) This is an infomercial, soon to be investigated by ASIC.Finally, if 650k could return 150k before gearing, and someone has 65k, they could borrow 320k at the cost of say 25.6k (conservative) and return 75k, or ~50k after loan costs. So now anyone with 65k saved can retire well above the pension. If you are to say that your assets are exceptions, then you are also suggesting that majoh really has no chance of seeing the required returns, which was my point. Also, if that 3k is truly +ve you’ll be losing so much to tax, you’ll be compounding far below the 24% you claim.
Now I’ll bite my tongue. [blush2]
Originally posted by superman:You paid 650k for assets that currently return >150k? Or you have assets currently valued at 650k returning >150k? There is a big difference.
Neither. What I said was I know that I can earn $3,000 per week (gross) without working or worry with a capital base of $650,000.
I suggest one of the following is possible:
a) Your math is wrong, i.e. the 650k is what you paid, not the appreciated value of the assets. Or you are talking gross returns and your nets are half.
b) You truly have found exceptional investments, but, but then by the precise definition of “exceptional”, they are exceptions to the norm and our intrepid beginner investor will not have a chance of replicating their performance.
c) This is an infomercial, soon to be investigated by ASIC.a) Not applicable
b) Any investor can do this but they need at least $200,000 to be accepted
c) No chance but a reason why I will not publicly state what this COMMON investment is.Finally, if 650k could return 150k before gearing, and someone has 65k, they could borrow 320k at the cost of say 25.6k (conservative) and return 75k, or ~50k after loan costs. So now anyone with 65k saved can retire well above the pension. If you are to say that your assets are exceptions, then you are also suggesting that majoh really has no chance of seeing the required returns, which was my point. Also, if that 3k is truly +ve you’ll be losing so much to tax, you’ll be compounding far below the 24% you claim.No gearing is involved and your only problem would be tax. I consider this a good problem to have and the figure I stated is a gross figure. I did not mention compounding. It is merely an example of an passive income investment that is readily available to many investors that returns a great gross return with minimal risk (in my opinion). How you structure your taxes etc to not lose a chunk to tax is your problem.
Now I’ll bite my tongue. [blush2]No need. I enjoyed the breakdown.
Robert Bou-Hamdan
Mortgage AdviserHehehe, np man, hey you’re up late [blink]. It’s 10:45am here.
Back on topic. 3k gross is not 3k earnings. Earnings are after costs. +ve cash must be post-costs. If you’re talking pre-costs, everything is positive, by taking interest as a cost.
The discussion point is whether majoh’s returns are realistic. We have established that your return, which I consider exception is ~24% before costs and tax. So then would you agree majoh’s expectations are unrealistic? This is all I aim to prove. And when I say unrealistic I mean to the point of delusion. [strum]
Also… 200k, can I guess at taxi plates? Do you not borrow, because loans are not available for the asset class? Or are these relatively normal RE investments? I’m interested in expanding my knowledge and options. [blush2] Oh and do these assets have capital appreciation? I would assume on average with inflation, but just checking. Ta
There are no costs associated with the investment I outlined. You only have to account for tax.
I think majoh’s goal is realistic considering he seems to have a lot of income available to reduce the gearing and compounding will do wonders to increase the cash flow. Good accounting strategies will also help increase cash flow exponentially.
Robert Bou-Hamdan
Mortgage Adviser“You only have to account for tax.” Only!!? Top marginal rate is ~50%, there goes half your return. 12% takes 6.1 years to double as opposed to 3.2 at 24%. I think it is valid to assume all +ve cash income is taxed at this rate given the savings potential of Majoh.
Secondly, you say the “investment you have outlined” exhibits the phenomenal returns Majoh3 would require, such that his goal is reasonable. But Majoh3 quite clearly plans to purchase cheap +vely geared properties. So his goals are unrealistic unless they borrow 80-90% against the investment you allude to.
Finally, please refer to the following link:
http://www.fido.gov.au/fido/fido.nsf/byid/A9F432CE4F18EA71CA256BB20024FBD6?opendocument
and perform a text search for the word “unrealistic”. You will find, “In today’s market, ASIC suggests that more than 15% per year should flash warning signs.” FIDO is a branch of the Australian Securities and Investments Commission. So with a 24% return, before gearing, I question the accuracy of your math.It is a disservice to inappropriately distort investor expectations.
Superman,
I would appreciate you checking your email before trying to make me out to be telling some sort of lie. I outlined the investment in the email I sent you yesterday. Go read and I would like an apology upon your return.
Now, regarding your post…
Originally posted by superman:“You only have to account for tax.” Only!!? Top marginal rate is ~50%, there goes half your return. 12% takes 6.1 years to double as opposed to 3.2 at 24%. I think it is valid to assume all +ve cash income is taxed at this rate given the savings potential of Majoh.
Top marginal rate is 47% excluding the medicare levy.
Secondly, you say the “investment you have outlined” exhibits the phenomenal returns Majoh3 would require, such that his goal is reasonable. But Majoh3 quite clearly plans to purchase cheap +vely geared properties. So his goals are unrealistic unless they borrow 80-90% against the investment you allude to.I do not think his goals are unrealistic at all and I actually said…
“I think majoh’s goal is realistic considering he seems to have a lot of income available to reduce the gearing and compounding will do wonders to increase the cash flow. Good accounting strategies will also help increase cash flow exponentially.”Just because you do not know how to do something or that a higher investment return exists does not mean it does not exist or that it is “unrealistic”.
Finally, please refer to the following link:
http://www.fido.gov.au/fido/fido.nsf/byid/A9F432CE4F18EA71CA256BB20024FBD6?opendocument
and perform a text search for the word “unrealistic”. You will find, “In today’s market, ASIC suggests that more than 15% per year should flash warning signs.” FIDO is a branch of the Australian Securities and Investments Commission. So with a 24% return, before gearing, I question the accuracy of your math.I am very familiar with FIDO, ASIC and their advice regarding high returns. Regarding you questioning my math, save your time. Math is one of my strongest points and I find it very simple to multiply 2 x 12 to come up with 24. 2% per month is the offer as outlined in the email I sent. It is very simple maths. Get over it!
It is a disservice to inappropriately distort investor expectations.It is more of a disservice to criticise something you know nothing about. This type of inaccurate and porrly researched information is what gets you sued in my line of business.
Finally, I thought we were discussing ‘passive income’. I do not recall majoh asking for a $3,000 per week NET income and my example shows a $3,000 per week GROSS income as has been made VERY CLEAR every step of the way.
If you wanted to get the NET return that you are focused on, double the amount required to invest and you will exceed the $3,000 NET per week required. My math says that will require $1,300,000 to be invested which is also not “Pie In The Sky” as ASIC likes to say.
Your comments are exactly why we are not allowed to talk about securities and other instruments in this website. Those that do not know or don’t believe because they sit on mediocre returns all their life and think they are doing well usually criticise those that do know but who cannot say.
I will be very interested in your response after reading the email.
Robert Bou-Hamdan
Mortgage AdviserActually I do appologize, I have been a little rude. [mellow] But I am enjoying the discourse and I’ll try reign myself in a little. [cap] N.B. ~ is generally accepted to mean roughly. So I don’t think it was terribly irresponsible of me to approximate 47% (+ medicare) to 50%.
Now, the reason I focus on NET returns, is that you cannot compound gross returns. So the returns in order to achieve Majoh’s goal must be NET.
But, if this investment in its own right (no gearing) returns 24%, then the required net remains possible. However, why is it that you do not borrow to extend your position? Is it that the investment is high risk? How much risk is being taken on for this reward? In order to achieve this goal Majoh will need to have well over 100% of his money invested (i.e. geared), so sensibly the investment cannot be too extreme.
Additionally if it takes 200k to get in the door it will be at absolute least 3 years before Majoh could use this vehicle and yet he would still need to be receiving high 20’s net returns in the mean time. Which I suggest is unrealistic in +vely geared RE, let alone just about any investment.
The problem with high returns is they are ephemeral. If 24% is possible today, the flood of demand will return the returns. This is how bond markets work and I’m sure you know all this perfectly well. But what I don’t understand is how 24% returns can remain in a stable state. Just such a stable state as required to compound sufficiently and achieve this goal.
Finally I did not receive your email, if you could send it again I would be very appreciative. I will keep an eye out for it. I have an exclusive filter and I must have deleted it from my junk mail accidentally. And if I get too cheeky, just slap me [biggrin] [blush2]. I usually need my wife around to keep me in check.
Flick me an email at Rob’s Email and I will reply to it. I sent it through this website last time so that is why it must have been caught up in the junk email filters. It might be still sitting in your deleted items folder as I only sent it yesterday.
Please type 24% Return in the subject heading so I know who you are. [blink]
Robert Bou-Hamdan
Mortgage AdviserOh I just saw it was a private message so I have it now. But it still sounds like 2% per month is the upper limit and this only compounds at 12.72% NET on the assumption of 47%.
I am not overly familiar with these instruments, so I really cannot pick at your numbers without my own research [biggrin]. However I strongly doubt they are low risk. If they were low risk, the banks themselves would be clawing at eachother to beat you to these opportunities, in turn driving returns down. My mind sees red flags. But back to Majoh, who is obviously interested in +vely geared RE, does it remain your opinion that through this alone his goals are resonable?
It remains my opinion that his goal is reasonable in 20 years not 8.
I think it is achievable but my thoughts are qualified. We do not know how much income / cash flow he has available to increase returns nor do we know which accounting and compounding strategies he will utilise or his risk profile to determine how highly he will gear.
Sorry about the PM. I thought I sent it in email. OOOOPS!!!
I will PM you a response to the comments you just made about the product.
Robert Bou-Hamdan
Mortgage Adviser
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