hi there,
yes when we invest in property there are many outcomes that we may desire. Initially we have to expect that the property will either be -ve or +ve geared. If you have adequate current cash flow, then -ve gearing is excellent because the tax benefits are good and if you purchase well, your property should grow in value over time. If however you want immediate extra cash flow from your property, then if you choose a +ve geared property wisely, then you should come out on top each week. That is, your income from the property should be more than the expenses you have to pay.
hope this helps,
Quickchick
The biggest problem in our lives is to pay off our own home loan – since in a 31.5% tax bracket (incomes upto $80K) we have to first earn $146 then pay tax of $46 and then $100 back to the lender.
With all this happening – we have 3 people who stop us from paying our own home quickly
Our employer – by paying us only 1/3rd of what we earn – the rest they keep
Taxman – by keeping a part of our income (from 1/3rd of the above) for doing a lot of good work – like police – hospitals etc
Bank – by telling me that how much i cannot borrow and telling me that i cannot buy the whole street
2nd Point is how much do we need – as most of us are collectors and not spenders – as we will mostly not be able to spend whatever we save. If we decide to retire at 60 and die at 84 like any other Australian – there are only 8765 days to spend !
Remember, at 60, if you eat out three times in a week you will end up with liver problems and diebities. With current inflation if you accumulate $2M – you can live on a 6 figure fruit and leave the kids fight over the tree.
In my Post i said there will be no income from rental income as we will be able to claim the interest as a tax deduction – I want investors to use the rental income to pay off their own home instead of paying off the investment loan or interest on investment loan = so that interest on investment loan is never paid or paid when the property is sold.
Strategies
1 = Pay off home loan from income after tax and max super salary sacrifice and rental income
2 = Maximise salary sacrifice and set up a SMSF and do gearing in the SMSF instead of outside super – because super will not pay any CGT when you sell the property in pension phase (after age 55) – remember CGT has to be paid on investment property (either when we are alive or by kids when we die)
3 = After you reach $2M you are sacrificing the goodies for anklebiters – so better enjoy it
What are we looking for – after reading 20 pages of posts – buying 100's of books = is it for some magic trick! and a wand which will take us to some Pandora Land.
With the current rules – if your super fund owns 5 properties – you are over 60 – the super fund will pay no tax and you will pay no tax – on the flip side if you own these properties you will pay tax. Once you contribute more to super – the borrowing in super will be paid off.
Negative income (due to depreciation) is for those people who do not understand the meaning of Estate Planning and usually do not know more than 5 people who are doing it the right way and have poor advisors – they have only one mission – aim less GREED – and in the process make the banks rich – if the asset values supporting the borrowing collapse = so does your retirement – few properties will beat compound inflation (C CPI) but not when you adjust it with each years CPI contribution and CGT – not many will measure up.
So, you must be thinking, what is the right answer, because i want to replace my working income with rental income (or free money) – how can i get money without working for it.
The answer is in two words – "compound income" – that is income on income – that happens when you pay less tax.
Manoj Abichandani
Interesting to hear where you are coming from, Manoj.
You speak of buying property in a SMSF.
I agree that that can be an effective way to make the most out of super.
The problem with super is, that you can't reap the benefits until you reach 67 (or similar retirement age).
And if we have another sharemarket dip before we have enough super to buy property, we will take a long time to build a property portfolio from our Super.
For most of us, "retirement" from the government is a while off, roughly 20 yrs in my case.Meantime we have had positive cashflow properties with 105% borrowings against. (ie no cash put in, just home equity to enable borrowing.) They are held in a trust, so we can direct the profits where we choose (including us and charity) before paying tax.
Some of these have also had phenomenal capital growth as a bonus. The home is paid off as a result, perhaps 10 yrs before "schedule".If our main strategy was to avoid paying tax, we would not have made the progress we have done.
Meanwhile, we are working part time and travelling more and more.
"Estate planning" is about retirement and when we die.
Some of us are not prepared to wait that long!It depends on how aggressive you want to be in property investing.
We have spent a lot on education but it has paid multiple dividends!
I do not know where you got 67 age from – the preservation age is 55 (when you are able to access your super) – 67 is when the Govt will give you pension
Further if there is enough in super and you donot have a job – you can access your super and live on it – instead of applying for unemployment – you need to look into financial hardship rules – you do not have to be retired to access your super
All your properties outside super in the trust will be subject to CGT
You will have to have quite a few properties (20 +) to live on property alone if the gearing is at your level as each property will contribute say $5,000 after tax – 20 will contribute a $100K income.
Capital growth has no meaning as you cannot sell them – because you are living on them – further selling them would mean – sharing the growth with your silent partner (Mr Wayne Swan or his treasury) so that option is out – anyhow you can leave that problem for the kids – education is good – but there is no one right way.
good luck! – please cut and keep this argument for 10 years later – perhaps you may agree then….
Manoj
Hi Manoj,
I appreciate your comments.
I am sure you know more about super rules than I do.If I were to live solely off my super from age 55, I would be broke and on the pension at 67 for sure!
ie. we don't have a lot!We have $60,000 net income from a pair of duplexes and a block of 7 units.
(Which is a bit more than net of what I would earn working full time. But I don't have to.)
ie 2 properties that contain 9 seperate tenants.
We have $370K in capital growth in the 3 and 6 yrs since we bought them.
That is after paying interest on combined mortgage of $600K between the properties.
There is no CGT unless we chose to sell.The property we did choose to sell and made $226K on, after costs $180k.
So that is $90K after the 50% CGT concession (having held for more than a year).
Deduct set up costs of Family Trust.
Divided between us both per Family Trust, only taxed at our personal tax rates.
We didn't end up paying a lot of tax, legally.I am not working hard for my money.
My money is working hard for me.I won't need 20 separate properties to achieve an income of $100K.
We have had single houses that net $100pw cashflow in our pocket each.Hope you can see the other side of the story.
quickchick
quickchick
That is what is said for $60K – 9 properties (or someone told me that 135 properties were sitting on all 135 diffirent peices of land – they were all bedsitters)
For $100K income after tax – you will need 20 properties as the tax rate will go up when income goes up – i know that sideInstead if you had 4 properties – fully paid up in super – since there is no tax – you can have $100K income – but for super to reach that milestone – you have to contribute (also known as salary sacrifice).
we are on the same page – but sitting in diffirent vehicles.
Manoj
Hi Folks, some feedback on a deal I'm working on is needed . . .
There's a 4 bedroom house that has been tenanted and neglected (and some damage) over the past 5 years of rental.
The owner has put it on the market at $195,000.Generally, in this part of the sth coast, 4 bedroom homes within major towns rent for $300 to $350 per week and are valued at $280k to $350K even without a unique selling characteristic. Throw in views of the ocean or pasturelands and you can add considerably.
The reason for the cheap listing is that virtually every room requires renovation. The kitchen & bathrooms are all original and over 20 years old (prob closer to 30)
Every room has plaster damage, stained carpet etc.
I am confident that the property could be purchased for possibly as low as $180K with a quick settlement but even at full cost of $195 it is a good buy.
It is the worst house in the street, other properties are owner occupied and street / house proud. It offers ocean views (approx 2 kms away) and scenic bushland. The land is relatively flat and lawn/landscaping/gardens are easily added to improve street appeal. ( no rocks, boulders or protected bush habitats)
My calculations are that with much less than $40k of work, the property should revalue at around $300k+ or higher.
Because we are already committed to purchasing an acre elsewhere in July, we cant divert our savings from the land, to put down as a deposit to purchase this one. (We are unlikely to meet the bank's T&C or the LMI)
However, given that we have good incomes of around $80 – 90K pa ( by country standards) with no debt (own our cars, boat etc) and if we were owner occupying the property we could pay $750+ per week towards a mortgage./ finance deal if we needed to in order to "buy" equity and secure the deal.
So, if we offered the vendor 2 years interest only payments at 7.5% ( based on 180k purchase) = $13,500 pa ($1,125pm)
and
10% deposit ($18,000) payable by December 31st, 2011
and
Vendor's Equity in capital appreciation of $25,000, payable at time of settlement (plus the $162,000 balance)= $211,975 at settleement on a $180k property purchase then worth over $300K
Is that a good offer that would be attractive to an investment property owner willing to let us have an extended settlement or lease to buy option ?
If required, the interest can go higher and the CG share too and we still come out on top within 24 months.
The idea is of course that over the two years, we use our strong cash flow to fully renovate and improve the property, as well as saving a larger deposit, so that when we approach a bank / lender in 18 months to 2 years, we have significant equity, as well as a cash deposit, to ensure the loan to pay out the vendor is approved.
Keen to know if its any good, or which parts need to be improved.
For the investors out there looking for cash flow positive investments, does this kind of "wrap / vendor finance" deal apply ?
This is a post I put on this forum elsewhere recently and on reading the past 5 pages of this thread, i realise the people on here are the ones I need to talk to.
Our plan is to build a portfolio of 3-5 properties over the next 7 years but our start is proving more difficult than expected (We're ready but the access to finance isn't).
The acre we have bought is in two 1/2 acre lots and ready for modest development to return rentals of about 11% p.a. on each. More importantly, they will provide a C.G of around $120K each within 12 months of commencement.
However, the first step is the important one and this property will provide us with an owner occupied home for our family, significant equity value to finance the other future deals, and ultimately, it will make a solid I.P. in its own right (5 +years later)We just need someone to help us get into it.
I leave it here for your comments.
Andy
[email protected] (if you think you can steer us to success)Dear Andy,
It sounds like a good plan. Speak to the owner with your good and genuine intention. People respond to that. Start with an offer of say, 7.45% (just an example) fixed over two years on a vendor finance term. Over two years, renovate to your heart’s content, increasing value but not overcapitalising. You certainly are on the right path.
There is a fallacy that you “find” cast flow positive properties. Well, you do, to some extent. But in reality, you “create” it.
Let me share a recent experience. October last year, I bought a property in the Northern Beaches. The property has 6 bedrooms, three bathrooms, walk-in robe in the master bedroom, gorgeous kitchen, backs into bushland and has 180 degree water views of Pittwater. It is high on the hill, so no tsunami in the near future.
Backstory: The couple were divorcing. As much as the property is well and truly gorgeous, they couldn’t shift it Nine months and four property agents later, they dropped the price from $1.25M to $970,000. I was stalking it from the beginning of 2010 with growing interest.
I thought, here is a couple, prepared to bargain off their home just because they can’t stand each other and the global financial crisis is in the way. Ummm… what to do?
I made an audacious move. I told the agent, I am prepared to “pay” $1.20M if they would accept $970K now and vendor finance the rest at NIL interest over five years. What have they got to lose? They will get their $970K now and more in five years. The couple agreed.
I still have the problem of where to find the money for the stamp duty which would be around $60K on a contract price of $1.20M. I certainly DO NOT have that much in cash as I am cash poor but asset rich.
Solution: on-sell the property on “rent to own”. Upon exchange of contract, I advertised it, requiring the successful applicants a non-refundable deposit of $40,000 (to go towards their deposit). I used the $40,000 to pay for the stamp duty and managed to find the rest to complete the purchase. So, in the end I bought a $1.2M property for $22,000 approximately. There is a loan of $970K on it.
The couple who bought it off me are paying the standard lease of $1,500 per week. This is the going rental rate per week for a property of this quality and scale in the Northern Beaches of Sydney. The suburb is Clareville, same postcode as Avalon.
The couple and I agreed on an a “price” of $1.6M, to settle in five years. With the help of an architect, they estimated the property to be worth around $1.8M to $2M in five years time. Giving them plenty of equity to buy it off me in five years, and I can also pay off the original vendors.
I hope this inspire some of you to “create” your CF positive property, too.
Hi Angel,
Thanks for sharing your story.
It is encouraging to hear of your creative tactics to buy a big pricetag property with very little money down, and a built-in profit!I have been thinking through the deal,and have taken the liberty to analyse it (to the best of my knowledge.)
RISK:
I guess the risk in the deal is that by the end of the lease, "if" the price of the property is less than $1.6m (unlikely) and the vendor does not take up the option to buy.hoice. (Depending on how the contract is worded, whether they have the ability to back down on the purchase.)CASHFLOW ANALYSIS:
Rental income:
(Do you have an annual rental increase at CPI or market written in to your lease?)
$1500pw x 52 = $78,000pa
(If you claim depreciation, you will have to pay it back from your profit at sale. May be worthwhile for your cashflow in the meantime?)Costs:
1. land tax $8,000 pa per NSW land tax website. I expect that you would have to pay this, can't pass on to the end vendor?
2. costs for rental management (presumably none, you are managing yourself?)
3. rates etc Is this your expense, or the vendors? (I'm not sure of this cost).
4. interest bill on $970k loan = $67,900 if loan was 7% interest only (no principal repaid).
5. I presume all maintenance costs are paid by the tenant/buyer, including insurance?
1. + 4. =$75900 (at least, maybe plus 2 and 3)I couldn't call this cashflow positve… maximum $2,100 wouldn't justify the purchase price on the cost/risk analysis.
HOWEVER for a deal with none/minimal holding costs and very little money down or ongoing expense, you have a very good prospect of significant profit in 5 years that I would be pretty happy with!
CAPITAL GAIN:
(calculated on money down, and deal as outlined. Insurance not included.)Expenses: stamp duty net $22,000.
deposit NIL!
interest on approx 20% loan NIL!In 5 years:
!,600,000 – $970.000 loan If loan was interest only) = $630,000
Less loan repaid to original vendor = $230,000.
Profit $400,000less tax…. if I had a profit od $400,000 for $22,000 cash down in 5 years with propbably low risk, I'd be happy to pay the minimum legal tax! And pay for good accounting advice!
Congratulations!
angelinsydney wrote:…. they dropped the price from $1.25M to $970,000.I made an audacious move. I told the agent, I am prepared to “pay” $1.20M if they would accept $970K now and vendor finance the rest at NIL interest over five years.
Hi Angel, why didn’t you offer the $970k and buy it outright? You could have still on-sold the property.
Kind Regards,
Matt.Hi Quickchick,
You have a brilliant brain for math. That kind of analytical thinking is what you need.
Hi Matt,
Interesting question. If I bought it for $970K, I would have needed to use my own funds. The 20% deposit alone would be a whooping $194K. The increased stamp duty is almost a non-event anyway because I used largely the “buyers” money. In this manner, I only has to come up with $22,000.
At the same time, what money I saved I bought a duplex in Millicent, SA for $185,000 returning $250 per week.
Instead of lumping all my available funds in one property, I ended up with a prime property in the Northern Beaches and a duplex, too.
Sometimes the only way to move forward to create a win-win situation for all.
I hope this has enlightened you. Thank you.
Angel
Dear Quick chick,
In answer to your question, yes! The rent is to be reviewed annually. It has to go with the market.
Yes, there is a risk. What investment has no risk? Think about it, how many people have lost their cash investment. There they were squirrelling away every cent in the bank and before their very eyes the bank goes kaput.
To protect both parties, there is a clause that says the “rent to own” option can be extended. If that does happen, I will have to find a way to pay off the original vendors their 20%. But 5 years is a long, long time to prepare for that.
With property investing, if you pick well, time is your FRIEND.
Angel
Hi Angel,
I appreciate your comments.
I agree that there is risk whatever you do. To me the worst risk of having money in the bank is inflation… eg $100,000 this year will not buy as much next year!
5 years is a long time, and I’m sure you will be in contact with your buyer and know in advance if they will want to extend the contract period.
And your SA property sounds like a good deal too!
quickchick
Hi quickchick,
If you happen to live in Sydney and would like to have coffee with me to share some “war stories,” I’d be delighted to. That is if you don’t mind hanging with a 50 something. Don’t worry I don’t sell finance, insurance, paint, laundry detergent or ponzi schemes. I just like to talk with people who are like-minded.
Angel
Hi Angel,
I appreciate your feedback on the scenario I proposed.
Especially from someone with the "cojones" to take on a deal like yours, it underlines the soundness of my thinking.I have to admit though, having been burned financially in the past due to reliance on others ( hence my need for assistance to put a PPOR deal together to get started) I wouldn't be able to sleep at night for the next 5 years till the deal was concluded, my liabilities covered, and my after tax profit banked.
When I was young, my mom taught me to never gamble more than i can afford to lose. The one period of my life when I forgot that advice and didn't establish "stop-loss" positions and protections, left me exposed to misfortune and when it came, I lost everything.
I wish you every success with your deal – really I do….. but let me assure you that I will never be a competitor…..I've lost my appetitie for large lunches. Hehehehehe.
regards
Andy
Dear Andy,
That’s a great feedback, especially for the newbies. We should and MUST do what we are comfortable doing. This is why I will never ever be a developer. You can promise me the moon, I still won’t do it. You can put me in front of a firing squad I still won’t do it. Being shot is a quick death, doing development would be like “killing me softly.”
Going back to this deal, I don’t want the newbies to think I’d been reckless. I can’t afford to be because I have 4 children, the eldest just turned 18, the youngest 12 year old who will still need a mum in 5 years.
This is not to encourage newbies to go “full steam ahead” but rather to show what parameters I used.
The reason I did this was:
1. I have tracked the Northern Beaches for over a year. There was no rush into it. It was months and months of research.
2. I know that the quality of “tenants” I can get at the Northern Beaches. They are usually young couples with very high income. People who pay rents in the range of $700 to $2000 per week for luxury houses. It’s hard to save a deposit if you’re paying such high rents. But for these people living in the “right” address is essential. If I could offer them an opportunity to “buy” the “right” address, I was pretty sure I’d have half of the Northern Beaches jumping for joy.
3. I wouldn’t have done it if the original vendors didn’t agree to NIL interest on the vendor financed amount. Never. Not a chance. It had to be positively geared or they would have to be selling off their house for peanuts.
4. The quality of the “tenants/buyers” really made me think they were the ones to have at the end of the line. They came with their architect and their builder to the inspection. They wanted to create value in the house. Currently, as of this writing, they have ripped up the old deck and replaced this. They have created, with council permission, a separate self-contained accommodation on the lower floor of the house. This they will rent out at $700 per week.
5. All deals have inherent risks, they can all be mitigated with research, research and research. As a rule, I don’t like people feeding me information. I have NEVER, EVER been in a seminar in my life. My tip to newbies is to find impartial people who can provide you insight and knowledge with no agenda. But having said that, the most expensive advise is usually free.
6. EXIT STRATEGY: In five years, what happens when the tenants/buyers can’t settle their end of the deal? The property goes to market/auction. If the house only sells for $1.4M, less my costs, I still made $170K at the very least. The tenants/buyer gets nothing. They would lose their $40K non-refundable deposit and expenses for improving the house. Why will they not get anything, you ask? Because all I ask of them was to pay rent. The $1,500 is standard rent. They would have had to rent anyway. If they want to move out this week all I have to do is find another tenant.
7. How can I afford the running costs such as insurance, water charges, council rates, etc? It is positively geared.
I hope this helps someone.
Take care.
Angelina
Good subject, risk management.
While I agree that it is a factor, on the other hand I would argue that if we are not prepared to stretch ourselves out of our comfort zone, we will not progress.
If I only did things I was 100% sure were very low risk, I would never do anything. NOTHING is risk free, even government bonds! But even leaving money in the bank (as I have said before) is a risk. Inflation will be more than our interest! (Ask the banks if in doubt!)I agree, Andy, that the risk of Angel's Northern Beaches deal is that the property drops in value.
One that I would be OK with, my view of the market is not pessimistic. So it would be an acceptable risk to me.
And worst case scenario may be that the occupants move out at 5 years and market drops.
If so, I would suggest that rents may not drop, but increase… as fear grows (eg recession) less people buy so more rent, which puts pressure on rent prices to go up. It helps to have an opinion of the market, and base your strategy on that.If you can buy or create positive cashflow ie property that pays all the interest, rates, insurances, and has a secure tenant base, THAT is low risk! If your property drops 30% in value but you bought for cashflow, your cashflow is still as good as ever and you should have no need to sell it in a hurry!
A well-educated investment is not really the same as a gamble. If you have done your due diligence and investigated your worst case scenario, you should be fine. eg we had an empty house during a local decline in market, but our other profit meant with 4 months vacancy, our other property in same location paid for the loss, and we were still ahead on cashflow overall through the year. Being in the sharemarket and not either having a stop loss, or a very definite strategy of closely watching and being disciplined to get out at a pre-determined point. Being in a margin loan for shares of course increases your risk which can become a big problem.
Property is not like shares, it takes longer to go up in value but also longer to drop on value (if that even happens). ie the bear does not fall down the stairs, like in shares.Angel, check your personal messages!
quickchick
Hi Quickchick,
Thanks, replied back.
Angel
Hiya QuickChick,
Please don't get me wrong, I don''t seek to avoid risk, on the contrary, the excitement of calculating risk vs return, and then seeking the strategies to mitigate or eliminate risk is what makes life exciting, whether in work, love, rest or play.
Personally, I love Montrose's Toast as a testament to bold spirits going forth . . .
I simply meant that while I love blackjack at the casino, you'll find me at the $10 table rather than the $100, even if I'm ahead of the house by 500% my original stake.
I have no passion for huuuuge gambles, although I admire those who do. ( That's how we got mankind to the moon) but for me, modest wins are sufficient.
Regards to all
Andy
PS: Montrose's Toast . . . .
He either fears his fate too much.
or his desserts are small,
Who dares not put it to the touch
and Win, or lose it all.The 5th Earl of Montrose
1612 – 1650
A Royalist General during the English Civil WarI should add that while I admire Montrose's win or be dammned valour, it was that spirit that when misfortune ( and employee negligence) arose meant I lost everything and now have to start again.
I should have listened more to the I Ching ( Chinese Book of Change) where some ancient sage wrote:
"Thus, the Superior Man, taking thought of future misfortune, arms himself against in advance"Happy Hunting
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