Hello Steve,
Have been reading your emails since your first email back in August 2000, and have tried to understand, what it is, to have a positive cash flow investment property. I have over this time prompted my husband to read your information, and he has come up with a property he thinks is worth investing in. As this is our very first attempt at property investing, you can understand our hesitation. To assist us to proceed to the next level, may we leverage from your experience to decide if this is infact a good investment.
Ad:
Display home in sought after area of melbourne. Offering guaranteed 2 yrs lease back at 8% with option of 3rd year. Price: $365K.Sums:
1. If we take an interest only mortgage of 90% fixed for 2 years($328,500.00). Repayments are $1546.00pm. based on 5.65%. Rental is $2433.00pm, leaving a positive cash flow of $887.00pm or $10644.00pa.
After 2 years, we sell the property and hopefully obtain the capital gain to invest into another property,(to avoid paying capital gains tax)which based on growth of area is a good chance.What questions have we not covered?
Is this considered a good investment?Looking forward to your reply.
Kindest regards
Dianne
Gday Dianne,
You said:
“Ad:
Display home in sought after area of melbourne. Offering guaranteed 2 yrs lease back at 8% with option of 3rd year. Price: $365K.Sums:
1. If we take an interest only mortgage of 90% fixed for 2 years($328,500.00). Repayments are $1546.00pm. based on 5.65%. Rental is $2433.00pm, leaving a positive cash flow of $887.00pm or $10644.00pa.
After 2 years, we sell the property and hopefully obtain the capital gain to invest into another property,(to avoid paying capital gains tax)which based on growth of area is a good chance.”What about the other 10% ($36500.00) plus the other costs you will have to pay on the purchase, i.e stamp duty, legals, etc. etc.
These will turn what appears to a positive IP into a typical Negative geared IP….
You will almost certainly find that the builder has also built into the price the rental guaruntee, so the purchase price maybe inflated.
Also consider the wear and tear on the property of thousands of people wandering through every weekend for the next 2-3 years.
Others may wish to add other pitfalls of this type of investment.
Cheers
watto
Melb FreestylerDianne
Watch out for rental guarrantees as well. They are often built into the price.
TW
Hi Dianne,
If 2 years is your timeframe then this sound more like speculating than investing. Don’t forget to take into account of the selling costs, account for at least 10% of selling price. Don’t forget your profit margin.
Using PIA for a quick check, with tenant paying $567/week, on 5.65% I/O loan, with let say 25% property expenses, this IP seems to be positively geared for the first 2 years at least.
Regards
Rodney :o)Edited by – [email protected] on 31/05/2002 11:05:08 AM
Just afew thoughts Dianne,
If the rental return is true to what they speculate, why do they need to have a “rental guarantee”?
Something that has always stuck in my mind from Steve and Dave is, with cashflow, it’s the person who is the asset, not the bricks and sticks.
See what the deal is like if you factor in the maintenance, rates, stamp duty, etc and see if it still fits into a positive cashflow scenario. As they say, the numbers don’t lie.
Regards,
Li-Sa
If the builder is doing a lease back, is he prepared to pay all the
outgoings. Also, there is no guarantee that you will have capital gain in 2 years. Check other property prices in the area to make sure you are not paying too much.Hi Dianne
Although I have bought a fair few houses on my own I am new to
this positive cash flow caper so how about if I answer with questions.
1. $328,500. seems like a huge amount of debt on one house.
Would it be better to spread your debts across a few houses rather than one house.
2. I have always been under the impression it is best to purchase properties that appeal to the widest section of the community. Does this house fit that description.
3. Will you have a contingency in place when the lease expires in case of the following:
a. Interest rates rise another 1-2%
b. If you can’t sell the house on completion of the lease
can you cover the payments with rent even if interest
rates go up.
4. If have a sleeping criteria on my investment decisions.
ie can I sleep at night if I take on this commitment?All the best Dianne, let us know how you go with your decision.
I agree totally with Tara. It is better to spread the risk and buy two properties for that price. It is always easier to find tenants in the lower rental price range, because that’s were most tenants are.
If one property is vacant, you’ve got a good chance of the other one being tenanted.
If you provide clean premises and perhaps do the lawn mowing yourself and attend promptly to any problems, the tenants are likely to stay for longer. It is well worth while getting a good property manager.
At the present I am focusing on the outer east area, there are opportunities if you look for them. I think, if interest rates rise and the market goes flat, those property owners with seriously negatively geared properties are the most likely to have difficulties.
If your properties are offering reasonable cash flow, you can survive much better.
ReginaHi Dianne,
Firstly, I think that the information provided by the replies you have received all contain good advice.
To be honest, it is difficult for me to comment on your deal beyond very basic indicators. But sometimes these are best because they tend to cut through all the hype and emotion associated with the ‘sell’.
If you haven’t already done so, I suggest you get and read my free newsletters and work through my laws of success.
The first thing I do on any potential deal is the 11 Second Solution. In your case, $2,433 pcm works out at $561 per week. Hmmm, this seems very high.
In any event, $561/2 = $280.50. Then *1,000 gives $280,500 – this is still much less than $365k.
I also get nervous buying an expensive property because:
a. If the property is vacant then the negative cashflow may be extensive. I realise there is a guarantee… just be careful about the clauses that write this up as legalise.
b. You could buy one property for $365 k, or 7 * $50,000 properties. More properties reduces both your interest rate risk and also your vacancies as you spread your exposure over 7 properties rather than one. Ie. all 7 properties would have to be vacant to have the same exposure as one $365k property being vacant.
c. I’d compute how far interest rates have to move before your ‘budgeted’ +ve cashflow is eaten up. 5.65% sounds a little optimistic given the change in interest rate landscape. If you buy on a 60 day settlement, then the rate may be closer to 6.5%. Watch out!
As for other questions – make sure you do your ‘due diligence’. If you have purchased ‘Property Secrets Revealed’, then use then PATTERN Templates included therein and also the negotiating strategies to try and get the price down a bit further.
Bottom line… this isn’t a deal that I’d do as a buy & hold. Too expensive and the risk is isolated across one deal. Even capital gains are now uncertain given the change in interest rate climate.
But my opinion is clouded because my niche is smaller regional properties – not CBD stuff.
Do your numbers very carefully and be sure to factor in ‘buying’ and ‘selling’ costs to get a realistic idea of how much you will make for how much you are risking.
Bye,
Steve McKnight
Steve McKnight | PropertyInvesting.com Pty Ltd | CEO
https://www.propertyinvesting.comSuccess comes from doing things differently
quote:
Hi Dianne,Firstly, I think that the information provided by the replies you have received all contain good advice.
To be honest, it is difficult for me to comment on your deal beyond very basic indicators. But sometimes these are best because they tend to cut through all the hype and emotion associated with the ‘sell’.
If you haven’t already done so, I suggest you get and read my free newsletters and work through my laws of success.
The first thing I do on any potential deal is the 11 Second Solution. In your case, $2,433 pcm works out at $561 per week. Hmmm, this seems very high.
In any event, $561/2 = $280.50. Then *1,000 gives $280,500 – this is still much less than $365k.
I also get nervous buying an expensive property because:
a. If the property is vacant then the negative cashflow may be extensive. I realise there is a guarantee… just be careful about the clauses that write this up as legalise.
b. You could buy one property for $365 k, or 7 * $50,000 properties. More properties reduces both your interest rate risk and also your vacancies as you spread your exposure over 7 properties rather than one. Ie. all 7 properties would have to be vacant to have the same exposure as one $365k property being vacant.
c. I’d compute how far interest rates have to move before your ‘budgeted’ +ve cashflow is eaten up. 5.65% sounds a little optimistic given the change in interest rate landscape. If you buy on a 60 day settlement, then the rate may be closer to 6.5%. Watch out!
As for other questions – make sure you do your ‘due diligence’. If you have purchased ‘Property Secrets Revealed’, then use then PATTERN Templates included therein and also the negotiating strategies to try and get the price down a bit further.
Bottom line… this isn’t a deal that I’d do as a buy & hold. Too expensive and the risk is isolated across one deal. Even capital gains are now uncertain given the change in interest rate climate.
But my opinion is clouded because my niche is smaller regional properties – not CBD stuff.
Do your numbers very carefully and be sure to factor in ‘buying’ and ‘selling’ costs to get a realistic idea of how much you will make for how much you are risking.
Bye,
Steve McKnight
Steve,Thanks for your response. I would like to thank everyone who responded to my original posting. After much thought we have decided not to go ahead with this purchase.
We have learnt a few things though, being newbies….and I thank you all again for your input.
Di & Pete
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