We need help. Simply put we are having real trouble getting our head around how property works for us…. Perhaps leaving school early is my excuse. I use Steve’s example in “Buy and Hold” of the house purchased in 1996 and held for 5 years, making a tidy $72679 profit. How does this compare putting the money away into a savings account for the same 5 years? Apply the same basic $$ as Steve’s example…. Deposit (20% of $144300) = $28860 + regular deposits (equiv to mortgage repayments) = $1000 per month over the 5 year period at (conservative 4% interest) = $101536 – outgoing rent $43316… Factor in finding the right tenants, property and location… and hoping that you don’t spend money on repairs…. How can the stress of a property be worth $10,000 over 5 years? I am sure that I am missing something obvious? Help Thanks in advance. Mark
Hello forgetful
I don't know which example you are using. I have 2 of Steves' 3 books but not the last one yet so without actually knowing the details of this example I will try to explain.
Knowing that Steve mostly buys cash flow positive investments he did not have to pay out the $1000 per month that you used as extra savings into that mythical bank account. By this I mean that the rent from the house was greater than all the expenses including mortgage repayments.
Put another way, his out of pocket costs were probably zero per month while yours, in your comparison, are $1000 per month.
Therefore a more accurate comparison is
Lets say Steve put in the 20% deposit, had no monthly costs and sold to make a nice profit of $72679 5 years later.
You put the same amount into a bank account, had no monthly additions, earned 6.5% interest (let's be generous) how much did you end up with after 5 years?
Even if a property is negatively geared (i.e not self supporting) you can still make a profit. The trick is to find a property that will appreciate faster than the out of pocket holding costs.
Don't forget, not all property automatically makes money. The trick in investing is to find the ones that will.
Can you please tell me what the outgoing rent ($43316) is in your post? I got lost there.
Hope this helps more than it confuses
Elka
Elka,
Sorry, the comparison that I used was the one on this site. https://www.propertyinvesting.com/strategies/buyandhold
It is an older reference to a problem.
My partner and I are trying to work out where to start. A common problem I think.
I currently own my own company and my partner works, our combined income is approx $280K yet were confused after applying to Mortage Choice for a home loan…. we were told that they were prepared to lend only 350K-400K. Clearly we began to question everything and doubt our own figures…. so I guess I ended up here again.
This will be our first home, but I doubt that we have an income problem. We have $0 debt and approx $20K + FHOG.
Perhaps I just need to do some more reading… I have Steve's first book, and I guess things have changed a little.
Lots of time to think is not always a good thing.
Mark
Hi forgetful,
Just a quick one.. please don't use leaving school early as an excuse…. I think sometimes school can limit you more that being exposed to the world at an early age can… just personal experience!!
I look at putting money into the bank or managed funds sometimes as a short term plan. When you have money in CF+ve property you have to think of the longterm.
you might be making if lucky 5% ad you might think "It's safer just being in the bank earning that interest".but what you have to think is that the sooner you get it payed off, the sooner you get that weekly rent in your pocket… and if property roughly doubles roughly every 10 years, you also have that equity to tap into.
I don't know much, but my theory is to keep it as simple as possible… even so someone who left school early can understand….!!!!
Luke
With a bank account you also don’t get any tax deductions (maybe on the fees) and you get taxed on your profits every year (cap gains tax).
With property, you can create a tax-free profit, and as long as you don’t sell, you can use the cap growth to further invest in more of same without ever paying cap gains tax.
There are ongoing problems with property with tenants, vacancies, repairs etc, but a well selected property with ‘good numbers’ will have all that covered.
No contest really.
On your combined income you could buy a pos cashflow property every year without raising a sweat – use more cash as a deposit to minimise loans and improve returns, and buy properties that are not too expensive.
Thanks Elka, Luke and Marc…. Appreciate your help…
It is funny, my partner and I were on the right track about 6 months ago… and somewhere the path was greyed by all of the "other" advice and influences around us….
You have helped remind us about the positive cashflow properties that we use to actively look out for, and I think now we will put our minds into action and start to do the math.
Thanks again.
Mark
$280k p.a income and only $20k in cash?
definately something missing…….
with that kind of income you shouldnt need a mortgage
Crashy…..
I guess that Wedding, Car, Holiday and becomming debt free have had more priority for a while.
Probably not the best order, but the least stressful for us both.
and there lies your problem. lenders think your excessive spending will continue. Until you have a savings record they will assume you are living beyond your means and that you could never afford the loan repayments…..
try to get together 20% deposit…..it will make things much easier…..and reduce the limits on your credit cards, maybe cut a few up.
We have only got $2500 on the card now. Moreso that I started my own company in Dec06… Actually the spending was all mine… that is what years of being single and irresponsible had lead me to… I guess you could say that I have been put on the right track by the right women….
haha. i'm 24. I have been together with my missus for 1 year and i have done exactly the same..
Maybe the secret to wealth creation and getting yourself together is to find a WOMAN?
It worked for me.
haha Cheers
Mark
If you are going to find a woman then make sure she is financially literate and not a shopper/consumer .
The other version can be very expensive.
Or, get yourself organised.
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