Hi,
I just have a question about getting into property and carrying a debt. This is not my personal situation but some close friends of mine who I am trying to help out.
See, he has the opportunity to get into a property at a good deal. It's still expensive for them (over 300k) but would give instant equity and would only cost him around $75 a week to hold the property. It's a good deal but they have one problem. They are in debt for over 200k for a bad business deal.
Now, I was thinking that to dig yourself out of a hole like that, you'd do something like this but am I being a bit pushy? They just want to buy the house and then onsell it straight away. They'll make at least 30k profit out of it and will inject that into the debt they have.
I'm not sure how to help them. Should I let them just sell and inject that money into the loan? Is it better to get rid of that before venturing into anything else? They are around 52 now so age wise they are getting on.
Or should I encourage them to hold the property and rent it out? It will only cost them about $80 a week to hold and the longterm benefits might be better? If they knuckled down, they might be able to pay the debt off in 10 years. If I pushed them to hold the property, maybe in 10 years they will be better off?
I guess I'm just not sure how to support them. I just want them to get back on track and am not sure whether turning over a property which is a good opportunity and onselling is a good idea. I don't want them to lose a good thing just to inject $25,000 into a debt, etc.
Thanks and any help if appreciated.
300.000 * 9 % = 27.000 / 52 = 520 dollars per week to hold the property.
Why do you think it costs 75$ a week ?Plus they have a debt of 200K, which costs them : 350$ per week.
That would be 870 dollars per week ( 3480 dollars per month ) purely interest.
That is , that's the least they will pay without actually paying any mortgage.They already gambled once and lost 200K, why would they want to lose another 300K on top of that ?
They should now accept that they need to work very , very hard, for a very , very long time to get rid of the 200K debt. After they are out of debt, they will have learned a lesson : nothing is free, and property is a gamble just like any other investment.There is no 'easy money'.
Please explain why they expect to pay 75$ per week when I come out at 870$ per week, and that doesn't even include repairs to the property , taxes, etc… Are they living in la-la-land where money grows on the tree and 1+1 = 3 ?
I agree with Scamp.
A good ball-park guide to work on with the expenses incurred in holding a rental property is to allow around 20% of the rent to be eaten up by the holding costs such as rates, insurance, repairs, management fees, vacancies etc. This is not including the loan and/or the loan interest.
On the other side of this situation; if they buy and then immediately re-sell, they will have all the buying and selling costs to be considered, and there will be capital gains tax to pay.
If they sell within 12 months, they will have to pay tax on 100% of the cap gain, at their marginal tax rate.
This could ultimately see most of their profit eaten up in costs and tax.
Not to say that they shouldn't do this deal, but you need to know EVERY cost involved, and over-estimate them as well.
Give us all the figures –
weekly rent, water and council rates, insurance, management fee, body corp fee (if applicable), repairs ($1k per year), loan size and interest rate, bank fees.If the property was built after 1987 there will depreciation as well, so find out the date of construction and cost if possible.
Then we can work out the cashflow more accurately.
I didn't list everything on purpose as I wanted to guage pure reactions so thanks for that.
Actually, this is irrelevant now because they've decided to onsell and take the 30k profit (that's a net profit) so no need to get into this discussion.
Thanks though.
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