I've read Steve's books 0-130 and 0-260 properties, so i understand the principle of acquiring cashflow (+) properties.
Furthermore i understand that during the last 4 years or so that finding cashflow (+) properties in suburban Australia was like searching for a needle in a haystack – mainly because Australian properties are by far the most overpriced in the 'English speaking world'! Subsidiary reasons are that our interest rates were (and still are) a lot higher than the rest of the English speaking 'first world' (with the exception of NZ) as well as the fact that property-related taxes in AU are also way above par …Despite this dismal picture I've painted, a considerable improvement in the market has occurred from the perspective of the cashflow (+) property investor during the past 6 months or so since interest rates have fallen so much, and also to a lesser degree due to the fact that property prices have (in the main) dropped slightly as well. The point is, it's now definitely possible to find cashflow (+) properties for sale once again.
What i can't fathom though is why the Australian banks seem to be doing everything in their power to put obstacles in the way of property investors? The first point in this regard is why on earth would they only recognize 65% of rental income as counting toward affording the mortgage? DUH!! What do they reckon i'd be doing with the other 35%? Buying lollypops???!
If the reasoning is that i could lose the tenant and then be unable to get another tenant at the same or similar rent, then so what?? That's why the banks only lend 80% of the property value! So if it repossessed the property it should easily sell the property for what's owing or more… Isn't that why there is this 20% differential between the value of the property and the amount i can borrow against it (the mortgage)??
The point is the bank already has more than adequate security against the loan, so they're covered.I know in NZ the banks recognize 85% of the rental income for the purposes of calculating affordability of the mortage, and so the investor only has to find 15% elsewhere. In the states i believe that 100% of the rental income is counted.
So my point here is in Australia, with the banks only recognising 65% of rental income, HOW on earth can one build up a large property investment portfolio with cashflow (+) properties???
If all properties are cashflow (+) it stands to reason that the investor should not require ANY additional income to cover these properties, since they're paying for themselves – which is WHAT CASHFLOW POSITIVE means!! But i guess Australian banks don't fully understand this principle or they don't care…and yes, the interest rates will go up again, potentially making cashflow (+) properties cashflow (-) but there are ways of mitigating against this, namely by fixing interest rates for as long a period as possible. By the time the fixed interest rate period expires, the rental income would have gone up a fair bit, so this would potentially cover most if not all of the increase due to interest rate increases once the loan goes back onto variable rate.
I've also 'heard' – through the comments made here by brokers, as well as on various finance websites – that when purchasing an investment property the banks are no longer satisfied with an 80% deposit, but require anything from 30 to 40%! Now either that's just the Australian banks once again doing complete overkill – and thereby acting as an effective barrier to investment – or it's a crystal ball into what they really think the values of properties in Australia are – i.e. 40% overpriced and the bubble is about to burst!!?
The point is … if these conditions are indeed being demanded by Australian banks
1. only counting 65% of rental income
2. requiring 30-40% depositHOW ON EARTH DOES THE AVERAGE CASH-POOR INVESTOR IN AUSTRALIA GO ABOUT BUILDING A SUBSTANTIAL CASHFLOW (+) PROPERTY INVESTMENT PORTFOLIO?
It's mathematically impossible – thanks to our banks!
Please show me different…Neil
Sorry my old mate i think you are totally wrong in regards to:
The point is … if these conditions are indeed being demanded by Australian banks
1. only counting 65% of rental income This is not the case and most lenders will take between 75-80%. One lender even 100% of the rent
2. requiring 30-40% deposit Again this is not the case. Until earlier this week 100% loans were still available but even without that i have many lenders who will still consider 95% lvr even in regional AustraliaMe thinks you should be trying a different broker for your finance needs.
Richard Taylor | Australia's leading private lender
Hello,
Well the reason is that we are now in a world wide financial credit crisis and the banks (don't tell anybody) don't have a lot of money.
You are also young and your first lesson is to understand that markets change.
If you were a bank looking at your profile would you lend yourself the money and why.
Banks are a business and what they are really saying if you are listening is something like this ….. S..t the market is going to get worse, there are less companies with money securing funds with us, 80% of businesses are now trading insolvent, people are losing their jobs in the multiple thousands so lets make it harder for people to borrow money … whoska !!!
25 years ago I bought my first property and paid a 35% deposit from my SAVINGS so why should you be any different … i am not being harsh i am telling you the truth … learn to read between the lines and you will become rich.
D
Thanks for the reply Richard. This has given me some 'hope'. However, i'd very much like to hear from other brokers and/or investors too who can comment on the points i've raised.
Recognising 75% to 80% of rental income is still not great news – the average hard working person who is still heavily dependant on his (very finite) salary will very quickly run into a brick wall and be able to get only one or maybe two positive cashflow properties because of this limitation.
Steve McNight made the point over and over in his books (at least the two i've read) that the main reason why positive cashflow properties are superior to negatively geared properties is being able to build a very large portfolio of positive cashflow properties – each property contributing a small passive income, but the combined effect of the large portfolio is a large passive income.
There are perhaps relatively many (+) cashflow properties around to be 'discovered' by the prudent investor nowdays, but whats the use if the banks are making it impossible to own more than one or two because of their lending criteria?
I still don't see how it's possible – with our banks' lending criteria – to build a substantial property portfolio of (+) cashflow properties if the investor has relatively little capital to spare and a limited salary.I am willing to put heaps of effort and study into ways of FINDING good deals (positive cashflow properties – but the other half of the equation seems to be missing … the half that both Robert Kiyosaki and Steve McNight always emphaise – USING THE BANK's MONEY for leverage…
Our banks are not making it possible
the reason that banks look at less rental income is to factor in vacancy periods if you lose a tenant.
Maximum Leverage and positive cash flow don' t always go together. If you get the principal down you increase your borrowing power and reduce risk.
"I still don't see how it's possible – with our banks' lending criteria – to build a substantial property portfolio of (+) cashflow properties if the investor has relatively little capital to spare and a limited salary."
It is hard to begin investing but as you pay off the loan and the value goes up it will get easier and also accelerate if you keep feeding money into the investment.I am willing to put heaps of effort and study into ways of FINDING good deals (positive cashflow properties – but the other half of the equation seems to be missing … the half that both Robert Kiyosaki
Robert also stated Cash is King when this economic cycle occurs as money is hard to borrow and someone with cash can snap up bargains.You might find this book interesting to read
Unlimited CashFlow – It’s easy make money in Property
http://www.propertyupdate.com.au/pages/Craig-Turnbull-Books.htmlYou will certainly need a good income to keep on borrowing in this sort of climate.
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
Hello neilvs
You seem to forget that not all the rent is availible to service a mortgage.
Generally 20% is already earmarked for expenses, excluding interest payments.
Council rates, water rates, insurance, repairs, agents commission/letting expenses, vacancy periods and possibly land tax also neeed to be paid.I guess the banks realise this.
Cheers
ElkaHi neilvs,
Re- "So my point here is in Australia, with the banks only recognising 65% of rental income, HOW on earth can one build up a large property investment portfolio with cashflow (+) properties???" …Mate, as Richard said, find another broker how can put you onto lenders with less stringent criteria. On top of this, find/create a deal with a high enough yield so the % of rent the bank factors in will cover the mortgage payments. An example is a deal im considering at the moment- they're asking $149,500 and it's currently rented at $175pw. Your not going to pay that but let's say you paid $145K and borrowed the full amount at 5.3% (very do-able in the current climate). Your interest committment on an IO basis is only $147.80pw. Now all you need to do is find a lender who'll consider 85% of the rent as contribution to servicability and your laughing (85% of $175 is $148.75). And this deals straight off the shelf with very little tweeking so far. A bit more would need to be done to make it worth buying and obviously there's alot more involved on the funding side but im just trying to make a point. All you need to do is find deals that you think have the potential to be turned into great deals and then get to work on them. You know all this neilvs, you've read Steves books.Good luck, I hope this was helpful
elkam wrote:Hello neilvs
You seem to forget that not all the rent is availible to service a mortgage.
Generally 20% is already earmarked for expenses, excluding interest payments.
Council rates, water rates, insurance, repairs, agents commission/letting expenses, vacancy periods and possibly land tax also neeed to be paid.I guess the banks realise this.
Cheers
Elkahi Erika
I see your point. I did not really express myself 100% clearly. All these expenses you've mentioned I would have factored in already, so when i say a property is cashflow (+) I mean that ALL these expenses are already factored in, eg vacancies, taxes, repairs, mortgage interest, etc etc..
Therefore the property is pretty much self-sufficient . What i may find (and this would probably vary from property to property) for example is that for Property A, 25% of the rental covers all expenses except for interest, whereas in property B only 15% of the rental is taken up by all expenses other than rental, so obviously with property B i'm not going to finance it through a bank which is going to recognise less than 85% of the rental income, whereas with property A it would be ok to use a bank which only recognises 75% of the rental as this would reflect the true situation for that property.In the end I guess that if the bank can see that i've done due diligence and have a detailed breakdown of ALL expenses, and if the property is truly self sufficient, i.e. the rental income covers all expenses (including vacancies) then they should be happy to lend me the money…
You must be logged in to reply to this topic. If you don't have an account, you can register here.
