Hi all,
It seems without cashflow (serviceability) it doesn't matter how much equity (LOC , Cash) you have for deposits. I have a tonne of equity in my PPOR (About 300k. Only because values have sky rocketed in my suburb) but limited income to service debt.
What serviceability game plan have others used in this situation?
PJ
I am in the same situation as you.
The only thing I have come up with but not done yet is to buy in a cheaper interstate location and then pay it off ASAP as the stupid Just Over Broke income loving banks and ASIC do not recognise massive equity as income. Lets face it you could borrow money and not pay it off for like ten years without a problem but the banks love the Just Over Broke income only. What really cheeses me off is if I could have borrowed on the massive equity I could have made massive capital gains from 2000 – 2004 when I was a university student but no I did not have a J.O.B. income so had to miss out on $500,000 plus in potential capital gains.
The only other thing I have thought of is joint ventures but have not done it yet as I am trying to save money at the moment.
Money Partnering is probably a thing of the past as ASIC has made it a lot harder for people to lend others money
with their new draconian credit laws..Try alternative lenders as not all leopards have the same number spots.
Take rental income for example.
Most lenders take between 75-80% yet there are some that take 100%.
Serviceability Rates – most lenders apply a margin of 1.5%-2% on top of their standard variable rate however some only apply 0.6% and take the actual repayment where they are not taking the property as security.
Makes a big difference.
Cheers
Yours in Finance
Richard Taylor | Australia's leading private lender
When it comes to cashflow it is definitely important and something you need to keep in check all the time – like with a family budget. This has been a challenge to me early in my marriage – it is different when you are 2 people – you can't just go and buy what you want.
But when it comes to servicing investments it's even more important to keep track of what's going on isn't it. There is so much involved. I am still looking for some software to help me, but for now i am using a spreadsheet – which gets complicated.
does anyone here use any software?
Richard,
Thanks for the experienced insight. It is good to see there is some scope.
However, even though I have ample equity (at least to set up a LOC) I would be lucky to have maybe 20K a year net in disposable income to put towards negative gearing. This is without having money set aside for those emergencies property seems to through up from time to time or even just to enjoy the sunshine.
My goal is to at least match my income of 85K gross a year in 15 years time. Am I better off putting my 20K/year in a managed fund or share trade rather than play with property?
How have others succeeded from this starting point?
PJ
I've never been in a position to need/take advantage of negative gearing. I went for a positive geared property. If you want cash flow go to the mining towns!
AntheaProperty wrote:I've never been in a position to need/take advantage of negative gearing. I went for a positive geared property. If you want cash flow go to the mining towns!No doubt that the yields are greater in mining towns – however, there is a greater element of risk (not saying it's a bad thing though – greater risk, greater reward).
Jamie Moore | Pass Go Home Loans Pty Ltd
http://www.passgo.com.au
Email Me | Phone MeMortgage Broker assisting clients Australia wide Email: [email protected]
AntheaProperty wrote:I've never been in a position to need/take advantage of negative gearing. I went for a positive geared property. If you want cash flow go to the mining towns!This is a strategy I’ve employed in balancing out my portfolio. Cashflow is obviously important. Earlier this year and after extensive research I purchased a high yielding property in a regional hub in the Bowen Basin. My next purchase, for example, will be more orientated towards capital gain and will be more negatively geared.
My strategy hinges on both timing the market and time in the market with care taken to maintain my cashflow against capital gain. If I purchase property sensibly in a bottom/rising market (Australia wide) for example that shows potential for both rental increases and capital gain (purhaps in an area where new infrastucture is being developed in a more traditional market ie. capital city or large regional city)…after time my cashflow should come back to neutral. Then repeat…repeat…repeat.
Most important…do your research and have a go.
JT7 wrote:Most important…do your research and have a go.Agreed. It doesn't matter what strategy you adopt, as long as you have done your research and are clued up, this will help mitigate risks.
Jamie Moore | Pass Go Home Loans Pty Ltd
http://www.passgo.com.au
Email Me | Phone MeMortgage Broker assisting clients Australia wide Email: [email protected]
Thanks for the replies.
I am obviously in the early days of sorting out my overall game plan. The property game lke mnay other games we play (shares etc) is all about managing the downside.
For me, in my current situation (limited disposable income with ample equity) its seems the biggest and first risk I need to mitagate is the cashflow needed to feed debt. Getting the finance is relatively easy but without the cashflow to service this debt, the game is over.
In the long term, quality, value add, B&H properties are the way to go however, these will almost always be -CF properties. So, how do I go about getting these while protecting my cashflow that will feed them?
(Thinking out allowed)
I am guessing I have enough equity and current serviceability to purchase about 3 properties.
Game plan 1.
Buy 1 or 2 Vendor Financed properties to feed 1 quality B&H property. This technique will feed the B&H and eventually manufacture +ve CF once profit margins are poured into the B&H when the VF properties close-out.
PROS
– You have created cashflow form your equity to service a quality B&H taking pressure of myself to work harder to make more money.
– You potentially have better quality people involved with your portfolio buying the VF properties from you. The 'people factor' is decreased.
– You know what the end game is with the VF prperties. That is, you know your repayments are covered plus some and you know what your profit will be from the beginning.CONS
– Getting a credit licence is difficult
– Banks will make it difficult for you and your VF buyers
– May be stuck with a property you can't work with
Game Plan 2Buy 3 Reno properties. Add the value, sell 12 months later. Buy a quality B&H. Pour the profits made from renos into the B&H and manufacture a +ve CF scenario by reducing your debt level on the B&H. Use your original equity to do it again.
PROS
– Take tenants right out of the picture whe you are doing the renos.
– Your reliance on tenants with the B&H is greatly reduced due to the reduced debt levels
– Because of reduced debt levels on the B&H vacancy periods are less of a burden on my personal income.
– Manufacture equity.
CONS
– Time consuming.
– Stress levels are higher. Cowboy tradies and the like.
– Sale price and time to sell is a loose end.
– Personal cashflow is under strain during the reno / sell period.Game plan 3
Use lease Options. Same as game plan 1 just a different instrument.
PROS
– Less regulatory challenges
– Banks do not see it as a threat.
– You know your exit numbersCONS
– Lower quality people involved with your portfolio. The 'People Factor' is increased.
– Left with a property you can't work with.These are some of the game plans I have been thinking through with the aim of ensuring my cashflow is protected and not relient on my personal limited income. With cashflow sorted you can build your quality B&H properties. Equity will come and basically feed and compound itself in time. Once I feel I have enough B&H properties I will go back and leverage their parcels by developing them into units. Sell 80% keep 20% with aim of making the 20% debt free.
Once I know my game plan, this will focus and streamline my research efforts. Looknig only at properties that fit my plan.
Thanks all for allowing me to think out allowed. I know these types of questions are asked time and time again.
The act of writing the post goes along way to clarifying my thoughts and understanding my goals and how to get there.
PJ
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