Hi Jacqui
You're completely right. It was just a simplified example.
I forgot to mention depreciation which will increase your tax loss without affecting your cashflow.
In my case it leaves me with $1000-$2000 out of pocket for each of my negatively geared properties. Which I have no problem paying to own these properties.
Hi Jotham
I am a high income earner like you. Let me explain my investment strategy/methodology. I invest in property because I like to have control of my investment. Both property and shares are mostly the same (both grow in value and both provide you with income (rent from property and dividends from shares) but they both have 3 important differences:
1. Property will never fall bellow 20% (there is a reason why banks will lend you 80% on properties) on average but shares on the other hand sometimes fluctuate by 20% on a daily basis and can go down to $0 in value.
2. As said banks will lend you 80% of a properties value. You will never get any bank to lend you 80% to purchase shares.
3. You have control of your asset when you purchase a property. When you purchase shares you vest this control to the companies management.
Ok so why do I prefer to invest in capital growth properties? This is the strategy I use, which a lot of other investors use too.
Example: Take a property worth $500,000 located in a metro area with low vacancy rates and high demand. I will put $100,000 of my own money in this property and the bank will give me $400,000 (80%). Let's assume this property will leave me with $4000 out of pocket every year (right now the highest loss I have had has been $2000). Lets also assume a modest 4% capital growth (not the 10% average everyone preaches, which maybe happened in the past but most likely wont happen again).
At an average 4% capital growth, this property will grow by $20,000 every year (this amount you wont be taxed on unless you sell the property). Unless you invest in mining areas you won't be getting this type of return from cash flow positive properties and even if you do, don't forget the tax you will be paying.
So the return on my property will be $16,000 (20,000 – 4,000) which equates to a ROE (return on your $100,000 you invested) of 16%. 16% return on modest assumptions from a low risk investment sounds pretty good to me.
My strategy then is to hold on to these properties and never sell them unless I really have too. As they grow in value I will draw on the equity to fund my other investments and aim to borrow 100% when purchasing other properties if I can. This is a high risk strategy if you don't know what you are doing and don't have certain buffers in place to protect yourself.
However if I didn't have a high income to support my properties I wouldn't be using this strategy.
This is my own structure that I use. I do consult with financial advisors and accountants to make sure that I am not missing any of the latest law changes.
Oh OK. I'm happy to part with a grand total of $2000 to own a property hehehe. I don't particularly mind where the cost has come from, so long as I can essentially buy a house for less than $1k or thereabouts hehehe.
Jacqui Middleton | Middleton Buyers Advocates
http://www.middletonbuyersadvocates.com.au
Email Me | Phone MeVIC Buyers' Agents for investors, home buyers & SMSFs.
Not many get the concept, Daniel. It's quite surprising. I hear this every now and then " I better not pay the loan off or else i will be paying tax".
Oscar
Say you earn 50k per year and you wanted to buy blue chip property, and the equity you had in your own home allowed you to buy 2 properties in the city valued at 300k each, which both have negative cash flow of $60 a week, your total dept would be $620 000 a further 20k for set up fee's
This $120 per week negative cash flow is your commitment after you have met all costs and is claimed as your tax break, although you chose a property with on paper deductions, the choice with inner city property is a lower percentage rent return as often the case with higher priced, blue chip property, therefore, she has a real loss of $90 per week and for this you receive a 30% tax break or $30.
If this were the case you would only be able to buy 2 properties and because your repayments are high you cannot afford to throw more money back into your mortgage and if interest go's up it make matters tuffer and if you loose your job your stressing.
If you hold the properties for 15 years your position is as follows
If the property grew by 8% per annum the properties are worth $1 900 000m, at the end of 15 years the dept is still $620 000 asumed you took an interest only loan, your net worth is $1 200 000m and now you would have 2 choices to sell and invest the profits elsewehere or hold and continue to collect the rent income.
Positive Gear
A person earning $50 000 per year wants to invest in property and invests in property that puts money in your pocket each week, so looking into regional areas with good cash flows and every chance of capital growth due to stability of the area.
So you buy a property for say 150 000 with a cash flow of $20 per week, the $20 that you receive is after tax cash flow, rent less costs less the on paper deductions result in a tax break. This tax not only makes up the short fall between income and expenses, it gives you a $20 per week left over. If you are unsure there are sites that teach you the maths to equate positive cash flow properties.
To speed this scenario up and you were to buy a property of the same investment value every six months over 15 years the position is as followed
considering a 5% growth rate per annum even on the properties you acquired only 6 months ago the property is worth $6 800 000m, the total dept considering fee's is $4 650 000 and if you channeled $20 per week back into the dept you would have payed off an extra $235 000 reducing your dept too $4 415 000.
the net value (gross value less dept) of all property held is $2 385 000 thats at a conservative growth rate at 38% less that the negative gear strategy and if you lost your day job you wouldn't be stressing, with this strategy you can factor in vacancy risks and higher interest rates.
you can play with rents and growth rates of both scenarios and positive geared cash flow properties win hands down, there are many positives to the strategy .
Positive Geared
You are assuming that you will be able to buy/find a positive cash flow property every month for 15 years. That's 30 properties.
Negative geared
You are only assuming to buy 2 properties and stay like that for 15 years. Those properties will triple in value over 15 years. That equity will allow you to borrow to buy more properties. You are also not taking into consideration rent increases which over time will make these properties +ve cash flow. Also your salary will hopefully grow over this time and will allow you to buy more.
Take those factors into consideration and see how the results change.
Good point FredG!
I'm new to investing so I don't have much tangible experience, however I have read up a lot about various investing strategies. At first the positive cash-flow idea appealed to me as the idea is that you are making money from the get go, albeit a small amount. I figured that over time and by purchasing many +ve cashflow properties like this I could get a passive income to replace my current income.
The problem I have found is that it may not be very realistic to source +ve positive properties frequently enough to make this strategy viable. I have opted for a strategy of investing in negatively geared properties which have all the micro/macro fundamentals for CG and therefore building up a large asset base which will with high probability increase in value. I have around $100k saved and am thinking of investing with minimal deposits in order to be able to invest in more properties. I will, however make sure I have enough cash left over as a buffer, just in case.
My reasoning is exactly what you said FredG, providing I'm not too negatively geared, the rental incomes of my properties will over time exceed their expenses, making them +ve positive anyway. I'm happy to incur the LMI since I am young and it will be capitalised into the loan in order to get more properties over the line and hence increase my asset base. My income will only increase from $60k (grad salary) which will allow me to cover rental income/expense shortfalls until the properties are neutralized or positive. After a certain period of time once I have built up enough quality properties that have increased in value, I can always sell of some of them, use the proceeds to pay down the remaining loans and then have enough +ve cashflow to replace income whilst still retaining a large asset base.
Any comments re this strategy would be appreciated!
That sounds like every other Aussie battler! a good plan,there is nothing wrong with that, and providing you do get capital growth its a viable option. With 100k I will buy PPOR and 2 PG properties. If I don't have to buy PPOR ill buy 3 PG properties. I say this to say if each grow 4% then that's 10% equity, Having these in different states offers diversification, then if you want to Neg gear so be it.
It's my opinion, of course the numbers have to stack up, calculate risk and there is skill in finding these and I like the challenge, and also having a good team, it's not for everyone.
They don't necessarily have to be cheap properties to be PG either and we are talking houses
Thanks for the advice Jotham!
The only reason I haven't emphasized buying PG properties is that, from what I gather, PG properties are mostly found in low growth areas, hence this strategy may stifle the growth of my asset base sooner than -ve geared properties. ( I'm assuming equity growth will be faster in -ve properties, hence I can use this as deposits for further accumulation)
Providing that I don't overstretch myself with -ve properties I can, overtime build up a bigger asset base which will provide a bigger cash cow down the line. I'd be open to looking at PG properties if they tick all the boxes, but not just for the sole purpose of offsetting my -ve portfolio..
Thanks for the tips tho!!
well that's exactly right obviously with your research you have a plan, and that is awesome. I hope you buy high growth property and are able to buy more property, but dont cry when you you get to 3 and the banks say "nup sorry.. no more." I wouldn't rule out that once you have 2 good properties you may decide to find some good PG properties.
But if you go negative make sure you do good research and buy properties that will grow in % quickly like 1-2 years rather than 5 years coz, I would hate to buy property that aint growing in value fast enough and it starts to hold you back.
not all PG properties are too expensive or in low growth areas. That's good advice!
How much are you looking at borrowing to buy your first investment?
I am constantly puzzled by the perception that properties with good yields are only found in the middle of nowhere. I find them in great locations every single week. Define your end goal and ensure you are acquiring properties that fit the goal. It's amazing how quickly even one negatively geared property can be to the growth of your portfolio.
Jacqui Middleton | Middleton Buyers Advocates
http://www.middletonbuyersadvocates.com.au
Email Me | Phone MeVIC Buyers' Agents for investors, home buyers & SMSFs.
Good points Jotham!
I've already bought one now looking to purchase 2nd which shouldn't be a problem but you're right that it will be harder to obtain financing for the 3rd, 4th properties which is why I wouldn't at all be opposed to buying PG properties to help with serviceability.
I haven't done enough research on PG properties as yet so I will definitely consider that option. I have a pretty clear end goal so I will look at whatever option will lead to that goal!
Cheers for the advice!
yeah I would definitely look at buying PG properties that have good CG potential, but honestly I haven't done any due diligence on my part to find any so I can't really comment. I guess I've just taken it at face value from what I've read and what people say..that PG properties are most often not in high CG areas. I'm sure you can find ones which are if you do the due diligence as you have..
That's awesome alpakka good on you, You can always create PG properties as well, by buying under median, something good but a bit different, little fix ups and your on your way, play around with the figures like price, rent, interest rates and costs, to see what you need to create cash flow. Ask your solicitor to do a building cost report so you can max out the depreciation.
You make money when you buy realestate!, run them like a business, the hard work is time consuming research but don't do it all alone, there is good honest help out there, just know your stuff though so you don't get ripped off!
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