[BennyModerator@bennyJoin Date: 2002Post Count: 1,416]

April 14, 2014 - 5:55 pm

Well, I enjoyed reading that one. And yes, I enjoyed reading both sides of the debate.

In early 2008 we were “enjoying” the rise in Interest Rates that followed newly-elected PM KRudd famously saying “The inflation genie is out of the bottle”, prompting the RBA to start raising interest rates as the rest of the world were madly cutting theirs (think GFC) !!

Also in early 2008, I had the good fortune (?) to have some of my Fixed loans come out of 6.49% to be hit with 9% variable. A 2.5% increase? Nope, it was a 50+% increase. Things did get quite tight for me (and COULD have seen all of Australia become a buyers market quite quickly, except that the rates then got SMASHED later in the year when the RBA realised they had got it wrong).

So I do recall WHY some of the gloomers were saying what they were, with 50% drops in values, etc.

They also used the US as a mirror of what would happen to Australia. But the US uses mainly non-recourse loans – you can take the keys to a house to the bank and walk away from any mortgage. WE can’t do that here. Thus, our market would never be subjected to the wild swings tht their system makes possible (in my humble opinion).

And the comments made about “house costs equal to 9 times wages”? Yes, we do see spikes now and then (it was similar in late 80’s wasn’t it? I recall values doubling almost overnight) but a comment today from Steve included this :-

Of interest, RBA Governor Glenn Stevens recently made this comment about a possible Aussie property bubble:

“You can never be 100 per cent sure. But the price to income ratio has been around four times … for about 10 years, so a very long-running bubble, if it is a bubble. Most do not last that long.“

Steve’s article is now off the front page of the forum, but you can read it all here :-
https://www.propertyinvesting.com/heading-property-crash/

If the long-term cost is around “4 times earnings”, then a sudden doubling in price would quickly become “8 times earnings” – until wages caught up again.

I just wanted to bump that old thread. Times change, and it is always useful to keep a weather eye on developments in real estate, so I appreciate threads like this one. Certainly, along with the raw emotion, there were some very pertinent comments made therein.

Benny

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April 14, 2014 - 1:39 pm

Hi DM,
The numbers would give you a clue. Have you calculated the dollars available after all costs?

First, is this “old PPOR” still your nominated PPOR? Or will you be up for CGTax on sale? CGT could be a MAJOR cost to you – is it?

Re “should you sell”, that will depend on
1. what it is costing you to hold,
2. whether having an IP so far from home is any kind of issue, or not,
3. the opportunity cost of holding on
4. the projected growth of this place into the next decade….

You might have a “screaming buy” elsewhere and could really do with selling. Lots to consider – good luck with it.

Benny

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April 12, 2014 - 11:59 pm

Hi Steve,

Of course, things will change over time.

Aha, I see you have added a quote – these seemed to disappear during the forum changeover. Let’s see if my quote works too…

Woohoo – it did !!

Benny

• This reply was modified 10 years ago by  Benny.

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April 4, 2014 - 11:01 am

Having just re-found this post for someone, I wanted to put it into this thread.  

It shows what CAN be done by young investors starting out…..  and the results are remarkable.  He created rental incomes of $200k in 2 to 3 years.  Out of that comes mortgage payments, rates, etc – but you will see there is still a LOT of cream left over……. (if you do a few calcs – if you can read the numbers)

Westnblue started investing in "buy'n'hold" properties in 2011, thus his success is quite recent.  

https://www.propertyinvesting.com/forums/general-property/4349392

If you think properties returning 10% can't be found, squint at the numbers in that thread, or buy the Dec 2013 issue of the mag, and see how he did it.

Benny

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April 4, 2014 - 3:17 am

A common question is when investing, "Why use IO loans and not P&I loans?"   

And for those REALLY new, IO means Interest Only (you pay only Interest, and nothing off the Principal), and P&I means Principal and Interest are paid.  Of course, a P&I costs you much more per month than IO.

One main reason is the thinking that it is silly to pay off Tax deductible debt (Principal amounts on an Investment Property) when you still owe NON-deductible debt (your own mortgage, car loan, credit card debt, etc).

The thread below has several good replies that cover a wide range of reasons and answer extra questions that have popped up.  So if you are one who has struggled with "Do I or don't I?" re IO and P&I, have a read – it should help to clarify things.   If it doesn't, ask your question on that thread, thus making it an even better resource.

https://www.propertyinvesting.com/forums/legal-accounting/4349025

Benny

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April 4, 2014 - 2:46 am

Hi Spud,

  Welcome aboard !!   I think you will get better answers if you can frame your question with more detail.  Just a few thoughts as a guide :-

  Is this urban or rural land?

  Is it subdividing an existing small block (perhaps with a house on it)?

  Is it an acre or so to be subdivided into 5 or more blocks?

  In a major city or a country town?  What area?

  For commercial or residential use?

  etc.

  I won't be able to help as I have never even been to SA.   There will likely be others who can offer suggestions though once they know a bit more from you,

Benny

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April 3, 2014 - 10:21 pm

Finding Cashflow Positive IP's – it is already a "sticky", but now and then, we need to review what is already "up there and available to all".  

At least stickys can be found easily, but just in case you missed it, this thread contains FAR MORE than a suburb-by-suburb list of "where to go".

A lot of the posts in here deal more with the "How to" rather than "Where to".  They are not "giving you a fish to feed you for a day" – they are "teaching you to fish" so you can feed yourself !!!!
https://www.propertyinvesting.com/forums/property-investing/help-needed/22508

Well worth a read – or a re-read !!!  

Benny

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April 2, 2014 - 10:44 pm

Hi Hamish,

Quote:

Is there a reason you want to invest in Victoria with something that seems quite "involved"?

What's your strategy towards buying there?

  It seems wilson wants the option of living in it himself. 

  If it is restricted to students or NRAS tenants, then he may not be able to do this.   And having it as his PPOR can be a very sensible way to improve the benefits of his investment.

Benny

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April 2, 2014 - 11:11 am

Hi Wilson,

   I see you have joined us quite recently – welcome.   I wish I was able to answer your questions, but I'm afraid they are out of my league. 

  I thought I would say Hi, and get this bumped into the "recent" pages of this site.   Hopefully, someone else from down your way – Victoria, maybe Melbourne (?) – will see it and respond with assistance.

Benny

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April 2, 2014 - 6:36 am

Hi Krystal,

  Welcome aboard !!   It is great that you have chosen to ask first – this is an area that can be a trap for many.  

Quote:

After speaking to my bank today, the issue they foresee is that I'll be using the equity from what would then be my investment for the principle residence – so there would be potential that the property was positively geared, as only the mortgage against the unit would be taken into account.

  I guess the "issue" they are talking of is that you will be likely paying tax with it being +ve geared.   And they seem (to me) to be right.   Any loans made may become tax deductible based on the PURPOSE of the loan.  In this case, the purpose is to partially fund your PPOR.  Thus, that part of the mortgage is NOT deductible. 

  And, yes, I think it would be smart to keep these borrowings separate from the rest of the mortgage.  That way, the original mortgage becomes deductible as soon as it becomes a rental.  

  When I mentioned a "trap", a more common scenario is for a new investor to upgrade their PPOR after having lived in the old one for several years – and have almost paid it off.   The old PPOR becomes a rental, but any small mortgage remaining is ALL they can claim as tax deductible (as any drawings to fund the new PPOR are not deductible).    Thus, it becomes hugely +ve geared, and Tax must be paid on the extra income.  

  To this situation, many advisers say "Sell the old PPOR, take your cash and buy the new PPOR, then use what remains to buy another IP".  Then all funds used to buy the IP ARE deductible.   In your case though, there still remains a decent mortgage that can be claimed, so it could still be a goer even if slightly +ve geared.  Down the track, you might choose to borrow the equity from this old PPOR (now an IP) to fund deposit and costs on a second IP – those new loans then become deductible.

  Do have a chat with a broker or other adviser re this situation (there may well be one or two replying here later on).   As I said, it is good that you are questioning now – this means you can chart your course for the best outcome, then implement the plan.

Benny

PS  If you don't have one already, do check out Offset Accounts – you might want to put one in place, even if you decide not to sell….   THey might have helped here, but can certainly help into the future.   Check for the post re Offsets in this link :-

   https://www.propertyinvesting.com/forums/general-property/4349450

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April 2, 2014 - 3:13 am

Hi Ryan,

   I just noticed this bit at the end of your first post :-

Quote:

If I don't sell, both properties will probably be negatively geared in about three years, thus giving me less cash flow.

I'm leaning towards selling now…. 

  This is good that you are thinking it through.   If your preference is to sell, because of risk tolerance, that's fine.  Financially speaking though, you have now added further information re a Fixed Rate loan.  Have you considered any cost of "breaking" that loan?  

  Break costs can be massive, depending on how much lower variable rates are at the time.  And "time left to run on the Fixed Loan" plays a part too.   Do check with your Bank re the likely break cost to get an idea.   It could be many thousands of dollars, depending….  

  But wait, there's more…. there could be another way to have your cake, then eat it !!  

Rather than selling, look at Break Costs of the Fixed Rate, and consider what current Fixed Rates are right now.  Run the numbers on taking out a fresh Fixed Rate loan now for (say) 4 or 5 years.    See, if "Breaking" into a higher Interest rate loan, the break costs could be minimal.  (Break costs hurt most when the banks LOSE money that was assured – e.g. you had a Fixed Loan at  6%, and they can now lend that money released at only 5.5% today).   Conversely, if the Fixed Rate today for a 5 year loan is 6.5% or higher, they may welcome the opportunity and allow the breaking of the first loan with minimal cost to you.

  Compare that scenario against your current plan of selling.  Any break cost should be way below the Selling Costs ($16k ?) – AND you get to retain the cottage and any future growth for another 4 or 5 years.   If a slightly higher fixed rate now has you sleeping well at night, it could be a goer, couldn't it?

Benny

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April 1, 2014 - 10:23 pm

Hi LL,

Quote:

There must be some good in X Coll or other wise they would not allow it ?? so is there anyone with good stories on x coll??

  I recall a post (I think it is on this site) where a poster called "Dazzling" was able to purchase a huge commercial property with awesome returns by x-colling with his PPOR.  He saw it as a great way to get into something that would otherwise have not been possible.   In effect he was "betting his house" on success with his new purchase…..  and it worked for him.

  And, in my case, it allowed me to buy a property in an area that the Banks were not too thrilled about.  But I crossed with another IP, and NOT my own home.    It paid off in my case too, as it meant I had two properties that benefitted from the boom in Brisbane in the early 2000's.   So, they certainly CAN work in some cases – they are just a bit more work if/when you want to "unwind" them.  

  x-coll can help early investors (on lower wages?) who might otherwise struggle to get a loan.  Of course, they would need to be really sure their move is "high likely profit and low likely risk" before going ahead.   If so, then this can allow their first steps into property investing.

  Do take note of the advisers who have replied too, and their comments – they mention things you need to keep front of mind when going ahead with this….. 

Benny

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April 1, 2014 - 9:59 pm

Hi CS,

   Your post is a little light on information, but it sounds like your cottage is not costing you much to hold.   With Interest Rates remaining quite low, maybe Fixing the Interest Rates would buy you the peace of mind re costs over the next few years.  

   Is the cottage your present home, and are you considering renting it if you don't sell it?  If so, what are your plans for "housing yourself" (rent, or buy another PPOR)?

   You don't mention other income but do you have sufficient "free-board" to handle an up-tick in Rates?  Do you believe you are secure in your job?  Are both house and apartment in this same "likely to rise in value" area?   

   If values for both ARE likely to rise, why not consider ways to boost income while you wait – e.g. check out the Tax deductions available should you rent the cottage, maybe do a reno to lift likely rents….    It is possible that even if negatively geared, your cottage could return a positive cashflow – and if there is a strong likelihood of a lift in value, it could be worth holding for now.  

   Maybe chat with an adviser, where you can lay out your full situation and take a look at things from their eyes,

Benny

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March 31, 2014 - 12:20 pm

OFFSET ACCOUNTS – Often mentioned in glowing terms – and well worth knowing of when starting out.

Offset Accounts are worth a look at RIGHT NOW, new reader !! 

e.g. Your future might lead you to rent out your PPOR.  IF you had an Offset Account already in place, this would have eased your way remarkably.  Finding out about Offsets just before you are about to make your old PPOR into an IP won't save what you might have saved had you known earlier – so, make this thread (linked below) a MUST READ, and also try a Search for Offset Accounts to read even more:-

https://www.propertyinvesting.com/forums/finance/4349251

 Some great posts in there from many who KNOW finance structuring. 

 Enjoy – (I really like the comment "An offset account is a thing of beauty!!"   Pretty close to the truth)

Benny

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March 31, 2014 - 12:17 pm

Cross collateralisation (whew!!) or x-coll, or cross securitisation.

Cross coll often comes up for mention on here, particularly in an investor's early days.  

What is it, and why is it a problem for most investors?

It is often promoted within banks as it is in the bank's favour (NOT yours) to have your properties "crossed".   When going for any new loan where you are drawing funds from two properties (say, PPOR for dep/costs and the new IP for 80%) be SURE you let the lender know that you DON'T want the loans "crossed". 

Or let your broker handle it (brokers on here would be sure to keep them un-crossed, but an outside broker….  who knows!!)

The following link has several good posts that outline what happens, how x-coll restricts you, and what power it gives a bank.  Do take the time to read the whole thread !!

http://www.propertyinvesting.com/forums/finance/4348983

Watch out when a bank or broker wants to put your new borrowings on ONE loan !!  It will likely be crossing the properties.

Benny

PS  There can SOMETIMES be reasons why x-coll can/should be applied – but these are not that common, and should be considered only after taking advice.
Update Oct15:- The link below has conversations adding information re why/when x-coll can work and its advantages :-
https://www.propertyinvesting.com/topic/4399435-cross-collaterisation-4/
And I will leave the last thoughtful words to Banker who says this

“There are benefits to avoiding CC but it comes back to the yin and yang theory. For every positive there will be a negative and vice versa. If you can see one and not the other you are only seeing half of the picture…”

• This reply was modified 10 years ago by  Benny.
• This reply was modified 8 years, 6 months ago by  Benny. Reason: Adding a further link - Oct15

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March 31, 2014 - 11:40 am

Hi Dave,

   Welcome !!   You seem like you are in a great position to get going.   With a bunch of equity and what I presume is a very good income (for now at least??) probably the best I can suggest is to have you think of what kinds of investments would "fit" with your situation.

  e.g. if you are in a FIFO situation, with perhaps several days between shifts, you might be able to take on more time-consuming investments (e.g. developing, renos, etc). 

  Have a think though re your current situation and any possible risks, and how investing might help to mitigate them.   e.g. we hear in the media of uncertainty re mining projects and possible future lay-offs.  Is this something that might impact you any time soon?  If so, then an investment that is more highly cashflow positive might make more sense – like a small block of units, or two/three positive geared homes (with good land sizes and locations that can become developments down the track).

  Or, you might be feeling comfortable with your work situation, in which case concentrating on growth of equity may be more important to you.  (developing, renovations,etc)

  From your comments re equity, it sounds like you are well on your way to paying off your PPOR (?)   It is always worth spending time looking at its financial settings too.  Maybe sit down with a good adviser re your finances and align your current situation with your goals.   Meanwhile keep on reading, asking questions, and taking in the replies from others.  There is a wealth of experience here, and hopefully others will share their thoughts to help you on your way. 

  Do let us know what transpires too,

Benny

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March 31, 2014 - 5:01 am

Hi mixedup,

Quote:

Do property values generally go up when a newer suburb/area if developed adjacent?

  I'd say Yes, but with caveats (below)…..   Your comment re infrastructure is a good one, and an area can/will usually grow in value as the amenities grow. 

  The caveats that I believe will affect the actual result are these:-

1.  IF the new subdivision is taking hold, selling well, with not too much discounting, and prices sold in each stage are ticking up a few $k each time, then "Yes, the adjacent suburb will be a beneficiary".

2.  Any change may not be immediate, but will take hold over a few years – especially as the new suburb becomes "older" and the location is better in that original suburb.  They don't say "Location, location, location" for nothing…. 

3.  Of course, if the whole area (city?) is booming, then the rising tide will lift all boats anyway.

4.  As the infrastructure progresses, this becomes a "rising tide" too – all for the good.

5.  Land sizes will have an effect over time too – many new subdivisions are on "pocket handkerchiefs", leaving the older suburb with more value as the new properties age.

Benny

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March 31, 2014 - 4:44 am

Hi Redwood,

Quote:

I will have to untangle the mess – unfortunately i will have to part with my banker if I do, but the question is did he act in my best interests by entering me into the arrangement in the first place.

  It could be that he did !!   In my earlier days, the broker I used arranged a cross between two IP's I was buying.  The reason given was because of one of the Post Codes.  Certain times (cycles) have banks getting a little more restrictive in their lending, and picking on certain Post Codes (perhaps because of their stats re "defaults" ???).  This may well have been one of those times. 

  Same for you perhaps?

  I sold one of them about 2 years later – but, in the meantime, Brisbane values had soared, and there was heaps of equity in the remaining property for it to stand alone.  So, no harm done (in my case). 

  If you are simply holding on to those two properties, I don't think you would need to rush to "unwind" the cross-coll would you?   Crossing restricts newer investors more than "old hands", so probably no big deal for you (???)

Benny

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March 30, 2014 - 10:06 pm

Hi Littlelegz,

   And welcome to you !!   With the equity you have, it seems to me that you don't need (and surely don't WANT) any x-coll.   Crossing properties just adds a level of complexity that will create more problems for you down the track. 

   Also, reading from the more experienced on here, it seems that some banks work with x-coll as a kind of "default setting", so when going for finance, it is important to let them know that you do NOT want the properties to be x-colled.   It means taking two separate loans (even 3?) instead of one – and they might say "there are more costs in setting up three loans" – but stick to your guns.

  I have not heard of too many people who wished they HAD x-colled – quite the opposite.  Have a chat with a good adviser (or take note of the other replies here that are likely to come) and go from there.

  Re "how do I go from there", perhaps check out this thread which (I hope) will grow to encompass a lot of early questions and the answers :-

https://www.propertyinvesting.com/forums/general-property/4349450

Benny

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March 30, 2014 - 2:48 am

Quote:

but it's really the last 10 years that I'm after.

Oh, I thought you wanted to see "10 year's growth" (which a 2004 issue of API would do, by comparing each suburb to today's API charts). 

But if wanting to see the spurts of growth within the last ten years, how would a select bunch of API mags do ???   e.g. buy one back-issue for each of 2005, 2006, 2007, etc – I think they would still sell these.  They used to advertise back-issues in each API mag – a new one today would probably provide you with a contact address still.

Anyway, good luck with it, Peter,

Benny