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Hi
I'm suprised you're finding an abundance of positively geared properties for sale given the current climate. So the house you're about to buy for $405k has to be returning rent of 29.5k per annum or $600 per week to cover the interest rate? Seems high rent for country towns but if so good on you.
CarpeHi Nathan
From a basic mathematical aspect most investors want to buy a property that is going to given them 5% rent on return or higher. Your property is returning 40k per year hence the property might be attractive at 800k (which is 5%) to some investors. Most of us look to buy properties that return a higher percent return on our investment and hence at a lower price than 800k and the seller of course (you) wants a higher price. If the property is likely to grow in capital and in rental returns you could go for a higher price even though it means a lower initial return on investment for the purchaser who might be discouraged. I would do research on sales in the area to get a good gut feel at prevailing sale prices. Make sure you're not just selling because you're worn out (which is definitely understandable) but having said that at the same time I have to say we only get to live this life once.
CarpeHi Andrew
I would leave the debt on the investment property ie the unit. You owe 70k so the interest per year is about 6k including rates, mtce costs and the income is about 4.5k so not much of a loss that reduces in a small way the tax you pay on your work income. In my view your primary goal should be to have no debt on your home (it is not a tax deduction) hence put the will money into it. When you have paid off your home debt then use the equity in it to borrow for perhaps another investment property if you can afford the struggle (see below). I have done well in property and I'd rather own an investment property that has a growth potential (ie best location) rather than a property that simply pays off the loan (positively geared) and has little growth potential. Better of course to have a property that yields both but these days virtually impossible. So choose wisely and go for location, location, location even if you end up with more coming out your pocket than you would with something else that is virtually a compromise and not worth tying up your equity plus your work in managing it. I know there are some people out there who don't believe in letting go of any property they own…..I don't agree…..if the unit you partly own is not in a growth area then if sold it can reduce further the mortgage on your home . Do your sums eg the debt on your house is 290K so the interest (7%)per year you pay out of your pocket per year is say 20.3k however if you had another 50k (say from the unit) taken of the mortgage your interest for the year drops to 16.8k which means you can pay another 3.5k off the debt and hence in each subsequent year you can pay more and more off the debt (ie maintain at least the current 20.3k payments each year even though the debt keeps dropping). Anyway this information is just something for you to think about given that you are just a young couple starting out and believe me you don't want heavy debt in those early years if you end up having children. Focus on the home and your family to start with.
All the best
CarpeThanks Bec.
Xenia. I'm not certainly expecting anyone to hold my hand on this and I'm not expecting magical answers from anyone. However this site has always been an excellent source of inspiration for me and I'm sure there are people on it that have done things like I am now pursuing. Where I have got with my property wealth has not been easy….it was a consequence of putting in the hard work myself. I suppose I was just exploring the main question on the risks associated with selling off the plan. I'm sure there are people who have demolished their home and replaced it with a dual occupancy for example without having to borrow too much for the work if they sell off the plan.
CarpeHi BJ
A lot of the discussion on this is very interesting. I have been investing in property for years and have done very well. I have done some calculations on your situation based on the kind of modelling I used for my own situation. I am just providing some feedback but of course you need to get formal financial advice before you make a decision on what to do next. I do not like the high debt ratio you currently have of around 80% and the pressure on your living costs. If you stay on this path and your properties do increase in value by 50% over the next 6 years and you can pay off your home loan by an extra 10k per year reducing your net income to live off of 40k per year then it can be done. I actually put all your stuff into a spreadsheet but not able to copy it (copies but does not align) here so if you're interested then let me know if you want me to send it to you.Based on fairly rough calculations on what you have provided your equity might increase by 425k based on a 50% increase in property values over 6 years and your debt ratio might come down from a very high 80% to about 50% (home loan goes down from 82% to 39% simply by paying an extra 10k per year). Your out of pocket costs over the 6 years has been 120k for the investment properties and an extra 60k for the home property (hence equity increase taking these costs into condsideration is 245K). It seems to me to be ok if you are able to live on a very tight budget of around 40k. If not then you might want to consider parting with the property that is least likely to grow in value and put more into paying off your home as your top priority. I do not know where your properties are located but realistically in today's terms can they keep growing at the same rate they have over the past 8 years?. I have very good properties in a capital city area that are now worth 2.5m (debt ratio 20%)and they have doubled in value over about 6 years but there is no way in the world do I think they are going to double in another 6 years so my view is that one should be a bit cautious with their levels of debt particularly on the family home. Also Tax rates are falling so much now that the benefits of negative gearing are not as profound as they once used to be on property investments. Anyway all the best BJ.
CarpeThanks ProDev and Redwing. Just to clarify a few things. My home has no debt (net 1.2) and investment properties have debt of 475k (value 1.1 and net 600k). The 30k income is from these properties (7 to 8% yield). My plan is to sell the home in 3 years as it is in a 3 storey redevelopment area in a premium Canberra city location (or even redevelop it myself but I don't want to do this right away as I'm not ready just yet ). One of the investment properties is also in the city and my plan is to move to it as my home when I sell current home or redevelop it . I have had that particular investment property for 5 years so moving to it would over time negate capital gains tax. As I say I could redevelop my existing house replacing it with 9 apartments but not sure if I can borrow the huge amount required for this. So here I am with all this equity and a relatively small income of $30k. I was in a worse situation in the middle of my illness so I had to sell a couple of other properties that had high debt levels that I could no longer support without a working income. So I am managing OK now with what I've got but as I'm not selling anything more for 3 years I feel that I should do something with my equity until that time comes. I hope I've clarified this as I've not put it into proper property investing terms such as LVR which I have to admit I don't understand. Regards Carpe
Trajik…..thanks re suggestion to consider SMSF. I had not considered this at all. Currently I just use Comm State Super Fund and have the investments spread over a range of investment options like Aust Shares, Global Shares etc etc. Compared to a SMSF approach this may be weak way to operate as I I guess I can do much more with SMSF including property investment and still be tax free. What sort of adviser do I use to get me to invest in the best SMSFway considering my situation?
CarpeOops ignore the last para of my previous shorter version and forgot to delete it…..I abandoned the shorter version to give you a bigger picture
Carpe (it pays to preview submissions!)You mention for investment purposes so I’m not sure you’re buying it to live in? If you are the two important things for you is to have a low mortgage and a property that is in the best location to assure you of capital growth. You have to like the property to some extent if you plan to live there a long time ….be it brick, fibro…..in the long term given it’s a growth location then it’s the land that becomes the most valuable.
If you’re buying it purely for investment purposes then I’m assuming you’re going to take out a mortgage on an interest only basis. The ideal is to have a high rental yield on the property that not only pays the mortgage but gives you an extra income. This is very rare these days so the best you can probably do is get a property that returns say 5% (ie cost of property 300k with an annual rental return of 15k meaning you pay out of your pocket the extra for the mortgage ie 8% loan interest is 24k less 15k rent = 9k loss plus the rates etc….all tax deductable for a total of 12k). So you might have a tax deduction from your normal income of about 12k that reduces the tax you have to pay. Some people focus on getting a lot of high rental return investments and don’t worry about the capital growth. The high yield may pay for the total mortgage payments but if your 300k property is still only worth 300k after 10 years and you still owe it all then what has been the point of this investment unless of course the rental returns after 10 years may be more than the cost of the mortgage. Still painful though as you would have to gather a lot of these properties to make it worthwhile however your debt could accumulate to levels of danger and of course you have all the pain and drama of managing so many rental properties. Go instead for fewer but good properties even if the mortgage level is a bit of a task. My advice is whatever property you buy make sure its in a location that is bound to experience capital growth……and this doesn’t mean just a nice place. It has to have potential for employment and business growth to attract people to the area. Sorry this is longer than I’d planned so I’ll now get off my soap box. Good luck and good on you for getting started.
CarpeI don’t like fibro myself but it all depends on what your goal is with this investment. If you are buying it because you know it has a high rental return respective to the amount borrowed then it at least gets you into the market and does not burden you too much. It will be a better investment of course if the location of the property is such that it will return a definite capital growth. Hence its location is very important for the future ie for redevelopment into a better home or has the potential for unit development if its a large block. So in a nutshell
Thanks Bruham. Like the developer who cannot develop his two blocks without my consent I cannot develop my block without his consent. He may approach me in terms of putting together plans for approval of all 3 blocks (my block with plans to suit me) and I could then develop my block separately. He has more to lose of course in waiting around for possibly years for my consent. So I expect that now that I’ve responded to him in writing along the lines that ‘ as I have no reasons for selling however I would consider an offer respective to the price I already expressed to you” that I will get an offer close to the mark…….alternatively I might get fitted with concrete boots and a ride out on the lake!
Regards
CarpeWell surprise, surprise I got a registered letter from the developer today expressing that he wants to buy and make me an offer if I’m seriously interested. I expect this will lead to a sale. Thanks for all your comments…..I just love this site especially the generous contributions being made.
The sale of this property shows up the importance of location, location, location for real estate as the return on the purchase price will be 14 times the price we paid in 1986 (to be sure we may have been lucky…..it’s hard to imagine any price paid today for property can go up that much in 20 years from now).
Still I do think it’s possible if you stretch yourself in buying a land based property in the right location and you’re willing to suffer in the short term with a low rental yield relative to a high level of borrowing on the property. Anyway, whatever you do I wish you all the best with your investments.
Regards
CarpeThanks Stuart. In fact I wasn’t interested in purchasing but tried hard with the daughter to get her to list it with a Real Estate agent rather than dealing directly with the developer. However she caved in worrying about the cost of using an agent and perhaps no one else interested…..it being the middle block or meat in the sandwitch. She was going to agree with a lesser offer (given she was from Qld and the proceeds of the sale anyway was to be split among 6 family members). So she did at least persist on a higher price at my insistence but it was still below the market price. He has bought both properties at below market prices and this is what he wants to do with mine. Luckily I am in a position to wait for many years and although I’d like to move on from this site there is no way I will capitulate so I’ll go on your last point and this is to not sell. Notwithstanding this I like your idea of calling in a number of real estate agents for valuations …so I will do that. Thanks Mate
CarpeThanks APerry ….I have already given him a high ‘price’ but he has not made contact again to negotiate so I do think the ball is in his court. I’ll ponder your view however and make a decision in the new year.
Cheers
CarpeThanks for responding Wanelad, APerry and Mathewc 73.
He is a professional developer but as I’ve discovered today he has actually rented out this new addition. He bought the first property about 4 years ago and has been renting it also. There is nothing he can do with the two properties unless he has my consent hence it has increased significantly the value, on paper, of my property. There is the risk that if I go to him it shows that I want to sell and he may then say ‘no I just want to keep renting the two properties!’ He will know then that he might just have to wait a few years before I capitulate at the price he wants. I’m not sure if other developers will buy my property if he gives the same answer to them (like his two properties I cannot develop mine without his consent). Hence instead of my property being a ‘Mayfair’ as it should be it could end up with the value of “Kent Rd”!!!
I’m thinking of writing to him and saying I’m in no hurry to sell particularly as I do own other high value development properties nearby (as I do). However notwithstanding this I realise that it will be beneficial to both of us to redevelop ASAP so let’s negotiate however I’m not interested in being offered a below market price. This will certainly be showing my cards and seems to me a bit risky. Alternatively, I could just wait a year or two and let him make the first move. What do you reckon?
Thanks Guys CarpeThese kind of investments are available in Canberra. I’ve seen them advertised around the 120k price and I recall seeing them about 2 years ago for 100k so they do seem to have a good capital growth as your example also shows. I’ve never got into this type as I’m more focused on the land as others have said. It does look like a good investment with positve capital growth and yield returns. Personally I tend to keep away from having too many properties as the dealing with them all is a pain so I go for fewer/more expensive investments but not many can you buy these days that give you the 10% yield and 10% annual growth. Looks good if this type of invesment suits you.
CarpeThanks Guys. Terry, if I do it as a private sale then normally no valuation is required. It is being sold at the market price. It might be just as easy to do a sale ie pay one solicitor for conveyincing or do you still think its easier and cheaper (including the run around forced on by the beauracrats) to do a transfer? I know the stamp duty and CGT has to be paid so I just want the best solution to get it into the other persons name.
Thanks
CarpeSorry for lodging this question….I just noticed “Rexilla” has raised this question for a Brisbane property just a few down from mine!
CarpeHi to All
This has been a most facinating topic as I’m about to enter into borrowing off equity to live. I raised my alarms of my poor cash flow but a fairly high level of equity on this site quite recently seeking help on what to do. My problem has been a quick exit out of the workforce because of a brain aneurysm operation and other complications some 18 months ago and the uncertainty of resuming work for the forseeable future…if at all. Advice came to me from quite a few on this site under my posting of “how can I live on 135k” that I should explore living off equity. I note under this topic I’m on now the different arguments for going down such a path. In my case I have 3 properties including my home worth 1800k and with loans on the 2 investment properties of 415k giving an estimated equity of 1385k. Hence the debt ratio is 23.06%. The debt of 415k is an interest only loans and is serviced by rental income and a bit from another small income. On top of that I have other income that gives me about 23k to live on plus I draw down on savings at this stage to survive ……however the savings are running out (and I’m a single father of two boys at uni). My home and one of the investment properties are in a redevelopment 3 and 2 storey areas in Canberra city and hence growth is probably guaranteed at the 10% level. The other property is also in a good area and growth will certainly continue on it albeit at probably 5%.
I have contacted my mortgage broker and discussed it and notwithstanding I’m not in employment its likely that I can simply get a line of credit of say 300k against my home which has no loan at present. I simply draw down what I require each year and pay interest on it as I go. On my calculations if I draw down 100k each year and pay the interest from it then at the beginning of the first year my debt ratio jumps to 515/1800 = 28.61%. On my calculations as below allowing for an 8% growth on all properties then in fact the debt ratio actually increases each year :
$K Value Debt Equity Debt/Ratio %
Current 1800 415 1385 23.06
Start Yr 1 1800 515 1285 28.61
End Yr 1 1944 515 1429 26.49
Start Yr 2 1944 615 1329 31.64
End Yr 2 2099 615 1484 29.30Start Yr 9 (8%) 3618 1315 2303 36.35
…..and at 10% growth:
Start Yr 9 4245 1315 2930 30.98
Start Yr 10 4670 1415 3255 30.30
Start Yr 11 5137 1515 3622 29.49Not that I’m expecting to spend 100k (say 93 after interest) each year but it certainly does indicate that you have to be in a much stronger position than I’m in to try to live off equity and keep the debt ratio low. Although at the expected growth of 10% the debt ratio does decline but of course how many properties maintain a consistent growth at that level over the long run? Anyway the impact of inflation and interest rate rises will require me to draw more down than 100k in a few years that’s for sure and of course it will raise the debt ratio. So I’m going to have to do something radical in the next couple of years at the latest.
So adding my bit to the argument for or against living totally off equity (based on what I’ve stated above unless I’m off the rails) you really do have to be in a state of constant low debt/ratio to maintain it for the long term.
Cheersj (‘[chill]’)
CarpeThe best way to do a rental is on a monthly basis to be paid on a specific date each month. If the rent is $200 per week then multiply it by 52 weeks in year and divide by 12 for months of the year. That comes to 866.66 per month. So if the new tenant moves in on 10 March then he/she is to pay up front 866.66 and then until the lease expires pays you this same amount on the 10th of every month. Best electronic transfer to your account so that you can see it online.
Carpe
In my view if you’re going to be working for a number of years and really want to make money in property then forget cash flow and focus on location of the property in terms of growth. Whilst a 10% yield on say a property that you’ve borrowed the whole purchase price of say 300k on gives you a positive return. That is, 30k pa (that’s a rental of $600 per week!) less the loan 21k and the rates, land tax, maintenance costs that might be another 8k giving you a grand net of 1k sounds like something for nothing but you would need 50 of these properties to even think about “I can stop soon”. In my view the aim is to buy properties that might cost you via losses (ie negative geared to start with) but have the potential to grow in value. If you can achieve both the cash flow and the growth then you’re definitely on a winner but if its just an insignificant cash flow then is it really worth all the drama? In the example above even if you made a cash flow of 10k net per year over and above the costs (rental at $800 pw) that sound good but if the value of the property hardly moves then it doesn’t look good to me. If it doesn’t have a significant growth factor then you might be better off putting your borrowed money into shares.
Cheers Carpe
