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July 10, 2011 - 11:38 am

I see where you’re coming from Terry and an offset account is great for its flexibility. But the $100,000 paid down on the loan could be used as equity value / security to be borrowed against for the second property. I don’t think it’s a limitation. Having said that, the offset account is still a viable option if you have $100,000 sitting around doing nothing. But if you’re paying $300-$400 to your account per week based on what’s left over after your living expenses, the benefits are negligible given that offset typically charges a higher interest rate vs standard.

As always, depends on the circumstances and best to run the numbers and compare.

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July 10, 2011 - 11:10 am

You know what, that’s actually a common misconception. An offset account is only fantastic if you have a lot of cash sitting idle in your bank account. If you went to a bank, you’ll find that an offset account typically has a higher interest rate compared to the standard mortgage rates – if you’re depositing $300-$400 cash into the offset per week, on an annual basis, the impact to reducing your interest rate is negligible. Furthermore, there are often annual fees on top of it that you’ll need to consider. Furthermore, interest free period are not forever -and once the interest free period ends, you’ll need to start paying your mortgage at the higher repayment amounts.

On top of that, the danger is, if property prices ever fall and lending criteria’s tighten (god forbid), then you haven’t got an equity buffer there.

On the other hand, if you reduced your mortgage and you wanted to buy your home, then you can obviously use the equity created from paying down the debt to borrow for the next property right?

It’s always best to compare and contrast – take the time and do the maths to make a smarter decision.

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July 10, 2011 - 1:09 am

Spandex wrote:

Thank you for the helpful post I will be having a 10k buffer savings for spikes,sickness,repairs etc. I currently save 1200 a week and still above my needs so 200 a week out of pocket for negative gearing is no worrie. Should I aim to make extra repayments to get to a pos geared loan as soon as I can?

The buffer is a very good idea. Good stuff.

Yep, there are two ways of creating equity value from an investment: 1) paying down your debt or 2) capital gains. You can't control 2 but you can control 1.  

If you have spare cash, I would suggest paying down your mortgage as quickly as possible. If you think about it, if you have the cash sitting idle in a term deposit, you'll make 6% off it at current rates. If you pay down your mortgage which is at an interest rate of 7%+, you're effectively making 7%+ on your cash.

It'll take a long time to pay down your mortgage to move it into a positively geared territory but if you're say getting nice annual bonus, that can be used to pay down your mortgage very quickly. Once your first property is at a comfortable debt level and you've created good equity, you can think about investing in your second property. 

With capital growth + equity value created from paying down your mortgage, you can sell the first property and may get close to paying off the second property. The rent on the second property is straight positive cashflow in your pocket – if it's high yielding enough, you may never need to work again – only if you choose to.

Hope this helps.

Cheers,
Jase & the Team at MID

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July 9, 2011 - 3:38 am

Hi Spandex

I think there’s been quite a few comments about negative gearing being a bad idea, which I think isn’t completely true. Obviously, a positive geared property is fantastic if you can find it, but it’s often difficult.

Given your high income, you are paying a LOT of tax. You should use it to your advantage (let tax work for you) but it takes a lot more skill / luck to do so – but if you’re a young person making that sort of money, I’m sure you’ll be able to grasp it in no time.

Think about an investment from a net returns on your property cost perspective (I’ll explain it in a second below).

As an example, say you investing in a $440,000 property that is negatively geared. Let’s say it’s an apartment, rents for $500, interest rates of say 7.5% on an all interest loan, strata of $1200pq, council rates of $200pq, water of $200pq.

Here are the numbers:
– Rent: $26,000 p.a.
– Less: Interest: $33,000 p.a
– Less: Strata: $4,800 p.a
– Less: Council: $800 p.a
– Less: Water: $800.a

Loss per annum: $13,400

Based on your income, your Marginal tax rate is about 30%. So your tax deduction is about $4k, so actually outgoing is $9,400 per annum or $180 per week.

Your net loss on your property is $9,400 / $440,000 = 2%, less than CPI. If your property capital gain grows by more than CPI (I would argue that based on your historical averages, it has been the case), then you’re in the green. On top of that, there’s further upside in terms of rental growth.

You’ve taken advantage of the tax deductions and basically reinvested $4K into the property investment p.a.; $180 per week cash outflow is easily achievable given your income. Obviously I haven’t taken into account vacancy or spikes in interest (potential downsides), which is something you’ll need to make an assumption on but the maths speaks for itself.

The key here is that you’ll need to run the numbers. If you don’t have time, try our website.

Good luck and let me know if you have any further questions.

Cheers,
Jase

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July 9, 2011 - 3:16 am

Hey Dellas,

Good job on saving $110K, that must’ve taken a lot of discipline – very impressive.

With $110k in savings, you can easily take out a mortgage of over $400K. Potentially up to $550K if the property generates positive cashflow (assuming you use the $110K as the deposit on an 80% LVR basis).

It depends on your goals in life. Property investment is a long-term game and worth the investment to a better life for your wife and yourself in the long term. If you can invest in a high yielding property today, pay the mortgage off as soon as you can, the rent could be your income stream for life. Imagine $500 in your pocket per week when you’re 50 for no effort.

Alternatively, you invest in a high yielding property today, invest in another high yielding second property in a year’s time. After 5 years, it’s not impossible that one of your two properties may have benefited from good capital growth. Combined with the deposit and the capital growth in one of your two properties, you can potentially pay off both mortgages early from selling one property. You can live off the rental stream of the other property and be financially free earlier than you imagined!

The above scenarios are examples of the benefits of investing in property. Obviously you’ll need to consider your current situation given that you probably want to settle down at some point, which may mean that you may want to move into your own home. Furthermore, you’ll need to make Smart Investment decisions, which is often harder than you think. There are plenty of resources out there these days – take advantage of them!

Good luck. Feel free to msg me if you want to sound out any ideas with me.

Cheers,
Jase

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July 9, 2011 - 3:01 am

Hi there,

There’s already been some great comments above so I won’t repeat them.

What I will add is that many high volume sales real estate agents will typically distribute Weekly/Monthly Property E-Magazines. For instance, Bryn Fowler from Sydney Cove properties in Sydney distribute weekly e-magazine (http://www.sydneycoveproperty.com/our_e_guide) of inner city properties that are pretty good. It’s fantastic for keeping up to date with the market in terms of opportunities and prices. Simply ask your real estate agent.

At risk of sounding like I’m advertising, our website http://www.myinvestmentdecision.com.au, genuinely provides great resource for property investors (news, tax, calculators, links to other resources). In addition, InvestSmart is a great resource for finding historical sales growth and rental growth etc.

Best of luck and let me know if you have any questions.

Jase

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April 20, 2011 - 1:01 pm

Wirraway,

Scott No Mates is absolutely right.  Selling or gifting a property to a trust or company will create a capital gains event however if you are receiving nothing in exchange for your property, you will need to get an independent valuation to provide that the exchange was at arms length basis for tax purposes as you will need to pay CG at the market valuation rate. If the tax that you need to pay is < the price that you're partner is asking for, then maybe it's worth the cost.

Good luck.

Cheers,

Jase

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April 20, 2011 - 8:55 am

Hi recyclingguy,

That’s always a key question and I would always suggest that you speak to a professional tax advisor or your local accountant to help you out. Essentially you'll have to calculate your tax position under both scenarios and see what gives you the best tax position.

But just as a little guide I think I can help. Just based on the depreciation and interest on both properties it would seem that the house will provide a better tax position for you. This is why –

The unit is say 15 years old and based on standard depreciation calculations that would give you around $5K of depreciation per year (on a stright line basis, around $8K for dimishing value – based on a purchase price of $450K which I guessed). Your loan of $200K at say a 7% interest rate will give you around $14K interest expense which also can be deducted. Therefore your total tax benefit is around $20K times your tax rate.

If you choose to have the house as your investment property, you generally wont received any depreciation on your property (as it is older than 40 years) but your loan is much higher at $468K. Based on 7% interest your interest expense is around $32K.

So even though you have depreciation benefits on your unit the fact that you are must more geared on your house suggests to me that you'll get more tax benefits from the house than the unit. There are other items for consideration though:

– I am assuming that the the property that you are not living in will be considered for investment purposes and therefore interest and depreciation will be deductible. You will need to check with a tax speclialist if that is the case

– you also need to consider the expenses for the properties as well. The higher the expenses the more deductions you should be able to claim as well.

– are you happy to live in either of the two? I would think living in a house would be more comfortable so you will have to make the call on your type of living standard as well

Hope this helps

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April 12, 2011 - 5:22 am

Hi all,

Some great posts and some interesting insights regarding Gladstone.

I can't call myself an expert in the particular area but it seems like people are investing in Gladstone essentially as a mining town play – which all investments in mining towns carry very specific risks different from property investments in cities such as Sydney and Melbourne.

 Since the project itself hasn't really taken off yet, you will have to take the risk of delays to the project – as the project could be delayed due to factors such as Government (especially given the higher politcal profile of the project), weather (which would delay site development and operations), as well as migration (given the current skills shortages here) to name a few. These types of delays will come at a cost to investors as they wait for the huge influx of people coming into town to work which they can then realise their return on investment. Although it is safe to say that it will happen – given the advanced state of the project, however you can expect a few bumps along the way. As long as you are patient and have enough cash to cover your shortages during the riskier parts of the project (i.e. approval, development, construction phase) you should be ok. The only long term exposure investors will have is to the prices and demand for commodities as well as the financial strength of the operating companies, all by which are risks that all investors must take when making a property investment in a mining town.

Good luck to all.

Jase

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April 11, 2011 - 12:54 pm

Pinkboy,

Could’ve hedged your spending in MAC camps by buying shares in the company. The share price performed fantastically in the 24 months leading up to their takeover. Could’ve made all your money back and more.

Just a thought.

Jase

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April 11, 2011 - 12:41 pm

Hi Christine,

There’s already been some excellent feedback on this topic already – especially Cath Wood who provided an interesting perspective of the pitfalls of mining town investments.

As Crj pointed out, Mining Town property investments are inherently more risk than Capital City property as investors are exposed to both commodity price risk and changes in macroeconomic cycles. Despite this, investing in an over priced Capital City Property is much much riskier than investing in a modestly priced positive cashflow Mining Town Property. The point I’m trying to make is that it’s all relative and comes down to making smart investment decisions – for all property types.

The fundamental property investment principles remains the same in any type of property investment. Buy cheap, sell high. Look for a high yield, aim for cash flow positive if possible and hope for capital gains. Mining Towns properties on average are generally not fantastic capital gain performers but usually offer excellent yields. Investors should expect positive cash flow versus fantastic capital gain potential (unless you timed it at the very beginning of a mining boom for that town, in which case you may have spectacular capital gains).

Given that the economics of Mining Towns are directly correlated to economic cycle and commodity markets, it’s critical that an investor conducts further research on the Mine, Mining Company and even Analyst outlook of the commodity itself. Some thought should be spared to consider technical due diligence issues such as understanding the nearby mine’s deposit and reserves, mine life, what the brokers are saying about the Mining Company.

If possible, attempt to lease the property to the mining company who can offer guaranteed rent for their fly in fly out employees over fixed term contracts (3-5 years) with a clause that allows for rental review on an annual basis given that the rental market changes quite dramatically in mining towns.

Ideally, you would want to invest in a mining town that is exposed to several long-term mines run by blue chip companies (the BHP, Rio, Vale, Macarthur, Newcrest and even FMG of the world). Avoid single mine towns that are exposed to small-caps or unproven deposits.

Despite the risks, some astute investors have made spectacular returns from investing in mining town property. For inspiration, take the Maloney family as an example. http://www.smartcompany.com.au/wealth/20101018-mining-services-rich-lister-kevin-maloney-eyes-340-million-payday.html

Kevin Maloney founded The Mac Services Group, a once private company that specialised in mining town accommodation to the major mining companies. The Family made over $300m last year after selling their 50% equity stake in the company to a foreign conglomerate. They made a fortune out of Mining Town Investments because they made smart investment decisions and negotiated fantastic contracts (guaranteed rental contracts with blue chip mining companies).

Good luck and let me know if you have any questions.

Cheers,
Jase

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April 9, 2011 - 7:59 am

Hi dougie,

With $200K you do have options but understand that you may have a number of personal circumstances that may make things a bit harder for you. All i can say that you are doing the right thing in asking around for advice. Here are couple of decent options if you can get a casual job to support your daily expenses:
1) Given your current cash position you will not be able to take excessive risks with investing so i would say to invest in a couple of properties and borrow up to the point where the income from the property can sustain all the costs of the investment (i.e. interest payments, expenses etc) – this is basically making sure your property is cash neutral. This way you can enjoy the benefits of capital growth while being able to support yourself through your casual job. With $200k you might even be able to afford more than 1 investment property.
2) If you don’t want all your cash invested in illiquid assets (like property), you could possible split your investments with a portion in property and another portion in stocks. That way if you need the cash you can always sell your shares in the event of an emergency. You also benefit from diversification as your wealth is spread out in other types of investments (you know the saying dont put all your eggs in one basket)

Now both of these may not be possible if you are unable to work for any reason. If you really find yourself in a pinch I would recommend you speak to an investment advisor or your local accountant to see how you can use your existing funds to make it work out for you.

Happy to discuss further

Good luck and all the best.

Cheers,

Jase

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April 8, 2011 - 12:02 pm

Hi Tony19,

No credit history shouldn’t be a big deal. As long as you have a good deposit and a steady income, you should be able to get approval from the bank for a mortgage.

Now with respect to where to start, you’re on the right track. You’ve already thought about investment and owning your own business as the means to your financial freedom. Saving in the short term for your property will be critical. Have you prepared a budget? If not, try the NAB Budget Planner – I’ve found it pretty good (http://www.nab.com.au/wps/wcm/connect/nab/nab/home/personal_finance/1/4/102/1). A budget is critical. I think working for a Mining Company as a chef is a good idea if you’re willing to make the sacrifices for the higher income.

Another good starting point is to read Robert Kioyasaki’s Rich Dad Poor Dad. The biggest take away is the concept of positive cash flow and the difference between having money work for you as opposed to you working for money. Whilst Robert Kiyosaki is referring to the US Property Market in his book, the book is still very motivating and he does explain some very complicated concepts very well.

From there, continuously educate yourself. There’s plenty of good property investment books at your local book store. Become familiar with the tax laws. Start talking to real estate agents and get on their mailing list so you’re front of mind if there’s ever any good investment opportunities.

Take advantage of online resources like this forum etc.

Overtime, with experience and learning, the pieces of the puzzle will fall into place.

Good luck and let me know if you need any further advice.

Cheers,
Jase

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April 7, 2011 - 12:41 am

Hi Matt,

Congrats on your first buy. I was in your shoes many years ago.

If you had time off, I would suggest that you pound the pavement. Get to know the top and reputable real estate agents in your city and discuss your ambitions. Get yourself on their mailing list.  The more investment opportunities you'll have to look at, the more chances that you'll have with making a good investment.

Furthermore, read. Get to know the tax laws, property investment strategies, success stories and what can go wrong in property investment.

Thirdly, become an expert with analysing the numbers of a property investment. Make sure that when you make your next investment, you don't miss a thing and there's absolutely nothing that you don't understand. Use property investment websites and get to know how you can play with the program.

Good luck and pm me if you need further advice.

Jase

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April 5, 2011 - 7:49 am

Hi Breeza,

I think it is great that you are serious about looking after your future through investments such as property. I can understand your situation – limited credit, limited savings, getting married, getting older. All I can say is not to worry. You still have plenty of time to create a nest egg for you and your future husband.

If you are really serious about buying an investment property as soon as possible it will all depend on how much you can save and borrow. Im sure the guys above have already told you how you can go around your credit challenges. The only thing I would like to add is that you will be able to save the most by living with your parents – the amount of savings will be substantial because you dont have to pay rent. You also need to understand the level of risk you are willing to take. If you are willing to take a bit more risk you can leverage heavily (90-95% borrowed) but will be subject to more financial risk (i.e. the risk that you can't meet your repayments as a large portion of the interest will need to be paid out of your own pocket). The advantage is that you will be able to get in the market quicker as you dont have to save as much. Or vice versa if you want to take less risk. Obviously staying at home will improve your situation as you have more disposal income to service the investment property as well as the ability to save more money for a deposit as well.

Goodluck and let me know if you have any questions.
Jase

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April 4, 2011 - 6:20 am

Zaul,

I think you have a great ambition and vision, which is where it all starts.

Whilst I think it'll be a challenge to obtain finance, it's still possible.
– Do you have family or friends who are willing to guarantee you on a loan?
– Can you take out some form of insurance product in Canada whereby the insurance company guarantees your mortgage (e.g surety bond like product or mortgage insurance)?
– Would you be able to develop a business plan and sell your idea to a bank or potential co-investors?
– Are you able to find a higher paying job and save save save?

It's all still possible if you put yourself out there, work hard, do the research and go for it.

Goodluck and let me know if you have any questions.
Jase

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April 4, 2011 - 6:00 am

Great story and contribution as always Angel. Completely agree – Australians are fixated with the negative gearing story – sold to them continuously by banks, mortgage brokers, tax agents etc. Unfortunately the whole point behind negative gearing is that you're making a loss on your investment on purpose so you can take advantage of the tax benefits. This strategy only works if you're a high income earner with a stable job and a high tax bracket.

However, if you're not as fortunate to be in that category, it may not be the best option for you. Given that property prices in most capital cities are so high, many investors will have no choice in which case it's critical to run the numbers to determine whether you can afford to pay for the cash short-fall / loss on your negatively geared property.

Good post Angel.

Jase

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March 30, 2011 - 11:51 pm

Hi Daewoo,

Wow, good stuff on the first property investment. I think you're at the right place -there's lots of people on here who are willing to help. There are a lot of people with hidden agenda in the property investment game and I would suggest that you should find yourself a property mentor who has also been down this path and has succeeded. The woman that you worked with previously is a good example – try your best to get in touch with her or work your networks.

At the end of the day, if you want to avoid falling into the trap of property spruikers, you need to learn! Read the forum, talk to your mentor, read property magazines (Google search API magazine, YIP Mag) and use free property investment websites.

PM me if you need more guidance. Good luck! 

All the best,
Jase

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March 30, 2011 - 11:43 pm

Hi Sherry1

Good question!

If I was going to invest in mining towns, I would look for cash flow positive properties with the view of making medium capital gains over a shorter than average investment horizon. 

I like to analyse a property based on the following two criterias:
1. Financial (in view of financials / cash flow, capital gain potential, affordability etc.) – using a property investment calculator
2. Macro view (location, potential changes in industry that may impact the property value, changes in infrastructure, risk of natural disasters etc.) 

From a macro view perspective, I would argue that investing in mining towns are more risky than average property investments. You're effectively betting on the mining boom – which is cyclical and dependent on commodity prices and macro economic environment. If there's another financial crisis, the first property markets to be hit will be the mining towns. Furthermore, once the mine life end, you're also at risk of the mining town turning into a ghost town. (not all – but some may)

Now it can be argued that this won't happen anytime soon, which I would agree with for many mining towns.  In view of that, I would approach mining towns with a medium term investment period (buy and sell after 5 years rather than hold and use the equity to back further investments). I would use the positive cash flow of the property to pay down the mortgage as much as possible with the aim of selling the property and making moderate capital gains (vs capital city investments) in the medium term.

I would approach with great caution, do the due diligence and make sure that it's absolutely positively geared! Use free property investment calculators to help you run the numbers and make sure you haven't missed anything.

Hope this provides you with some food for thought.  Good luck and let me know if you need a hand,
Jase

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March 30, 2011 - 11:17 pm

Hi George,

You're absolutely on the right track. Save, learn, keep up with the markets and learn the numbers before any investment.

I think the press have all pointed to housing affordability being a major issue for the property market. In my view, that doesn't necessary translate to a market crash for investors since this issue really only concerns home owners rather than property investors.

I think the biggest threat to the industry is potential regulatory changes – recent data has suggested to a slowdown in demand but the data realistically reflects the full year impact since the govt wound up its stimulus. See this link for recent data on the property market.

Looking ahead, major capital cities like Sydney and Melbourne will always be in high demand – expected to experience moderate growth due to the demand/ supply dynamics driven by demographic changes (domestic and international migration, growing upper middle class). Recent signs have shown that other markets may have slowed down, but the data is heavily skewed by a slowdown in Queensland due to the impact of the floods on investor demand.

I think the future is bright for you as long as you make smart decisions.

Good luck!
Jase