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Sounds like developing may be an attractive option, with new house values going to rise with first time buyers being even more enticed into this market.
Thats fine Richard, I thought that might be the case but I guess I was just hopeful.
Seems like it is not really worth developing anything significant as it might not be effective anyway, and probably better off just approaching lenders and seeing what they will allow, I guess at the end of the day it is them you have to satisfy anyway.
Richard,
I was wondering, do you by any chance have a “borrowing power” spreadsheet or similar you would be able to share with me? I was able to develop a relatively simple one which worked for me in my first purchase, but since then it has become a lot more complicated. So I thought I would see if you would have anything useful.
JacM makes a good point up there. I do not look at investing into a town where the population is around 2,000, and has not changed over the past couple of decades, where there is no significant industry around. In these places your property will only go up by inflation if you are lucky.
There are still regional centres that are growing significantly enough to achieve decent capital gains. Towns particularly with universities should always be a decent place to start.
And as for accessing equity, I also believe that renovating a property or adding cosmetic improvements is a good way to gain access to equity, instead of just waiting for for equity to grow naturally, you can force it to happen by improving the property. Of course if this is your strategy, you need to purchase a place where you can make a significant difference, no point buying a newly built apartment where you can’t make any changes.
At the end of the day, some properties will still be negative geared, if the capital gains is significant it can still be worth it, just make sure the amount of money that comes out of your pocket is minimal and does not leave your pockets empty!
I remember looking into mining properties, and to me there just was not the value. Because the high price of a mining property is only limited while the mine is in operation, it can only ever be seen as a short term investment.
Look at a couple of scenarios, a house worth $750,000 in the mines, receiving $2,000 per week in rent, mine is in operation for 20 years. After the mine operates, the house will be worth $200,000.
Alternatively, a house worth $750,000 in a good area in Sydney, receives $700 per week in rent, capital appreciaiton of 4% per annum.
Scenario 1 – After 20 years, Total value = $200,000 + $2,000 x 52 x 7 = $928,000
Scenario 2 – After 20 years, Total value = $750,000 x 1.04^20 + $700 x 52 x 7 = $1,643,342 + $254,800 = $1,898,142
I know I have made a lot of generalisations, but the traditional scenario still shows more than double the value of the mining property.
I am always open to hear other peoples opinions, just I believe that there is not much value in mining property, unless of course you are lucky enough to buy a property in a mining town, before a mine is discovered.
It is not sustainable buying negatively geared property, as they cost money to maintain the loans, there is a finite amount of properties that you can purchase before you reach your limit. Then you are forced to wait for capital gains, and wait for rent to increase enough to make it positively geared and pay itself off.
I guess that is why most people who negative gear property as an investment, normally only have a couple properties in their portfolios.
Buying positively geared property is something you can do every day, literally every day of the week you can purchase a positively geared property and it will pay itself off. I do not see a reason why your strategy cannot bring you significant wealth down the line. Of course it will take a lot of work but if you are prepared to work hard then it should work effectively. But as Jamie said it is all about balance, there are definitely good oppurtunities in property that may be negatively geared.
The issue with purchasing regional property is typically there is no capital gains, but I do not see how it matters if the property is paying for itself. If you find a true positively geared property, then with some management on your part, it will simply pay for itself, and need no financial input from yourself after the initial purchase and renovations.
We invested in the US market purely for cash flow, and if there were any capital gains then that would simply be a bonus for us.
If the yields do fall to the 6% net return, then that will definitely make it less appealing for a lot of investors from Australia. But if the interest rates are still only around 4%, then it is still positively geared property, so there will still be a big attraction from investors over here.
It will be very interesting to see what happens in the next 3 to 5 years over in the US. All I know is that we are trying to get as much property as we can in the next couple of years to build up our portfolio as best as we can over there.
I remember recently I made up a spreadsheet on purchasing a mining property as an investment, and comparing to a more traditional investment property.
Obviously the big difference is that mining property has an extremely high rental yield, but loses significant value once the mine closees. Whereas a traditional investment has lower yields but as long as you buy in the right area, well there is the capital gains that you can look forward to.
I guess if you are after instant cash flow, then a mining property would be ideal for your investment portfolio, but looking in the long term, it seems that you are almost always better off with a property that will achieve capital gains in the future. I guess you may be lucky to purchase a mining property, collect some great cash flow for a couple years, and then on sell the property while the mine is still open, hopefully at the same price you initially paid for it, or maybe slightly higher. Then it would definitely be an attractive option, however long term it almost never seems to work out.
Sorry I guess this post is a bit off track with the initial topic, just thought it might be interesting to note.
keiko wrote:streamlineinvesting wrote:Seems like Australia is heading downhill, I believe we did not escape the recession, merely just delayed it by a couple years. Instead of falling down a couple years ago like the rest of the world, we survived by our high amount of resources, but that can only last so long. The next couple years in the Australian economy will be very interesting, confidence appears to be very low at the moment.Is peoples confidence realy down or it is just because you read some negative posts and what was in the paper and on the news?
Are you still working, buying property, living the same life you were living 10 years ago or living a better life or worse?
Everyone think about it like this, what realy went wrong in your life in the last two years, did the down turn realy effect you? or did it make you money? or has it just been the same as the last 10 years.
To be honest my life has not changed, it is still the same, I make money in good times or bad times, I have bad days and good days, Iife goes on.
Media is all ….Funny, radio is on while I am typing and they say, well there was another interest rate cut but not what everyone was hoping for, only a 0.25% cut. mmm mmm mmm
I see your point about how sometimes everything is portrayed in the media poorly and that people simply jump on the bandwagon. I agree that this happens too often and can have a negative impact on the perception of the economy.
My judgement this time is based on what I have seen first hand, firstly that my company (civil infrastructure engineering) has not been winning many jobs lately simply because there is not as much work as there was 2 years ago. This is not just my company, but all the competitors company’s are similar, there were no redundancies in my company 2 years ago, but there has been several over the past months.
Also I have seen in my dad’s business (foundry work) it has been getting a lot quieter across the nation, there are fewer foundries than there was 10 years ago, and yet they are still quieter than they were 10 years ago, saying there is simply less work out there.
Sorry I do not want to be pessimistic, and I know I probably sound it, I just am trying my best to be realistic and prepare myself as best as I can for the future.
Seems like Australia is heading downhill, I believe we did not escape the recession, merely just delayed it by a couple years.
Instead of falling down a couple years ago like the rest of the world, we survived by our high amount of resources, but that can only last so long.
The next couple years in the Australian economy will be very interesting, confidence appears to be very low at the moment.
I agree with Terry, I do not thing changing the rate you pay to the property manager will make a different on the yield return of the property. Your best chance would be to look at ways to increase the rent charged on the property, either by renovating to increase its rentability. However given it is a newer property this may not be worthwhile. There is always the option of renting the property out by room? This would take more work for the property manager, but can potentially deliver you higher returns.
I remember a few months ago I was looking into the same thing. A friend of mine went to go work in the mines, and I saw that the place the company put him up in rented out for $1,800 a week, similar houses in the town were selling for about $600,000. So obviously it would be positively geared.
Unfortunately as soon as the mine runs out, the value of the house becomes nothing pretty much, since it is out in the middle of nowhere, and a lot of the time these places are really nothing more than fibro shacks out in the sticks.
Still with the high rental returns, it seemed it was almost too good to be true. I ended up making a spreadsheet to see what it would be as a long term investment. It was not too complicated, basically just had an input of how long the mine would last, typically around 10 years, and after this, the value of the house would dramatically drop off.
The spreadsheet was fairly simple, but it let you look at your total value after 5, 10, 15, 20 years, whenever you want. It was interesting to look at this compared to a typical investment where you might get around 8% gross yield, but with some capital gains available, you almost ended up worse off by investing in the mines.
Of course there are plenty of variables, but it is nice to be able to just assume some figures and looking at what your expected returns might be.
They definitely charge higher fees than typical property management, as the above post said it is around 16% of the fees. I do not understand why they would charge so much, it is not like they really have to ‘look’ for a tenant, they have plenty of people in the defense forces who need housing, so they do not have to look hard to find one. And as for maintaining the property, I do not believe 16% is really justified.
To be honest it does not make sense to me, the DHA is run by the government, the government pays your rent, and then you pay a fee back to the DHA property management, which is run by the government? It seems a little bizarre to me, and it seems like they could just pay you less rent and then say they have no property management fees.
Anyway, as people have said before me, there is next to no risk with this investment, but the return is not that high. From memory looking at it a few years ago, the typical gross yields were around 6.00% mark, but they did vary, believe in Darwin they had some decent yields? At the end of the day they are nothing special, nice guaranteed return but would most likely be negative geared (unless you had a very large deposit) so you would hope there would be good capital gains to make a tidy profit.
Also note there is no flexibility with the property, with the lease periods up to 12 years you are essentially locked in for this period of time.
We received insurance quotes for our property in Florida, aparently only one insurance company would look at it due to its age (built in 1966), the insurance company is Citizens?
When we received the quote I was shocked to see that the premium would be $1,800. I was shocked to be honest, the property cost us $44,000 and the insurance premiums would be 4% of this value? Not to mention this does not cover flood insurance, that was separate (only about $250 though).
I asked for a breakdown of the cost, turns out wind and hurricane was costing $1,200 on its own, so without it, it would only be a $600 premium. I am still tossing up whether to include the wind cover or not. The property has been standing there for almost 60 years and has had no problems, it is about 20 miles inland so I do not think it is really in a ‘hurricane’ zone. It is a bit tricky though because our property manager is suggesting we don’t need the wind insurance, whereas the insurance broker believes we really should get it. So I am still deciding at this stage.
$1,200 is a fair bit of money considering the rental return is only $700 a month, so almost 2 months rent (14% of the return) gone just like that.
Does anyone else out there have a thought? The property is in Lehigh Acres not far from Fort Myers.
It sounds like there is no doubt that you can afford another IP, but with the new IP comes the extra debt and undoubtedly extra stress. Growing your debt does seem to be a way to become financially independant some time in the future, but that being said it can also lead you down a dangerous track. So I never see it as a bad thing to pay down your PPOR as much as you can, it will free up your extra cash to have a higher quality of life, or invest in other ways.
That being said, I do like how you plan to pay off your IP, a lot of people seem to be under the impression that because it is tax deductible, it is not a bad thing to be paying interest on a property for years and years to come. I would much prefer to just be free and clear of any debt and simply sit back and collect the rent, not have to worry about banks chasing me down if things do become a bit tight. This approach may be a bit more conservative than other ways, but I believe the risk is a lot less.
Anyway back to your decision, I would agree that you should avoid paying the LMI, hence an 80% LVR is beneficial. And yes I beleive taking 60k out of the property, allows the extra interest to be tax deductible. I believe I read this in Steve McKnight’s book, but you probably should double check with your accountant before you do this.
Now back to affordability, looking at it a realistic way, hope this makes sense
You have $170,000 in combined income, and assuming you can rent the place for $360 per week, that would add an extra $18,720, since they only accept 80% of rental income, reduce this to $15,000. Giving a total gross income of $185,000.
Assume you pay an average tax rate of 35%, leaves your net income at $120,000.
Taking away living expenses, I am not sure what yours are but assume $40,000, gives disposable income of $80,000.
Assuming paying all debt in interest only terms, at an interest rate of 8.00% (I know you can probably get 6.00%, but I believe it is best to be conservative), paying $80,000 at this rate, gives you a total debt allowable of $1,000,000.
Since you are looking at increasing your existing $500,000 mortgage to $860,000 (the $40k in your savings taken up in stamp duty and buying expenses) then it looks like you should be able to comfortably afford the new property. However I have made a fair few assumptions above, so you would have to look at what would suit you in your situation.
Obviously nobody can predict the future when it comes to how the AUD USD exchange rate will be in the future. The best way I can suggest is to factor a bad exchange rate in your investment calculations, a worst case scenario sort of thing so you can see how your investments turn out if everything goes wrong.
Also in my personal opinion, I believe AUD reaching parity with USD is only a temporary thing. When I was looking at purchasing US dollars for our US house, we were aiming to just be happy with anything above the long term average. Looking at historical data, the average appeared to be around 1 AUD = 0.75 USD (I am sure the exact number is up there). So the way I figure it is, anything above 0.75 USD should be a good exchange rate.
CasaHunter wrote:streamlineinvesting wrote:This was one of the biggest concerns we had with our agent in Florida when we got our first house. We had never met her, even though we had been dealing with her for over a year before we finally got to finalise on our first property. Towards the end there were ple…..ngs like this, we were able to build up enough trust in her, and now it has turned into a very great business relationship.Hi streamlineinvesting, could I ask you which agent did you used and where did you buy the properties?
Thanks!No problem, we purchased in Florida, Fort Myers area. And our agent was a poster on this forum, her name is Judith and posts as ActToday, send me a private message if you want her contact details.
Thanks
This was one of the biggest concerns we had with our agent in Florida when we got our first house. We had never met her, even though we had been dealing with her for over a year before we finally got to finalise on our first property.
Towards the end there were plenty of questions between my business partner and I about can we really trust this person, how do we know this all has not been some elaborate scam?
We did our best to look her up on the internet and see if there was any sort of bad news about her, we talked to people who had dealt with her before, unfortunately none of them had secured a property with her despite using other services that she offers.
The biggest thing for me that let me know she was legit, was how when we had asked her about potential investment properties, she had rejected probably 90% or so of what we suggested saying they were not good investments. Not only this, but she also put her own money forward as a deposit for us on a couple properties. I guess by doing things like this, we were able to build up enough trust in her, and now it has turned into a very great business relationship.
bigfirerichie wrote:On recent trip to US I opened a new account with Charles Schwab bank.Couldn’t do it on line as I don’t have a US drivers license. Managed to work around it (I thought) by attending branch in person.
Opened account with $10, even got my first statement, and started to organize payments, rent etc to move from Wells Fargo account.
Now that I’m back in Oz they write to me and tell me my account will be closed within 5 days unless I attend the branch with my US drivers license.,!!
Bloody Nora
A similar thing happened with us, we were trying to open an account with BB&T bank from Australia, which of course is next to impossible, anyway, we were able to do it by getting a special contact.
To ensure there were no fees in the account we had to fund it with $1,500, which was no problem, so we wired the money across and everything was great, had a US bank account, had internet access to the account, even had a Visa card for the account.
Then out of the blue we received this letter saying that our account will be closed in 9 days and any funds will be sent to us via a cheque, the date on the letter was 5 days before we received the letter, I guess sending it internationally took some time. Anyway, the account was closed and a couple weeks later we received a cheque for the $1,500 we had in the account.
Now try cashing a cheque which is in your US company’s name, when there is no bank account in the world in that company’s name, the cheque was barely worth the paper it was written on.
All in all, it was definitely one of the most frustrating experiences we had
I would definitely rent in northern beaches and rent out the Umina place, I assume the rent received from Umina would almost cover the rent you pay in the northern beaches? If not, then I am sure with the tax benefits you would hopefully get close to it?
As for reinvesting the 150k you have, there are a whole bunch of scenarios that the future can have, trying to look at each and every outcome to try and see which option can give you the best result is definitely tricky, but developing a spreadsheet and crunching the numbers should be able to show you which option would be the best financially at least?
Also note, if you are unsure and uncertain about what the future will hold, then I don’t really see a problem with ‘investing’ it back into the Umina loan? You did not mention if you own this property outright or not? I assume there is still some loan on it? But if you put the 100k back into the Umina loan, assuming you had an offset facility set up then you can guarantee an after tax return of 6.5% or whatever interest rate you are paying? Just a thought anyway.
