If you buy a property using 100%+ finance (i.e. 80% lend using new property and 20%+ using equity in existing properties), does that make the CoCR infinite as you have a positive cashflow on $0 down, or should you value the cashflow against the redraw of equity?
If you don’t spent a cent to purchase your IP then you don’t need to worry about CoCR. If the ip is +ve cash flow then every cents you earn is your income.
Say your repayment is $500 per month and your rental income is $500.01 per month then you have to pay tax for your $0.01 that you put into your pocket every months.
Kind regards
Chan Dollars
[Retire Young, Retire Rich] [strum]Do closing fees on the purchase count for CoCR calculations?
Oh and hello everyone. I am new to this forum.
Hallo skozak, and welcome
I would count all fees/costs that I paid out of my own pocket when calculating CoCR.
Cheers
MelBut what if you redrew everything against existing equity in other properties? That means you have bought a property using no additional cash…. but at the same time, some of the equity may have actually come into existance through repayments on a P&I loan. How then do you evaluate whether or not the property is a good buy? Maybe CoCR has its limitations in this case???
If you “redrew” your equity then I’d count that as Cash you put in for the deal.
However, if you left your equity in your other property and used simply used it as security then I wouldn’t count it as it wasn’t cash you put into the deal, your loan would have been for the full amount plus fees on the new propoerty in this case.
PK
Does that mean then that any +ve cash flow property you buy without having to find any additional money is a good deal? Any extra money coming in in that case would be an infinite return on $0.
Yes, I’d say so as long as the property your purchasing is sound and rentable.
Bashiba,
Whether you’re using cash as a deposit, of using equity from existing IP’s, it’s the same. Actually, if you save up a deposit, it’s better because you have to borrow less. But borrowing from existing equity is still borrowing, so it’s not really “putting no money down”. It’s just adding to your existing loan.
COCR should add in all existing costs- borrowing costs, capital costs, and ongoing IP costs.
kay henry
Originally posted by bashiba:Does that mean then that any +ve cash flow property you buy without having to find any additional money is a good deal? Any extra money coming in in that case would be an infinite return on $0.
You are correct here. Personally, I am looking for zero deposit +ve IP’s. As you can imagine these are very hard (two in 4 months). You need a yield of around 16% for it to work.
We have loans secured against other property for these so we are not using the current equity we have in our other IP’s to fund purchases. ie. we cross colateralise the loans. At this stage we are happy doing that.
You are probably like us and have been paying off our PPoR first instead of saving money for investing/holidays/renos etc….
‘Eat rich food, barbeque a yuppie’ [greedy]
Not quite Rugbyfan…. I am a renter, but I do hold four investment properties (and oh how I wish I had more).[biggrin]
Hi bashiba
For the sake of determining whether or not a property is a good deal or not, treat the 20% drawdown as a cash deposit when doing your calculations. You are limited to how much equity you can draw down from other properties and the theory is that each deal should stand on its own two feet.
If you can eventually revalue the property and refinance to extract the original 20% deposit and you still have +ve cashflow you will then have infinite CoCR
Cheers
Jeffbashiba, probably no polite way to ask this, did you inherit the 4 investment properties?
cheers
brahms
If you don’t ask, the answer is no!!
The following statement may not reflect the best strategy when borrowing against equity.
“treat the 20% drawdown as a cash deposit when doing your calculations. You are limited to how much equity you can draw down from other properties”
— When borrowing against equity retained in another property
, often the best strategy is to not “draw down” cash. Instead “borrow against the equity”, which is the banks/lenders security.“Whether you’re using cash as a deposit, or using equity from existing IP’s, it’s the same.”
— This is not accurate – for a number of reasons.
“borrowing from existing equity is still borrowing, so it’s not really “putting no money down”.”
— Either strategy is a form of borrowing, but only a “cash” investment is putting “money down”.
Let me use one example of how equity combined with capital growth outperforms cash from an investment [net worth] perspective.
I met someone in mid 2002 who had a passion for real estate investment but only $5,000 in the bank to invest.
I explained the theory of how to create wealth with “no money down” – or a minimal cash investment to get underway – using equity. We have since remained in contact.
Today this person has a net worth in excess of $2 million. His total cash investment was $5,000.
The COCR is infinite if there was no cash investment and income derived is sufficient to meet outgoings.
— Michael
Michael R
You seem to have misunderstood my point. I said that ]”For the sake of determining whether or not a property is a good deal or not, treat the 20% drawdown as a cash deposit when doing your calculations.You are limited to how much equity you can draw down from other properties and the theory is that each deal should stand on its own two feet.”
Yes of course if you have 100% borrowings and a +ve cashflow your CoCR is infinite but that could be $1 per year – how bad is that.
The fact is, you need to know if each property is a good deal or not.
Example 1: 100%finance using 20% equity from other IP’s
Purchase Price $ 200k
Rent 20k
Less Interest on $200k at 7% -14k
Less Opex -5k+ve CF 1k = infinite CoCR
Example 2: 80% finance & balance in Cash
Purchase Price $ 200k
Rent 20k
Interest on $160k @ 7% -11.2k
Opex -5k+ve CF 3.8/40k 3.8k = 9.5% CoCR
This is a loose example but the point I’m making as in example 2, the deal doesn’t stack up at 9.5% so you wouldn’t buy the property. Yet in example 1 at 100% finance it is still an infinite CoCR. Why would you utilize your good equity to buy a property that doesn’t stack up?
I repeat,each deal has to stand on its own two feet – you should do your calculations accordingly. If you are then able to extract equity from other properties to finance the deposit then you are that much better off.
Regards
JeffJeff – read again what I wrote. In a round about way it appears you agree with what I have said.
Do not use [or “draw down”] cash if there is equity available to offset a deposit, for example.
— Michael
Sorry Michael – my understanding of “draw down” is from a loan and not a draw down of cash.
First and foremost Bashiba needs to know how to value a property deal. Keep it simple. If you don’t, an increase of 1% in interest could turn an infinite CoCR to a -ve CF. Refer to my example 1 and change the interest rate from 7% to 8% and see what happens.
So I don’t necessarily agree with you Michael.
-First you must value the property correctly, if not and you utilise existing equity to make the purchase you may find yourself running out of equity real fast.Happy investing all
JeffFor the person who asked; no, I didn’t inherit the four properties. I bought one, negatively geared as per Jan Somer’s model back in 1985. This built up equity over the next five or six years to the stage I could buy another property without any deposit… I used the equity in the existing property and bought another one without any additional funds input by myself. This was also negatively geared but on a block just asking to be developed (until GST came in and buggered the cost to build by a rather large margin…. 40% cost increase in one year with the same builders). I found another property the same month that was positive cashflow and bought it on minimal deposit. Then came the latest property explosion which has meant all my properties have built up a stack of equity. I used some 12 months ago to buy another positive cashflow positive property (in the Margaret Lomas style this time) and in the last 12 months have gained a stack more equity…. this is what brought me to the CoCR question in the first place. If I can use my existing equity to buy a property that is at all cashflow positive, then it appeaared to me that the property had an infinite CoCR as I’m using equity to buy it…. the only tricky point being that some of the equity came from P&I loans on the initially positively geared properties… very confusing…. just to add confusion, I recently attended Steve’s 0=130 seminar and a Maragert Lomas seminar in the same month…. Steve spoke about CoCRs all day, Margaret indicated that they are irrlevent for a cashlfow positive property????? Maragaret is very apporachable, so I intend to ask her more about EXACTLY what she said about CoCR… will post when I know
brahms, what on earth made you ask
‘did you inherit the properties’?
is it because you inherited yours, or something, and that was your way of trying to ‘bond’? or what?
joy to the world
Jeff – my recommendation is based on a “simple” investment strategy which is the foundation for aquiring real estate and other assets, and building wealth.
The most confusing term used in this discussion is “draw down” – when you leverage equity you do not need to “draw down” anything – unless you are referring to a “home equity loan”.
The bank/lender takes a “note” against the equity in property A. The value of the note is applied to the cost of property B.
[J] “First you must value the property correctly, if not and you utilise existing equity to make the purchase you may find yourself running out of equity real fast.”
I don’t think anyone with a basic understanding of real estate investment would proceed with the equity/leverage [or any] investment strategy if it did not “stack up”.
My recommendation is based on a fundamental principle – there are a number of variables, i.e. interest rates, to consider and it cannot be applied to every investment.
Most of the investments I am personally involved with – whether acquiring/investing in real estate or other assets, result in infinite COCR/ROR due to leveraging equity, institutional lenders and OPM.
— Michael
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