All Topics / Help Needed! / Why is everyone telling me ‘NO’?

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  • Profile photo of lealea
    Member
    @lea
    Join Date: 2004
    Post Count: 26

    Hi all,

    I’m needing some unbiased opinions please.

    You see, I found a house that returns a very healthy positive cashflow return. Long term tenant wants to stay on. The rent amount covers the mortgage repayments even after I’ve added 2% to the current interest rate and still turns a profit after rates/taxes and maintenance allowance costs.

    So naturally, I want to buy it. It will be my third CF+ investment property, but I’m a single girlie and my friends and family think I’m being stupid.

    So everyone’s telling me not to touch it. Yes, the house is old and daggy. Yes, it’s in a less-than-desirable area. Yes, the tenants are… how can I be polite?… feral? And yes, the entire area is filled with these types of people and houses.

    In my eyes, the house is structurally sound. (It’s cosmetically awful!). The tenant’s rental history is solid (never missed a payment in 2 years). And the cashflow is GREAT!

    So why is everyone trying to talk me out of this? Should I take the view that the house is in a disgusting low-socio-economic area and my friends and family are going SNOBBY on me? Or should I be pleased that they are seeing a lemon than I can’t see? Or should I just grab it anyway – it’s my portfolio after all???

    Opinions would be greatly appreciated.
    [biggrin]
    Thanks
    Lea

    Profile photo of Nigel KibelNigel Kibel
    Participant
    @nigel-kibel
    Join Date: 2005
    Post Count: 1,425

    Hi Lea

    I would need to know where the property is located, however in Australia the banks are tightening there lending. If it is country and the fundimentals do not ad up then you may find that they are only prepared to loan say 60%. If you want to buy positive cashflow, I would suggest New Zealand. You will need a 20% deposit however because you can buy positive cashflow in main cities the properties end up being separate to anything in Australia. It is a matter of establishing the correct structures. With a 20% deposit you should get approval. Returns are higher in the country however stick to main cities

    Nigel Kibel

    http://www.propertyknowhow.com.au

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    Profile photo of lealea
    Member
    @lea
    Join Date: 2004
    Post Count: 26

    It’s northern Adelaide metropolitan suburbs. Lending maximum is 90% there according to my bank, however, I only need to use 78% (I have deposit for remainder and fees)

    I’ve been pre-approved for a mortgage for this intended place for a principal and interest loan with an interest rate of 6.62%

    Thanks for the tip, though.

    Lee

    Profile photo of ThePropertyProfessorThePropertyProfessor
    Member
    @thepropertyprofessor
    Join Date: 2005
    Post Count: 5

    Ask yourself these questions.

    Do the people that are telling you not to do it have investment properties? Do they know anything about property.

    Are they just being negative because of jealousy.

    Are you happy with the research you have done and with the figures for this property.

    Tip: Don’t listen to people who don’t have investment properties as they don’t know what their talking about.

    Buyers Agent
    20 years experience in the Real Estate Industry on the Gold Coast.

    Profile photo of Richard TaylorRichard Taylor
    Participant
    @qlds007
    Join Date: 2003
    Post Count: 12,018

    Lea

    Think many of the concerns have been covered.

    Do you have a good Property Manager in the area?
    Someone who knows the area has worked it for many years. If these tenants leave how easy is it to quickly relet.

    The property is sound – have you had a building inspection on it?

    If everything checks out ok go for it girl.
    Remember as TPP said ignore friends who are jealous and try and put you off. Be firm in your committment its you decision at the end of the day.

    Think in 5 years time when you have 50 properties under your belt and they are still in rented accomadation. Then they will have something to be jealous about.

    Good luck.

    Cheers Richard
    richard at castlewhite.com.au
    Email me for details of our Qld wrap CD which gives you a full Installment Contract.

    Richard Taylor | Mortgage Broker helping investors build their wealth thru property
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    0-40 Properties in a decade with a unencumbered portfolio value in excess of $40M. Ask me for a copy of my API Interview.

    Profile photo of Robbie BRobbie B
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    @robbie-b
    Join Date: 2004
    Post Count: 2,493

    People are generally negative regarding things they do not understand or find ‘difficult’. If you are happy with your due diligence, don’t let the ‘don’t be’s’ put you off.

    Just regarding your loan, why are you going with 78% principal and interest? I would recommend 80% interest only regardless of your other structuring. Get your whole portfolio looked at and you may find you can make additional investments at a quicker pace.

    Robert Bou-Hamdan
    Mortgage Adviser

    http://www.mortgagepackaging.com.au

    Investor Links

    Profile photo of lealea
    Member
    @lea
    Join Date: 2004
    Post Count: 26

    Thanks heaps everyone. The people around me are a mix of investors and non-investors. Everyone without exception is saying don’t do it. I have no idea why they’d be jealous of anything I do. I’m just a regular nobody.

    So you guys are the only ones saying ‘go for it’. Thanks. :)

    Originally posted by The Mortgage Adviser:

    People are generally negative regarding things they do not understand or find ‘difficult’. If you are happy with your due diligence, don’t let the ‘don’t be’s’ put you off.

    I’m basically happy with my due diligence. I believe that the area will be redeveloped in a couple years when the housing trust (housing commission to you easterners) move on. They’ve recently done this in the surrounding areas. The area I’ve targeted will be next.

    Unfortunately, I don’t know any agents in this area. I’m from south of the city and my other properties are all south as well. I’ve been talking with and visiting some. They all say it’s easy to get tenants in that area. They call them “professional renters” – people never likely to purchase their own homes.

    Just regarding your loan, why are you going with 78% principal and interest? I would recommend 80% interest only regardless of your other structuring. Get your whole portfolio looked at and you may find you can make additional investments at a quicker pace.

    I chose Principal and interest because then the place can pay itself off. It’s still positively geared with P&I and I know it would be more so with Interest only, but I like the idea of my debt getting smaller without needing to use any of my own money. All excess funds from the existing rentals sit in an offset/redraw account to wait until it’s time to pay their own rates and expenses. It seems to work so far and I’m in no real rush.

    What’s the benefit to me of NOT paying off my houses? Just keeping the cashflow? Can you explain this idea a little further? Thanks.

    [biggrin]
    Lea

    Profile photo of Robbie BRobbie B
    Member
    @robbie-b
    Join Date: 2004
    Post Count: 2,493

    The idea behind interest only and using offset accounts to park anything above the interest expense is mainly to provide flexibility. The effect will be exactly the same as if you were paying principal and interest including the taxation benefits if you do not spend the money sitting in the offset accounts. You must ensure not to mix up investment and personal expenses in the offset account though.

    The biggest benefit is when it comes time to buy your next investment property – you will have a lot more cash available for deposits and expenses without needing to ask for a loan increase or other change on every loan. If you use the money from these investment loan offset accounts, it will still all be deductible.

    Another benefit is if you live in your own home. Using an offset account instead of paying off the home means that you can maximise your deductions if you move out later.

    Remember, at any time you can place all funds from the offset into the loan to pay it off.

    It is all about flexibility and maximising returns.

    Robert Bou-Hamdan
    Mortgage Adviser

    http://www.mortgagepackaging.com.au

    Investor Links

    Profile photo of fostonfoston
    Member
    @foston
    Join Date: 2003
    Post Count: 111

    My opinion is if the figures are good, the property is sound after the pest & building inspections, you are happy with the current tenants and you feel comfortable about the purchase go for it.

    Cheers
    Foston

    Life is a series of new beginnings

    Profile photo of lealea
    Member
    @lea
    Join Date: 2004
    Post Count: 26
    Originally posted by The Mortgage Adviser:

    The idea behind interest only and using offset accounts to park anything above the interest expense is mainly to provide flexibility. The effect will be exactly the same as if you were paying principal and interest including the taxation benefits if you do not spend the money sitting in the offset accounts.

    Okay – so I got online and altered my investment mortgages to interest only. I understand now what you mean about leaving the excess in the offset account. I can use it later. Good point.

    My original logic was, if I pay off some principal, then it increases my equity (coz house prices aren’t going anywhere here, so I can’t rely on capital growth – yet). But the offset should have the same effect – right?

    You must ensure not to mix up investment and personal expenses in the offset account though.

    I knew this one. My personal mortgage has an offset account, too. I pay no interest at the moment, just a payment. I have equal funds in offset as I do in debt, but this house will become another rental when I’m ready. So I understood why it was set up that way. If I redraw the funds from my offset as a deposit on another home, then the remaining mortgage becomes fully deductible.

    The biggest benefit is when it comes time to buy your next investment property – you will have a lot more cash available for deposits and expenses without needing to ask for a loan increase or other change on every loan. If you use the money from these investment loan offset accounts, it will still all be deductible.

    okay. valid point. I guess I was focused more on reducing the level of debt (thus the principal repayments) so that I’d still have equity as well. But the extra cashflow into the offset accounts provides the same benefits, doesn’t it?

    Excellent. Thanks heaps for that.

    By the way – I put the offer in on that house i wanted. It looks as though I’m going to get it after all [biggrin]

    Lea

    Profile photo of Robbie BRobbie B
    Member
    @robbie-b
    Join Date: 2004
    Post Count: 2,493

    Hi Lea,

    I wish you all the best with the offer you made.

    Regarding your questions, the funds in the offset does not technically increase your equity. It just provides you with the equivalent amount of equity in cash. If you prefer the actual equity and don’t need the cash, you just transfer the funds to your loan. With investment properties though, I would never do this until I decided I want to pay out the debt and not invest further.

    Regarding reducing your level of debt, using the offset will not do this but it will decrease your required repayments (and your tax deductions). This is not a disbenefit with lenders when they see you placing much more than is required to service your loans into the offset account and not spending it. It might even be of more benefit when you do not need to borrow as much in one go for the next property because you have a heap of cash available.

    An investor savvy accountant can talk you through all the tax implications and a good broker can show you how to exponentially grow your borrowing capacity by using good lending packages.

    Robert Bou-Hamdan
    Mortgage Adviser

    http://www.mortgagepackaging.com.au

    Investor Links

    Profile photo of thecrestthecrest
    Participant
    @thecrest
    Join Date: 2004
    Post Count: 992

    Hi Lea
    Get a printout of the tenant’s rent record and verify their “good record.” Check their tenancy application. I had a tenant once who never missed a rent payment in 2 years, but 80% of them were late, he was a hell tenant and I took him to tribunal about 5 times. Like extracting teeth.
    Building and pest report ?
    Valuation ?
    Last deal on this property $$ through LPI ?
    Suburb vacancy rate ?
    Likely property items to require replacement in the next 2 years e.g. hws, roof, screens, wiring, aircond or heater, fence etc etc,
    hope it’s a goodie for you.
    good luck
    cheers
    thecrest

    thecrest | Tony Neale - Statewide Motel Brokers
    http://www.statewidemotelbrokers.com.au
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    selling motels in NSW

    Profile photo of DDDD
    Member
    @dd
    Join Date: 2004
    Post Count: 508

    HI Lea, great to see another motivated buyer. Shame we all face the negative people who say dont do it. They mainly want you to stay poor and miserable like them so maybe its time to surround yourself with others that own IP’s and speak to intelligent forward thinkers.

    I believe it is 20/1 the raitio of negative comments about property to good ones from family friends and business people I deal with.

    If I listened to the dudds, my wife and I wouldnt be in this months API agazine as a feature couple.

    Take the plunge again and again and again. As long as its safe, affordable and allows for your costs, why be held back by the dummies that infest our thoughts sometimes with their sad tales of woe.

    Being a part of this fantastic forum with intelligent and knowledgable people is a great asset. Is there an investors club or meeting group you could attend locally to you. What a breath of fresh air that would be for your psyche, to actually have smiles and genuine interest shown in your little(for now) empire.

    Go get em!!! Don’t take prisoners, and see you on the beach.

    DD

    Buyers Agent (Dip Financial Services(FP)
    Don’t sweat the small stuff,and it’s all small stuff!!

    Profile photo of markpatrickmarkpatrick
    Member
    @markpatrick
    Join Date: 2004
    Post Count: 94

    It would depend on your job status, equity position etc.
    To be highly leveraged in this type of property in the current market can be hazardous.
    Remember Murphys law if anything can go wrong it probably will and all at once.
    If you feel financially comfortable with this I would say go ahead but you need to factor in interest rate hikes, vacancies, worse case scenario options.

    Profile photo of redwingredwing
    Participant
    @redwing
    Join Date: 2003
    Post Count: 2,733

    http://www.apimagazine.com.au/

    Congratulations DD..we’ll have to get the magazine[biggrin]

    Lea..
    I prefer Interest Only on my IP’s for several reasons including the fact that only the interest is deductable, my payments required are less (more money to go into non-deductable loan-PPOR) and that the amount owing devalues as inflation rises and the years roll on..$70 000 from 10 years ago seemed a lot, compared to $70 000 now or even another 10 years from now.

    REDWING

    “Money is a currency, like electricity and it requires momentum to make it Effective”
    Count The Currency With This Online Positive Cashflow Calculator

    Profile photo of surreyhughes19905surreyhughes19905
    Member
    @surreyhughes19905
    Join Date: 2003
    Post Count: 204

    Hi,
    My friends kept telling me no with all of my choices in the share market. They are respectable, intelligent investors themselves so it was hard to ignore them. But This past 2 years (good market) I’ve made 60%/year on my cash whereas they made 15%. I did my homework, like what I saw (including the risk) and ignored the negative nellies. It was just that the people telling me no had a lower appetite for risk and had personal opinions based on lack of knowledge that made them say no. There was no greater ability represented.

    You really have to be confident in your own ability, after all it’s your money and future, not theirs.

    Surrey.

    Profile photo of quy17187quy17187
    Member
    @quy17187
    Join Date: 2003
    Post Count: 22

    I agree with Surrey. At the end of the day it is your money and your decision. As Steve said it’s all about doing things differently.

    Cheers.

    Profile photo of Millionaire in trainingMillionaire in training
    Participant
    @millionaire-in-training
    Join Date: 2004
    Post Count: 154

    Hi lea
    Firstly good luck “you go girl”
    I do remeber in one of the many property investment info packs that one definitely recommended not only doing due diligence on the property but also on the current tenants that way you can be sure of their so called goo record.
    Sue Owen

    Profile photo of markusjmarkusj
    Member
    @markusj
    Join Date: 2004
    Post Count: 17

    Hi Lea,

    I wish you well whatever you decide. I am from Adelaide and planning my first investment property purchase. I work in the building industry and have worked on many developments in the “trust” areas. The old trust homes are being bought,buildozed, split down the middle and two courtyard homes built. Maybe explore the possibilty of subdivision in the future if the land size and council allows it. Not advice, just an idea I am exploring myself. Best wishes

    Markus

    Profile photo of lealea
    Member
    @lea
    Join Date: 2004
    Post Count: 26

    Thanks everyone. You’re all great. I’m glad I asked on the forum rather than listen to my family.

    I got the property I wanted. I paid $81,450.(gotta love those daggy Adelaide prices, huh?) The tenant signed a 12 month contract at $140 per week. Settlement is 31st May.
    [biggrin]

    The rental agent provided me with a print out of the rental history for this tenant. She’s been there for 21 months. Every payment made. One payment 2 days late through January 2005 (she was giving birth the week prior, so probably a fair excuse!)[blink]

    My loans have been amended to match some of the suggestions made on this forum topic previously. Thanks for the tips.

    I’m really pleased I asked now. Thanks very much once again. You’re all great
    [thumbsupanim]

    Lea

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