All Topics / Help Needed! / Multiplication x Division: I question this theory?

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  • Profile photo of mspartalmspartal
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    @mspartal
    Join Date: 2006
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    Multiplication by division seems like a good idea in theory. Yes you use the profits to aquire 2 more properties. For e.g. you sell a property and have $50k profit after costs. You can then use $25 each for depositis on 2 more houses. But aren’t you then doubling your buy in costs and purchasing costs (settlement, stamp duty etc). Your still going to have the same amount of debt if you just use the equity and purchase another. Yes your intial house will be $50k more in debt but your second will be $50k less in debt and you only have one property to worry about all the buy in costs involved.
    Can some one please give me an Ah-ha moment because im failing to figure out why this strategy is so much better.
    Maybe its just because im new to all this, i dont know.
    Cheers

    Profile photo of Stuart MilneStuart Milne
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    @stuart-milne
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    This theory works on the principle that yes your buy in costs are doubled, but so is your Capital Growth as you have Three yes three Properties where before you only had one. It is also handy when you have an underperforming assett…

    Remember you are using the PROFIT to purchase the next two. your initial deposit is then placed on a third asset, and as such yu expand your portfolio much faster than before…

    Then again maybe I’m wrong on this one…

    Stuart Milne
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    Profile photo of BennyBenny
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    @benny
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    Your still going to have the same amount of debt if you just use the equity and purchase another. Yes your intial house will be $50k more in debt but your second will be $50k less in debt and you only have one property to worry about all the buy in costs involved.

    I don’t agree. If you’ve sold the first IP to fund the next two, then you have cash in hand as the 2 x $25k deposits. Therefore your next two are LESS in debt. If you had taken an equity loan against #1, then your $50k (deposit, costs) IS a debt. But by paying cash for the deposits no debt is associated.

    Will it be better? I don’t know as I haven’t done this. And did you have to pay capital gains tax on the sale? Sorry – probably more questions than answers

    Benny

    Profile photo of Kiwi-FullaKiwi-Fulla
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    @kiwi-fulla
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    Hey There….

    If you have a nett profit of $50K after a sale it would definately depend on a few factors.
    1. how much te percentage of growth in the area you have sold
    2. Do you intend to reinvest in the same location?

    If you are just taking the profits and running to find another deal that returns say 10.4% rental yeild …. then you could also roll over the security on your existing loan and then you only have to apply for 1 more loan (since the initial one has just rolled over). This wil save you one set of application fees but you will still wear vals and contract assignment fee fro mthe lender (usually).

    Let s look at an example: (not accounting for capital gains tax to keep it simple enough
    Say your initial purchase was $75K and you now sold it for $110K = $50K profit ($60K mortgage +$15K deposit + Capital gain profit of $35K)
    So you have $15 tied up to secure the 60K mortgage leaving $35K

    You decide to buy the house down the streeet for $110K… so you top up your exisiting morgage deposit by a further $7K to allow the loan of $88,000. The remainder $28K will allow you to purchase another property for $110K (with another 22K deposit to secure another $88K mortgage on that one. This will leave $6,000 to look after stamps and legals of approx
    2 x sales conveyancing $1900 legals
    1 x Stamps on the first $110K house = $2340
    1 x Stamps on the second $110K house = $2340
    Total = $6580
    This is not accounting for the duty on the mortgages also or any fees on the second loan.
    Bust is gets your very close …. as you can see.
    Cheers,
    Kiwi[strum]

    Why Rent? Rent 2 own!
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    Profile photo of mspartalmspartal
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    @mspartal
    Join Date: 2006
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    i think i kind of get it kiwi-fulla
    Cheers

    Profile photo of ducksterduckster
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    @duckster
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    If you use the original house to borrow against you are putting this house up as a guarantee for the other house. If something goes wrong you lose both houses to the bank. By dividing you are seperating the risk across two houses.

    Profile photo of mspartalmspartal
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    @mspartal
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    I bought the master class pack so hopefully that will explain the mechanics of all this. Im sick and tired of getting the top level theory in all these books etc without the detail of HOW? It really bugs me. All good in saying do this do that but for us beginners where is the THIS IS HOW?

    Lets hope the masterclass pack fullfills this.

    Cheers

    Profile photo of Kiwi-FullaKiwi-Fulla
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    @kiwi-fulla
    Join Date: 2002
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    Originally posted by mspartal:

    I bought the master class pack so hopefully that will explain the mechanics of all this. Im sick and tired of getting the top level theory in all these books etc without the detail of HOW? It really bugs me. All good in saying do this do that but for us beginners where is the THIS IS HOW?

    Lets hope the masterclass pack fullfills this.

    Cheers

    Not to sure what you mean by top level theory….. It seems pretty clear to me… Find deal… crunch numbers… check condition, stability of area and rental demand, Place an offer (conditional to finance, organise finance, Buy house… then do it all again. and again and again. [strum]

    Why Rent? Rent 2 own!
    http://www.rent2ownaus.com

    Profile photo of TerrywTerryw
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    @terryw
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    I must say I cannot really understand the ‘multiplication by division’ theory. I am inclined to say the selling costs and purchase costs on the new one will not make it worthwhile – you might as well just keep the property and increase the loan.

    Maybe the only time I would do it is if you think the property has had some quick growth and would be in a long period of no growth while other areas are still growing.

    Terryw
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    Profile photo of PickworthPickworth
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    @pickworth
    Join Date: 2004
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    mspartal

    Like I have said before the costs involved in buying and selling makes things very difficult when you want several properties.

    I believe the way to get over this hurdle is to use another strategy and that is to buy, renovate and refinance therefore avoiding all the associated fees incurred when you buy and sell.

    This allows you to add value using, for example, renovations, developments, refurbishments etc.

    I normally use a buy and hold strategy and use this over time to increase my equity.

    With the increased valuation you use the equity to do it all again without the need to sell therefore avoiding all the associated costs.

    ‘ you will never go broke taking a profit ‘

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