Hi, We are looking into purchasing a IP – probably not this year but towards then end of the first quarter of next year – all depending how the markets go. Below I have done a quick estimate to see how much an IP would cost us a fortnight. I would appreciate any comments on the numbers and if I am on the right track.
PPOR value: 590k
Current Loan amount: 380kProposed IP:
IP value: 290k
Rent: 325 p/w
Purchasing cost
Stampduty: 8500
Reg Fee: 200O
ther: 800
Total Purchasing costs: 9500Total Amount to borrow: 290k + 9500 = 299500
IP expenses per fortnight:
Strata: 115
Water: 23
Council: 23
Misc maintenance: 38
Property management costs (8% of 325p/w): 52
Total IP Expenses: 251What the IP will cost me per fortnight with assumed 8% interest rate over 30yrs
Rent – Fortnightly repayments – Total IP repayments = 650 – 1014 – 251 = -615A few question:
Do I need LMI – from what I understand I don’t require it a for the above load amountAre the purchasing cost tax deductable as well? Do you take them up in the next tax return?If the mortgage on the PPOR is 50% fixed and 50% variable (Offset account) can you still use the variable mortgage for purchasing an IP?Thanks Johk
Hi Johk
The purchasing costs are a little out – they don’t add up but it’s close enough to what it would be.
You should factor in land-lord insurance – say $15 per fortnight for a unit.
Repayments on $299,500 at 8% rates should be $922 per fortnight (interest only) – don’t set this up as P&I
You’ll be able to claim depreciation as well – grab a depreciation schedule from a quantity surveyor.
Holding costs will be closer to $540 when you include insurance and change the repayments to $922.
You don’t need to pay LMI – you have sufficient equity in your PPOR.
Purchasing costs such as stamp duty aren’t deductible immediately but are claimed back when you sell (it’s added to the cost base for calculating CGT).
Ideally, you would want to set-up a third split here so you can identify your tax deductible debt (IP deposit) from non-deductible debt (PPOR loan).
Hope that helps
Jamie
Jamie Moore | Pass Go Home Loans Pty Ltd
http://www.passgo.com.au
Email Me | Phone MeMortgage Broker assisting clients Australia wide Email: [email protected]
Hi, Thanks for replying. I forgot about landlord insurance – thanks for mentioning it.
Does that mean if I would say increase the rent by 10% per year it will take 5yrs before the property is cash flow positive?
Assuming that the holding costs are the same – which obviously is not true.When you say “set-up a third split” do you mean have a separate mortgage for the IP and not “bundle” it up with the PPOR?
Cheers,
JohkBuilding insurance + some contents insurance (carpets, window coverings, etc… discuss what "contents" you ought to cover with your insurer), plus landlord insurance WITH TENANT PROTECTION CLAUSE (to cover rental defaults, malicious damage etc). Remember, when telling the insurer "how much it would cost to rebuild if the place burned down", you include the numbers to replace fences and even driveways and concreted areas if necessary.
Jacqui Middleton | Middleton Buyers Advocates
http://www.middletonbuyersadvocates.com.au
Email Me | Phone MeVIC Buyers' Agents for investors, home buyers & SMSFs.
johk wrote:
When you say “set-up a third split” do you mean have a separate mortgage for the IP and not “bundle” it up with the PPOR? Cheers,
JohkHi Johk
Yep, that's the exact reason.
Cheers
Jamie
Jamie Moore | Pass Go Home Loans Pty Ltd
http://www.passgo.com.au
Email Me | Phone MeMortgage Broker assisting clients Australia wide Email: [email protected]
Let me get my head around this.
You’re going to buy an IP (wrong term I think) that will cost you $15k/yr approx to hold onto. You think if you can get away with a 10% rent increase year on year for 5 yrs it may get to be cash positive. Meanwhile its cost you around 70k to achieve this.
Then we’ve got a property market with more downside risk than the last depression and I suppose somehow you think this property may appreciate rather than depreciate.
Tell ya what. You give me $15k/yr. I’ll keep half and bet the rest at a casino for you and give you any winnings. They’re way better odds than you’ve got right now!!
Jack
Hi, I am only trying to figure out how much it would cost me per month to hold a property. The numbers ie the IP value and then proposed rent are from a property on RE.com that was for sale.No we are not looking at buying a property now but merely trying to learn how to calculate the holding cost of the IP.I would appreciate any comments/feedback on how calculate the fortnightly holding cost of the IP Thanks,johk
Hi Johk,
Your numbers look mostly correct to me. Don't forget you can claim depreciation on newer properties which will increase your after-tax cashflow. For example, if your gross cashflow on the property is -$15,000/year:
Tax Saving @ 30% tax rate: $4,500
$10,000 Depreciation @ 30% tax rate: $3,000Therefore your after-tax cashflow is actually -$7,500 and not -$15,000/year.
I have made a big assumption with the $10k depreciation for the example, that is something you should get a quantity surveyor to estimate for you.
johk wrote:Hi, I am only trying to figure out how much it would cost me per month to hold a property. The numbers ie the IP value and then proposed rent are from a property on RE.com that was for sale.No we are not looking at buying a property now but merely trying to learn how to calculate the holding cost of the IP.I would appreciate any comments/feedback on how calculate the fortnightly holding cost of the IP Thanks,johkHi Johk
I probably should have mentioned this before – if you plug your numbers into this spreadsheet it will give you an estimate of the holding costs – http://www.passgo.com.au/investment-property-analysis-tool.html
Cheers
Jamie
Jamie Moore | Pass Go Home Loans Pty Ltd
http://www.passgo.com.au
Email Me | Phone MeMortgage Broker assisting clients Australia wide Email: [email protected]
Hi Johk,
Just to put more bad news into your costs, property management is a little bit more expensive than just the 8%. I am not sure which state you are in, but in SA, there are varying other costs on top of the 8%, the main one being the letting fee, which is charged at the beginning of the tenancy, and can be quite painful.
There are solutions around this of course, look for an agency that can offer an all-inclusive fee, no hidden charges, with it all rolled into the one monthly fee, that way you can budget confidently, always knowing what is coming up, and what you need to top up. This is more expensive than 8%, but works out the same, just spreads the cost over the year, and avoids the initial hit at the start.
Good on you for researching it so thoroughly. Property investing can be fun, but harsh if you dont research!
lifestylez wrote:Your numbers look mostly correct to me. Don't forget you can claim depreciation on newer properties which will increase your after-tax cashflow. For example, if your gross cashflow on the property is -$15,000/year:Tax Saving @ 30% tax rate: $4,500
$10,000 Depreciation @ 30% tax rate: $3,000Therefore your after-tax cashflow is actually -$7,500 and not -$15,000/year.
Just to clarify, you only get immediate benefits from tax deductions if they can be offset against income. In simple terms, this usually means if you buy in your own name. If you buy in a trust, you get to carry those deductions forward in order to offset against future profits, however for the immediate year you still need to cover the full costs (i.e., $15k using the example numbers above).
Hi,Thanks for all the feedback and comments. It is very much appreciated especially when you try to start to get an idea of it all.
Jamie, thanks for the link to the excel sheet – might come handy one day.Been looking around and it is very hard to find any cash-flow positive properties. After I spent a night searching and reading I came across Vendor Finance.This seems very interesting. The sort of Vendor Finance that interest me at this stage is if I buy a property and then put it out for Rent-to-buy.
(I also read about “sandwich” deals where you literally only are the one passing the money. There seems to be a lot more money in making these “sandwich” deals but I reckon you need a bit more experience before you get into it.)Numbers:
Looking at this property for example http://www.realestate.com.au/property-house-qld-northgate-108172436
I have assumed I can pass on all the cost associated with taking out the mortgage to the prospect buyer.
As the buyer will pay for any costs associated with the property I don’t require a property manager (correct me if I am wrong)
Say I buy the property for 469’ and take a mortgage with the interest rate of 7%. The buyer and I enter a contract with him having the option to buy the property for 507’ in 2yrs (4% increase per year)My repayments (P&I) will be per fortnight: 1529
The buyers repayment are calculated with 8% interest rate: 1669
My profit after 2 years (1669-1529)*52 + (507’-469’) = 45280What lump sum payment can you ask of the buyer initially – is it whatever the buyer can afford or a percentage of mortgage?
Can you make the buyer pay for all the costs associated with taking up the mortgage – stamp duty etc?How or where do you find a buyer?
How much are people generally willing to pay per fortnight on rent-to-buy scheme?
Are there any premade (or templates of) contracts out ”there” that are available?Any comments would be much appreciated.
ThanksJohkHi Johk
If you're talking about vendor finance then Paul Dobson who posts on here is your man.
Cheers
Jamie
Jamie Moore | Pass Go Home Loans Pty Ltd
http://www.passgo.com.au
Email Me | Phone MeMortgage Broker assisting clients Australia wide Email: [email protected]
Hi,
In my searching on the internet I found this http://r2bginvestments.com.au/archives/86 which states "
The vendor finance laws in each State are slightly different. However as of Jan 1st 2011 all Vendor Financiers must hold an Australian Credit Licence (ACL) in order to carry out this business."
Is this correct – in most places I it mentions you don't require an ACL?
Johk
If you are selling an option then you won't be providing finance. What you have described as a rent to own seems more like a sale by installments to me.
Either scenario you couldn't get the buyer to pay your stamp duty as they will be up for their own stamp duty themselves. It would need to be built into the sums.
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
Hi Johk
We discovered vendor finance (VF) in 2002 and did our first VF transaction in 2003. Since then we have gradually built our VF business so that today we work in our business full time so, for us, it's been a great niche to get into.
One important point to remember when thinking of doing VF, is that you're selling the asset to generate cash flow. I believe it's worth remembering that VF is a cash flow business but your real long term wealth is in the equity you own in real estate. In short don't become so involved in VF that you neglect planning your buy and hold portfolio.
I'd suggest your first move should be to research and then do some more research
A few web resources that may help in your search for information about vendor finance are:
https://www.propertyinvesting.com/strategies/wraps
https://www.propertyinvesting.com/str…/lease-options
http://www.jvpropertypartners.com.au…d=50&Itemid=75
http://www.vendorfinancelawyer.com.au/
http://www.vendorfinance.asn.au/ The Vendor Finance Association of AustraliaOnce you have researched and read as much as you can, it's worth considering how to get more detailed information/education. Possibly with one of the educators out there or via some hands on learning with an experienced VF'er.
The reading above should give you a lot of answers to the questions you've asked above. Feel free to come back again with those that aren't answered.
Cheers, Paul
Paul Dobson | Vendor Finance Institute
http://www.vendorfinanceinstitute.com.au
Email Me | Phone MeAn alternative way to finance your home.
A few web resources that may help in your search for information about vendor finance are:You must be logged in to reply to this topic. If you don't have an account, you can register here.
