BenParticipant@albangaJoin Date: 2014Post Count: 54
I am new to this forum and half way through Steve’s amazing book. Apologies if I am jumping the gun and a later chapter explains this in-depth :)
I have recently become very interested in property and its earning potential. I attended a seminar which was great and am also hooked on 1 -135 properties but i still am having difficulties applying the positive cash flow to a real life scenario. So what i want to do is throw out an example which mine may soon mirror and see how it may work.
If i have a 280k mortgage and my home is valued at 330k then that means i have access to 50k of equity. Lets assume I have no savings and earn 70k a year.
I then decide to purchase my first IP for say 220k (stamps&closing included) so i pay my 20% deposit which is 44k and then get a renter in who gives me a positive cashflow of let’s say $50 a week.
Now because i took 44k out of my existing property the equity in that property is now down to 6k, now my IP also has equity but when i take away let us say 20k stamps its actual value is 200k so really I now have 24k equity in that home.
So now my equity is down to 30k and for this example let’s say there is no capital growth for 10 years so that figure does not change.
I understand I am still earning a wage at this point of around $1050 and also receiving $50 positive cash flow so in total $1100 a week. The IP is covered by the rent but $400 of my wage goes to paying off my main property and for this example let us say my lavish lifestyle eats up the rest of my wage (It doesn’t but just for this example).
I know this is long winded but i am now at my point :). If I now want to buy another IP of the same value then how can this be done (without lending more than 80%)?? This is the part i am having trouble understanding.
I appreciate the answer may be change your lavish lifestyle but that may allow me to buy the next property but what about the one after that and so on.
I guess the main thing i am having trouble with is if stamp duty and closing costs keep eating up my equity then at some point I simply will have none left for my next deposit. Even if i own say 3 properties earning me $50 a week positive cashflow then $150 into an account is not going to allow me to buy another property until i get another 40k deposit which would take forever without capital growth.
I do apologise in advance if this sounds silly but I i am just having a hard time understanding the concept. Negatively geared is a no brainer which as Steve mentions is why 90 odd % take this route and buy 1 maybe 2 properties and wait for capital growth.
Thanks in advance to all the experts on here :)Jacqui MiddletonParticipant@jacmJoin Date: 2009Post Count: 2,539
If you are using exclusively natural equity growth (as opposed to the forced variety through value-adding such as renovation and subdivision) and your day job income to fund deposits etc on subsequent properties, then one way to maximize what you can do with your available equity is to keep your deposits low, and go a higher lend on the main IP mortgage (eg 95%). Yes you will have to pay LMI (lenders mortgage insurance), but that tends to be cheaper than stumping up for bigger deposits.
Some other things you can do to expedite getting you in to more properties are of course increasing the income you earn from your own labour (eg get payrise, take a second job etc), force equity growth through renovation / subdivision / buying under value, or introduce another investment stream that earn you more income faster without having to turn up to a job.mattstaParticipant@mattstaJoin Date: 2011Post Count: 604
You have got the main gist of positive cashflow investing, and your question revolves around what JacM called ‘natural equity growth’ – which is a good description.
One of your assumptions was this: ‘So now my equity is down to 30k and for this example let’s say there is no capital growth for 10 years so that figure does not change.’
However, if you have been paying principal and interest for both your PPOR and your IP, then in 10 years, you would have paid down a fair amount of the loan for your principal for the PPOR and IP. As you pay down your principal, this also actually increases your equity in both the properties (even if the properties did NOT achieve capital growth at all in 10 years).
Another way that you increase equity (without lavish renovations), is to gradually increase your rents – even by just $5 per week per year – or at least in line with the market. In 10 years, the rent is very much likely to go up, just by virtue of inflation. As your rents go up due to inflation, then the value of your property also goes up due to the income-method of valuing a property. As the income of a property goes up, then the value of a property goes up and your equity goes up – and so inflation has helped you within that 10 year period to increase your capital growth.
So as you can see, there are 2 factors that you didn’t consider that will actually help increase your equity over time (even if you don’t do proactive renovations OR the capital growth in the area is lousy): 1) Paying down the principal of your properties over time; and 2) inflation and the gradual raising of rents.BenParticipant@albangaJoin Date: 2014Post Count: 54
Hey JacM and Mattsta,
Thank you for your detailed explanations. Both scenarios make plenty of sense :)BennyModerator@bennyJoin Date: 2002Post Count: 1,376
First off, please note that the following thoughts don’t directly answer your question, but the thoughts therein might still be useful to you.
Many of the following poster’s “numbers” won’t apply directly to your situation, but do have a read of this whole thread :-
In there, several posters share some very useful information that can perhaps turn on a light or two for you. In particular see my post of 29th March, where I project the poster’s likely situation in 10 years time. Note that I take an EXTREMELY conservative view of things (e.g. rents DON’T increase over those ten years), and yet the final outcome is pretty darn good anyway.
Perhaps take that example, run YOUR numbers through it, and see what YOUR situation might look like in ten years too. You might also get a very pleasant surprise.