Forums / Property Investing / Help Needed! / I own a Negative Geared property, what now?

Viewing 16 posts - 1 through 16 (of 16 total)
  • Profile photo of JBJB
    Participant
    @jayburd
    Join Date: 2016
    Post Count: 4

    Good afternoon all,

    Thank you for taking your time to read this post.

    A bit of background before I begin. I am 22 years old I have a partner and as the title states I own a Negatively Geared property. It is on an Interest only loan. The house was built 2 years ago and has not yet built equity. Foolishly my down payment was 5% and I was whacked with LMI upon purchase and now the realization of paying off nothing but the interest on the loan is bugging me to say the least. After reading Steve’s book I am kicking myself that I did not wait until I had a little more knowledge under my belt.

    My goal is:
    Acquire a positively geared property portfolio and create enough wealth to retire comfortably with my partner by the age of 50.

    The question I have is, what is the best way to deal with this property?

    My current plan is to place every spare cent I have into my offset account until I can pay P&I on the loan and have the property still be positively geared. Then to save up a 20% down payment prior to purchasing the next property and continue to do so.
    The property is also in my name, long term would it be worth looking at creating a trust?

    Thank you.

    • This topic was modified 2 years, 6 months ago by Profile photo of JB JB.
    Profile photo of Tony FlemingTony Fleming
    Participant
    @the-dark-knight
    Join Date: 2008
    Post Count: 396

    Congrats on starting so young. I guess with it been two years old probably not much sweat equity you could create. Any features you could add to boost the rent? Any future infrastructure plans for the suburb? I’d talk to a broker at least to see if you have any options available to refinance or restructure the loan etc.

    For future properties you don’t need 20% deposit I’d take advantage of LMI as much as possible. You just need to make sure you are buying cash flow+ properties. With interest rates low at the moment it’s never been easier.

    If you plan to build a large portfolio you will probably have to start thinking about trusts sooner than later. As for your age goal why not aim earlier. I had enough passive income to retire from the rat race at 28 and I started at 20 as well :)

    Best of luck with it all.

    Tony

    • This reply was modified 2 years, 6 months ago by Profile photo of Tony Fleming Tony Fleming.

    Tony Fleming | Triumphant Property Group
    http://www.triumphantpropertygroup.com.au
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    NSW Buyer's Agent specialising in Western Sydney-Blue Mountains-Orange-Albury

    Profile photo of JBJB
    Participant
    @jayburd
    Join Date: 2016
    Post Count: 4

    Thanks Tony,

    The property is in the Scenic Rim Region of Queensland and I am hoping that the Bromelton SDA generates some growth in the area.
    I will definitely look into creating a trust.
    That is pretty impressive!

    Jay.

    Profile photo of TerrywTerryw
    Participant
    @terryw
    Join Date: 2001
    Post Count: 16,110

    Why look at creating a trust?
    Why pay PI on an investment property?

    I think you should do some more reading.

    Terryw | Structuring Lawyers / Loan Structuring Pty Ltd
    http://propertytaxbook.com.au/
    Email Me

    Lawyer, Mortgage Broker and Tax Advisor (Aust wide) http://propertytaxbook.com.au/

    Profile photo of Ethan TimorEthan Timor
    Participant
    @ethantimor
    Join Date: 2016
    Post Count: 282

    Good afternoon all,
    Thank you for taking your time to read this post.
    A bit of background before I begin. I am 22 years old I have a partner and as the title states I own a Negatively Geared property. It is on an Interest only loan. The house was built 2 years ago and has not yet built equity. Foolishly my down payment was 5% and I was whacked with LMI upon purchase and now the realization of paying off nothing but the interest on the loan is bugging me to say the least. After reading Steve’s book I am kicking myself that I did not wait until I had a little more knowledge under my belt.
    My goal is:Acquire a positively geared property portfolio and create enough wealth to retire comfortably with my partner by the age of 50.
    The question I have is, what is the best way to deal with this property?
    My current plan is to place every spare cent I have into my offset account until I can pay P&I on the loan and have the property still be positively geared. Then to save up a 20% down payment prior to purchasing the next property and continue to do so.The property is also in my name, long term would it be worth looking at creating a trust?
    Thank you.

    Hey mate,

    Well done for starting so early and thinking so ahead! 👍😎

    If 5% was all you had to put into the house, why are you kicking yourself over LMI (which is 2-3% of the purchase price)?

    Ideally one would buy a property that has manufactured growth potential instead of the good old ‘buy and hope’ but guess that’s not the case with this one?

    What is the shortfall from paying the IO?

    When we are talking about CF+, we mean that the income is greater than 100% of the purchase price (as IO loan) because any funds that are placed as a deposit are actually taken from an offset of a different property 😉

    What’s the plan with this property? Maybe best to sell it and redeploy the funds elsewhere?

    Yes, learning (all the time) is important. It never ends. Experience is one of the greatest ways to learn. No point kicking yourself if you ask me 😊

    Trusts have pros and cons. Not sure a trust would be the best way forward?

    Hope this helps?

    Cheers,
    Ethan

    Ethan Timor | Aligned Finance Pty Ltd
    http://www.alignedfinance.com.au/
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    Active Investor & Broker; Based in Northern NSW, servicing Australia wide; Author of '34 Proven Ways to Maximise Your Borrowing Power' (download free from our website)

    Profile photo of JBJB
    Participant
    @jayburd
    Join Date: 2016
    Post Count: 4

    I definitely believe that I didn’t do enough research prior to purchasing the property. I did not know exactly what my goals where.
    You are right Ethan I shouldn’t be disgruntled over not having enough of a deposit in the first place. In hindsight I should have A) Saved more for a deposit or B) Adjusted my budget prior to purchasing.

    This was a Buy and Hope. Selling the property now would leave myself a little worse off than when I started.

    I’m not in the position right now but would a family trust be a good idea in the long term for the distribution of wealth?

    I do believe that IO loans are not all bad news now. Thanks for prompting myself to read up a bit more.

    Thanks for the replies.

    Profile photo of DeanCollinsDeanCollins
    Participant
    @deancollins
    Join Date: 2015
    Post Count: 372

    Selling the property now is terrible advice.

    You will just end up paying entry and exit costs twice.

    Firstly, are you getting market rent?
    Secondly, are there any small and cheap renovations you can to do the property to increase the rent? (dishwasher/new paint etc)
    Thirdly, if I knew what you know now at 22……I’d be ecstatic, you are way way way ahead of the curve, chill and bask in the knowledge that you are on your way and way way ahead of your peers. In 20 to 30 years from now you’ll look back and realize this was a smart move.

    What you are doing about offset etc is smart, so keep doing it and wait patiently until you can afford your next place.

    Profile photo of Ethan TimorEthan Timor
    Participant
    @ethantimor
    Join Date: 2016
    Post Count: 282

    Hey mate,

    All good, live and learn and you’ll be (more than) right 👍😎

    Just one more comment:

    You are right Ethan I shouldn’t be disgruntled over not having enough of a deposit in the first place. In hindsight I should have A) Saved more for a deposit or B) Adjusted my budget prior to purchasing.

    LMI is not necessarily a bad move! Let’s say LMI is 3% and you have only 5%. If you save 5% p/a it will take you 3 more years to get to 20% (this is taking into account that in addition you have the circa 5% purchasing costs).

    So, in our example only if the market didn’t move up more than 3% in 3 years (…), only then it would have been a smart move to wait until our borrower has the magical 20%.

    In a funny coincidence, I scheduled a post on our website talking exactly about that. It will be published Wednesday week and it was promoted from an expert advice I read in some magazine telling the borrower to wait for a few more years until she has 20% because “it’s important to avoid LMI” 😱😱😱

    Hope this helps? 👍😎

    Cheers,
    Ethan

    Ethan Timor | Aligned Finance Pty Ltd
    http://www.alignedfinance.com.au/
    Email Me | Phone Me

    Active Investor & Broker; Based in Northern NSW, servicing Australia wide; Author of '34 Proven Ways to Maximise Your Borrowing Power' (download free from our website)

    Profile photo of Ethan TimorEthan Timor
    Participant
    @ethantimor
    Join Date: 2016
    Post Count: 282

    Selling the property now is terrible advice.
    You will just end up paying entry and exit costs twice.

    Did anyone give him such an advice? I know it’s wasn’t me 😂😂

    If you were indeed referring to my comment, then yes, examining all options is prudent IMHO and selling a lemon (for example) may be a best way forward in some cases, if can’t turn it into lemonade of course 😉

    Ethan Timor | Aligned Finance Pty Ltd
    http://www.alignedfinance.com.au/
    Email Me | Phone Me

    Active Investor & Broker; Based in Northern NSW, servicing Australia wide; Author of '34 Proven Ways to Maximise Your Borrowing Power' (download free from our website)

    Profile photo of Corey BattCorey Batt
    Participant
    @cjaysa
    Join Date: 2012
    Post Count: 1,010

    Ethan is right – LMI certainly has a place. Looking to just save on LMI without factoring in the opportunity loss and the power of leverage in these scenarios is short sighted. LMI is a tool which can be used to your advantedge – in general sticking to 88%/90% LVR is more preferable as this balances cost vs outcome, but overall it allows investors to build a property portfolio faster and larger than otherwise.

    This all goes out the window if you’re starting investing and have 500k of equity available from day 1 you can release, but for the average investor starting out it certainly has its place.

    In terms of working out that cost/benefit – I’ve written about LMI and what to look out for when choosing a LVR here: http://www.precisionfunding.com.au/lmi-friend-or-foe/

    Corey Batt | Precision Funding
    http://www.precisionfunding.com.au
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    Investment Focused Finance Strategist - servicing Australia-wide

    Profile photo of Guest

    Hey I am using these forums as part of my learning, I am reading your post what mistake did you make exactly? I can’t spot it. Is it the negative gearing? I see you wrote down paying the interest on the loan is bugging you I don’t see what is the mistake?

    Profile photo of Corey BattCorey Batt
    Participant
    @cjaysa
    Join Date: 2012
    Post Count: 1,010

    From what the original poster wrote – it looks like they believe it wasn’t a wise decision for them to buy a negatively geared property which is eating into their cash flow each week – instead of buying a cashflow property which would increase their cash flow each week. (which could then be redirected into more investments).

    Corey Batt | Precision Funding
    http://www.precisionfunding.com.au
    Email Me | Phone Me

    Investment Focused Finance Strategist - servicing Australia-wide

    Profile photo of JaxonJaxon
    Participant
    @jaxona
    Join Date: 2014
    Post Count: 282

    I think there is a lot of mixed/different information, I hope below is a fair and respectful overview

    -was the property purchase a good idea-ANSWER; depends on what the goal was. but if you get a deal on the purchase price (below value) and also have a high rental yeild in a possible growth area, your ahead of the curb

    -should I sell or keep or restructure-ANSWER: the easiest way to work this out is, what is the benefit and cons of each option, selling incures various fees (bank/loan, Real estate agent/captial gains/etc,etc)
    keeping the loan/property as is means youve learnt changed nothing, unless you know where your heading, which can be the best option under the right circumstance
    Restructure-this could also be good if your saving more money due to the various rates, this likely in your case may not be overly useful as it can incure fees and seems you may not have built a large amount of equity.

    I would like to end by saying Corey, Ethan, Terry, Dean, Tony all have points that bear a level of reasoning that make sense in their own way.
    but if you know each of their points and the value in each of their points, then that should mean you will understand which option fits you.

    I wish you all the best

    Profile photo of JBJB
    Participant
    @jayburd
    Join Date: 2016
    Post Count: 4

    Apologies for any confusion,

    When I intially purchased the property I didn’t educate myself with different investing strategies. I purchased an off the plan house and land package. I did intend to purchase a negatively geared property at the time.
    Now after reading a few books I am now aware of how positively geared properties are a more logical way to build a property portfolio.

    I did believe the area was going to experience some growth, allowing me to use the equity to buy more property, however this hasn’t happened yet.

    It is not worth selling at this point in time, therefore I am going to continue to keep it negatively geared as originally planned.
    When the area does experience growth I will sell and start investing again with a different strategy.

    I hope this clears up any questions,

    Kind Regards,

    Jay

    Profile photo of JaxonJaxon
    Participant
    @jaxona
    Join Date: 2014
    Post Count: 282

    Jay,

    that may be the best option what you just stated above, or it may have a lot of sense to hold onto it and use the equity to build a larger portfolio than selling and buying.

    Remember there is fees (as noted above) every time you buy and sell, and if you gain profit generally the government wants a cut.

    Profile photo of Guest

    Ah ok thanks guys.

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