Am I on the right track?

ok so after lots of reading (and still doing lots and lots) I have started to try and work out some numbers on some properties for sale purley as practice just to try and get my head around everything a bit better. I would love some feedback especially the bad, just play nice :D

This is my first practice run...

Ok property is on the market for $209000 ( I havent actually been to see it)
(expected rent to be 260ish)

Now If I get a loan for $110 000 and using the interest rate of 8.36% fixed for 15 years (is this even a good idea?) repayments would be $842 per month.

I expect stamp duty/startup fees to be approx $6500 (this is using calculators and such that are provided on bank websites)

Plus legal fees and pest/building inspections which i am not really sure how much but estimating around the $1500 mark?

This would mean I would be up for approx $110 000 (rounding up a bit) cash straight up. Does this sound right?


So working on having $2856 after loan repayments each year do you think It is possible to have a place like this service itself or close to? (Is that even the right term to use?)
Not sure on rates and things like that. What else am i missing?

I have the capability to get a higher loan/put more actual cash into it to make it work better.

This is purley a hypothetical situation (using a real house on the market) As i would obviously run everything past an accountant first. I am just hoping I am starting to get my head around everything and not completely off track.
 
Cath, why are you putting in so much of your own money and why are you fixing so long for 15 years at 8.36%?

The least amount of your own money in any IP deal the better. For example most investors would borrow the full purchase price including costs.

Also, allow 5% of your purchase price to cover all your purchasing costs & legals. (ie stamp duty, conveyancing fees, rates adjustments, pest/buildings etc etc)
 
lol clearly I have a lot lot more to learn. This is why am not going to be rushing into anything. I really wish there was a newbie forum on here so I wouldn't feel like such a fool putting this in here :eek:.

I was thinking along the lines of not having to put any extra money into it to meet loan repayments. ok need to looking into interest only loans is my guess? What about borrowing the most amount possible using an offsett acount and put that money in there therefore creating equity faster as well as access to it to purchase another ip when one comes along. I earn next to nothing so need to be pretty comfortable with being able to make loan repayments.

And thankyou for your help on allowing 5% for purchasing costs - was struggling to work that one out.
 
lol clearly I have a lot lot more to learn. This is why am not going to be rushing into anything. I really wish there was a newbie forum on here so I wouldn't feel like such a fool putting this in here :eek:.

Most of us are noobs to some extent. I wouldn't feel too bad, this forum is all about sharing ideas :)


I was thinking along the lines of not having to put any extra money into it to meet loan repayments. ok need to looking into interest only loans is my guess? What about borrowing the most amount possible using an offsett acount and put that money in there therefore creating equity faster as well as access to it to purchase another ip when one comes along. I earn next to nothing so need to be pretty comfortable with being able to make loan repayments.

Offset accounts are gold.

Interest-only is generally what the forum will recommend but in large part this also comes down to your SNAF.

If you've got debt against your own home, too, that would usually be a better place for the excess cash.


And thankyou for your help on allowing 5% for purchasing costs - was struggling to work that one out.

The bulk of that will be in stamp duty. Have you got the PIA software yet? It's a beautiful thing for analysing potential purchases.
 
Hey Cath,

Don't feel silly - there's plenty of us newbies on here. You'll learn more each day.

If servicing the cost of the IP is your greatest concern than perhaps you should focus on securing an IP that's closer to cashflow neutral/positive. Maybe start looking in regional areas where you can get cheaper properties with relatively high rental yields. Have you read any of Margaret Lomas's books? She's big on cash flow positive properties (which is probably the best way forward for you if you're trying to avoid forking out cash each week to keep your IP).

I agree with the previous poster - I wouldn't be using $110k of my own cash for a $210k IP. I'd use that $110k to secure $1,000,000 worth of IPs :) But that's me....

Jamie
 
Thanks for going easy on me everyone :)

One thing I am learning to love on here is everyone has different opinions and stratergies It really helps with getting the whole picture rather than just one person telling you "negative gearing is the way to go, no if's or butts" -which is what i was getting from someone I know

Ok I dont owe anything on my ppor so that is not an issue so could possibly use as equity - I have meeting with a mortgage broker next week just to get some ideas.

I haven't read any of her books, I am currently reading Jans books just started on the "story by story" one and have the other on its way. I have also read steve mcknights and some other one that is mostly about the benefits of negative gearing. So will look into the ones you suggested next.

No don't have any PIA software, have been madly scribbling down numbers on paper and trying to work it all out - definately not really working.

SANF is a big issue for me right now as I have a young family and would like to have a good balance at the moment- especially while starting out.

Ok so back to the drawing board for me I think.
 
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I really wish there was a newbie forum on here so I wouldn't feel like such a fool putting this in here :eek:.

lol dont worry about it. We've all been there!! Check out some of my early posts from last year. I re-read some of them the other day and I couldn't believe how much I didnt know and the silly questions i was asking! :D

The more you read you will learn and that includes interacting here on ss and asking questions. Sometimes it can be hard to find info here using the search button, but just keep searching, and reading old threads and new ones.

I've been on here for about 1 and a half years, i come on every day, spend at least 2 hours i'd say. Learnt heaps on here as well as by reading all the books i can find.

:)
 
Ok I dont owe anything on my ppor so that is not an issue so could possibly use as equity - I have meeting with a mortgage broker next week just to get some ideas.

SANF is a big issue for me right now as I have a young family and would like to have a good balance at the moment- especially while starting out.

Could you tell us a bit more about your situation so we can help

Income your on
Your ppor's (principle place of residence) worth


thanks
 
lol dont worry about it. We've all been there!! Check out some of my early posts from last year. I re-read some of them the other day and I couldn't believe how much I didnt know and the silly questions i was asking! :D

The more you read you will learn and that includes interacting here on ss and asking questions. Sometimes it can be hard to find info here using the search button, but just keep searching, and reading old threads and new ones.

I've been on here for about 1 and a half years, i come on every day, spend at least 2 hours i'd say. Learnt heaps on here as well as by reading all the books i can find.

:)

Thanks for making me feel a bit better. :) I have lots of love for the search button!

Could you tell us a bit more about your situation so we can help

Income your on
Your ppor's (principle place of residence) worth

Here is a link to my very first post with all the info in it - even reading this i realise how much I have learnt already (still a long way to go) Maybe I am better off leaving all my questions in one thread? http://www.somersoft.com/forums/showthread.php?t=57152
 
A slight thread hijack here, but why the focus on interest only?

Running Cath's borrowing requirements and interest rates through the BBC Mortgage Calculator gives $770 per month interest only and $1100 per month for repayment over fifteen.

(Her numbers seem closer to a $120K borrowing requirement, which gives a repayment of $1200 per month.)

The rents would be bringing in $13.5K in initially, rising to approximately $21K (assuming 3% inflation) over 15 years. So approximately $250K in rental income over this time.

If Cath borrowed $110K then the total mortgage payments would be about $140K (interest only) and $200K over 15 years.

In the interest only case, this would be a profit of $110K from rental income, whereas in the repayment case it would be a profit of $50K from rental income, plus she would have saved $110K by repaying the loan, putting her $50K ahead, and by another 9K per year thereafter.

The only advantages that I can possibly see for running an interest only scheme are:
  1. Tax benefits allowing interest to be offset against income.
  2. Using the extra income for an IO strategy to aggressively grow the portfolio size.
In the case of the first, it would have to be a very big tax advantage to offset being 30% ahead in terms of raw figures.

As for the second, I'm not convinced that it's going to be easy to ramp up a portfolio as fast in a low inflation / low growth environment, and I can't see house prices continuing to increase ahead of wages over the long term.
 
Thanks Kim.

Looking at that thread, and one or two linked to it, the theory (as I understand it) is that the cost of being highly leveraged is offset by higher capital gains.

I need to do some proper calculations, but an interest only mortgage is about two thirds of the cost of a repayment one over 15 years. So (using my figures for Cath) she could own outright two houses after that time, or have three on an IO basis.

Ignoring tax, it roughly comes out that if house prices increase at a relatively low rate (saying tracking wages at 3% or 4% per annum) then both approaches come out roughly equal. But at higher rates of increase (the typically assumed 7% to 10% per annum) the more leveraged position wins out.

It's hard to call where inflation's going right now, but if it remains low over the long term then (in my opinion) house prices cannot rise far faster than income. In which case the repayment strategy makes sense.

If it remains high (and that's a possibility given the amount of money being pumped into the financial system to keep it afloat) then a highly leveraged position is better.
 
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