Are we living in our first CF+ Investment Property???

[BayView]

No, I am talking about purchase price....and every other investor should. The property would bring in money each week on top of expenses, not arguing that point. However the cash could be used for other income streams and therefore there is OPPORTUNITY COST that they are foregoing.

You keep missing the point here Somerville.

Read the question asked by Samwise.

The point that you keep missing is that you can't call any property positively geared by just adding a bigger deposit. By your definition I could be some sort of genius by making all of my properties massively CF+.

Yes, you can, but most people can't as they don't have enough cash. Positively geared means the income from the rent is greater than all the outgoing expenses. They don't all have to be massively cfp by the way. One dollar of cfp is still cfp. Not that you'd be thrilled by this, but it is technically correct.

However I wouldn't be able to keep purchasing properties by doing this.

Actually, you could. If you started off with a pos geared IP, and then re-invested all the rent and tax returns, and implemented a debt-reduction plan using some normal cash from PAYE income - the same as you would put into a saving account in a Bank - you would end up with another load of cash towards another cfp IP. Of course, you wouldn't buy as many in a short period of time as the investor loaded up with 95% LVR neg cashflow IP's, but you will have more nett income and a safer LVR than them. I would rather have 5 cfp IP's after 10 years than 10 neg cashflow Ip's. My exposure to the market is less for the cap gains aspect, but the combination of cap gain from the 5 cfp's, plus the pos cashflow being re-invested is accelerating the equity, the cfp cashflow, lowering the LVR and so on.

But this is getting away from the question, which I've answered, and you keep arguing with me about on another aspect of the investment.

So if someone says to you is this $1m property CF+ with $500/week rent would you say 'yes of course, just put down a $600 000 deposit. I'll also give you my friends phone number who will lend you the money for free'

Technically, this is a correct example, but highly unattractive from a C.O.C point of view. I doubt that anyone would work on these figures.

In the case of Samwise, he/she is able to turn their cashflow situation into a pos from a neg, based on what the already have now.

You are turning the thread into a returns comparison. That is a futile discussion. It's been done to death with shares V property here already, and there are so many varibles you simply can't compare the two - leverage, depreciation, dividends V rents and so on.

This is not what was asked by the original poster. All he/she wanted to know was if they rent it out, will their PPoR have more money coming in than there is going out - based on current situation. You already know the answer to that.

If you want to argue opportunity cost and returns, start a new thread.

 

[Somerville]

Man, so you do have a friend that will lend the money at 0% interest????? Can I please have his number. You're also wrong about me being able to buy more property if I put all of my cash into my current properties to make them more CF+. There are these things called deposits that I sort of need to buy property. Anyway, I've proved my point, it's getting a bit tiring now.

Samwise, with regards to the property next door, it looks as though you've done quite well from your current property and looks as though you know the market quite well judging from your purchase. If you think that it will continue to increase in value and have good reasons to support your decision then why not? It will be CF- (yes Bayview) at $550 but isn't the end of the world if the capital gains continue as they have for your PPOR.

 

[BayView]

Man, so you do have a friend that will lend the money at 0% interest?????

This was never in the equation.
As per my calcs; there was interest on the existing $320k factored in.

You're also wrong about me being able to buy more property if I put all of my cash into my current properties to make them more CF+.

In the case of Samwise, he has an offset account, and he will already be pos cashflowed.

If he deposits all his cfp, his tax returns and any other spare cash into this account, he is doing three things which combined accelerates the time until his cash is enough for the next deposit - reducing debt, and decreasing the interest on the exisiting loan, which increases the cashflow - all three will allow more cash to be used for more debt reduction and building up of cash - it's an accelerating cycle.

And there is also any cap gain along the way, but this doesn't help cashflow - only equity.

There are these things called deposits that I sort of need to buy property.

Correct; and using the above strategy, Samwise will accumulate a good deal of cash for the next one in a shorter time than the person who is neg geared and using out of pocket funds. This may be because they may not be able to pay down any debt. This person is then only able to use the effects of time in the market for cap gain before they casn afford to buy again - they will run out of servicability due to the neg cashflow.

If Samwise keeps the purchase prices down in the lower third of price range, he will be able to buy again sooner, and often these pricepoint properties have better rent returns to begin with.

Anyway, I've proved my point, it's getting a bit tiring now.

That's a shame; I was just getting warmed up, and I'm sure Samwise would benefit from the in-depth discussion.

Samwise, with regards to the property next door, it looks as though you've done quite well from your current property and looks as though you know the market quite well judging from your purchase. If you think that it will continue to increase in value and have good reasons to support your decision then why not? It will be CF- (yes Bayview) at $550 but isn't the end of the world if the capital gains continue as they have for your PPOR.

This is quite true.

However, you could spend the same amount of money over maybe two cheaper properties of say: $250k each with much better rent returns, still receive your tax deductions and depreciation, hedge against vacancies by having two properties rather than one that might be vacant (yes; I know they could be both vacant simultaneously, but more unlikely), and more importantly; the pool of renters is much larger, so there are fewer and shorter vacancies anyway.

Cheaper properties can also enjoy exceptional cap gain while all this is occuring, so you will have maximised a much larger number of factors associated with the investment.

 

[Samwise]

This is not what was asked by the original poster. All he/she wanted to know was if they rent it out, will their PPoR have more money coming in than there is going out - based on current situation. .

Actually not quite true... I can work out that its CF+ quite easily myself...

Let me clarify the issue here:

Situation 1: My house as an IP will be CF+ but then that ignores the fact that if i rent my house out i'll have nowhere to live! So, I'll have extra costs... perhaps rent for myself at $550pw, so am I still CF+? Yes, pretty much. Well, I may as well buy another place, whch may as well be next door seeing as we like the house layout so much... but then where does that leave us? Is my original house CF+ because i'll have a very much increased home loan size and etc.... Do you see my point?

Situation 2: I started off by looking at units as IP's and working out the cash flow on 100% LVR and they are always CF-, but then that includes all the purchasng costs and expensive stratas so it would be. I have then been comparing it with my situation above, which is a $700K property with $320K oweing and no 20% deposit to find and no purchasing costs and a strata of only $100/qtr and surprise surprise, its CF+!

There must be an even (apples for apples) way I can compare the two situations and therefore work out an investment strategy?

That is the question.

Thanks for this great learning experience... it may be rattling you guys but it is helpig form the foundations of a long term investment strategy inside me

 

[Somerville]

Actually I'm not tired anymore, I've realised that it's a good learning experience discussing various topics.

Thanks for clearing it up Samwise, that's what I was thinking that you meant.....the opportunity costs associated with it all. It's very obvious that it's currently CF+, i don't think you need to be told that.

Let me get home after work and see how it all stacks up 'apples for apples'

Thanks.

 

[Samwise]

Indeed... and what I think i'm learning is that its all about balancing your gearing with both your cashflow and your cash reserves...

Its great getting a 100% LVR IP and it being CF+ but then the interest rates go up a bit and you're losing money... if they go up a lot (even 3%) and you dont have spare cash lying around you're stuffed... if you sell the place you might not be able to pay off the banks. This seems risky to me.

I spoke this through with my Dad in the UK who has 5 fully paid off IP's and who remembers interest rates at 17%. He thinks that the recent housing crash in the UK was partly due to property investors who geared too highly, took out 100% I/O loans on 1 bedders that only an investor would buy, and who consequently couldnt sell them when they devalued. Crash. He was horrified when i suggested i was considering getting a 100% loan and losing money every week with it being CF-! Could be a long wait for the rents to inflate enough to pay off that loan... and all those loses up until then.

I'm starting to prefer the scenario where I put down a 20% deposit on an IP and the CF is positive. OK i lose the deposit money from my own mortgage offset ("opportunity costs") but it is still invested in the housing market where I want it and means we're not stressing, week-on-week.

I am comfortable with the accepted definition of a CF+ property being one that pays for itself with a 100% LVR... but am wondering if this is an idealised scenario... something you'd do with someone elses money.

Thoughts?

 

[Samwise]

There is no rule that says it has to be a "no money down" deal.

Not everyone has the luxury of cash to kick them off, so they have to go for cfn and plod along until it's cfp and hope for some cap gain.

This is a very good point... I have the luxury of cash it seems, so....?

 

[Gools]

This could quite well turn into a massive thread but here's my take on it.

I often get asked "should I rent out my PPoR or sell it?" People get hung up on the amount they have left on their mortgage and look at how positive the cash flow would be from it. My answer is always "if you could buy it at todays price and rent it out would you?"

That is the only true way to work out what to do. If you wouldn't buy it at todays price because it is too expensive for the rental return then you should sell it and go and buy a better deal. The only thing requried to look out for then is entry/exit fees.

Opportunity cost has to be looked at. The opportunity cost in my example above is all that equity sitting there getting wasted. There are 105% LVR CF+ properties about at the moment. If CF+ is what people are after then it is crazy having a $700k property rented out at $550/week and thinking that is an excellent return. It may be good in future in terms of capital gains but it is no where near as good a return as 3x $230k properties each returning $300 per week is it.

Gools

 

[BayView]

This is a very good point... I have the luxury of cash it seems, so....?

Well, you are ahead of most investors when they start off.

I started (investing) with virtually no cash, but lots of equity and bugger-all personal debt - 100% borrowing, which scared the hell out of me and prompted us to look for very good cashflows and to minimise debt. Our overall LVR's at the start were still well below danger level when everything was thrown in together, but still.

It has worked well thankfully.

Now, I would recommend everyone to do this - irrespective of you financial position and how clever you think you might be.

Back to you though; the choice is virtually endless, and the conumdrum of opportunity cost will be there - what to whack the cash into??

Whatever you know the best; that's where it goes.

I've already given you what I would contemplate doing.

 

[Samwise]

If CF+ is what people are after then it is crazy having a $700k property rented out at $550/week and thinking that is an excellent return. It may be good in future in terms of capital gains but it is no where near as good a return as 3x $230k properties each returning $300 per week is it.

Gools

You make some good points Gools but I disagree with the above. $700K is the price that YOU would have to pay for my property... but I have it available to me (and me only) at the discounted rate of $550K. PLUS i no longer have purchasing costs to think about... that money disappeared down the dunny long ago

With depreciation it is CF+. If i were to buy the identical house next door, then i'd be agreeing with you. Not a go-er.

 

[Samwise]

100% borrowing, which scared the hell out of me and prompted us to look for very good cashflows and to minimise debt. Our overall LVR's at the start were still well below danger level when everything was thrown in together, but still.

Thanks BayView. I think this is the best strategy for minimising risk, so I agree. I think the following will be my mantra:

- Max LVR across all properties (including PPoR) of 80%
- CF+ or damn close if possible. Post 1985(7?) houses help
- Pay off capital, not I/O loans

Sam

 

[Gools]

I think you might have missed my point. You can sell your house tomorrow for $700k and use the profits (and borrowing power) else where. You can't look at it like you are getting it at a discount. Can you understand what I am getting at?

You can have:
Your $700k house with a mortgage of $460k returning $550/week
3x $230k houses with a mortgage of $460k returning $900/week.

I know which I would prefer. That's what you can't look at it like you are getting your existing house for a discount. Now you might be "scared" to go and buy cheaper houses or think they won't have as good capital gains but that's a different story, we're talking about CF here.

Gools

You make some good points Gools but I disagree with the above. $700K is the price that YOU would have to pay for my property... but I have it available to me (and me only) at the discounted rate of $550K. PLUS i no longer have purchasing costs to think about... that money disappeared down the dunny long ago

With depreciation it is CF+. If i were to buy the identical house next door, then i'd be agreeing with you. Not a go-er.

 

[Samwise]

OK yup I geddit... although there's a couple of 'real world' factors working here:

1. This is fine if you assume that all of our cash and equity is available for purchasing IP's. Most people like to own their own home though, and this leaves us without any cash or deposit and nowhere to live.

2. Aside from cash flow and capital growth we would really like to hang on to this particular little house if we can - at the moment its our home and if we move out we might want to move back in again... plus its in a great area and showed excellent capital growth for the area.

So realistically, converting our PPoR into an IP leaves a $460K mortgage @ $550pw (+ depreciation, $7K first year). Then we have $140K cash to put down as a deposit on another PPoR....

 

[Gools]

Sam,

I don't agree with your first point. If you decide to leave $100k of equity out of either of my two 'options' it still works out the same.

I totally agree with your second point. There is a considerable cost to it though but so long as you know the cost of that choice ($18k/year possibly from my example) then that's ok.

Gools

 

[Samwise]

Hmmm.... I must be more emotionally detached!

Cheers