Damn you Dazz
- Thread starter lizzie
- Start date
With the suggestion $200k as deposit, or cash deposit ?
Sheryn,
If you decide to invest in this sector of property, you limitations shall be set by two things ;
1. Your financial resources - what you bring to the table.
2. Your Lender's willingness to contribute - what they are prepared to bring to the table.
Obviously, starting off, most people don't have a lot, and they cannot prove a good track record to their Lenders....so naturally it's feeling your way to start with, usually something small and risky.
It starts out that way, but doesn't need to remain so if you have your act together and are willing to take some calculated, strategic risks and work your tail off to minimise those risks.
We started our venture into CIP with a 1.3m purchase, contributing about 25% as a deposit, in the form of a X-coll residential title deed.
The mortgage cost 104 K pa to service. We locked that in for 5 years.
The Tenants were locked into a 10 year Lease, and were paying $ 120 K pa in nett rent, plus another 15 K pa in outgoings (CR / WR / LT / Ins / Strata Fees).
So, our first one put (120K - 104K) = $ 307 per week into our pocket.
After 5 years, the rent had escalated to 140K pa....which increased the money going into our pocket to (140K - 104K) = $ 692 per week into our pocket.
This is the sort of stuff that provides an axe that allows you to chop the chains that tie you down in your job.
Small beginnings, but you need to start somewhere.
Most banks insist nowadays that you have at least 35% plus closing costs as a minimum. Some want to see as much "hurt money" stumped up by the investor as possible.
Cashflow is king too. Our last approval, the Lender wanted us to prove to them unequivocally that the property would produce at least 2.2x the amoutn of the mortgage. That is, if the mortgage cost was say $ 1,000 per week, the property needed to produce at least $ 2,200 per week after paying all other costs to own the property were paid for.
They set the bar ridiculously high nowadays....not many properties pass this criteria, hence why they have great delight in refusing most applications.
Hope that clears it up somewhat.
I'm about to do the same as you; dip my toe in the CIP pool. This would also count as my first investment (no shares, RIP etc). CIP seems to align more to my strategic goal.
I too, being in my particular position, find myself starting at the bottom. Certainly not like Dazz's initial purchase of over a mil.
I've got several things going for me; good income and a good size deposit ($100k). But, as it's my first purchase I'm aiming low. This initial one is all about the education. So even if it's CF neutral I will still come out on top.
I'm aiming for an initial CIP of under $400k with 7.5+% net yield and more than 60% remaining on their current lease. I've found a few within my limited range and have started going through their current leases (Note: I can see why Dazz put so much emphasis on leases being key).
Anyway, my point was that it seems you can get into CIP with less than $200k deposit. You've just got to measure the risk and give yourself a buffer beyond the deposit.
Good luck to all
One thing I found while looking is that CIP interest rates on borrowings is around 8+% for newbies - so 7.5% wouldn't be neutral. The banks would also only lend max 70%, but preferably 60% to a newbie.
Also found with the lower cost entries, with exisiting tenants, the landlord was paying the outgoings - so even more negatively geared.
Make sure you look at every angle.
Being a devil's advocate for one moment, putting CF aside, I'm interested to know what Dazz's cg has been over the last 12-18mths, presuming he can find a financed buyer.
The point being, yeah the rents might be +, but how about trying to grow a portfolio in the same vein as Dazz, from last year, based on equity?
The point being, yeah the rents might be +, but how about trying to grow a portfolio in the same vein as Dazz, from last year, based on equity?
Good points Lizzie! I've been reading quite a few leases lately with the terms "the lessor must pay all outgoings for the land or building of which the property is part when they fall due"
On a side note; 7.5% in my example was on the gross value (for return from leasing), whereas the rate from the bank (e.g 8.5%) would obviously be on the loan itself. Given the size of the deposit I'm paying, the difference between the yield and loan % is offset and still positive.
My bank has (kindly) offered me up to 75% LVR, as well as a good rate however I'll be keeping my LVR as low as possible to begin with. I'm more interested in the process etc at this stage
Working towards dipping a small toe in...
Agree I need to start somewhere, what would you consider is the better structure [company, trust etc] to buy a CIP in to try and protect other assets?
Kind Regards
Sheryn
Agree I need to start somewhere, what would you consider is the better structure [company, trust etc] to buy a CIP in to try and protect other assets?
Kind Regards
Sheryn
What do you mean Stefan ? The possibility of not much growth due to the type of asset - commercial property.
Or do you mean more generally that the at 12-18mths might have not been the best time for growth for alot assets ?
Hi GFM,
if I understand your finances correctly, you're basing your returns (or CF neutrality) on the loan amount only and not your deposit.
When investing in CIP, I would consider my returns based on the total amount or (cash-on cash) returns as some like to call it rather than only borrowings.
To give a true value on returns, you really should factor in all cost including the potential $$$ you would not get on your $100,000 if it was otherwise investing into say a bank acc.
Also, don't assume the bank will give you the full 75% LVR as this will depend on a number of factors in the deal. The type of property and of course the lease and it's tenant all contribute to this number..
I do applaud you for bucking the trend and going straight into the lions den so to speak as most will happily choose the well worn trail over the one less traveled.
Good luck
B.D
I absolutely agree and would add that this applies equally to Resi and for that matter absolutely any investments.
There is always an opportunity cost and you might as well us the prevailing interest rate to calculate it.
I have noticed that so many SS poster nominate that their property if CF neutral when in fact they are only taking into account the loan amount.
Cheers
