Deposits for IP's

[Easymonet]

I generally use the rent received versus investment cost as my guide to what the bottom line is. For example if the IP is going to cost me $200 per week (mortgage interest + the various ongoing fees) and the rent is $200 per week we have a winner. Not being a very experienced investor though I have ended up with IP's that are slightly negatively geared (by about $20 per week for instance). My question is about the effect of deposit on the bottom line. I have bought my IP's with no deposit. Obviously if I had bought them with a 10% deposit my bottom line could be said to be better, since that would make them slightly positively geared rather than slightly negatively geared. I thought it would be better in the long run to borrow the full amount, put up with negative gearing for a while, and wait for the day when rent goes up a bit and I get to a positively geared situation.
What are your views on the use of deposits for IP'S?

 

[paulzag]

Deposits for me are a poor use of capital. But often are a necessary evil. I prefer to use capital for short term deals, e.g. buy 100% cash, renovate and refinance or sell.

I evaluate a deal based on 106% finance ( purchase costs and all expenses).

Anybody can turn a dog into a positive cashflow if they put enough deposit in it. That doesn't make it a good investment.

Regards

Paul Zag
Dreamspinner

 

[Rolf Latham]

Hi PZ

Good point PZ, different yardsticks.

Good example is a unit block rtning 10 % but you need generally 25 to 30 % deposit or equity (sometimes 20), whereas a house rtning say 7 % can be bought with a 90 to 95 % lend.

All that tied up capital must come into the equation somewhere.

ta
Rolf

 

[Kevmeister]

I would consider that having to put additional money into the deal removes that money from being used elsewhere. It therefore produces an opportunity cost.

If you have $100K and use that as a 20% deposit into a block of flats (cost $500K) returning 10% you're making $50K per annum from that.

If you have $100K and use that as a 10% deposit into houses, you'd have $1 million of property earning 7%, or $70K per annum.

If you could do it, you could use that $100K as a 5% deposit into houses, you'd have $2million of property earning 7%, or $140K per annum.

(As we talking nett returns here - I assumed so for simplicity).

As PZ says, pretty much any property can be made to be cashflow positive if you throw enough deposit at it (assuming it gets tenanted). Simplistic projections would fail to account for the fact that you could be earning something with your deposit, which in effect increases your break-even point.

If you pull $10K out of a bank account, you have now lost the interest that $10K would have been earning. If you use existing equity to get the 106%, it means you're now paying interest on the full 106%.

That's why PZ looks at everything as a 106% deal assuming the entire investment is financed to determine if it will be profitable.

 

[steveadl]

You'll have to excuse me as I don't follow the news so am completely oblivious as to what's happening up there - could someone answer me, why is the Govt. not assisting with temporary funds until insurance policies kick in? Why is there a need for public donations?