Finance

[WebBoard]

From: Mike .


What to do with equity
From: Sim'
Date: 10 Feb 2001
Time: 11:20:36

We are in the delightful situation now where we have a large amount of equity in our house (~$170000), a high disposable income, no debt and a nice bit of rental income coming in.

We are assessing our investment options from here and attempting to develop an ongoing investment strategy.

Given that we have such a large amount of equity available to us, I was wondering how best to make use of it.

The key is that we want to avoid negative gearing if at all possible.

My question to everyone is... what use is equity ?

What can I use it for (in relation to property investment) ?

The only thing I can think of is, if I can find a property (or properties !) that has a high enough yield... I can theoretically borrow 100%+ (using the existing equity) and still not be negatively geared.

Are there any other creative suggestions out there ?

Sim'

 

[WebBoard]

Mike

Reply: 1
From: Mike .


Re: What to do with equity
From: Mike
Date: 11 Feb 2001
Time: 01:14:02

Hi Sim'

As a newbie, I generally avoid answering these sort of questions but I've got to get my feet wet sometime, so here goes:

As I understand it (thanks to the forum posts) you can either mortgage your home to the bank and use the equity for the 20% deposit required to avoid LMI on a 100%+ I/O IP loan in which case you are probably going to end up negatively geared but still able to leverage >$500,000.

Or, sell home and buy again, realizing a profit of $170,000. Use this to buy IP's at <100%, thereby positve gearing. Drawback of this method is amount leveraged will be considerably smaller than negatively geared option. How'd I do?

Regards, Mike

 

[WebBoard]

Sim

Reply: 1.1
From: Mike .


Re: What to do with equity
From: Sim'
Date: 11 Feb 2001
Time: 10:48:20

Hi Mike,

I think your post was technically accurate enough... don't be afraid to post ! People here are generally pretty good with gentle corrections when people make technical mistakes !! It helps us all learn ;-)

Yes, I am certainly looking at borrowing against my existing property to finance 100%+ of a new IP but I do want to be careful about -ve gearing, so I'm not rushing into that strategy. Rather than cross-collateralisation, I would have an equity loan on my existing property which would allow me to borrow 20% of the funds for a new IP and save me the mortgage insurance.

As for selling... that's definitely not an option, and not for any financial reasons ;-)

The property we bought was bought to live in... we spent 18 months searching until we found the "perfect" place, and then went all out to get it ! Fortunately after 18 months we knew what the value was and I think we got a bargain, but we were still prepared to pay in excess of 20K more that we did !!! There was a lot of emotion attached to the purchase, which we make no apologies for ;-)

Unfortunately, we only got to live in it for 9 months before I got offered an interstate job that I really wanted... so we moved out and got tenants in. Hence I became a property investor by default ! Since then, our tenants have helped us pay off our mortgage (we never actually think of it as an IP... we will be moving back into it in the next couple of years).

So as you can see... selling is unfortunately not an option. Recent valuation has seen a compound capital growth of over 8 percent per annum over the last three years... not brilliant, but not bad for Adelaide !!

Sim'

 

[WebBoard]

DuncanM

Reply: 1.1.1
From: Mike .


Re: What to do with equity
From: DuncanM
Date: 11 Feb 2001
Time: 08:22:22

"High Disposable Income".. does it follow that you are also paying large amounts of Tax? Is it PAYE income? I wouldnt throw the baby out with the bathwater in seeking not to negative gear.. It's possible to negative gear with out actually losing money thru non-cash deductions.

Regards, DuncanM

 

[WebBoard]

Sim

Reply: 1.1.1.1
From: Mike .


Re: What to do with equity
From: Sim'
Date: 11 Feb 2001
Time: 10:25:18

"Negatively geared but still Cash-flow positive"

From what I've read in this forum and in books, I guess that the strategy for achieving this rather delicate balance is to purchase new or almost new properties which allow the maximum possible depreciation to be claimed, therefore potentially achieving an overall cash-flow positive situation whilst still being negatively geared.

Does anyone have any specific suggestions as to exactly what type of property (in their experience) would achieve this goal ?

Have people successfully managed to purchase this mythical cash-flow positive, negatively geared property ?

Jan Somers briefly mentions this phenomenon in both her "Building Wealth through Investment Property" and "Building Wealth in Changing Times" books, but does not go into details about how to achieve this scenario.

Fred and Brett Johnson virtually preach this strategy in their book "The Wealth Power of Property"... targeting new unit and townhouse developments.

Does anyone with real experience care to share their knowledge about achieving this balance ?

Have people done it ? Have you done it with houses or is there more to deduct in a unit/townhouse ?

Sim'

 

[WebBoard]

Les

Reply: 1.1.1.1.1
From: Mike .


Re: What to do with equity
From: Les
Date: 11 Feb 2001
Time: 12:31:58

G'day Sim,

From the sound of things you might own an IP in Sydney (or Melbourne?) - the "mythical" -ve geared, +ve cashflow IP is really not that unusual (at least not for me ;^) - but all 3 of mine are Brisbane).

Start with a property where rent is at least 1.5 times price in $k - e.g. $200k IP, rent $300 and you'd be getting close.

Where can you get these? If Sydney, you might need to start with one of the "3D" opportunities (death, divorce, or desperate) and buy under Market Value. Typically, new properties wouldn't give you many opportunities for a 20% discount on the price - developers would maybe discount somewhat, but they are usually less likely to provide "real deals" than someone in the 2nd hand market.

How about a property in a good area, where the property has become "tired" and the current owner just wants to quit it. Find a "must sell this weekend" vendor (bank is about to foreclose, and they want to keep their good credit rating). Or find a "mortgagee in possession" property and cut a deal.

Capital Allowance is claimable for properties built after 1985 (Jun?) - but even on an older property, any Capital cost you spend (renovations) is a valid Tax deduction too.

With Interest Rates going down again, these become even more possible. This should put more of the "mythical" IP's out there.

Or check out some Regional areas (Peter Spann quoted a property he bought in Geraldton, WA while waiting for a plane - cost $25k, rent $150 per week - he wrote a cheque for it) - it is common to find people not wanting to BUY (low Capital Growth) but WANTING TO RENT - supply to demand ratio gets heavily weighted in favour of the landlord !!!

Depends on what YOU want - good luck,

Regards, Les

 

[WebBoard]

Anna

Reply: 1.1.1.1.1.1
From: Mike .


Re: What to do with equity
From: Anna
Date: 11 Feb 2001
Time: 16:38:35

Hi Sim

Have done the "mythical" negative geared and +ve cash flow thing. It was with a vehicle that was bagged by this forum previously.

I achived this in Melbourne with a serviced apartment. It has a commercial lease which guarenteed a 7% return increasing at 4% of 7% each year. Because it is fully furnished I have been able to depreciate all the furniture and the building depreciation is higher than usual at 4% because it is tourism not residential. On a month by month basis it has been positive cash flow, no outgoings payable and approx 4k back in tax at the end of the year.

The negative is it is harder to find financing as banks seem to put all serviced apartments in the same basket. There are essentially 2 types of serviced apartments and I would never go for those that require you to carry any of the commercial risk.

The other type of property I have seen in this catagory are new houses/townhouses etc in large regional centres where rents are higher and there is still some growth.

 

[WebBoard]

Gee Cee

Reply: 1.1.1.1.1.1.1
From: Mike .


Re: What to do with equity
From: Gee Cee
Date: 11 Feb 2001
Time: 19:48:46

Just 2 questions:

What do you do with a motel/holiday unit/apartment when the whole block is tired & the management people move on?

Who can you sell to at a capital gain? Will all of the purchasers be holding units that require total refurbishment and a new motel/ management mob to run it all?

Never been there done that but I like to Time Line it all & see yrs ahead.

Gee Cee

 

[WebBoard]

Anna

Reply: 1.1.1.1.1.1.1.1
From: Mike .


Re: What to do with equity
From: Anna to Gee Cee
Date: 13 Feb 2001
Time: 14:23:09

Hi Gee Cee

"What do you do with a motel/holiday unit/apartment when the whole block is tired & the management people move on?"

Bought apartments that look like apartments and would function well as individual dwellings. Are near shops, transport, 4km from Melb CBD and with beautiful views. 2 bedrooms and 2 bathrooms. Plan to rent out as residential when returns to me eventually.

Have not been many sales but those few have been showing decent growth. The only responsibility of the owners is capital expenditure and that includes repaint of outside of building etc. We are contributing to a sinking fund each year in preparation for this work as it is in everyone's interest. Part of contract includes management returning units recarpetd and repainted at end of lease.

Hope that answers your questions.

Happy to answer any more you may have.

 

[WebBoard]

Gee Cee

Reply: 1.1.1.1.1.1.1.1.1
From: Mike .


Re: What to do with equity
From: Gee Cee to Anna No Problems
Date: 13 Feb 2001
Time: 22:35:36

Hi Anna

Sounds like you have it sorted out.

Friend of mine bought a serviced appartment that had similar qualities.

After three years the management company went bust.

Returns possible were no where near that predicted.

Occupancy rates were only around 20%.

Negative gearing to the HILT.!!!!!!!!!!

The new property management group suggested a re-fit to increase the occupancy rates.

OK each owner just come up with $30k.

Sounded like a bucket to just put your spare money into.

At the end of the day I said to my mate.

Who will want to buy this unit anyway especially if it is part of a motel or holiday leasing group?

Anna you obviously have a lot better deal.

Gee Cee