far too risky, he has no disposable income. what happens if market drops or there are maintenance issues or whatever?
First time Investor, Melbourne
- Thread starter Jedi
- Start date
far too risky, he has no disposable income. what happens if market drops or there are maintenance issues or whatever?
2 things.
Firstly if you do end up buying a property with cash make sure you dont spend all the 500k, keep some for maintenance and any other unforseen expense.
Secondly, what you have listed above is exactly why i suggested you consider buying a commercial property and keep enough cash as a buffer to be able to pay a couple of years interest.
It appears your issue is not having enough income, to me spending 500k to chanse 4 or 5% yields when what you need is income/cashflow doesnt make sense. for someone who is chasing capital growth and has more discretionary income sure but for you it doesnt make sense to me.
Deltaberry, you sure do paint a very pretty picture but I am concerned that the risks associated would be a bit too great.
Sanj, 500k isn't actually all of it, I have allowed (about 50k) to be kept as a buffer.
And I really don't need income from this capital. I don't care what the split between rental yields and capital growth, I just want the combined to be as big as possible.
Sanj, 500k isn't actually all of it, I have allowed (about 50k) to be kept as a buffer.
And I really don't need income from this capital. I don't care what the split between rental yields and capital growth, I just want the combined to be as big as possible.
That's right. There is risk. Market might fall a gazillion percent per year. Or it might rise 20% also. Maybe the yield is actually 2%. Or it could be 8%. Who knows?
For some people the best thing to do is just to hide their cash in the tile behind the toilet in their bathroom. I always tell people that.
It's not even strategy. Its just numbers and common sense. If the numbers work out they work out. If they do not then too bad.
One hole in Delta's assumptions is that 5.5% gross yield is near impossible for any decent growth property in Melbourne.
Net yield can be improved by deposit size and LVR though; although the OP stated that his depreciation and tax benefits are minimal so I'd say 5.5% will be quite the stretch
Net yield can be improved by deposit size and LVR though; although the OP stated that his depreciation and tax benefits are minimal so I'd say 5.5% will be quite the stretch
If you're wanting to increase your captial as much as possible, your best strategy is going to involve borrowing money to do it.
Let's assume a property goes up 10% every year (and make lots of other assumptions to keep things really simple).
You can buy a property for $500k. Next year it'll be worth $550k and you've increased your net worth by 10%.
You can borrow 90% and purchase 10 properties worth $500k. Total value $5M. If the values increase by 10% you've now increased your net worth by 100% in the same timeframe.
Obviously a very basic example, filled with flaws and probably quite risky, but it does demonstrate the power of using other peoples money.
Perhaps a more moderate strategy would be rather than leverage 90%, figure out how much you can borrow given that you can put far more than a 10% deposit down. Chances are that if you borrow about 60% of a properties value, the rental income will cover your holding costs such as loan interest and maintenance, etc. It won't cost you anything to own the property given the rental income, and it will allow you to gain control over more growth assets.
Under these circumstances you'd probalby be able to purchase up to $1M in properties and still have a little cash in the bank for other things.
Let's assume a property goes up 10% every year (and make lots of other assumptions to keep things really simple).
You can buy a property for $500k. Next year it'll be worth $550k and you've increased your net worth by 10%.
You can borrow 90% and purchase 10 properties worth $500k. Total value $5M. If the values increase by 10% you've now increased your net worth by 100% in the same timeframe.
Obviously a very basic example, filled with flaws and probably quite risky, but it does demonstrate the power of using other peoples money.
Perhaps a more moderate strategy would be rather than leverage 90%, figure out how much you can borrow given that you can put far more than a 10% deposit down. Chances are that if you borrow about 60% of a properties value, the rental income will cover your holding costs such as loan interest and maintenance, etc. It won't cost you anything to own the property given the rental income, and it will allow you to gain control over more growth assets.
Under these circumstances you'd probalby be able to purchase up to $1M in properties and still have a little cash in the bank for other things.
that is a bit silly mate. he has NO disposable income. ZERO.
4 negatively geared/cashflow properties would be financial suicide.
of course there are always risks but there needs to be some contingencies too and spending the lot and relying on capital growth with no spare income to fund much is far too dangerous imo.
A hole? Perhaps just a function of skill and knowledge.
Maybe he should get some disposable income then.
And my examples consisted of 4 positively geared properites. But of course there's always the risk the house could blow up or Russia will drop an atomic bomb on his land, so it'll be untenanted and negatively geared.
a) Agree re getting more disposable income but until then your idea is a bad one for someone with none.
b) 5.5% yield is not positive cashflow and will require him dipping into his pocket. what about vacancies, insurance, property management costs, any maintenance?
c) im not sure why you feel the need to be a smarta rse, bringing in russia or gazillion % per year. do you think it helps the poster with his question at all? you're one of the brightest and most successful on this forum, is there any need for the rest that comes with it?
b) 5.5% yield is not positive cashflow and will require him dipping into his pocket. what about vacancies, insurance, property management costs, any maintenance?
c) im not sure why you feel the need to be a smarta rse, bringing in russia or gazillion % per year. do you think it helps the poster with his question at all? you're one of the brightest and most successful on this forum, is there any need for the rest that comes with it?
b) I counted most of that, bar vacancies and maintenance. Lots of assumptions but in general it doesn't amount to much, depending on where/what you buy etc.
b) Just emphasising that it is not as high risk as you make it to sound. Depending on his age, risk appetite, future earning potential etc, it's perfectly feasible. Eg if he is 25 and has his life ahead of him, it's a risk worth taking. If he is 65, maybe not.
b) Just emphasising that it is not as high risk as you make it to sound. Depending on his age, risk appetite, future earning potential etc, it's perfectly feasible. Eg if he is 25 and has his life ahead of him, it's a risk worth taking. If he is 65, maybe not.
Hi Jedi,
You need to have a proper think about what you're actually trying to achieve before you start thinking about a particular property.
Given you have no disposable income, do you think it's a good idea to utilise your capital to obtain some cashflow? If so how should you go about this? Commercial properties? Shares? High yielding IP's? Low yielding high growth IP's that you sell to release equity later?
For what it's worth, if i had 500k i'd gift it to a discretionary trust and purchase a commercial property around 800k.
I'd put in 370k of capital for purchase price + costs and get the trust to obtain finance of about 520k to maintain an LVR of around 65%.
Assuming a net yield of 8% and interest costs of 7% it would give you around 23k per annum of income and could obtain some capital growth.
You could then use the additional 130k as a deposit on a residential IP, purchase shares outright for more income, or anything else that suits you.
You need to have a proper think about what you're actually trying to achieve before you start thinking about a particular property.
Given you have no disposable income, do you think it's a good idea to utilise your capital to obtain some cashflow? If so how should you go about this? Commercial properties? Shares? High yielding IP's? Low yielding high growth IP's that you sell to release equity later?
For what it's worth, if i had 500k i'd gift it to a discretionary trust and purchase a commercial property around 800k.
I'd put in 370k of capital for purchase price + costs and get the trust to obtain finance of about 520k to maintain an LVR of around 65%.
Assuming a net yield of 8% and interest costs of 7% it would give you around 23k per annum of income and could obtain some capital growth.
You could then use the additional 130k as a deposit on a residential IP, purchase shares outright for more income, or anything else that suits you.
