Flip

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From: Mike .


Novice question (Owen..? / Les..?)
From: Curious Onlooker
Date: 22 Oct 2000
Time: 21:53:50

Ok, let's say I put my deposit on the table, and voila, I have an IP (let's even say already tenanted)

What I don't understand as yet, and please forgive my ignorance of the basics, how do I/you then move into the next IP, when cash is tied up with the first buy/deposit?

Ahhh, I hear some people saying .. what you do is 'flip', or on-sell to another party ..

But how do you go about securing the original property at a less than market price, while locating the future owner, so as not to be left holding the property?

Wouldn't deposit bonds put you in the same position, of having cash effectively tied up, pending re-sale,

and,

I read about 'escape clauses' in contracts, and wrap contracts, but what if you wouldn't know one (original contract/variations) if you tripped over it?

Another question.....

With a 5Y IO loan, is the principal payable at the end of the term?

I've read "somewhere" that at the end of the initial 5Y period, another 5Y IO term can be applied to the loan -- is this the case, with the new interest rates applying?

Thanks for your time ...CO

 

[WebBoard]

Owen

Reply: 1
From: Mike .


Re: PS -- [Re: Novice question (Owen..? / Les..?)]
From: Owen
Date: 23 Oct 2000
Time: 11:24:20

OK, first question re buying second IP.

The basic principle is that as the value of your IP grows your equity grows. The difference between value and mortgage is where your next deposit comes from as long as you maintain you LVR (loan to value relationship) across all your properties. The banks like this to be 80%. So:

IP1 cost $200K with 20% deposit = $40K with $160K loan = 80% LVR.

Year 1 @ 10% growth. Value $220K. $160K loan = 72% LVR = 8% available equity = $16000.

Year 2 @ 10% growth. Value $242K. $160K loan = 66% LVR = 14% available equity = $33600.

Year 3 @ 10% growth. Value $266.2K. $160K loan = 60% LVR = 20% available equity = $52960.

This equity value can be used as a deposit on another IP without exceeding your overall LVR. The second IP will therefore not cost you anything out of your pocket as you are borrowing 100% while maintaining your 80% LVR overall.

This is why buying well (good bargaining and excellent due diligence) and adding value is so important. If your IP was selling for $200K and you bargained it for $180 and did paint, carpet and a new bathroom immediately for $10K, it could be revalued at $220 and you could already be at 65% LVR with loads of equity to use.

Second question about flips and contract changes. Can't help you and trying to learn myself. See my response in "More on property deposits" below for where I'm at on this.

3rd question re I/O loan periods. Yup, that's how most banks work although some are offering 10 years up front. It's up to you if want to extend.

 

[WebBoard]

Curious Onlooker

Reply: 1.1
From: Mike .


Thanks Owen, and,
From: Curious Onlooker
Date: 24 Oct 2000
Time: 00:49:53

Thanks for your time and patience, especially with what must be mundane questions ..

Ok, I undertand the equity bit .. what I don't undertand is how some people buy a number of IP's over a seeningly very short period of time, such as < 18 months, seemingly with liitle of their own cash up front (isn't that tied up in the first IP), seemingly mimized risks of getting "stuck"

Most banks have the 5 or 10 YR IO rate - is the choice completely mine after that, to either re-apply for another FT period (at a presumably different and higher rate, or revert to "normal" PI ?

Thanks again, Curious Onlooker