Getting Started

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From: Mike .


Owen....(over here !!!)
From: Russell
Date: 09 Oct 2000
Time: 22:49:43

G'day Owen,(and others!)

thanks for finding me. I've just found this site & forum and from reading many of the comments, I like your work!

I'm 30 years old, married with my first baby due any day now. My wife has stopped working while we have the baby and that leaves us with my wage of $ 35,000 p.a.

We are paying off our home and have built up $40,000 in equity and desperately want to get started on our retirement plan and get that 1st IP under our belt.

I have found a property development company that sells off the plan with a 10% deposit and the balance on completion (based on independent valuation, final inspection and our satisfaction). They build units, low level apartments and houses if requested. This is attractive to us because of the payment terms and the fact the the company can provide all of the necessary services or can work with our own independent people.

Can you give us some advice in relation to (1)suitable LVR's for taking the first step and (2)methods of securing a positive or at least break even cash flow for that 1st IP.

Thanks, appreciate your time and look forward to hearing from you !

Russell.
 
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Owen

Reply: 1
From: Mike .


Found you...
From: Owen
Date: 10 Oct 2000
Time: 09:06:11

Hi Russell,

Welcome to the forum. It certainly wasn't hard to find you with a title like that!!! Congrats on the soon-to-be arrival. Let us know when it happens.

As for your other questions. It sounds like you are doing OK with your own home (paying it off is a top priority) but I'm sure things are going to change dramatically with your new arrival as well as getting used to living off one wage. If you want to send some more details through of your house value, loan type and amount, %age rate etc the forum may be able to help a bit more with the numbers you may need.

Also let us know what company you are talking about. It sounds like they are offering the finance and everything else you don't know you need? What are some estimated costs for the properties they are selling and known rents in the area?

Keep in mind that all developers only require a 10% deposit to secure a property so that's nothing special. A lot of lenders will only loan 80-85% of the value of a property so you may still have to find the balance to pay out on settlement. An independent valuation is always advisable but this will have no impact on the purchase price set in the contract so has nothing to do with the developer. You should know if the price you are paying is correct or not in your own mind. A valuation is just for your own benefit if you can find a lender willing to loan on valuation, not purchase price. Ensure the contract spells out what the developer deems as "complete" and that you agree to that. With "off the plan" purchases there are usually many disclaimers to protect the developer and ensure that you complete the transaction when called to do so. Get a good property lawyer to check it out and explain it to you.

The simple explanation of how "off the plan" IP's are suppose to work is you find your property, bargain a discounted price (hard to do), put down a deposit bond instead of cash for your 10% (about $1500 instead of say $25K), wait a year for completion, revalue at settlement and borrow 80% of new value. Hopefully if inflation has done it's job and you got a good price in the first place then the 80% of the new valuation is 100% of your original purchase price and therefore your IP is effectively "no money down". If your rent then covers your costs then it's positively geared.

I doubt your developer is marketing the properties in this way. I am guessing they are negatively geared and only going to cost you "a few dollars per week" according to their numbers. Remember negative gearing works best if you are in the highest tax bracket which you are not. To positively gear an IP in the true sense means rent covers all costs (interest, maintenance, rates, water etc) BEFORE tax deductions. In other words if you have no job the income is still coming in. This can be easier to do on older properties where you can more easily bargain the price and then add value yourself by renovating. This may be a simple as repainting and polishing the floorboards but your your rental returns can increase significantly by doing this.

The bottom line is continue your IP education (this forum is a great start), invest in some reading (Jan Somers, Robert Kiyosaki, Noel Whittaker and a million others), perform due diligence on a suburb you are interested in, visit open homes, find out real "sale prices" vs "advertised prices", compare apples (2br aprt) with apples (2br aprt), find out "true rents" vs "advertised rents", find out real rates, strata levies and water bills, talk to some lenders and find out real costs and what the can and can't do for you (convince them you know what you talking about), get some software or a big calculator and run a lot of numbers to see what works and what doesn't, keep it all in a folder and build up a resource of averages so you can identify and assess a deal quickly (and above all confidently) so when you are ready to move, you can.

Man, I can really crap on sometimes. I hope this helps more than it confuses. Kind of got away from me there. Send through some details if you can I'll run some numbers for you to show you how I look at that side of things anyway.

Type ya later, Owen
 
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Russell

Reply: 1.1
From: Mike .


Re: Thanks for making contact !
From: Russell
Date: 10 Oct 2000
Time: 12:21:56

Owen, thanks heaps for responding!

Just when I thought I was starting to understand the basics!I really haven't got a clue.

I have been doing a lot of reading, and will continue to do so (Jan Somers, Robert Kiyosaki, and about a dozen others). I have been looking for relevant internet sites and discuss the topic with friends and workmates.

I'm from Melbourne and there was an investment, business and franchise expo at the Exhibition Centre on the weekend. I found a developer called IPI Property Group (Integrated Property Investments level 1/1 Redwood Drive, Notting Hill).

As for my numbers...

Our mortgage is with the Bank of Melbourne. We borrowed $ 120,000 in 1997 to build our new home in Kilsyth. In 2000 we owed $ 103,000. We had the home valued at $165,000 so we consolidated some personal loans (doodads which we purchased before we understood what an asset was). We now owe $125,000 at 8.07% interest. Plus we have one car loan at 9.25% which still owe $ 9,100 on. ($ 200 per month repayment)

We have both our wages (well mine only now!) paid directly into the mortgage, from which we can redraw, and we use the credit card to pay for everything. We have managed, for the past 6 months now, to make this system work for us by redrawing wages to payout the credit card bill at the end of the month before we incurred any interest charges. (Our minimum mortgage payment is $1054 p.m) We stack up approximately $1000 - 1200 each month on the credit card which includes all our living expenses...food, petrol, bills, rates, insurance.. everything but the loan repayments.

My wife, Kerry, intends to return to work in 6 - 12 months on a part time basis. Until then we will be relying on one wage and trying to control our expenses as best we can. In the mean time I'll endeavour to learn as much as possible.

Thanks for the offer re: throwing some figures around. It will be nice to get some informed advice in regards to where we really stand at the moment in terms of our financial position. What we really need is to know where we are so we can figure out were we need to be in order to get started !

O.K, now I'm crapping on !

Thanks for making contact owen and I look forward to hearing from you.

Russell, Kerry and Junior(gender unknown).
 
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Owen

Reply: 1.1.1
From: Mike .


Re: Thanks for making contact !
From: Owen
Date: 10 Oct 2000
Time: 15:44:10

Hi Russell,

If you have been reading all those books then I'm sure you have a very firm grasp of the basics. You are certainly ahead of the majority anyway. Maybe it's time to take your education to the streets (leave your money at home first though).

You seem to be taking the right steps when it comes to your home. LOC loans (when managed properly) can save you a lot of money and pay off your mortgage faster. Keep a close eye on it though as with only one wage and increased costs coming up you seem to be cutting it pretty close to the bone. You must put in more than you take out or you'll dig yourself a big debt hole. Get rid of that car loan too.

Your current outgoings add up to about $2450pm and at $35,000pa you are earning $2920pm leaving just $470pm but this is BEFORE tax is taken out. Is this correct? I don't have a PAYG calculator handy but I can't see how you can do it. Did you quote your nett income?

You do have around $40K equity in your home which is a great start but equity won't pay your loan, only secure it. Banks will usually go to 80% LVR (across all properties) and you are already at 75% LVR on your home. This leaves you 5% ($8200) available to use. Add this to the 80% you can borrow against the new IP and you'll have to fund 15% of the purchase yourself (deposit) plus stamp duty and costs. These number don't quite work as the $8200 may be only 2% of the IP depending on price but you get the idea.

The other part of the equation is your DSR (Debt Servicing Ratio). The bank calculate this at around 40% of your income. They will also take 80% of an IP's expected rent into consideration but also usually up the interest rate by a couple of % to build in a whole lot of safety buffers. I assume your home mortgage was calculated including Kerry's wage whereas if you tried now with only one wage you may find it harder to get the money needed. At $35K nett your DSR is 36% already. At $35K gross it's much higher.

Of course if you can find a true positive cashflow IP and none of this is an issue. If it really pays for itself then all you have to do is save enough to pay the extra tax at the end of the year. Your income has nothing to do with it.

Now nothing I have said about the banks is carved in stone (far from it). Every lender does things differently and they will (should) all bargain. I've only dealt with a couple of them but my personal situation is very different to yours although I did have a DSR problem. Do the due diligence mentioned before and research the banks. Then when you are ready to move you can. Keep paying off the loans and beware of borrowing up to the limit in case of interest rises (or more babies in the future).

Keep the ideas alive though though. My partner and I bought our first IP 3 yrs ago when our combined earnings were less than my personal income is now. We had both dropped out of our careers and were working casual jobs but wanted to invest in IP's. We did it (not very cleverly mind you) and we learnt some valuable lessons in lifestyle. We then read Rich Dad, Poor Dad and RK seemed to mirror what we had been doing. We are now living off my partners smaller wage (quite happily or though we do need a new lounge suite) and investing my salary 100% in more IP's. If you can invest safely now on one wage, when Kerry goes back to work you will look at the extra money very differently.

Owen

PS. Looked at IPI on the net and YOU can do everything they are doing without paying for the privilege. Maybe learn what you can from them but be very sure of what you are doing before buying off them.
 
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Ian (NSW)

Reply: 1.1.1.1
From: Mike .


Re: Thanks for making contact !
From: Ian (NSW)
Date: 10 Oct 2000
Time: 19:35:04

Hello Russell & All

"Well done" Owen on the responses.

Congratulations Russell on..."my first baby due any day now"....the wonders of modern medicine!!

I would tend to be looking at off-loading the car loan too Russell, as this would assist your "numbers" to present better also.

Yes things will become very tight when the bub comes along....it is very difficult to restrict the outgoings....not to mention the extra pressure (living with a new born baby) on you and your wife.

I too have been learning after initial IP mistakes and struggles, well I see them as points of learning, so I feel better equipped to take the initiative myself now.

Ditto Owen's comments on LOCs and future planning. I'm sure if you take a step back to... absorb what Owen has presented, to look at your finances, to read more of the valuable information in this forum, then research/target potential/achievable IPs....that you will do far better than to hop straight into bed with a third party property group.

All the best Russell, stay in touch!

Disclaimer: I have 3 x IPs, 2 x Kids (under 3yrs), 1 x vasectomy, 1 x Wife....for now!!

Cheers Ian
 
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Russell

Reply: 1.1.1.1.1
From: Mike .


Owen.
From: Russell
Date: 11 Oct 2000
Time: 16:55:45

Thanks for your efforts and comments.

Obviously, I need to send the Mrs back to work ASAP !

In the meantime I'll concentrate on getting rid of the car loan and saving as much as we can to attack the home loan.

I'll keep on with my education into IP techniques and try to learn as much as I can.

Thanks for going to the effort of crunching my numbers. I downloaded a sample of PIAadv from Jan's site. Do you thinks it's worth spending the money to play around with the full version at this stage?

Hopefully we'll be in a better position in 12 months time to do something.For now I wonder what your thoughts are on this method -

If you were to buy a weatherboard house on a big block....tidy up the weather board (floorboards, paint job, garden work)rent it out, and chop the land in half and sell the 2nd half of the land....would you use the cash from the land sale to pay off the principal of the investment loan (creating a better cash flow) or would you use that cash as a deposit for a IP2. (oh yeah, I imagine you would pay cgt(%?) on the sale of the land?)

Would this be a realistic method of starting an investment portfolio?

Thanks again, look forward to my next lesson! Russell.
 
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Owen

Reply: 1.1.1.1.1.1
From: Mike .


Re: Subdividing question
From: Owen
Date: 12 Oct 2000
Time: 13:37:10

Hi Russell,

No problem with the help and ideas. Just remember they are just that, MY ideas and MY comments. Make sure to check anything out with people in the know or just add them to your own thinking and come up with a strategy that is right for you.

As for sending Kerry back to work. Try the RK idea of thinking "how you I afford it?" rather than "I can't afford it". Step outside the norm of earning more money through jobs and let your mind create a solution for you. You might surprise yourself and get that IP sooner than you think.

As for your other idea about a weatherboard house on a big block (sounds like you have one in mind) and what would you do with the cash after subdividing. I think it would depend on your situation at the time and your reasons for buying it. If you are after cashflow then paying off the house is one way of getting it but as I've seen elsewhere "pay off $100 principle and what is your gain...$100". If the IP was bought well in the first place then it shouldn't be costing anything (much) anyway so you would probably invest the land sale money in more IP's, especially if it is your only IP. One IP does not make a portfolio. Another idea is developing the land yourself and then renting the new house. That needs more capital upfront though. I don't know but I guess that building a house on land you already own and selling it complete would probably give you more profit than selling the land alone.

Anyone else with development experience like to comment on this.

Owen

PS. PIAadv is good. Bought and use it myself for all my due diligence work and IP tracking.
 
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