Help with my risk factor - Should I buy or not?

[devank]

Hello,
I am hoping to get some advice/opinion from people who are/have been in my shoes before and other experts in this field.

We have young kids (4 yrs, 2 yrs & 2 months old). My wife is on mat leave now but I know she will go back to work at least on a part- time basis. My salary and her part-time salary would be just enough to handle our near future out goings.

We have about 1.5 mil worth of 3 IPs (all houses) at 80% LVR. They are located in Parramatta region (Sydney West), Newcastle region (NSW north) and Beenleigh region (Logan – QLD). All current IPs are costing about 6K (after tax) together at the moment.

We have reached our first mile-stone which is one IP for one kid around 500K each. We started in 2006 and bought one IP every two years.
Now we need to work on our second mile-stone which is accumulating another 1.5 Mil worth of IPs. I’m planning to have my options open by age 55 (another 18 years). Hence I’m planning to reach the second mile stone in next 5 year period.

Currently my borrowing capacity is about 400K based on my salary alone. We have about 150K in off-set + 30K in shares. According to my budget we are about 3K negative per year with wife’s 2.5 days part-time income.
So my question is… should we take risk and buy another cf+ IP now? Or should I wait till my wife goes back to work and assess the situation at that point in time?

Regards,
devank

 

[Peter_Tersteeg]

A good risk management strategy would be to keep sufficient cash in the bank for up to 2 years to make up any shortfalls in the portfolio. Then add a bit extra for additional contingeies. This will probalby require you to do some sort of budget and personal cashflow projections.

Whilst your affordability is probably fine, this will mean your wife doesn't need to go back to work as you've got your bases covered and she can enjoy her maternity leave.

You might also want to consider reviewing your various personal insurances. At this piont everything is dependant on your income and your family will be in trouble if your income is no longer available. It would probalby be worth making sure you've got sufficient life insurance to pay down debts to the point where they're sustainable without your income. Also review your income protection to ensure that if you can't work you've still got income coming in.

That's the general advice. For specific advice, talk to a financial advisor as they tend to be risk management specialists.

 

[kathryn d]

Will you be adding baby #4 too?
(you really should )

 

[devank]

Thank you Peter. Good points about buffer and insurances.

We have a decent budget based on last year expenses. Our expenses are about 130K. IPs cost before tax about 8K. Our 150K in off-set should handle those expenses for a year.

We have upgraded our insurances recently. Death insurance with super is enough to pay off all mortgages. We have high level Health & Trauma insurance cover costing $3500.00 per year with HCF. I got the Income & Permanent Disability insurance with onePath costing about $1500.00 per year. Wife’s company provides Income & Permanent Disability insurance for herself. All IPs have good Building and Landlord insurances. Are these insurances reasonable enough?

Will you be adding baby #4 too? (you really should )

No chance! Even three was a bit far stretch for us! All my modelling told me that financially two was the best number. Our kids don’t have many cousins. So we thought it is better for them to have one more sibling.

 

[rowena]

when your wife goes back to pt work you will need to consider the cost of childcare, unless u have other child care arrangements in place. In the long run it may be more beneficial for her not to work at all, and possibly getting more FTB FTA benefits, but this depends on what type of wage she is getting too along with cost of child care and being able to get the kids into said child care. You will have 2 kids in child care which is going to be a fair whack of her salary, and if she does 2.5 days if they are full days then the primary school child would need before or after school hours care, unless she can push her work hours out over a few days, or you can finish early etc.


I would be budgeting off of one income only for time being because you dont know how she is going to feel come a years time when going back to work.

Also this is dependant on where you want to get the most of your tax deductions based on your and your wifes income. If she is not earning anything and the IPs are in both names, then buying property this financial year would be of no benefit to her, if she has had no or hardly any earnings because she is not paying any tax or hardly any tax... You want the tax benefit to gain maximum potential aka getting all that tax back, otherwise put the property soley in your name, and then when she is working again put the next property in her name to "even" things out... (Again this is dependant on what she earns and what u earn).


If you add in a CF+ property it may increase your tax and even out some of the negative gearing. This is where a good accountant should be able to advise what is best for your situation.

hope that made sense.

 

[Rolf Latham]

Intuition or gut feel may be useful here......................

ta
rolf

 

[devank]

Thank you Rowena. I can understand what you are saying about the child care costs. It is going to cost about 45K for pre-school, child-care and one-one grandma care. I have included that in our budget. My work is very flexible. So it is better for us if she works at least part-time.
So far we kept everything 50:50 to keep it simple. Also I believe it is less trouble if one dies. Moving forward I think we should think about your suggestion.

Intuition or gut feel may be useful here......................

Unfortunately you might be right

 

[jingo]

We have upgraded our insurances recently. Death insurance with super is enough to pay off all mortgages. We have high level Health & Trauma insurance cover costing $3500.00 per year with HCF. I got the Income & Permanent Disability insurance with onePath costing about $1500.00 per year. Wife’s company provides Income & Permanent Disability insurance for herself. All IPs have good Building and Landlord insurances. Are these insurances reasonable enough?

Hi Devank,

Would it be cheaper to buy Life Insurance, TDP and income protection insurance through your super fund?

In answer to your original question, I think Ralph is right. Gut feel is a great response! I wouldn't rule out buying another property if it is cash flow positive and set to provide capital growth over the long term.

I think keeping flexibility in your home arrangements is the key. You don't want to commit to buying again if it means your wife will have to return to work just to keep the investment going.

Congratulations on reaching your goal of buying a property for each of your children. Just curious - will you give this to each of your children, or use the equity from the investments to help them secure their financial positions later in life?? Regardless of what you do with the investments - its great to have the options, many people don't.

All the best with your decision.

Regards Jason.

 

[westminster]

I do like the gut response.

I had a surprising gut moment this week. I thought I had everything tied up in my current development but saw a golden opportunity. I didn't think I had any capacity but my gut kept niggling me until I spoke with my broker and she said 'go for it' and so I think I might be going with my gut

 

[devank]

Would it be cheaper to buy Life Insurance, TDP and income protection insurance through your super fund?

Did a bit of reading before getting them. Life insurance is with super. Everything else is outside for following reasons.
1. Tax savings
2. Didn't want to spend everything in super as we are already paying for life insurance.
3. You can get much better cover outside super
4. Apparently it is harder to get payments from super (if/when needed).

I wouldn't rule out buying another property if it is cash flow positive and set to provide capital growth over the long term.

I think keeping flexibility in your home arrangements is the key. You don't want to commit to buying again if it means your wife will have to return to work just to keep the investment going.

Yes.. that is one of the dilemma.

Just curious - will you give this to each of your children, or use the equity from the investments to help them secure their financial positions later in life??

What ever the future holds. Ultimately to help them secure their future. It may come in the form of private schooling in their high school or deposit for their investments or roof over their heads or financial security if we die early or windfall at the end. We may even end up selling all and buying 4 villas so everyone is forced to live together

 

[beachgurl]

I'd say it's all about the deal. We bought a place when I was on maternity leave cos we couldn't pass up the opportunity. Granted it was a tough few months financially until I went back to work but 2 years down the track we've done well on that property and it was worth it.

I've heard a few people talk about the sleep-at-night factor. While sleeping through the night probably isn't happening at your house anyway right now, you don't want to be spending your time lying in bed worrying when you should be catching up on the zzzs in between feeds/crying.

 

[westminster]

What ever the future holds. Ultimately to help them secure their future. It may come in the form of private schooling in their high school or deposit for their investments or roof over their heads or financial security if we die early or windfall at the end. We may even end up selling all and buying 4 villas so everyone is forced to live together

Love this idea
I'm going to go threaten my kids with it lol
I am building 4 villas at the moment so that would be one for each of our kids and one for us.

 

[devank]

I do like the gut response.

What that really tells me is that we are in a bit of border line. So there is no right or wrong way.

Granted it was a tough few months financially until I went back to work but 2 years down the track we've done well on that property and it was worth it.

I assume that was cf –ve. You still took the risk even though you weren’t working. Well-done for making the right decision under pressure. How can we move ahead if we can’t take few calculated risks ehh?

I am building 4 villas at the moment so that would be one for each of our kids and one for us.

Are you seriously thinking this way? Is this the place you want to retire as well as your children to have their families? Most likely they will all go to different states or countries or move around.

 

[matto_]

depends whether you want to continue at your current pace (prop every 2 years) or you are happy to stretch it out a bit more.

 

[westminster]

Are you seriously thinking this way? Is this the place you want to retire as well as your children to have their families? Most likely they will all go to different states or countries or move around.

Nope not serious but I can threaten them with it if they never leave home Plenty of years for that to happen though as they are only 4, 6 and 13.

 

[kathryn d]

In our case, if we wanted to get ahead, because we started late (in our 40s), we needed to be agressive in our purchases. Even though they were CF+, there were always unexpected expenses popping up. With only one employed income (which was a very very modest one) the finances could be strained at times.

We have reached the point where we have a difficult time obtaining conventional mortgages (in Canada).We still buy, but usually cheap places, using a credit card, or vendor financing.

While you are able to buy more, and it is still feasible for you, I suggest you take advantage of it.
Sooner or later you will hit the wall.

Good luck in whatever you decide.

 

[devank]

depends whether you want to continue at your current pace (prop every 2 years) or you are happy to stretch it out a bit more.

One IP every 2 years fits well with our plans. Would you take a bit of risk to stick to your plans?

Even though they were CF+, there were always unexpected expenses popping up.

Would you consider that as ‘adding risk’ or ‘spreading risk’? The impact of 1/3 property being vacant is higher than the impact of 1/4 property being vacant. However the impact is other way around if of all properties are vacant.

While you are able to buy more, and it is still feasible for you, I suggest you take advantage of it.

With one income, not all banks would give us loan now. They consider the full liability for our existing loan even though it is 50:50 ownership. Apparently only few banks take only 50% of loan into their calculations. So I can understand what you are saying.

 

[virgo]

Should i buy more?

Hiya Devank

Most people want to buy more IPs; and they are usually hampered not by their LVR but by their Servicibility...

Your 3K negative cash flow as a % of your total portfolio,i suspect will be a miniscule percentage...

If you aim to buy positive cash flow IPs, i don't see why not?

I used to think how am i going to pay for these IPs? My sanity factor is worst case, i will transfer my IPs to my kids (i have 3) and they can continue fiddling with them (and the loans)...The kids know and are "mentally" prepared....heck! i think that's an understated, they are READY and HUNGRY! They know its a whole family effort...

On a sidenote, i think buying 1 IP every year or every two years is a good strategy...be bold

 

[kathryn d]

Would you consider that as ‘adding risk’ or ‘spreading risk’? The impact of 1/3 property being vacant is higher than the impact of 1/4 property being vacant. However the impact is other way around if of all properties are vacant.

Even though our properties are CF+, ours are all P&I, so they do not always show money in our hand.

This past 12-18 months, the economy is getting worse in the towns we invest in.We have one particular town that has a welfare mentality, but instead of being assured of getting payment by the government, tenants prefer to not pay rent for as long as it takes to get evicted. In one apt building (11 unit) we currently have 4 vacancies. We did have some applications we declined because they had a history of non-payment and destroying their rentals. We would rather leave them empty.

Our other town, it is a continuation of chasing some tenants ( 6 currently) on a weekly basis (when they are supposed to pay monthly). Forget about doing credit checks or databases...it is not an option. Every tenant is judged "a risk".
We do not have landlord insurance that covers rental arrears (not available)

In the winter time, we also have to balance the reality of evicting a slow paying tenant, who is at least keeping heat in the property, so the pipes don't freeze or paying for this heat and the electricty to run the furnace and lights, and also trying to find a new tenant.This puts us in a negative balance.
Going after the current is fine, but getting the money is a time consuming process, with no guarantees.

Knowing what I know now, would I change anything?
Nope. We know markets change, and we need to be able to adapt.

We have just started advertsing "rooms for rent" in the 11 unit apt building.(3 bed apts)
Many landlords are offering a "free month" of rent to entice tenants.

I just noticed a large nice hotel in halifax is offering rooms which include breakfast, and weekly room service for $700 month until end of April (college finishes then). The room comes with a mini fridge and microwave.

The economy is going down again, and I think we will probably be lowering rents soon too.

 

[Peter_Tersteeg]

Would you consider that as ‘adding risk’ or ‘spreading risk’? The impact of 1/3 property being vacant is higher than the impact of 1/4 property being vacant. However the impact is other way around if of all properties are vacant.

I see where you're coming from with this statement, but if the properties are negative geared, the impact and of 1/4 could actually be more serious than 1/3.

With 4 properties negative geared, your outgoings are higher than if you have 3 negative geared properties. Hence if a property is vacant, with 4 properties you're making up a larger shortfall at the best of times, then a vacancy could be the thing that makes the whole structure unaffordable.

You are also more likely to have a vacancy at any given time with a larger portfolio.

The analysis would certainly be very different if you were neutral or positive cashflow, but the criteria under which lenders assess risk make the cashflow positive caculation to be come into effect when the rental yeild is about 12%.

From a lenders perspective, 4 properties are definitely a higher risk than 3.

With one income, not all banks would give us loan now. They consider the full liability for our existing loan even though it is 50:50 ownership. Apparently only few banks take only 50% of loan into their calculations. So I can understand what you are saying.

You're married. Regardless of your ownership structure, the banks will assess you as a couple and given your wife isn't working she'll be classified as a dependant. You'll be assessed on the full loan amounts and 100% of the rent will be taken into account. Negative gearing benefits will be assigned based on the ownership structure and the lenders policies.