Interest only loans?

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From: John Eagleton


I am 24 yrs of age and have recently become heavily interested in real estate investment. Although I haven't bought a property as yet I am researching and reading anything I can get my hands on at the moment regarding real estate. There was an article I read recently where the author who was 34 years of age wrote that he had acquired 7 properties in 5 years via negative gearing using interest only loans and he said that he was no longer working but still owned all of the properties. The question I have is if he hasn't sold any of the properties, where is his income coming from for him to retire so early? I realise the properties aren't costing him anything or very little but I don't understand how he can retire by having these properties just sitting there. I realise many seasoned veterans of the real estate game visit this forum and I hope you don't think that this is a silly question but if someone out there has the time to explain this concept to me in detail I would much appreciate it.

John Eagleton
 
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Reply: 1
From: J Parker


John,
It's possible that if his 7 properties are all positively geared (that means that the money he is using to pay them off and maintain them is less than the income he is receiving from them) then he would be in a position not to work. By using IO loans, he is also decreasing the cost of his repayments, as they turn out to be less than P and I loans, in most circumstances. However, even with a mediocre standard of living, you'd have to be making pretty substantial cashflow to live off 7 properties.
Then again, it also depends on when he bought them. Has he had them for a no. of years? Has the rent increased by a lot since he purchased them? What type of properties are they? All these questions (among others) would make a huge difference! All I know is that one day, I too want to be living purely off the cashflow from both my properties and shares. Got a bit of time to go yet, though!
Hope my input has helped you out a bit Joel. I only wish that, like you, I had started investing at age 24. ( I'm a little bit past that now) Better late than never!
Cheers, Jacque :)
 
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From: W W


He could be living off the capital gains by drawing part of it down.

Woz
 
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Reply: 1.1.1
From: Les .



G'day John,

You wrote "author who was 34 years of age wrote that he had acquired 7 properties in 5 years via negative gearing using interest only loans"

Probably a lot depends on just WHERE this author has bought. Certainly, in Sydney and Melbourne, values have screamed upward since 1996. Today the median price for Sydney is around $320k - back then it was (possibly) half of that. So, he/she could have bought the first two properties for (say) $160k each. Rent would likely have been $180 per week. Today those same properties would be fetching $280 per week, but his costs are the same.

So, he/she would be $100/house/week ahead. OK, they started with negative geared property - by now, they are almost certainly positive. But even if the later purchases aren't, another reply mentioned that they could be living off the capital gain. Let's look at that.

Bought for $160k, today worth $320k - i.e. gain of $160k over 5 years. Or, $32k per year per property - or, approx. $600 per week gain per property. So, with 7 properties, they are gaining at the rate of 7 x $600 per week - $4200 per week. Could you live on that?

Of course, some of the later properties are probably still negative geared - but, could you live on half of that? $2100 per week - doesn't sound too bad to me ....

Consider too, though, that Sydney has possibly peaked (some say) so similar growth is not guaranteed for the future. But doubling in value in 7 years is common for Sydney because of demand (10% per annum).

Keep in mind, too, that Interest are historically low at this time. This has undoubtably helped this author. But, the future?....????? Will they be able to hold on if/when Interest rates start to climb?

Still, I would love to be where this author is today, that's for sure (and I will be... but I'm not there yet).

Regards,


Les


- "Eschew Obfuscation" - ;^)
 
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