LVR's and establishing viability

From: Tom Moschitz


What LVR to folks use when establishing whether a prospective IP is cashflow positive? Using an LVR of 110% as part of an aggressive strategy has a very different outcome to one of 80% as part of a more conservative strategy.
A recent discussion agreed that the most important figure when accessing a deal was pre-tax cash flow. If one is to leave the rat race obviously this figure needs to be in the black. At what stage it becomes black depends on the individual strategy. Using an accelerated no money down strategy means initial costs are much higher. The flip side of this is more equity in the future to pay down mortgages.

Any thoughts?

Cheers,
Tom
 
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Reply: 1
From: Paul Zagoridis


We've dealt with this in the archives, but there is no consensus.

Paying down debt to retire is a valid strategy and extremely personal. You need $x per month.

Now to discuss "cashflow positive" in marketing or bragging terms. Some count it by putting a hefty deposit down. Doesn't work for me as any deal can qualify so that makes a "cashflow positive" nothing special.

Therefore for me a cashflow positive deal is one that is positive at 106% because even if I have the cash I lend it to the purchasing entity.

Paul Zag
Dreamspinner
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Reply: 1.1
From: Andrew G


Hi there,

How many people have been able to buy these positive cash flow properties at 106% as you mention? I'm pretty new to all this, but I've yet to see such a deal at present? Perhaps I am looking in the wrong places, but the lower the cost of the property, the more likely it will get towards the above figure, however generally you don't get capital growth from such properties ....

Andrew.
 
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Reply: 1.1.1
From: Gail H


Andrew,
Yes, that's my feeling - cashflow positive will come at the expense of capital growth.I've heard of cashflow positive deals in areas that might show growth, but I've never seen them.

In addition, the profit is normally a couple of grand a year, so think how many you would have to have! My main goal is for cashflow neutral properties (or slightly negative) with a few higher yielding properties in the mix.

My sister recently bought a newish duplex in Rockhampton. It cost $147,000 and rent is $265 (rent should be a bit higher). She has significant depreciation benefits with it. Rents are going up in Rocky, so its value should increase. Its part of her superannuation strategy. I aim to get a couple like this myself eventually to complement the higher growth part of my portfolio. Maybe only cashflow positive while interest rates are low, but certainly a respectable yield.

I don't know if any of this is "right" in any objective sense. I'm not really advocating my strategy to others. Its just what seems best to me.

Cheers
Gail
 
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Reply: 1.1.2
From: Manny B


Hi Andrew,

I must admit, you won't find any cash flow positive properties in Melb if you think you can just buy it & simply rent it out (won't be handed to you in a platter)... What you need to do is look beyond the peeling paint & ugly colours (ie. an ugly duckling) of a property & visualize what it would be like with a simple coat of paint (which you can do yourself), some nice plants/mulch in the gardens, get rid of the mould in the bathroom (which may involve painting the wall times if the tile colours are ugly), etc... so basically with a little elbow grease, a property you would normally buy negatively geared in this market, can become positively geared with 1-2weeks worth of elbow grease... so the point is to go for properties everyone else overlooks that is structurely sound & give it a quick in-expensive face lift & reap the benefits...

Good luck,

Manny.
 
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Reply: 1.1.3
From: Michael G


Andrew,

Gross rental returns are the key figure to determining how much LVR will make a property positive.

It IS the rent that pays the bills and interest, so its naturally the figure to use to determine how much expense a property can support.

Have havent got a spreadsheet on me, but it should be too hard to create some "what if" device.

Just think...

Inner city - gross rental 3%
Regial Rural - gross rental 12%

(two different ends of the spectrum)

If you work out %'s for costs (interest, rates, repairs, etc), you should get a figure which is a percentage of the purchase price, at the moment I read on this forum someone saying its about 8% (with a 5% interest rate), so ....

8% gross rental would be break even

But dont forget to factor tax in and deprecetiation, as they change the it all aswell.

Michael G
 
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