more info needed



From: Rasputin .

I have read often off people saying that the best way to make money in IP is to buy and never sell, and then as the value of the property appreciates, refinance and get a bigger loan and live of the difference.

How does this strategy go if interest rates suddenly skyrocket as they did in the 80's, can oyu earn enough this way so as to not work anymore. are there properties that will have this great capital growth and also have positive income before tax deductions (if i no longer working i wont have any income to offset the loss against) .
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Reply: 1
From: Rasputin .

In addition how do you keep the laon as I/O for so long, do banks let you do this ???
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Reply: 2
From: GoAnna !

Hi Rasputin

You are talking about the basic buy and hold strategy. This way does take time, patience and relies on both growth and increasing rents.

The risk of rising interest rates would vary according to period of time you accumulate your properties. The properties I purchased 10 years ago of course have much higher returns than the properties I am looking at buying this year. Hence less risk in relation to interest rates.

As a variation of this theme you could buy under value, make improvements to increase both rent and value, sell and reduce debts, buy in an emerging market to get extra growth etc etc.

The variations are only limited by your imagination. (and your comfort zone)

Personally I believe that one you start saying "never ever" or "always" you are probably missing opportunities. Look at each situation individually with an eye on your goal, and question all assumptions.

Think about never ever sell for example. If you had a property worth 200K which had doubled over the past 10 years and some-one offered you 1 mil for it today would you sell? Or would you say I never ever sell so no thankyou?

Also the risk of interest rates can be partly managed by fixing them. In terms of tax deductions they could still be offset against your rent income.

Hope that helped a little.

GoAnna !
(aka Anna before she got real)
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Reply: 2.1
From: Debra L


If you purchase a property for $150,000, that returns a growth rate of 10% per annum, then in 10 years it will be worth just over $389,000.

If you originally borrowed 105% of the purchasing costs on an interest only loan then in ten years you will still owe $157,500 so your actual equity in this property will be $231,500.

This would allow you to refinance to around 80% of the value (without wasting money on mortgage insurance) and draw out $150,000 (which is tax free) and use this money to live off. Extending the loan by this value would still leaves $81,500.00 equity in this property.

If you had purchased an average of one property per year during those 10 years, then it would be possible to refinance your other properties in alternate years to live off.

Once you refinance your properties and draw out money to live off...the interest on that additional amount borrowed will not be tax deductible.

I personally think that a more preferable course to take, is to keep buying properties, until the income stream from the rentals will produce enough income to live off.

Once you reach this point, as long as you hold the investments, the power of compounding will make sure that this level is sustained, and will increase for you at a faster rate than inflation.

The main factor that give weight to the power of property investing is the wonderful way that compounding assists in building your wealth.

A property purchased for $200,000 at 10% growth will be worth $518,748 in 10 years, $1,343,500 in 20 years and $3,489,880 in 30.

If you take into account that the median price of property over the past 40 years has maintained a steady buffer of around 4% above inflation then the increase in value of $3,289,880 in 30 years would be equivalent in effective spending power as an increase of $448,679 or around $15,000 per annum.

Hence once you build up a portfolio of 10 properties, you could be receiving a capital gain of an average of $150K per year (assuming you hold them for 30 years) and this is on top of the rental returns, which should be well and truly positive by year 10.

My aim is to own all my properties outright by the time I retire.

In my opinion it is fine to pay out interest to the banks while building up my investment portfolio (as gearing allows me to build it up at an accelerated rate), but once I have achieved the result I am after, why would I want to throw money away.

Even though it is tax deductible, every dollar paid to the bank (and discounted by the tax department at 30-48 cents in the dollar) is still being wasted at 42-70 cents per dollar, depending which tax bracket you are in.

Build your portfolio as quickly as possible, then work on eliminating the debt.

Work on steadily purchasing properties, which are preferably as close to positively geared as possible.

Do plenty of diligent research to enable you to locate properties that have the best potential for capital growth and go from there.

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Reply: 2.1.1
From: Rasputin .

Thqanks for that info, I was definatly leaning toward sthat type of stratgey so good to hear of others doing it
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