multiple property finance

I have a question and would like to know if anyone else is using this technique to acquire multiple properties . Bascially buying property 100 percent the rental income is used to pay down the loan as usual , but the short fall is made up in further borrowings , similar to those who are familiar with the way a share margin loan would work . Seperate loans for each propery bought with all short falls made up with borrowing the repayment , enventually the propery would become cash flow postive via rental income . Using this way to finance property now allows more property to be purchased with out the need to dip into your own pocket . Also is anyone using the new loan product where only a partial amount of the interest is paid and the balance accumulated on the outstanding balance?
 
Hi financiall free,

Lets assume a $350k property (including all costs) that yields $280 pw rent (after pm fees) and this rises 3.5% pa.

year starting loan interest 7.5% rent new loan size
year 1 $350,000 $26,250 $14,560 $361,690

year 2 $361,690 $27,126 $15,069 $373,747

year 3 $373,747 $28,031 $15,596 $386,182

year 4 $386,182 $28,963 $16,141 $399,004

At the end of year 4, if you sold the property for say $440,000 after ~7% growth per annum you have the following...

sale price $440,000 minus REA of ~$12,000 minus starting price $335,000 = cap gain of $93,000. CGT = ~$18,000.

You receive $440,000-$12,000-$18,000-$399,004= $10,996:eek:
Not much reward for 4 years worth of holding. What is left out is the rates/insurance costs, plus the tax returns you would gain.

You would obviously be using other equity to fund such a scenario and the real question would be if you could use that equity better in another way??

How did most of the clients of the property spruikers who sold this concept (in regard to inner city apartments) a few years ago end up???

bye
 
Hi financiall free,

I agree with Bill that it can be a dangerous road to go down but not completely.

In his example he does not account for tax deductions, depreciation or rental increases.

Have a read of Michael Yardneys book.
http://www.propertyupdate.com.au/pages/Shop
He goes into this strategy fairly in depth. You will want to ensure that you have enough equity built up and that the market is growing before you adopt this strategy.

Pablo.
 
Hi Pablo,

You are right, but that is why I included...

What is left out is the rates/insurance costs, plus the tax returns you would gain.

I deliberately left out those things as we have no indication of how much tax saving etc that financiall free would have.

The scenario would also look completely different if the time frame was different, the yield of the property was different, the cap growth was different, or if it was the fifth property compared to the first, or interest rates or, or, or!

What I tried to highlight was how just one property by itself given average conditions of yield, cap growth, interest rates etc, does not seem to be ovely profitable by capitalising all interest.

A couple of years ago, I went through the numbers of doing this on the property we owned in Mulgrave. I included tax returns as being payed into the loan. What I found was that the size of the loan in 2004? was about the same size as the value of the property!!! This was mostly due to how much of a loss was generated each year that had to be added back into the loan due to high interest rates.

bye
 
Thanks for that guys , I can see your point about return being small but it is a return . I have crunched the numbers and as far as I can see it is feasible . Plus the money that would normally be used to service the debt is free for day to day living . I have used this strategy to buy shares with great success as long as the buffer of equity is there or cash to protect from any downturns there should be in theory no end to how many propertys you could own doing this , I have spoken to a couple of finance people and there are lending products that allow me to do this. My financial advisor on the other hand is against the risk , So I am researching as much as I can on the pros and cons .
 
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