My situation & some lending & general questions

[Vesuprop]

Hi! Please scroll to the bottom to the questions if the background section is too long!

My story so far

I am 25. I grew up in Ballarat, Victoria and was taught from a young age to be frugal (my parents aren’t “property investors” per se) and that is one of the valuable lessons that they passed on. They have held properties, but sold them within the first few years. I remember at some point in high school setting myself the goal of “never having to rent and pay off someone else’s mortgage.” So I was careful with money and saved what I could.

I bought my first and only property in December 2008 - A one-bedroom unit in Black Hill, Ballarat. It was renovated, and clearly well presented to sell quickly. I didn’t know anything about investing in property at that stage and my intention was to live there so having to do nothing and move in straight away was a bonus. I was caught under a spell so to speak (emotions ruling over logic) and offered $130k, which was the asking price. The agent said there was another interested party (uninitiated I fell for the trap) and ended up in a presumably fake bidding way and paid $136,500 after threatening to walk away. I haven’t verified out of pride, but my “knowledge” tells me I paid $10k too much. A small price to pay for a valuable lesson?

I only lived there for six months, as I fell in love with a Brisbane girl and we happily live together up here. She owns her own 3 BR villa in a townhouse complex, and it is entirely in her own name. She pays the mortgage etc (but we split all the bills 50/50). I currently work as an accountant in public practice, with my CPA qualification and earn $55k plus super per year. She has no spare income for investing as she works on a casual basis at the moment. I plan to keep my investing separate for the foreseeable future.
My place in Ballarat most likely hasn’t achieved any growth. I have monitored the market for a while. This is no doubt due to the “premium” paid on buying. I would say it has probably worth $135,000, but I haven’t got a valuation yet. The tenant signed a 2 year lease last year, and the rent is $145pw, with an increase to $150pw in July 2011.

I currently have a loan with the CBA. A no frills loan, so no offset or redraw or any extras like that. There is just under $54k owing. I also have $8k sitting in an interest account in the bank, plus an everyday account with $1.5k for bills etc.

I am saving $500-600 a week on average after paying the mortgage ($160 a week) and live well below my means, so to speak. I’m a bit of a stickler for tight budgeting. My property is neutral cash flow with the loan at its current balance.

About six months ago something clicked in my head and I decided that property investing would be a good idea, for better or worse.

My long term goals

I would ideally like to retire in 15 years time. I would be able to live very comfortably on a passive income of $50k per year, but I am aiming for $80k as I would like to spend my time travelling the world and enjoying my part-time photography hobby.

I believe that in today’s terms $2 million of net assets should be sufficient to cover this goal.


Research so far

In the last six months I have read books by the following authors:

Lomas, Yardney, Somers, Fitzgerald, Gray and a few other minor authors whose names escape me now. I read API every month, and have lurked around internet forums such as Somersoft and Property Investing.com for the last few months, reading as much as I can, and even gravedigging many of the old “classic” threads.

To start with I was most impressed with Yardney’s methodology of buying well and within 10km of the CBD. It made logical sense that these places would always have the best infrastructure and always be in demand in the long term. So I went in search. Unfortunately my budget, stretched to 90% LVR would allow me to spend no more than $400k to my estimates. I decided to look for 2BR units, and picked Coorparoo.

I inspected 15-20 2 bedroom units, and after speaking to agents, and using my own nous I decided that 2 bathrooms was a must. I decided that I would buy one as soon as one came up that looked suitable. There was a bit of a lull in the amount of inspections in this range in the December / January period. The “thinking time” that this lull provided had me second guessing. I’d already done the sums, but the estimated $250 per week negative cash flow started to look like a monster. I asked myself if I could do better with the same fundamentals.

I then started paying close attention to some of the posters on forums such as this one. Cognitive dissonance, analysis paralysis, call it want you want. I started to feel uncomfortable with the cash flow, but approached it logically. How would I buy more property if my cash flow was destroyed by this much every time? What if it didn’t grow for five years? I cannot see any fallback position to rely on. I was starting to see that property might be better off if it had multiple “benefits” that could be done at different stages. Renovation. Subdivision. Development.

Recently I started attending the Brisbane Property Networking Group. I have since discovered that in some of the Northern suburbs in the 15km ring, it is possible to buy older properties on decent land size (sub-dividable in the future), renovate them, and make a quick equity and rental gain. If I did this I would hold for the long term. It would be most likely a lot closer to neutral cash flow. Possibly better.

Then I did some more reading and got even more off-track. I started worrying about LVR. I started worrying about Brisbane and looked at Sydney and Perth. Then perhaps I should use 80% and avoid LMI. Then I’d be saving for another 12 months. What if I miss out on the “perceived” buyer’s market? So I am in an awful tangle and mentally drained! I am finding it hard to step back. I want to achieve very lofty goals by society’s standards...and it feels as if I have no time to lose. Especially not to save money for another twelve months!! Given the current market sentiment, this makes more sense, to actively manufacture equity, rather than praying for it over the long-term and having big negative cash flows eat you alive. I have no hands on skills though. I would have to employ a project manager. Now I am worried and fearful of this eating a massive chunk into my margin. But it would be done better than I could achieve with no experience. Less stressful too.
I also went and saw a mortgage broker initially and she said that when just buying (I hadn’t had the renovation idea yet) that I would have 3 loans; one for my Ballarat property, a second for the buying costs + deposit of the new property, and a third for the balance of the new property. This seems like a bit of a mess. I would like to avoid cross-collateralisation too.

I am mindful of two things:

1. I know nothing!
2. If I keep trying to seek knowledge because I know nothing I may never do anything.

Questions

Therefore I am trying to set a timeframe and some achievable short term goals for myself. Hopefully it helps ease the stress and confusion! I basically want to know how much equity I need and how to structure it all. But I require some assistance in some specifics:

If I purchased a property for $320k + costs $13k est. ($10k stamp duty, $1k legals, $1k loan fees, $1k title search fees etc.) how would I structure my loans? If I renovated I would like to spend $25k-ish. Where does this money come from? Do I put in $5k and borrow $20k for the renovation, or is it like buying costs and I have to come up with the whole $25k as it does not form part of the valuation. To explain myself, as I understand it the buying costs reduce your equity by 100%, whilst for every dollar of property you purchase, you only contribute 20% at 80% LVR.

• How much equity do I need for a scenario with 80% LVR? 85% LVR? 90% LVR? Assuming $320k purchase, 13k buying costs & 25k reno. Total of $360k rounded.

• What are the advantages and disadvantages of each LVR ratio? I realise that it is a personal preference, but your experiences would be much appreciated. I’ve already gained some understanding from a separate thread on the issue. But the differing opinions are hard to sort out at times!

• How can I research the buy / renovate / hold strategy further? Does anyone know of any authors that advocate this and explain it in detail? It seems really hard to find any practical examples any where.

• I am still at the “viability” stage of my research for this. It is hard to come up with the sums to know how well it will work when you have no experience. Some guidance to put me on the right track would be great. I am aware that for every $1 I spend on a renovation, the goal is to return $2 or $3 back in extra value at least.

• When I am ready to purchase should I be getting a separate valuation myself ( a more thorough one)? Can this be used for the bank?

• Also, as an addendum. I went into the CBA and asked for a mortgage offset. They said that I had to refinance my entire loan and pay the exit and establishment fees (for the new loan) to have this type of account as my current loan is “no frills.” I plan to refinance this loan as part of the new property finance with another institution, so I am adamant to do it now. Is there anything wrong with this? I have just been feeding my savings into an interest account the past few months. It’s not ideal, but at least I have access to the money.

I guess my greatest fear is that I am going to take the plunge when I am not ready. How will I know?

Sorry for the long-winded “essay” – hopefully it all makes sense.

Cheers

 

[tgarthe]

Off topic, but with a CPA qualification, I would be looking for a new job if I was only getting $55k a year.

That aside, saving $500/wk on that wage is a great effort and you've taken the right step by educating yourself.

 

[Rolf Latham]

• Also, as an addendum. I went into the CBA and asked for a mortgage offset. They said that I had to refinance my entire loan and pay the exit and establishment fees (for the new loan) to have this type of account as my current loan is “no frills.” I plan to refinance this loan as part of the new property finance with another institution, so I am adamant to do it now. Is there anything wrong with this? I have just been feeding my savings into an interest account the past few months. It’s not ideal, but at least I have access to the money.

Hi

welcome

I think u will find some comfort here.

CBa will do a product switch to an SVR with MISA ( offset) without break costs unless u are on a fixed product

ta
rolf

 

[Vesuprop]

Thanks for the reply Tgarthe - I sent you a PM.

Rolf - I went into the CBA yesterday. I am switched over to a SVR + MISA now. Very quickly set up and no fees.

I assume that they did not have the zero fee offer when I went in last October. Thanks for the heads up.

Just a quick query - is my original post too full of information? I can cut it down if that would encourage some more discussion. I can also re-word it if anything I have written is hard to follow.

 

[alexlee]

My long term goals

I would ideally like to retire in 15 years time. I would be able to live very comfortably on a passive income of $50k per year, but I am aiming for $80k as I would like to spend my time travelling the world and enjoying my part-time photography hobby.

I believe that in today’s terms $2 million of net assets should be sufficient to cover this goal.

It is a bit too much info, but I'll give you a few ideas about this.

Do you plan to have kids? That'll change your plans significantly.

Re the net $2m assets thing, I doubt that's enough. For one thing, it's very different to have just 2m cash to invest and having 2m net from property. 2m net on 4m of resi property is likely to be cashflow neutral. Even if you get to 2m cash, if you eat 4% (and is that before or after tax?) of it, you're likely to get killed by inflation.

My advice is to aim higher.

 

[Vesuprop]

Hey alexlee, thanks a lot for your kind thoughts.

We don't plan on having kids at this stage. My partner isn't interested, and I am apathetic to the idea. This may of course change and I am trying to plan for contingenices like this. "Worst" case scenario for everything like this; separation, death, job loss.

What sort of difference to the net cashflow do you think it would make it the portfolio was half-resi, half-commercial by the time I retired? I know there is definitely a few financially independent people that post on here, so I would be interested to see what sort of asset base & mixture (include shares too, if anyone uses them to supplement cash flow) that successful retirees have had in real life examples. That'd be a great help in allowing me to come up with some sort of rough model that I can adapt to my own investment strategy and needs.

 

[alexlee]

We don't plan on having kids at this stage. My partner isn't interested, and I am apathetic to the idea. This may of course change and I am trying to plan for contingenices like this. "Worst" case scenario for everything like this; separation, death, job loss.

You're 25. Things are likely to change. Don't assume what you want now will be what you want in even 5 years.

What sort of difference to the net cashflow do you think it would make it the portfolio was half-resi, half-commercial by the time I retired?

You tell me. Plug the thing into a spreadsheet. Put in different yields and you tell me what the cashflow looks like.

Personally, I think it's a bit too early to you to model your end game, because you don't know what assumptions are realistic. Learn the basics first. Use your strengths. As a CPA, you have some basic tax knowledge a lot of people don't have the time to learn. Develop that. Learn about how negative gearing works. Why is depreciation good even though you have to deduct it off your cost base when you sell? How to use franking credits effectively, and under what circumstances? How does debt recycling work? Under what circumstances is the ATO likely to disallow it? What are the tax implications of using an offset against a mortgage vs a redraw / LOC? What legal structures are good for what sort of assets, and what are the limitations?

 

[Vesuprop]

Hi, thanks again for your comments. I will have a play with the yields tomorrow. Some answers to your other questions (they are most likely rhetoric, but I would like to demonstrate that I am not trying to be spoon-fed and I have done my own research).

1. Learn about how negative gearing works.

This strategy involves buying an asset that (initially) has higher holding costs than it does income generation. This reduces your taxable income, and is most effective at the highest tax bracket. In some cases at asset can make be positive cash flow in real terms, but create a negative gearing situation for tax purposes due to things such as depreciation and capital works deductions. The idea behind this strategy is that in the long run, the growth performance of the asset will outstrip any negative outlays. The capital gain of course is never taxable if the asset is never sold. Often people buy poor investments because they care more about ‘saving tax’ than they do creating wealth, which gives negative gearing somewhat of a stigma.


2. Why is depreciation good even though you have to deduct it off your cost base when you sell?

Depreciation helps cash flow (by saving you tax because it is deductible. The time value of money / theory of opportunity cost build a solid argument against worrying about a reduced cost base. You receive the tax benefit now rather than later. Besides, who knows what tax bracket you will be in when you eventually sell the asset to worry about cost base exclusively (if you ever sell it)?


3. How to use franking credits effectively, and under what circumstances?

I am unsure what you mean by this. However, franking credits and discretionary trusts can get tricky if the trust is making a tax loss. In fact, as far as I am aware, you lose the entitlement to those credits if there is no income to distribute. Also, franking credits mean that at the 30% tax bracket or lower you are effectively paying no tax on the income, as it has already been paid by the company.

4. How does debt recycling work?

Using the equity in a non-deductible (bad) debt for investment purposes. The investment loan is interest-free, and the income and tax benefits (if negatively geared) are used to reduce the bad debt at a faster rate.

5. Under what circumstances is the ATO likely to disallow it?

I take it that you refer to Division IV(A) where the investment is made for the dominant purpose of avoiding tax. Also see things like buying your PPOR in a Family Trust in order to create a negative gearing situation.

6. What are the tax implications of using an offset against a mortgage vs a redraw / LOC?

I would say that the mortgage offset account is safer in terms of the ATO. For instance, if you withdraw from a MOA it does not add to the debt and therefore will not cause debt contamination in the eyes of the ATO. However, for those that are disciplined an LOC adds more flexibility in the fact that you can use it to capitalise excess expenditure in relation to the investment (interest, rates, repairs, renovations) providing that you have the capacity.



7. What legal structures are good for what sort of assets, and what are the limitations?

A Family Trust structure with a corporate trustee seems to be the ideal structure for asset protection. It is also ideal tax-wise as you effectively will not pay more than 30% tax. The real issue lies when the Trust has loss-making investments sitting inside it and no income to offset these against. You lose all of the negative gearing benefits (see Q1). Some people use a hybrid unit trust set up to get around this (ie borrowing to buy units in their own name).

There are also land tax threshold implications to look out for too.

In my personal situation – I am very unsure of when to start making use of the Trust Structure due to the fact that my investments would most likely be negatively geared to begin with.

Please comment on my answers if you believe they could be better! Which I am sure they could, as I was as brief as possible. Hopefully I am on the right track.

 

[alexlee]

Good knowledge, Vesuprop, though remember theory is useless without application. None of the following is advice, just discussion:

1. Learn about how negative gearing works.

This strategy involves buying an asset that (initially) has higher holding costs than it does income generation. This reduces your taxable income, and is most effective at the highest tax bracket. In some cases at asset can make be positive cash flow in real terms, but create a negative gearing situation for tax purposes due to things such as depreciation and capital works deductions. The idea behind this strategy is that in the long run, the growth performance of the asset will outstrip any negative outlays.

Good. You understand the difference between a tax gain/loss and cashflow.

2. Why is depreciation good even though you have to deduct it off your cost base when you sell?

Depreciation helps cash flow (by saving you tax because it is deductible. The time value of money / theory of opportunity cost build a solid argument against worrying about a reduced cost base. You receive the tax benefit now rather than later. Besides, who knows what tax bracket you will be in when you eventually sell the asset to worry about cost base exclusively (if you ever sell it)?

Even more importantly, you get the 50% CG discount when you sell. Deduct at the marginal rate, pay tax on it in the future at half the marginal rate (you control the timing). Also, depreciation is not a cash expense, though you do 'pay' for it in the purchase price.

3. How to use franking credits effectively, and under what circumstances?

I am unsure what you mean by this. However, franking credits and discretionary trusts can get tricky if the trust is making a tax loss. In fact, as far as I am aware, you lose the entitlement to those credits if there is no income to distribute.

Correct. Which is why keeping negatively geared properties in your own name while putting shares into a DT would be one strategy, especially if you have a non-working partner and/or children.

Also, franking credits mean that at the 30% tax bracket or lower you are effectively paying no tax on the income, as it has already been paid by the company.

You probably already know this but you didn't mention it, but excess franking credits are REFUNDED as cash to the taxpayer.

4. How does debt recycling work?

Using the equity in a non-deductible (bad) debt for investment purposes. The investment loan is interest-free, and the income and tax benefits (if negatively geared) are used to reduce the bad debt at a faster rate.

5. Under what circumstances is the ATO likely to disallow it?

I take it that you refer to Division IV(A) where the investment is made for the dominant purpose of avoiding tax. Also see things like buying your PPOR in a Family Trust in order to create a negative gearing situation.

No, because then you're just taking out a new loan to buy investments, so your loans are increasing. The investment loan obviously isn't interest free. The idea is to 'change' non-deductible debt into deductible debt without changing the total loan amount.

6. What are the tax implications of using an offset against a mortgage vs a redraw / LOC?

I would say that the mortgage offset account is safer in terms of the ATO. For instance, if you withdraw from a MOA it does not add to the debt and therefore will not cause debt contamination in the eyes of the ATO. However, for those that are disciplined an LOC adds more flexibility in the fact that you can use it to capitalise excess expenditure in relation to the investment (interest, rates, repairs, renovations) providing that you have the capacity.

Wrong track, though I wasn't clear enough. I'm talking about the fact that money taken out of the offset doesn't change in nature from when it was put in. However, paying off part of an IP loan and then redrawing is a NEW borrowing and therefore takes on the nature of what you use that money on. Very important concept when you're looking at switching from PPOR to IP, or you're looking to use PPOR equity for investment purposes, or you buy an IP first, have savings against it, and want to use those savings for a PPOR.

There have been many people on the forum who bought an IP first, saved into the mortgage, and found that when they want to buy a PPOR, they can only redraw from the IP loan as a non-deductible loan.

7. What legal structures are good for what sort of assets, and what are the limitations?

A Family Trust structure with a corporate trustee seems to be the ideal structure for asset protection. It is also ideal tax-wise as you effectively will not pay more than 30% tax. The real issue lies when the Trust has loss-making investments sitting inside it and no income to offset these against. You lose all of the negative gearing benefits (see Q1). Some people use a hybrid unit trust set up to get around this (ie borrowing to buy units in their own name).

Correct, but remember the losses are carried forward (unindexed) in the trust to offset against future gains. Whereas franking credits, if unable to be distributed to beneficiaries because the trust is in a loss position, really are lost.

Hybrid trusts are still an evolving structure, but it's important to know it's there and what the issues are.

There are also land tax threshold implications to look out for too.

Correct. Some states allow tax free thresholds in trusts, some not.
What would be a strategy to minimise land tax?

In my personal situation – I am very unsure of when to start making use of the Trust Structure due to the fact that my investments would most likely be negatively geared to begin with.

Again from an application point of view: can you envision a situation where property in your personal name might be negatively geared, but you have an investment vehicle with a taxable gain? Under what circumstances would this be tax effective?

Please comment on my answers if you believe they could be better! Which I am sure they could, as I was as brief as possible. Hopefully I am on the right track.

Actually your theory is pretty solid. Think more about the application. For every bit of theory, think of a couple of circumstances where the application would result in different tax positions. That's how you can see when it will be advantageous, especially when you start combining strategies.

 

[Vesuprop]

Even more importantly, you get the 50% CG discount when you sell. Deduct at the marginal rate, pay tax on it in the future at half the marginal rate (you control the timing). Also, depreciation is not a cash expense, though you do 'pay' for it in the purchase price.

Apologies, I forgot to mention this important aspect. Obviously this will differ with an asset held in a company (0% discount) or a superannuation fund (33.33%).

You probably already know this but you didn't mention it, but excess franking credits are REFUNDED as cash to the taxpayer.

Yes, I did. Even in the case of little or no taxable income for individuals. A popular strategy for retiring business people who had a company structure was to pay dividends out of their private company once they had retired and had no other income to their name. Over a number of years it was a refund of all of the tax that their company had paid over the years in some cases. This was especially handy for those who qualified for SATO.

No, because then you're just taking out a new loan to buy investments, so your loans are increasing. The investment loan obviously isn't interest free. The idea is to 'change' non-deductible debt into deductible debt without changing the total loan amount.

Wrong track, though I wasn't clear enough. I'm talking about the fact that money taken out of the offset doesn't change in nature from when it was put in. However, paying off part of an IP loan and then redrawing is a NEW borrowing and therefore takes on the nature of what you use that money on. Very important concept when you're looking at switching from PPOR to IP, or you're looking to use PPOR equity for investment purposes, or you buy an IP first, have savings against it, and want to use those savings for a PPOR.

There have been many people on the forum who bought an IP first, saved into the mortgage, and found that when they want to buy a PPOR, they can only redraw from the IP loan as a non-deductible loan.

That is one disadvantage of renting and investing before you buy your PPOR. There are obviously many advantages of that strategy though... and it's a case by case basis as to if it will work well.

Re debt recycling; by the ATO trap did you mean the fact that the borrower should keep a separate loan for the PPOR and new investment if any money has been taken out of a redraw? Otherwise the ATO may take the view that the debt is mixed, and therefore any money being put back in (eg dividends, rent) will be proportioned against paying off the PPOR and investment debt.

I will have a further think about how 'debt recycling' works in practical situations. My girlfriend has a lot of equity in her home, but she has no cashflow to take on any more debt.

Correct, but remember the losses are carried forward (unindexed) in the trust to offset against future gains. Whereas franking credits, if unable to be distributed to beneficiaries because the trust is in a loss position, really are lost.

Probably should mention here that to carry forward losses in a Discretionary Trust you have to make a Family Trust Election. This can highly limit your options with future beneficiaries. Again, a case by case basis as to whether this is the way to go.

The Bamford Case and all of the new rules regarding Unpaid Present Entitlements (to companies) may limit what we can and cannot do effectively in the future as well. A case of "watch this space."

Hybrid trusts are still an evolving structure, but it's important to know it's there and what the issues are.

Honestly, I have seen very few of these in my time in public practice. I do not do any business services work any more though. I have had very little experience with the strategies involved with them, and the units / CGT events can get fairly complicated from what I have heard.

Correct. Some states allow tax free thresholds in trusts, some not.
What would be a strategy to minimise land tax?

One property per trust. This becomes hard to manage, but on the other hand would also provide excellent asset protection.

You could also of course diversify into other States. This is something that I plan on doing in the future (or note: I am effectively doing now as I am looking in QLD with one already in VIC). You also take opportunity of the different investment cycles of the different states (a debatable issue going on discussions in another thread).

Again from an application point of view: can you envision a situation where property in your personal name might be negatively geared, but you have an investment vehicle with a taxable gain? Under what circumstances would this be tax effective?

You can do lots of things. Mix shares and property. (Unadvisable for asset protection) but some people mix business income and investment. You can bite the bullet and wait until later when the property makes a net income (this doesn't appeal to me). You could also mix positive cash flow and negatively geared properties (again, might depend on a lot of things, borrowing capacity and land tax risk profiles).

My girlfriend's father is a retiring accountant, and he still uses his family trust income to take advantage of her low income. He won't do this forever though, so I will be able to think of ways of doing the same thing with my own family trust down the track.

Actually your theory is pretty solid. Think more about the application. For every bit of theory, think of a couple of circumstances where the application would result in different tax positions. That's how you can see when it will be advantageous, especially when you start combining strategies.

Cheers - thanks for making me think a bit.

 

[BlueRidgeHomes]

Good afternoon Vesuprop,
You've got some good equity in your Ballarat property and cash flow - well done on that one. I'd suggest at your stage and due to your current income that you continue to focus on properties that don't put such a drain on your pocket. Have you considered either developing an existing property or building outside of the standard 10km of CBD? I agree that it's good to have bluechip property (within 10km of CBD) in your portfolio but it all depends on your personal situation. I've made good capital growth with property in both regional and cbd and with both existing properties (long term, steady growth) and new builds (immediate cg, reasonable cashflow and good depreciation). As an example we've developed a few cheaper properties on large blocks in regional towns (bought in cheap, built a basic second house on the back which has generated positive cash flow and made very respectable growth due to being able to sell them off separately at much higher than what it cost to buy and build). Your budget of $320K might not extend quite enough to do a buy existing and develop but you could consider a new build and I know of places where your $320K will do you quite nicely for a new build either a basic house or townhouse/unit (depending on the area) within a couple of hours of Brisbane both West and North. You will be alot closer to being at least cashflow neutral and have the benefit of having generated immediate growth which you can then leverage against for your next property. Until your personal income increases as it will over the coming years I definately recommend cashflow over cbd so that you don't slow down your portfolio growth. As an example I bought a property in Bendigo in about 2003 when I was on a low income - my criteria was that it had to hold it's own from the start cashflow wise - it has done nicely for my $82K buy in (rental return then was $145 per week) it's now worth approx $180k+ with rental of $195. I'd rather 3 of those scattered across the country than 1 house any day. Over the last few years have done alot of new builds and as an example have 2 units which cost $260K each to build at client rate (inc. land) in a regional town in SE Qld. These return me $275 & $290 per week respectively and were valued less than 6 months after completion at $320K each. As opportunity presents itself I am investing into more CBD now yet by going down the cashflow route first it's enabled me to look at both options and not slowed down portfolio growth. That being said - I can't see that you will loose anything by purchasing a run down but solid unit/apartment and doing cosmetic work to it (which generally the bank won't fund to answer one of your questions, but if rentable as is you could hold for a year, have revalued then use the equity gained if sufficient plus your extra savings if you have any after being cashflow negative to do the work then). Either way you won't regret getting into the market again now in 10 years time.....

 

[Vesuprop]

Hi Meg, thanks for the thoughtful reply.

I've been thinking a lot more on the cashflow issue lately as you can probably tell. As you said property is a long term thing, and there's no reason you have to invest in the CBD first.

Which areas do you mean when you speak of the North and West of Brisbane? Places like Gympie. I checked out your website and it seems to indicate that this.

How recently have the revaluations been coming back on the completed builds with equity gains? Is it much harder now that the market is becoming flatter and flatter?

I am not sure how confident I am on locating decent land and organising for the whole building place to happen. Although, I might be making a mountain out of a molehill, it is possibly very smooth if you find the right building team to help you along the way.

 

[Vesuprop]

You tell me. Plug the thing into a spreadsheet. Put in different yields and you tell me what the cashflow looks like.

I calculated a general cashflow scenario. I obviously had to make some assumptions of course.

Assumptions:

50% LVR
Portfolio size $4 million
Debt $2 million (50 / 50 resi and commercial)
Commercial 50% Residental 50% of total holdings

Rent - commercial 8% (trying to be conservative)
- residential 4.5%

Commercial interest rate 11%
Residential Interest Rate 9%

Other expenses - estimated at 40% of rent for residential
- Are there any notable expenses for Commercial property? I am of the understanding that the tenant pays all outgoings except land tax.

I came up with:

Rent - residential $90000
- commercial $160000

Expenses

- resi interest $70000
- comm interest $90000
- other resi $36000

Total net cash flow $54,000 gross of tax.

From my research this sounds reasonable. You could probably do much better (thinking of posters such as Nathan) or worse if you planned poorly.

By this point I would be chasing more yield friendly assets.

What do you think?

 

[alexlee]

There are infinite combinations, but how are you going to get there? How are you going to borrow 2m? What are you going to do next?

 

[Vesuprop]

Whilst I ponder that question further I have another quick question.

What, if any, are the advantages of having an unencumbered title deed on my current IP? Obviously the cash flow would be better (although, you could make better money by putting it in the bank at the very least). I would have better equity of course.

Are there any lending opportunities that it would open up?

 

[cadence]

How much equity do I need for a scenario with 80% LVR? 85% LVR? 90% LVR? Assuming $320k purchase, 13k buying costs & 25k reno. Total of $360k rounded.

V, if I may just inject my 2c. I think you may be over-analysing, which is not a bad thing by any means! It's better to be over-prepared than under-prepared. But, property is a long term game. Personally, I dont think 5-10% in LVR for a property of $320k will make much difference. You know more about tax/financial planning than many people double your age. You are on a reasonable income. You already have purchased an IP. You are a good-saver. I'm sure your next purchase will be a sound investment as you are the type who would do proper due diligence.

You want to do what is best / the most suitable. We all do, but in property, you won't find out for some time - as CG doesn't happen overnight, and there are so many other factors out of your control.

Sometimes you just have to make a decision (based on your current circumstances), stick with it, and believe in the strength of your convictions.

You would be suprised how many 'accidental millionaires' there are out there who made their money from property investment.

I read elsewhere Rolf said you can get 85% LVR without LMI. If I were you and I can afford to pay 15% deposit, I would just go with this option for now. Try to sign up to a flexible loan arrangement which allows for redraws etc. Banks are becoming competitive so you should have no trouble in this regard.

If you do not have at least a 15% deposit, then you have no choice but to go with LMI.

I wish you all the best!!!

 

[BlueRidgeHomes]

Hi Vesuprop,
Gympie would fit your budget for a new build yet as someone holding a number of properties there at the mo my concern would be the currently higher than comfort level vacancy rates & that the rental return between an old entry level property & new property is not wide. If looking in that area (I have both new builds & old entry level) if you are looking to hold for a number of years I'd consider a solid cheapie, in the central area on a block size over 800sqm (general guidelines). The reason - you should be able to pick up for low $200k's & rent out reasonably easy for $230+ per week. By looking for 800sqm (in Gympie, check council regs whick differ for each town) this is the general guideline there for a 2nd dwelling. In this scenario I'd recommend checking potential prior to contract & then lodging DA application immediately after purchase for the 2nd dwelling which you fund your 20% thru a mix of equity growth & savings as house 1 won't be putting a big drain on you. Other areas that come to mind are Ipswich & Kingaroy. If you had a larger budget I'd suggest other areas. PM me if you'd like building specific thoughts/ideas. Meg

 

[BlueRidgeHomes]

How recently have the revaluations been coming back on the completed builds with equity gains? Is it much harder now that the market is becoming flatter and flatter?

I am not sure how confident I am on locating decent land and organising for the whole building place to happen. Although, I might be making a mountain out of a molehill, it is possibly very smooth if you find the right building team to help you along the way.[/QUOTE]

Hi Again Vesu,
I didn't the above part of yr question in my other reply. Approx turnkey / tenant ready (basic landscape, tv antenna, blinds) new build in Gympie from about $300K depending on the land mainly. Cheapest block currently on market in reasonable part of town is $95k (it's an odd shape but workable) most of the blocks are b/w $120k to $130k your stamp duty is only payable on the land. 4bedrm, 2 bath. Dble garage etc completed sell from $330k, rental for these properties about $320. Note the sales prices vary much more than the rentals in Gympie (I've 1 house worth only about $170k bought last yr that I get $245 p wk for yet a beautiful new build worth about $385k that gets only $320). Depreciation & immediate cap gains on the new build makes up for it for me but is whatever suits your situation. I was always scared of the building process before knowing Carl & had only bought existing houses. The process is easy thou - wish I'd put it in the mix years ago.

 

[Vesuprop]

Hi Again Vesu,
I didn't the above part of yr question in my other reply. Approx turnkey / tenant ready (basic landscape, tv antenna, blinds) new build in Gympie from about $300K depending on the land mainly. Cheapest block currently on market in reasonable part of town is $95k (it's an odd shape but workable) most of the blocks are b/w $120k to $130k your stamp duty is only payable on the land. 4bedrm, 2 bath. Dble garage etc completed sell from $330k, rental for these properties about $320. Note the sales prices vary much more than the rentals in Gympie (I've 1 house worth only about $170k bought last yr that I get $245 p wk for yet a beautiful new build worth about $385k that gets only $320). Depreciation & immediate cap gains on the new build makes up for it for me but is whatever suits your situation. I was always scared of the building process before knowing Carl & had only bought existing houses. The process is easy thou - wish I'd put it in the mix years ago.

Thanks for the heads up. Have you noticed much activity around Ipswich since the floods? You would obviously be buying in the higher areas of Ipswich? I would definitely consider something like this if you could get away with a $320k build and a solid cashflow (rent + tax benefits).

I'll have a look at Kingaroy. I know every little, but have heard it mentioned a fair bit lately.

edit: My biggest concern is spending more on the building than the land. Do you agree that this is a potential issue? (ie land appreciates, buildings depreciate). I wouldn't want to go any where below 50/50 on a stand alone house.

 

[Vesuprop]

V, if I may just inject my 2c. I think you may be over-analysing, which is not a bad thing by any means! It's better to be over-prepared than under-prepared. But, property is a long term game. Personally, I dont think 5-10% in LVR for a property of $320k will make much difference. You know more about tax/financial planning than many people double your age. You are on a reasonable income. You already have purchased an IP. You are a good-saver. I'm sure your next purchase will be a sound investment as you are the type who would do proper due diligence.

You want to do what is best / the most suitable. We all do, but in property, you won't find out for some time - as CG doesn't happen overnight, and there are so many other factors out of your control.

Sometimes you just have to make a decision (based on your current circumstances), stick with it, and believe in the strength of your convictions.

You would be suprised how many 'accidental millionaires' there are out there who made their money from property investment.

I read elsewhere Rolf said you can get 85% LVR without LMI. If I were you and I can afford to pay 15% deposit, I would just go with this option for now. Try to sign up to a flexible loan arrangement which allows for redraws etc. Banks are becoming competitive so you should have no trouble in this regard.

If you do not have at least a 15% deposit, then you have no choice but to go with LMI.

I wish you all the best!!!

Thanks very much, this good advice. If my "action taking" was as good as my knowledge I could go a very long way to achieving my goals. Certainly working on it!