Your comment about Loc's did not make sense to me so I had to look it up and i've just finished reading a very interesting article on line of credit or equity loans. So you use the CG to get a loc to cover the cost of interest payments on your negatively geared IP. That works but aren't you then paying more interest on a larger loan?
yes you are paying more interest overall, but the idea is to use this strategy as a cash flow safety net for short to medium periods...i.e. if you lose your job, or rates go up before you can raise your rents to compensate.
I prefaced this strategy with "helping you cope with the downside risk", so it is meant as a risk managment tool. If you were faced with a cash flow crisis, and didn't realize you could do this, you would be faced with selling the property, possibly into a soft market.
Looks like that building a portfolio with negatively geared properties relies on the assumption that your income will increase as your portfolio grows AND that you use enough of your income to pay off extra on your IP's so that they can become nuetral or +CF in 6 years.
Well, at the end of the day, you can't grow a portfolio any quicker than allowed by your maximum debt serviceability. DS improves when:
- your non property income goes up (wage)
- your property income goes up (rents)
- interest rates go down
- non interest holding costs go down (self manage)
- equity goes up and you use a loc to help fund interest (for short to medium periods)
You can risk manage a drop in debt serviceability by:
- locking in rates when they look like rising, or locking 50%.
- up your rents with the market (some PMs are slack)
- reduce non interest holding costs (do your own property management and maintenance)
- increase your non property income via your main job or a second job or partner's income.
- decreasing discretionary consumption.
I am spelling all these things out because some people might have to do this stuff when rates start to rise or they lose a job. And if they're not aware of these options, they might panic sell property.
Be interesting to see a graph that shows how long it takes with minimal P&I payments on a typical 300k house before it becomes +CF.
I haven't got a P&I graph, but below is an Interest only loan.
Assumptions are on the right.
The cash injection is for in costs.
Even if you cannot borrow 100%, it is worth doing the analysis with 100%, because that will cover opportunity costs for any deposit you throw in.
It is also good practice to do the analysis covering the opportunity cost of the in costs, which this doesn't.
The strategy I'm working on for my self is to have the over all portfolio to be at least CF nuetral so I have a lot of learning to do on how to get +CF properties with good CG.
The graph shows you are cf neutral after tax from the outset in this scenario.
Thanks once again.