Single girl needing IP advice

[Bon]

I started property investment with a P&I loan back in 2000. I thought it was the right way to do it.
I was wrong.
I'd be retired by now if I'd used IO loans and bought more property.
I spent many years trying to "own" my first IP.
I've bought 5 in the last year, having learned my lesson and am financing with IO loans.
Almost regardless of your risk profile and objectives, I would have to say that P&I loans are not the way to building wealth through property investment.
My first IP cost me $79k in 2000. It's now worth $260k. Assuming I had an IO loan of $60k outstanding, I'd still have enough equity for me to not really care too much about the outstanding debt.
I made an expensive mistake. You can learn from it for free

So true!

My initial thought was to pay P+I and reduce it as quickly as possible... but, since reading this forum + Jan's book, I have quickly changed my mind and opted for IO to accumulate as many properties as quickly as possible.

 

[GoAnna!]

I dont like the idea of interest only loans - think i still want the P+I loan.

Why not take out an interest only loan and set up a 100% offset account giving you the best of all worlds?

Minimise your interest bills with any excess cash lying around hence building up equity faster.

Maximum tax deductablity for any loan that goes from PPOR to IP.

Low commitment to the bank.

I know some feel that there is no point to paying debt down. But if you have money that will otherwise just be spent on "stuff" rather than further investments and you would like to speed up your investment jounrye and lessen your debt risk then yes putitng that loan towards the loan makes sense. But the 100% offset account is definitely the most flexible option.

The difference between IO and P& I in terms of payments may not seem much with one property but with multiple it would soon make a huge difference to your cashflow and hence how many properties you could hold.

 

[tyger]

Hi,

I have just started reading this forum a few days ago and I am loving it!

Was wondering why you don't recommend student accomodation? (does that also go for serviced apartments?)

My apologies if it has been covered already in other topics..

Thanks

 

[sailor]

I used to have P&I loans...no more. I can use that extra cash to invest in another property. The equity accrued on a new IP can be used to invest in another IP. And so it goes. I don't believe I could have purchased all my IP's had I paid down the loans.

Somewhere deep down, I started with a fear of having debt. My first home loan was for $19K....and I was terrified. It all depends on how you see that debt...is it "good" debt or "bad" debt. If the capital growth (CG) is going to increase, (and history tells us it will over time), then the proportion of the debt to the value of the property goes down. Meanwhile the rents go up over time.

Look at my very first home loan, which I paid $40 pw in repayments. Now that house would be worth around $300,000 now and the rent would be around $300 pw. And I would have had $220K to go buy another couple of IP's. So the rent well and truly pays for the loan repayments, and I have more IP's doing the same thing, which is increasing my assets.

If I had paid out the $19K loan on that property, I would have had to use my hard earned cash to save for a deposit for my next IP.

 

[boomtown]

Normal dwellings converted into student accomodation is fine.

The purpose built student accomodation that I have seen has been an absolute disaster for investors.

The property I have in mind cost about $150k for a 25m apartment back in 2002. They now sell for $110k if you are lucky. Very high vacancy rates because they are crap - a student moves into them for the first few weeks of term then finds a better place to live and moves out. The apartment then stands empty until the start of the next term.

Apart from the fact that the yield is awful and they are making a long term capital loss - banks also wont lend very much against them because of their tiny size.

You would be better off wrapping your money in tinfoil and buying it in the backyard.

 

[The Y-man]

Normal dwellings converted into student accomodation is fine.
.

Although even that can be trying!
http://www.somersoft.com/forums/showthread.php?t=41421

Cheers,

The Y-man

 

[The Y-man]

The purpose built student accomodation that I have seen has been an absolute disaster for investors.
.

Some people have been happy with their purchase, but the key to student accomo flats and serviced apartments is this: you are not buying realestate - you are buying a share in an unlisted business. As such, the banks will only lend 60% (as per commercial property/shares).

If you are confident in their business model, then ok - other wise why not buy shares in a company you undersatnd better (eg a company that owns shoppng centres, or supermarkets, or makes food?)

Cheers,

The Y-man

 

[boomtown]

Ugh.

I think the thing with converting existing homes into student accomodation is that location is hyper critical. If its not within reasonable walking distance of the uni I wouldnt bother.

 

[Perp]

Was wondering why you don't recommend student accomodation? (does that also go for serviced apartments?)

Normal dwellings converted into student accomodation is fine.

The purpose built student accomodation that I have seen has been an absolute disaster for investors.

The property I have in mind cost about $150k for a 25m apartment back in 2002. They now sell for $110k if you are lucky. Very high vacancy rates because they are crap - a student moves into them for the first few weeks of term then finds a better place to live and moves out. The apartment then stands empty until the start of the next term.

If your student accommodation is in an area with high demand - and it should be! - then you do what I do and only put them on leases that end in late January or late June. Doing this, student accommodation in Brisbane (of the "share house" type; not purpose-built studios) achieves > 97% occupancy.

Apart from the fact that the yield is awful and they are making a long term capital loss - banks also wont lend very much against them because of their tiny size.

On purpose-built accommodation, I concur. LVRs usually about 60%, as quoted by Y-Man. I'm sure over the long term the values will rise a bit, but they're still a pretty awful investment.

And yes, serviced apartments have pretty much all the same disadvantages - probably more, as you can't cover the low-demand periods as easily because you don't have leases. Though the depreciation benefits are awesome - you can accelerate depreciation of furnishings and some fittings in such properties.

 

[steveadl]

Do people really think the market is going to cool off? Every time I think its going to cool off and im better off keeping money in a term deposit, I read somewhere that the market has gone up 12 percent in 12 months, or that the property market will rise by 40% over the next 5 years. are these scare tactics?

Remember there are lots of markets. While some are cooling off, others are running hot. This is why research is so important.

There will always be many reasons people (incl. friends and the media) will offer up to you not to invest. You have to work out whether you are willing to look past this and take the risk. As they say, "no guts, no glory."

After you've done your research, you'd have to seriously ask yourself why you would listen to people who say it's a bad time to invest. What are they basing this on - they're opinion? What research and factors have they taken into account? One of the worst things you can do is listen to locals opinions about buying in areas.

 

[GoAnna!]

ozperp;And yes, serviced apartments have pretty much all the same disadvantages - probably more, as you can't cover the low-demand periods as easily because you don't have leases. Though the depreciation benefits are awesome - you can accelerate depreciation of furnishings and some fittings in such properties.

Only true if you run the business and own the property. Many serviced apartments (such as the one I own) are on commercial type leases so there is zero vacancy (the operator's concern no the property owners) and the tenant pays most outgoings. Yes crap capital gain and lower LVR's. So they need to suit your strategy and you need to plan to hold long term - preferably until they convert to straight residential and you get instant capital gain. I personally wouldn't touch student housing or hotel type serviced apartments - only genuine residential that is used as serviced apartments.

 

[nugget]

I am a blonde, but still dont get it

Sorry guys, I still dont get it...
I just dont see how it is possible to accumulate more IPs by paying interest only loans. Rental returns on properties these days barely cover half of the mortgage payments, so the investor always has to contribute a fair sum each month just to keep the mortgage covered. How is it possible to afford to do this for two, three, or even more properties?
eg: Just say i borrow $250,000 for a property worth $275,000.
The IO repayments are still around $1800 per month, but rental return could be as low as $1100 per month, meaning I have to put in $700 of my own cash each month.
Is there a secret I havent heard?
Thanks for the advice by the way, I am loving this forum.

 

[boomtown]

Sorry guys, I still dont get it...
I just dont see how it is possible to accumulate more IPs by paying interest only loans. Rental returns on properties these days barely cover half of the mortgage payments, so the investor always has to contribute a fair sum each month just to keep the mortgage covered. How is it possible to afford to do this for two, three, or even more properties?
eg: Just say i borrow $250,000 for a property worth $275,000.
The IO repayments are still around $1800 per month, but rental return could be as low as $1100 per month, meaning I have to put in $700 of my own cash each month.
Is there a secret I havent heard?
Thanks for the advice by the way, I am loving this forum.

Lets pretend you have $2100 spare cash per month that you can spend on IPs.

If IO payments (after rent) are $700 per month then you can afford 3 IPs ($700 x 3 = $2100). If you make PI payments (say $850 per month after rent) then you can only afford 2 IPs ($850 x 3 = $2550 which is more than you can afford).

 

[Perp]

Rental returns on properties these days barely cover half of the mortgage payments, so the investor always has to contribute a fair sum each month just to keep the mortgage covered. How is it possible to afford to do this for two, three, or even more properties?

What boomtown has said is correct, but your question seems to confuse two issues:

1) negative gearing - the cost of holding a property is generally more than the rental income, meaning you have to supplement the rental income with some of your other income to cover all expenses. Yes, to hold multiple negatively geared properties, you either need a large income from another source, or have enough reserves in a LOC to allow you to capitalise interest and have the property refinanced periodically. Alternatively, you seek out opportunities that are cashflow positive. (Yes, finding them takes some effort.)

2) IO vs P&I - Either an IO or P&I loan will probably result in your property being negatively geared, but a P&I payment will mean that you're more negatively geared than an IO payment. The fact that you're implying otherwise makes me wonder if you have missed something really fundamental.

Do you realise that boomtown's assumption is correct? ie if you have a loan for a certain sum, the interest-only payments will be smaller than the P&I payments for the same loan amount.

 

[s_t]

We live with negative cash flow for expected increases in both capital gains, and rents. As the rent increases, the amount of $ you have to put into a property decreases. Eventually it will become cash flow positive and pay you money (assuming you leave the loan alone!).

The reason for IO is cash flow. IO reduce the amount you have to pay the bank each week/month, improving the cashflow. As rents increase, it'll become cash flow positive and start paying you money earlier than a P&I loan would. That means you can buy another property earlier with an IO loan, than you could with a P&I loan. Some more capital gains and rent increases, and you'll then be wanting another, then another

Sorry guys, I still dont get it...
I just dont see how it is possible to accumulate more IPs by paying interest only loans. Rental returns on properties these days barely cover half of the mortgage payments, so the investor always has to contribute a fair sum each month just to keep the mortgage covered. How is it possible to afford to do this for two, three, or even more properties?
eg: Just say i borrow $250,000 for a property worth $275,000.
The IO repayments are still around $1800 per month, but rental return could be as low as $1100 per month, meaning I have to put in $700 of my own cash each month.
Is there a secret I havent heard?
Thanks for the advice by the way, I am loving this forum.

 

[Alex P Keaton]

Sorry guys, I still dont get it...
I just dont see how it is possible to accumulate more IPs by paying interest only loans. Rental returns on properties these days barely cover half of the mortgage payments, so the investor always has to contribute a fair sum each month just to keep the mortgage covered. How is it possible to afford to do this for two, three, or even more properties?
eg: Just say i borrow $250,000 for a property worth $275,000.
The IO repayments are still around $1800 per month, but rental return could be as low as $1100 per month, meaning I have to put in $700 of my own cash each month.
Is there a secret I havent heard?
Thanks for the advice by the way, I am loving this forum.

If your shortfall each month is $700 to start out with it would take you a while to be able to afford to buy your 2nd ip. What happens is after some years you end up paying less and less each month to keep the ip, because of increase in rents etc. Eventually you will be earning an income from the ip.

What people do is use the equity built up (have a revaluation done) and use this as the deposit for ip2, but you have to make sure you can service both loans.

Read as much as you can and it will all start to click for you.

I'm always using the search button on here. Its great. Also look at the recommemended books. There is heaps of info out there.

Also IO loans are tax deductable. If you pay back the principle it is not.

 

[Perp]

Also IO loans are tax deductable. If you pay back the principle it is not.

Clarification: the principal portion of P&I loans isn't deductible. So using boomtown's figures, in each case, you could only claim $700 as your tax deduction; the $150 principal portion of an $850 P&I payment isn't deductible.

 

[nugget]

Ok - the lightbulb has finally gone off. Thanks guys - i understand now.
It totally makes sense now. what a doofus eh?

thanks again for all the advice.

 

[SupaRex]

Hi nugget,

IMO, the best time to buy was yesterday, the next best time is today. Even if property prices were to universally drop 10% next year, chances are that over 10 years, the prices would recover and still double. That's based on 100 years of data.

That's a slightly simplistic explanation, but as the great woman herself says (Jan Somers): "It's time in the market, not timing the market".

All the best,
SupaRex