Trouble with numbers

W

WebBoard

Guest
From: Michael Howser


Hello to all you fine folk out there

Anyone mind helping out a newbie (wannabe?)

I'm standing on the edge of the pool, looking down at you folk swimming round in the world of PI, and the water looks oh so good!
I've read all the recomended books/sites/forums/etc and I know I just have to plunge in, but one think is holding me back. I'm not very good with my numbers.
Either that, or I'm missing some of the key ingredient somewhere.
I want to positively gear my properties, but with the amount that I would need to borrow (even to get a VERY modest house) I can't see how I could meet repayments on the loan and gear positively. Am I trying to bite off too much? Would I be better to save a bigger deposit, and hence borrow less? Or should I negatively gear this first investment and pay it off asap with the intention of using the (then positive) income to offset my next purchase and so have a positive folio?

I hope these questions don't seem too stupid.

Kind regards,

Michael
(TwoThree)
 
Last edited by a moderator:
W

WebBoard

Guest
Reply: 1
From: Frank Shead


Michael,
Positive gearing is good. I learnt something a long time ago
"100% of nothing is still nothing."
If you cannot afford PG get into NG and get your roll started.

Frank Shead
 
Last edited by a moderator:
W

WebBoard

Guest
Reply: 2
From: Frank Shead


Michael,
Positive gearing is good. I learnt something a long time ago
"100% of nothing is still nothing."
If you cannot afford PG get into NG and get your roll started.

Frank Shead
 
Last edited by a moderator:
Reply: 2.1
From: Jacque Parker


Michael,

Most investors take out Interest Only loans which are more cost effective than Principal and Interest loans. Because the interest on investment loans is tax deductible it makes more sense to get every dollar you can using IO loans. The repayments also work out less than P and I ones. IO loans basically allow you to maximise your cashflow and put you in the position of being able to afford more IP'S! You can build your net worth faster on five properties, say, by relying on cap growth and using IO loans, rather than using P and I on one or two properties. IO loans also allow for the property to be positively geared, as the rent exceeds the repayments.
As for locating positively geared places, you will have trouble finding them falling into your lap, especially in capital cities. Depending on what you want to do, you can make a property positive by renovating, or increasing accommodation (like Michael Croft does, by splitting houses into two flats etc)

Big country towns tend to have more properties that can be +vely geared without any work on them. Stick to the cheap ones and you will find more success generally. Do your homework and make sure the rental market is good before you buy. They are out there. I bought a house last year that cost me $85K and is returning me a rent of $180 per week.

In the end, it pays to research, read and ask questions before you plunge straight in. Good luck with it all and happy hunting! Let us know your progress.
Cheers, Jacque :)
 
Last edited by a moderator:
Reply: 3
From: Gail H


Don't think about paying off the investment property ASAP - this will limit your ability to acquire multiple IPs and you want the "multiplier effect" operating. Your equity in the property will grow through the increase in capital gains. If you have to put too much of your income into the IP, the lenders will decide that you will be unable to service more properties (ie. your DSR or debt servicing ratio will be a barrier).

My strategy is to have a blend - some properties in moderate growth areas that require a small amount from my pocket each month and for which I have an interest only loan. Numerous properties which are positively or neutrally geared and in areas where there is some prospect for growth (but not heaps). For these latter properties I take out 30 year principal and interest loans.

I avoid high growth areas (aka Sydney and Melbourne) as I only started this year and my cashflow can't sustain the monthly shortfall in meeting repayments. Prices have gone through the roof in these areas, but rents are pretty stagnant. Plus if interest rates rise, your monthly costs will just soar. I'll look at Melbourne again in a couple of years to see if its a more viable prospect. Anyway, that's just what I'm comfortable with.

Good luck

Gail
 
Last edited by a moderator:
W

WebBoard

Guest
Reply: 4
From: Simon St John


Michael

This is a GREAT question! Just the thing I am dealing with.....

Simon
 
Last edited by a moderator:
Reply: 4.1
From: Asy .


Michael,

Welcome to the pool... (cute speedo's!!)

What Gail and Jacque said is probably the answer to your question.

Cashflow and the possibility of capital growth tend to be inversely proportional.
That is, properties that promise a high capital gain tend to be negatively, or at best, neutrally, geared, whereas properties which promise little or no capital growth tend to have the highest cashflow returns.

As investors, we have to decide whether we are going for the cashflow, or the growth. (No, it is not impossible to get both, and often going for one, can get the other as a nice surprise) You seem to have decided to go for cashflow! Well done!! A decision made gets you closer to the water.

Now... Where to get it.

As was touched on earlier, you need to look outside the high capital growth areas (as a general rule, but let's make it easy, and talk in generalisations...) Jacque(?) mentioned that you should start looking in Larger country areas, and this would include outer suburbs of capital cities too.

Look around, but don't look too long, you will get sunburned, better to jump into the water even if you do it with floaties on.
It really is true, find something, do the numbers, and if they stack up, JUST BUY IT. Maybe the first one will not be the best one, but you will learn lots (I promise that!!!)

Good luck with it, let us know how you go.
Hope to meet you 'round the traps some time.

asy


"Don't forget what happened to the guy who suddenly got everything he ever wanted...
He lived happily ever after.
(Willy Wonka).
 
Last edited by a moderator:
Reply: 4.1.1
From: Glenn Mott


Asy,

I like your reply.

My first purchase was not the best in capital gain terms but after 2 years was positively geared. I have sold it now as my long term plan is to have capital growth and have come to the conclusion that as I do not know which suburb will be the next hot one, I will buy as close to the CBD as my money will get me.

Just have a go, a small property will not cost you much per week even if Neg geared.

Glenn
 
Last edited by a moderator:
W

WebBoard

Guest
Reply: 4.1.1.1.1
From: Tony Blanch


A comment in this stream proposes that High Income AND High Growth are unlikely to be found in the same package.

I have heard that Houses are better for Capital Growth while Units are better for Income.

Does this hold true?

Are there other scales, such as proximity to the city, that indicate growth versus income.

Cheers,
Tony
 
Last edited by a moderator:
Top