What is the average time between joining the forum and buying an IP?

[handyandy]

My understanding of Chinas approach

Find property at say $2mil

Use LOC on PPOR for the 20% or even 30% contribution and then costs. So he will need $600k + stamps ($100k) + GST (unless going concern). You will be able to claim the GST back.

Get a loan for the balance - $1.4mil financed through seperate loan (different bank) with an offset facility

Total cost $2.1mil 100% financed with all interest deductible.

Throw the excess cash into the offset account thus preserving the cash separate from the investment.

Ends up paying interest on $1.1mil and is now effectively earning interest on his 'cash' of about 5.4% (the interest cost )

I use this method for all my spare cash and achieve maximum interest with no long term commitment as I can withdraw it at any time for new opportunities.

From your previous number you might be looking at a smaller investment but the theory is sound.

Cheers

 

[Aaron_C]

But it's just that - theory

 

[handyandy]

But it's just that - theory

Now it's just a matter of getting China to take the real first step - ACTION

 

[geoffw]

Throw the excess cash into the offset account thus preserving the cash separate from the investment.

Using the loan, and then putting excess cash against the loan, is a good idea. Sorry, I should have thought of that.

It gives the flexibility of a loan without all the costs.

Just don't put 100% against the loan in case that closes the loan completely.

 

[TingTong]

Just don't put 100% against the loan in case that closes the loan completely.

It won't close the loan, it's just that you won't benefit because the bank won't pay interest on any funds in the offset account which exceed the loan amount. In HA's example, China puts his $1m cash into his offset account against the $1.4m loan so pays interest on $400k. Any other income inc salary and dividends would be deposited into this account until it reaches a balance of $1.4m and then excess funds should be put to use elsewhere.

 

[china]

Thanks very much Handy (your post summarises what I have learnt on this forum over the past year or two), AaronC, Geoffw, HiEquity.

I feel that time has not been wasted because I have learnt the theory and concepts behind financing investments during this time as applicable to my situation and it gives me much greater confidence to proceed. From no idea at all - my approach prior to the forum used to be save up and purchase in entirety with cash.

Although I suspect that with my lack of experience and confidence, I will probably start with something reasonably small that does not devour the entire LOC as a deposit in one go.

But many thanks once again.

 

[BayView]

The information I have obtained from this forum is that I should never use my own savings and income for investments, if possible. Or use as little as possible.

Hence, the LoC.

If you have the cash, use that.

Borrowing for the sake of it substantially diminishes your nett cashflow.

Borrowing merely allows you to leverage a lot more and increase your footprint...good for the mere mortal with no money.

As I have learnt, it is best to risk others money

I can promise you one thing; all the risk is with YOU; not the Bank.

 

[HiEquity]

If you have the cash, use that.

Borrowing for the sake of it substantially diminished your nett cashflow.

Borrowing merle allows you to leverage a lot more and increase your footprint...good for the mere mortal with no money.

Bayview, I can't agree with this advice. Regardless of whether you are trying to grow a portfolio or not, in my view you should always borrow if you can. I would much rather have a $1m loan and $1m of cash available to me in an offset account than just spend $1m on a property and be left with no cash, or $1m less cash available than I used to have!

While it's a glib saying, it's also remarkably true - people go broke when they run out of money. So always get access to finance while you can (and use offsets if need be) because if you find you suddenly need more money for whatever reason, that's exactly the time a bank won't lend it to you... so maximise your cash buffers while the sun is shining is my view.

I can't think of a circumstance where borrowing isn't the better option, if you can do it.... I'm also a believer that the presence of a mortgage on a title is helpful to an owner in a lot of other ways.

 

[Tigger]

I was unemployed in late 1998 with $10,000 HECS debt. I started borrowing library books (JS among others), liked the JS ones, read them back to front, upside down, inside out, multiple times and then once I had a job, bought a -ve geared brick duplex.

I'm now working part time with home + 2 rentals paid off. I don't need hundreds of rentals or millions of dollars so am happy with what I have.

 

[BayView]

While it's a glib saying, it's also remarkably true - people go broke when they run out of money.

So, you're saying go into debt, when you don't need to?

If you want to be totally anal about investing and want to look at the IRR on the cash, it may be way less than the bloke who say; borrows half and uses half his cash, but the nett cashflow is also way down in the deal.

If you have say; $1m in cash, and spend 2/3rds of it on two or maybe 3 IP's, you have the cash from those IP's - minus the usual costs which would swallow up a generous 20% of the gross rent (usually less in newer properties due to less maintenance).

You still have a large amount of cash earning interest in an ING or other similar account of you wish, or in an offset type of account if you wish, over and above the rent.

So, with a constant rent stream which is massively pos cashflowed, and interest on the $250k, and a PAYE income; how could you run out of money, unless you spend it all on stuff every month?

If you do, then that's your own fault.

In China's case, he still has his PAYE (or business) income, would have close to a grand per week from the rent, and all the cash savings.

He could even move out of his PPoR, rent a cheap flat somewhere and get all the rent from his fully paid off PPoR as well. He would be swimming in cash, and no debt.

Where's the problem, and there is no loan to worry about.

Or, he could really go out on a limb and spend the whole $1m on IP's and get even more rent....but not have the $250k savings up his sleeve.

Three IP's and a PPoR all going up in value over time...

It-is-a-flamin'-doddle-shooting-fish-in-a-barrel.

 

[china]

So, you're saying go into debt, when you don't need to?

If you want to be totally anal about investing and want to look at the IRR on the cash, it may be way less than the bloke who say; borrows half and uses half his cash, but the nett cashflow is also way down in the deal.

If you have say; $1m in cash, and spend 2/3rds of it on two or maybe 3 IP's, you have the cash from those IP's - minus the usual costs which would swallow up a generous 20% of the gross rent (usually less in newer properties due to less maintenance).

You still have a large amount of cash earning interest in an ING or other similar account of you wish, or in an offset type of account if you wish, over and above the rent.

So, with a constant rent stream which is massively pos cashflowed, and interest on the $250k, and a PAYE income; how could you run out of money, unless you spend it all on stuff every month?

If you do, then that's your own fault.

In China's case, he still has his PAYE (or business) income, would have close to a grand per week from the rent, and all the cash savings.

He could even move out of his PPoR, rent a cheap flat somewhere and get all the rent from his fully paid off PPoR as well. He would be swimming in cash, and no debt.

Where's the problem, and there is no loan to worry about.

Or, he could really go out on a limb and spend the whole $1m on IP's and get even more rent....but not have the $250k savings up his sleeve.

Three IP's and a PPoR all going up in value over time...

It-is-a-flamin'-doddle-shooting-fish-in-a-barrel.

BV this is an overly simplistic analysis of the situation.

Lets say you buy 3 resi Ips with 1 mil cash. At 6% gross yield, you would be lucky to get $1k in the pocket every week to spend as you please. The net yield would probably be about ?4%, that is under 52k a year after other expenses of a resi IP.

Furthermore, the whole point about investing is to be free of the need to actively work.

So the one million worth of IP is unlikely to generate sufficient income to live happily ever after.

 

[geoffw]

So, you're saying go into debt, when you don't need to?

Having the debt, but putting cash into an offset account, would only cost the setup fees. This gives the flexibility of having a loan without the expense, and keeps a few more options open.

 

[BayView]

BV this is an overly simplistic analysis of the situation.

Lets say you buy 3 resi Ips with 1 mil cash. At 6% gross yield, you would be lucky to get $1k in the pocket every week to spend as you please. The net yield would probably be about ?4%, that is under 52k a year after other expenses of a resi IP.

Furthermore, the whole point about investing is to be free of the need to actively work.

So the one million worth of IP is unlikely to generate sufficient income to live happily ever after.

It was a figure for the sake of the argument.

I never said anything about being in a position to never have to work again. It is a damn good starting point for you, which most will never have.

All I can say is that a million in cash is better sitting in a million worth of rental property.

You can then leverage off the 3 IP's if you wish and buy more. Use the rent to pay down some debt, and buy more.

You will arrive at your Nirvana before too long.

You may only get 4% yield nett, others will get a better rent return that that quite easily.. But; not in your local neighborhood, which I'm sure is the only place you will look.

But $52k for not even getting out of bed is pretty good for most of the planet.

Don't cry to me about "under $52k" of free money. All your angst is tiresome.

You are spoiled and not living in the same world as many.

What is the nett on $1mill in cash?

And; there is no CG with cash - only deflation and tax.

 

[geoffw]

So the one million worth of IP is unlikely to generate sufficient income to live happily ever after.

It depends on what you require to live happily ever after.

And it depends on the time frame, and what else you do.

Many people have the ability to not only survive, but to thrive, on $50k pa. From what you've said, you would require a lot more than that.

In a few years, your income and house value grows. In ten years you have a bigger income and a much bigger asset.

And you have the option of using that $1M as equity for further purchases.

 

[china]

It was a figure for the sake of the argument.

I never said anything about being in a position to never have to work again. It is a damn good starting point for you, which most will never have.

All I can say is that a million in cash is better sitting in a million worth of rental property.

You can then leverage off the 3 IP's if you wish and buy more. Use the rent to pay down some debt, and buy more.

You will arrive at your Nirvana before too long.

You may only get 4% yield nett, others will get a better rent return that that quite easily.. But; not in your local neighborhood, which I'm sure is the only place you will look.

But $52k for not even getting out of bed is pretty good for most of the planet.

Don't cry to me about "under $52k" of free money. All your angst is tiresome.

You are spoiled and not living in the same world as many.

What is the nett on $1mill in cash?

And; there is no CG with cash - only deflation and tax.

I agree with you that cash is the worst, especially with interest rates so low and that is why we are here to discuss best use of funds for the best investment.

However, what I have learnt from here is that the cash should be placed in offset against an investment loan rather than used to purchase investments outright so as to maintain flexibility with the cash and to minimise the cost of the investment which loan interest represents.

Cash and capital protection is paramount.

 

[Aaron_C]

china you are good to go. Keep looking, something good will eventually come up. Sometimes good stuff doesn't come up for months.

 

[china]

It depends on what you require to live happily ever after.

And it depends on the time frame, and what else you do.

Many people have the ability to not only survive, but to thrive, on $50k pa. From what you've said, you would require a lot more than that.

In a few years, your income and house value grows. In ten years you have a bigger income and a much bigger asset.

And you have the option of using that $1M as equity for further purchases.

I hope my PPOR value grows because I think it has actually gone down since I bought it in 2010.

And I am not sure about active income growth over time. I run a small business and there is no guarantee of anything. And hopefully, I can stop running the business as soon as the passive income flow is achieved. That is why I favour a set and forget investment if I ever find the right IP, pay it off whilst I do earn an income and hopefully generate a passive income flow for a very long time. The right IP will give me a good focus for forced savings as I suspect that I squander a fair bit - and hence living expenses are over 50k p.a.

 

[BayView]

I hope my PPOR value grows because I think it has actually gone down since I bought it in 2010.

And I am not sure about active income growth over time. I run a small business and there is no guarantee of anything. And hopefully, I can stop running the business as soon as the passive income flow is achieved. That is why I favour a set and forget investment if I ever find the right IP, pay it off whilst I do earn an income and hopefully generate a passive income flow for a very long time. The right IP will give me a good focus for forced savings as I suspect that I squander a fair bit - and hence living expenses are over 50k p.a.

With so much fear, how do you get out of bed?

 

[HiEquity]

So, you're saying go into debt, when you don't need to?

Yes - forget about the amount of money for a second and just focus on the principle. The idea is to never run out of money, regardless of what circumstances life throws at you. There is no real difference between the two options we are discussing, in terms of cashflow or anything else, except that one gives you access to a lot more cash than the other one.

Debt (if you can get it) with an associated offset account is always preferable to spending your cash. I'm not saying anything controversial here. That principle applies whether you have a net worth of $100k or $100m.

 

[BayView]

Yes - forget about the amount of money for a second and just focus on the principle. The idea is to never run out of money, regardless of what circumstances life throws at you. There is no real difference between the two options we are discussing, in terms of cashflow or anything else, except that one gives you access to a lot more cash than the other one.

How does it give you access to a lot more cash?

The nett worth is the same, the LVR is the same.

Or, are you talking about being able to draw on the cash in the offset if required?

To get access to more cash for more IP's, more borrowings are required, unless you use the cash in the offset, in which case now the borrowings are more exposed and the LVR goes up.

How is this better then, if you have 3 IP's fully paid for with cash, or 3 IP's totally debted, but with all the loans covered by the cash in the offset?