Where are your positively geared IPs??
- Thread starter Lauren_274
- Start date
Only if your goal is to get to 0.
Even if you only borrow 80% you have still paid for in cosats (roughly 5%). You need to calculate this.
Where did the other 20% come from? Assuming you had it in the bank, you now forgo the interest you would have earmed from that. You have not factored that in to your calculations so you are deluding yourself that it is CF+
I too borrow 105% (80% loan attached to the property plus the other 25% from a LOC). I use my cash for other things that I cannot claim tax deductions for (eg holidays). Why use my cash when the banks will lend me all the money I want for investments.
CF+ properties are not easy to find but they are a lot easier to make. Buy a run down cheap property, do a reno = CF+ from day one.
Most of my CF+ ones are in Mt Druitt, Blacktown. Mt Druitt because of reno's. Blacktown and others CF because of growth and rent increases.
8 in USA/Atlanta gross 20%+ returns. Unfortunately I don't believe these returns exist anymore as property prices have almost doubled now.
To answer the original question, most places.
@ MTR: looked into Japan, Spain lately?
@ MTR: looked into Japan, Spain lately?
Hi Lauren and welcome !
Mine are in 4114 and 4304.
Mine are in 4114 and 4304.
Purchase Price + Stamp Duty + Solicitors + Other disbursements.
eg. $500,000 + 17,990 + $1,500 + $500 = $519,990
$519,990 / $500,000 = 1.03998.
Therefore when people are talking about positive gearing, its all on a level playing field.
For example, say I buy a property for $500,000 and rents it out for $450 per week, applying the 105% calculation it would be
$500,000 x 1.05 x 5% interest = $26,250
I receive rent of $450 per week = $23,400
Therefore i an negatively geared by $2,850.
Conversely, my friend also buys a property for $500,000 and rents it out for $450 per week. However they put down a 20% deposit ($100,000) and paid for stamp duty in cash.
Therefore their borrowing costs are $400,000 x 5% interest = $20,000
Receive rent of $450 per week = $23,400
They claim to be positively geared by $3,400.
So using 105% allows for an apples for apples comparison.
Simply put, if you were interested in getting a positively geared portfolio and my suggestion to you was to put down a larger deposit or put more of your own funds into the loan, you would probably think "thanks for wasting my time"
Delta - have you? I have friends in Spain perhaps I should ask them about the market...?
Purchase Price + Stamp Duty + Solicitors + Other disbursements.
eg. $500,000 + 17,990 + $1,500 + $500 = $519,990
$519,990 / $500,000 = 1.03998.
Therefore when people are talking about positive gearing, its all on a level playing field.
For example, say I buy a property for $500,000 and rents it out for $450 per week, applying the 105% calculation it would be
$500,000 x 1.05 x 5% interest = $26,250
I receive rent of $450 per week = $23,400
Therefore i an negatively geared by $2,850.
Conversely, my friend also buys a property for $500,000 and rents it out for $450 per week. However they put down a 20% deposit ($100,000) and paid for stamp duty in cash.
Therefore their borrowing costs are $400,000 x 5% interest = $20,000
Receive rent of $450 per week = $23,400
They claim to be positively geared by $3,400.
So using 105% allows for an apples for apples comparison.
Simply put, if you were interested in getting a positively geared portfolio and my suggestion to you was to put down a larger deposit or put more of your own funds into the loan, you would probably think "thanks for wasting my time"
Doing it at 105% effectively captures the opportunity cost of putting your 'deposit capital' elsewhere. Given that those funds would've been earning you a return somewhere (even if its just term deposits), for a fair relative comparison between investments, it should be inputted into your calcs.
Cheers,
Redom
Howdy
The properties mentioned are well CF+ even with the 105% calculation you have outlined.
Point was that I would never borrow that much these days due to all of the extra and unnecessary costs associated with it.
In regards to calculations I see it like this:
- My own money (20%) is the capital that grows with CG of the property. That is what I truly own in each property (initial capital invested + ongoing / compound growth). So this money does grow and is not stagnant as you outline. Also remember I have no ongoing interest to pay on this, only growth.
- All borrowed money is cost to me until I repay the loan. The purpose of this loan is to generate higher growth over my own capital invested. I do not consider any 'growth' over this portion of the purchase amount but only take away what it costs me to hold the loan over the years (interest).
- All one off purchase costs taken out of equation in first year (when it happened).
- All ongoing costs taken out of equation.
- All income from the property added to the equation.
Cheers
I think we scared Lauren_274 off?
Don't get what you see, and what is the accepted calculation comparison mixed up.
pinkboy
Sure but it will cost you in interest.
In investing the main purpose is to nurture and grow the capital you initially invested. So with a 105% loan you are not actually investing anything but spending your own money to pay for purchase costs / lmi just to get a title (even worse - spending borrowed money additional to the 105%). After a few years of repayments / CG you are hoping to be back to 0 and move forward from there if market conditions allow. Yes you can get lucky in times of high growth but not sure if this is investing or an expensive speculative exercise.
A lot of people do it so I am not completely dismissing this approach, just sharing another perspective on the topic
I don't get it.
I thought the question being answered was how does one calculate their investments, not, is this the right way to invest.
I purchase everything 80% LVR and front the costs to avoid LMI. I still do my calcs to see if I want to purchase the place at 105% though, compare like for like.
I thought the question being answered was how does one calculate their investments, not, is this the right way to invest.
I purchase everything 80% LVR and front the costs to avoid LMI. I still do my calcs to see if I want to purchase the place at 105% though, compare like for like.
Your net asset position still goes backwards making the purchase, even if you use cash.
The idea is that if you have a property with an expectation of growth or related to this thread CF+, this will outstrip the reduction in asset position from the buy in costs.
Yes I am paying interest but it is tax deductable. As I said I'm better off puting my cash into NON deductable things.
Some people buy with 80% because they have to (or choose to). You see my LVR is so low that it makes sense for me to buy at 105%. I have no cash sitting around to use for deposits. I have my money parked where I can access it but I don't want to use money that I may need in an emergency to buy property, it just doesn't make economic sense.
In a crisis I can access cash. With your 80% borrow do you have ready access to cash or have you used it all for deposits (I mean the general you, not you specifically)? I saw people lose everything in the GFC. I'm not deluding myself into thinking it won't happen again. I'm ready!
I think you've got it wrong. Let's say you put NONE of your own money into the deal and you have a cf+ investment. For interest's sake, say you purchase a property with an 8 - 10% return, and the property increases in value by $50k.
So ........the capital invested is NIL, making it an infinite return on investment. I'll take one of those every day, thankyou.
Likewise mate I didn't mean you in general but just used your write up as an example as it is the first one that jumped at me.
My point is that in investing one has to put some capital in to begin with. So forcing this portion of the investment to be calculated within a 105% loan calculation is not necessarily right in my opinion.
It is expected for some capital to be 'locked in' as a part of the purchase.
My point is that in investing one has to put some capital in to begin with. So forcing this portion of the investment to be calculated within a 105% loan calculation is not necessarily right in my opinion.
It is expected for some capital to be 'locked in' as a part of the purchase.
I see your point but let's also say that your tenants leave half way through the year and the property value decreases or is stagnant throughout the year.
It's a gamble, not investment
Yes of course you have to have some money into your first deal. But after that, if you buy correctly, you can refinance and never have to put any money in again.
I started with an ordinary PPOR with a small mortgage and no cash but in 5 years I made well over $1m using NONE of my money.
