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Why would you buy at 105%? You have to go quite a few steps backwards before you even get back to 0.
I have a few positive ones in Melb CBD (3000). They are either:
- fully furnished, or
- short term rentals
All were positive from the start with 80% finance.
I'm new to property investing and I think I must be doing something wrong. I'm looking for a positively geared property but all the ones I look at online and do rough calculations on only seem to just cover the IO loan and the extras leaving nothing extra. I know you can add extra income by putting a granny flat and renting rooms seperately. But for my own curiosity I would like to know where are your positively geared IPs?
Thanks for answering in advance.
Ok. I'll put my hand up. What is this 105% calculation? Can somebody point me to a resource which explains this?
Isn't the best measure annual return on deposit paid?
To answer the original question, most places.
@ MTR: looked into Japan, Spain lately?
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"
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+
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 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.
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
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.
This makes no sense. The investment will not all of a sudden be no good if you don't put your own money into it. It's just a different alllocation of your own money. Anyone that borrows 105% has enough equity to be able to do that. So it's not like people are borrowing 105% on all properties they own and having a negative LVR.
A lot of people do it so I am not completely dismissing this approach, just sharing another perspective on the topic
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%).
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.
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.