Who has followed Jan's advice "to the letter" ?

[Garry K]

Hi HWD

Good explanation. I too follow your strategy as cash flow is okay at present, as we both are employed.

I can see a time drawing close when, if we keep buying -cash flow properties, our cash flow is under pressure. Can remedy this by taking tax deductions as we go, but prefer not to and get a refund cheque at end of year. Sort of forced saving idea.

Also some concern if either of us lost our job, but probably only short term situation.

Lenders may also have some concerns.

I areas where there has been capital growth, it is difficult to get above 5% return just now, but eventually this will sort itself out (we hope).

I believe there are still areas with some capital growth left, so worthwhile still looking for deals at the right price, even if -CF.

Geekay

 

[Janfan]

jans methods & serviceability

kev,

hey good post

Though I must admit to being confused

Jan says that serviceabilty is based on 30% salary and 80% rental
should be greater than loan payment
these figures may vary a bit- maybe?

but if you look at Jans figures in her 10 year forcast
in year 3 income 30% 60K +rent80% 54k = 61k
payment (io) = 78k therefor doesn't work
she makes no mention of cash bond so how does it work?

is this another reason why people don't follow to the letter

Janfan

 

[hwd007]

Yes Garry I do prefer the low maintenance strategy, being interstate. I took out income protection to try to help reduce the risk. It is tax deductible. But it only covers 75% of your income and only if you get sick, but not if you get sacked or made redundant etc.. Not sure that such cover exists at all, but if it does I'm all ears.

cheers.

 

[elwyn.d]

the Book

Hi Kev,
I bought a couple of ips 3 1/2 years ago. Read Jans book a year later and it was like ' Eureka'. Its been my bible ever since and the first book I recommend to anyone considering pro inv.
In fact when I read it I sat with a highliter (remember school) and highlighted passages and made notes in it.
No I havnt followed it to the letter, but I have stayed pretty close all the same. Now have 9ips and cannt wait to get my next 9. Good Luck. Elwyn

 

[Les]

G'day Janfan,

And welcome to yet another of them (Jan's fans, that is...)

You said:-

Jan says that serviceabilty is based on 30% salary and 80% rental
should be greater than loan payment
these figures may vary a bit- maybe?

but if you look at Jans figures in her 10 year forcast
in year 3 income 30% 60K +rent80% 54k = 61k
payment (io) = 78k therefor doesn't work

Fortunately, your example appears to be from "Building Wealth in Changing Times" (I have that one - I've lent my "Building Wealth white books - both old and new - out to others...)

I must admit, you have been VERY THOROUGH in noting this - I can only agree with your mathematical conclusions (I'd never done this before, but your comment is quite correct).

Now, let's help with the confusing bits:-

Let me refer you to page 96 of "Changing Times". At the top of the page, it says (edited) "First, the bank had its own set of rules... (which may vary from bank to bank...)"

It then follows on with:- "Notice how the bank does not take into account the tax refund. Nor do they acknowledge that most, if not all, of a second wage can be put to loan payments.
...... Let's see how it looks through the eyes of Bill and Mary".....

The book then shows that Bill and Mary reckoned that 25% of rents should be allowed for expenses paid from rent (even though the bank only required 20% allowance for DSR calcs).

Also, on page 100, this comment = "Consequently, for Bill and Mary the key indicator is the excess cash flow...... " and the following spreadsheet shows THEIR calculations re when THEY believe another property is possible. It does not take into account any particular bank, or their respective lending criteria.

Keep in mind that some Banks will lend far more than 30% of wages (they use the term NDI - or Nett Disposable Income) and it is up to you to demonstrate that your NDI allows their loan to proceed.

So, in a few words, the calcs were Bill and Mary's view of the situation, and were NOT keeping to "the bank's" rules. It is based on their NDI calcs - and what THEY believe is achievable !!

Also, the table doesn't take the "excess" from previous years into the equation - but, if the excess paid down a mortgage, then interest payments would be reduced accordingly (see page 104 under the heading "8 the excess")

these figures may vary a bit- maybe?

Yeah - they can vary A LOT !!! Find a good Mortgage Broker, or search for "other" lenders - and the NDI thing can work for you too !!!

Hope that helps, JF

Regards,

 

[Janfan]

debt serviceability

Les

thanks for your response

I accept that the figures may vary , but
- I looked at year three figures so If you squeeze by in year 3 year, still borrowing in year 7,8, 9 seems impossible
- the figures are presented on the basis of IO loans and buy and hold so I have to assume that paying down the loan while possible is not subject of discussion

so to the bigger picture
am I right in saying Jan's method can't work as shown
and needs high positive cash flow rentals to sustain

I was hoping for more input from others but the thread is probaly buried too deep in this one



Janfan

 

[Les]

G'day Janfan,

I accept that the figures may vary , but
- I looked at year three figures so If you squeeze by in year 3 year, still borrowing in year 7,8, 9 seems impossible

I'm not "with you" here Janfan - Year 3 had the least amount of "excess income" - why do you think that years 7, 8, or 9 would be impossible??

the figures are presented on the basis of IO loans and buy and hold so I have to assume that paying down the loan while possible is not subject of discussion

Maybe - maybe not - I would think that "whatever works" would have been the answer. What IS happening with the "excess income? I don't see it "utilised" in the worksheet - but it could be paying down a loan (in Offset account, perhaps).

so to the bigger picture
am I right in saying Jan's method can't work as shown
and needs high positive cash flow rentals to sustain

Hehe - this could lead to a rehash of previously travelled discussions - but, personally, I don't agree. Bill and Mary are demonstrating how they CAN afford these extra properties. And, if they meet up with a bank/lender who DOESN'T limit their options by using the 30/80 rule to qualify customers, they will succeed.

Reading between the lines, though - are you currently some years "down the track" and are striking problems? Or are you simply a keen maths (logical thinker) person?

I do know that "some" lenders will loan greater than 40% against income (but that is often where NDI comes into it). It CAN work - but probably not with ALL banks. (You only need ONE to say Yes!!)


Regards,

 

[Janfan]

Les,

thanks again for your repsonse

I jumped to the conclusion that serviceabilty issues would get worse.

I am only a newbie looking for answers.

Jans books have inspired me and am trying/planning to enter the market.

Janfan

 

[Les]

G'day Janfan,

Well, I must say, your enthusiasm to "tackle" Jan's spreadsheet in such detail has impressed me. And, since you raised a very important point, which was absolutely correct (i.e. it DIDN'T fit with the bank's 30/80 rule), it "drew me in" and found me replicating Jan's calculations in an Excel spreadsheet.

Can I say "It was an enlightening process" !!!!!

Jan had explained the calcs on the following pages (102 thru 104) and they were a great help in compiling the spreadsheet.
I'd suggest you read each of the points on those pages, as they put each of the numbers into perspective. e.g. p103, point 5 - Interest - Jan used 10% which was probably reasonably valid in 1994 when the book was first released. WHAT would be the result today if lower rates were used??? (Can I say the difference is HUGE !!!)

And questions like this were what prompted me to do the spreadsheet. In this way, any considered changes can be entered and the results seen immediately. The "bones" of Jan's spreadsheet are great, but the values therein don't really fit with TODAY !!

So, Janfan, take the IDEA from Jan and work through with YOUR numbers to ensure it sits well with you, then, having proved to yourself that "the numbers work", then approach a lender (or two, or ten, or a Mortgage Broker...) and make it reality!!

One of the major points was that the return on these IP's of Jan's were 6.7% (not overly surprising for Brisbane in the mid-90's) and Bne returns are certainly higher than Sydney - but, are they 6.7% today?? For some, the answer is yes - but getting harder as CG goes through its cycle for Bne.

And I was able to confirm that the "excess" each year is NOT carried forward through Jan's calculations (she explains this on p104) - i.e. you might have spent it buying dinner out for a year.... But what you DO do would have a marked effect on the possibility of buying the NEXT IP.

I jumped to the conclusion that serviceability issues would get worse

They certainly CAN, but don't have to, Janfan. So much depends on a number of factors. A good Mortgage Broker may well be able to "find a way" - as YOU can too, but with hundreds of different lenders, each with differing rationales, you could spend MONTHS checking them all out. A good MB can point you in the right direction in an hour !!!

Anyway, welcome aboard - and thanks for such a thought-provoking question.

Regards,

 

[Janfan]

Les,

great reply

now who is being thorough

I used a spreadsheet downloaded from [email protected].
Michael & Kaye in this very forum, a very big help it is to.
Played with interest rates , growth etc

I also think 6.7% is very difficult in bne but I think/hope the longer term will still work.


regards
Janfan