Lithgow Properties

Having a quick look on www.realestate.com.au you will see there are several properties that can provide you with neutral/positive gearing. Have a look below at a list of properties with their figures and gross yields for each of them. These are all simple calculations and using a spreadsheet was able to take only a minute to generate them. Note these are all free standing houses so have no strata associated with them.

House Cost	Rent Per Week	Gross Yield	Interest	Weekly Profit
$143,000.00	$165.00	6.00%	$151.25	$13.75
$155,000.00	$175.00	5.87%	$163.94	$11.06
$185,000.00	$210.00	5.90%	$195.67	$14.33
$209,000.00	$225.00	5.60%	$221.06	$3.94
$235,000.00	$265.00	5.86%	$248.56	$16.44
$180,000.00	$195.00	5.63%	$190.38	$4.62
$199,000.00	$225.00	5.88%	$210.48	$14.52
$160,000.00	$180.00	5.85%	$169.23	$10.77
$165,000.00	$185.00	5.83%	$174.52	$10.48
$160,000.00	$175.00	5.69%	$169.23	$5.77
$249,500.00	$350.00	7.29%	$263.89	$86.11
$229,000.00	$300.00	6.81%	$242.21	$57.79
$169,500.00	$250.00	7.67%	$179.28	$70.72
$235,000.00	$265.00	5.86%	$248.56	$16.44
$240,000.00	$375.00	8.13%	$253.85	$121.15
$245,000.00	$300.00	6.37%	$259.13	$40.87
$189,000.00	$210.00	5.78%	$199.90	$10.10
$150,000.00	$175.00	6.07%	$158.65	$16.35

The interest is assumed to be 5.50% per annum. 

As you can see, just having a quick look there are plenty of properties which can offer you positive returns. Now I understand that I have only done gross yield, and there are plenty of expenses that have to be accounted for that will severly reduce the overall yield, but hopefully even without some of these expenses the properties should be at least neutrally yielding. 

It is also important to note that it is not always the best to go purely off yield as a figure, but sometimes a figure like weekly profit would also be a good test. In the above table, a higher yield does not always correspond to a higher weekly profit. And at the end of the day that is what is really important, getting that money in your pocket! 

A cash on cash return is also a good way to check and compare properties, the following table does a cash on cash return with a couple extra assumptions. Assumes a deposit of 20%, additional purchasing costs of 5% (stamp duty, lawyer fees etc). And additional expenses such as property manager fees, insurances, rates etc of 2% of property value.

House Cost	Total Purchasing Costs	Loan Size	Interest	Expenses	Gross Rent	Yearly Profit	Cash on Cash Return
$143,000.00	$35,750.00	$114,400.00	$6,292.00	$2,860.00	$8,580.00	-$572.00	-1.60%
$155,000.00	$38,750.00	$124,000.00	$6,820.00	$3,100.00	$9,100.00	-$820.00	-2.12%
$185,000.00	$46,250.00	$148,000.00	$8,140.00	$3,700.00	$10,920.00	-$920.00	-1.99%
$209,000.00	$52,250.00	$167,200.00	$9,196.00	$4,180.00	$11,700.00	-$1,676.00	-3.21%
$235,000.00	$58,750.00	$188,000.00	$10,340.00	$4,700.00	$13,780.00	-$1,260.00	-2.14%
$180,000.00	$45,000.00	$144,000.00	$7,920.00	$3,600.00	$10,140.00	-$1,380.00	-3.07%
$199,000.00	$49,750.00	$159,200.00	$8,756.00	$3,980.00	$11,700.00	-$1,036.00	-2.08%
$160,000.00	$40,000.00	$128,000.00	$7,040.00	$3,200.00	$9,360.00	-$880.00	-2.20%
$165,000.00	$41,250.00	$132,000.00	$7,260.00	$3,300.00	$9,620.00	-$940.00	-2.28%
$160,000.00	$40,000.00	$128,000.00	$7,040.00	$3,200.00	$9,100.00	-$1,140.00	-2.85%
$249,500.00	$62,375.00	$199,600.00	$10,978.00	$4,990.00	$18,200.00	$2,232.00	3.58%
$229,000.00	$57,250.00	$183,200.00	$10,076.00	$4,580.00	$15,600.00	$944.00	1.65%
$169,500.00	$42,375.00	$135,600.00	$7,458.00	$3,390.00	$13,000.00	$2,152.00	5.08%
$235,000.00	$58,750.00	$188,000.00	$10,340.00	$4,700.00	$13,780.00	-$1,260.00	-2.14%
$240,000.00	$60,000.00	$192,000.00	$10,560.00	$4,800.00	$19,500.00	$4,140.00	6.90%
$245,000.00	$61,250.00	$196,000.00	$10,780.00	$4,900.00	$15,600.00	-$80.00	-0.13%
$189,000.00	$47,250.00	$151,200.00	$8,316.00	$3,780.00	$10,920.00	-$1,176.00	-2.49%
$150,000.00	$37,500.00	$120,000.00	$6,600.00	$3,000.00	$9,100.00	-$500.00	-1.33%

As you can see, when you do a bit analysis into the figures a lot of the properties start to give you poor returns, and are slightly negatively geared. Keep in mind that even the worst performing property above is only in negative about $1,700 per year, about $33 per week. But still, it is costing you money, not making you money! On the other end of the scale, there is a property that is earning you $4,140 per year, an extra $80 per week! It may not sound like a lot of money, but it is all passive income, money in your pocket for doing minimal work. 

As I said at the start, finding positively geared properties is very difficult, the list of properties above, although looking at the gross figures appeared to give you positive returns all of them, with a bit of analysis, it showed that most of them were indeed negative, albeit not too badly. But the point to remember is that the positively geared properties are still out there! I searched for about 30 minutes to find this list of properties above, and only searched in one city. The analysis took a further 30 minutes, so one hour of my time and I can find a good positively geared property to help increase my real estate portfolio.

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Disclaimer: By viewing this website, you acknowledge that it is for informational purposes only and does not imply any contractual agreement, promises of returns or legal expertise. All investors should consult with legal representation and appropriate accountants before making any investment and should ensure that individual due diligence is done. Any information provided here is for educational purposes only and should not be taken as financial advice.

Interest rates: are your investment decisions sending you to an early grave?

On the first Tuesday of every month something happens that gets every property investor and commentator curious.

I am talking about the meeting that the Reserve Bank of Australia (RBA) has every month to talk about all things interest rates. 

It may seem insignificant to change interest rates by 0.25%, but 0.25% means millions of dollars for banks and financial institutions. If property owners are treading that fine line of only just being able to service their loans, then one rate change in the wrong direction could leave them struggling to make ends meet, and a couple rate changes could leave them close to having to sell their home or even facing bankruptcy.

This is why it is so important that people take into consideration the potential consequences of rate changes before they sign up to a new loan. A property loan is a long-term deal. Even with refinancing you could still be locked in for up to three years - and facing 30 potential rate changes in that period.

It's a matter of needing to hope for the best but plan for the worst.

I still remember when I got my first home loan ... the standard variable rate at the time was about 5.80% per annum and with that rate I was comfortable making the repayments, even being able to manage some extra repayments. But before I finally signed off on the contract, I wanted to make sure that changes to the interest rate wouldn’t leave me bankrupt. Having done the sums, I would have still been able to make the repayments if the interest rate rose to 10.00% per annum.

A simple way to check is to add 3.00% to the current standard rate and see if you are still able to make repayments. If you can then you should have no problems servicing the loan.

It’s interesting to note that most financial institutions don’t advise you to carry out this sort of simple, yet very important, check. I was given pre-approval for a loan amount way out of my limit. Add to that a few rate changes in the wrong direction and I would have been on the brink of not being able to service the loan.

In my opinion, this is just pure greed on the part of financial institutions and is plain negligent. A lot of people will take the pre-approval amount and start looking for properties up to this price range, completely unaware of the precarious position they are putting themselves in. Add to this the tendency for Australians (at least in the past) to live way above their means and you have a perfect recipe for disaster.

At the end of the day, however, people still need to take accountability for their own actions and should take a greater interest in their finances. Getting finance is the most powerful tool property investors have in regards to building wealth, but, like most things, it is a double-edged sword. You need to take stock of your current situation and plan for the different circumstances that could arise in the future.

I have watched my parents worry about bills as they come in and get stressed at the increases to grocery prices. One of the things that they did do right was to pay off their home loan as fast as they could. Couple that with a large deposit and they didn’t need to wait for RBA’s monthly interest rate announcement with sweaty palms.

It is this mentality that I have emulated. When I see the interest rates change, I know my large buffer will keep me going before things get tight. As I increase my investment property portfolio, I make sure that I use these ideals in every investment decision. The last thing that I want is to be watching the news once a month, praying that the RBA does not increase interest rates, knowing that if they do, it would lead to financial catastrophe.

Investing is about growing wealth, not about growing stress.


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Disclaimer: By viewing this website, you acknowledge that it is for informational purposes only and does not imply any contractual agreement, promises of returns or legal expertise. All investors should consult with legal representation and appropriate accountants before making any investment and should ensure that individual due diligence is done. Any information provided here is for educational purposes only and should not be taken as financial advice.

The Myth of Negative Gearing

I remember when I was younger, asking my mum what Negative Gearing was. I had seen it advertised everywhere, from free seminars on television to articles in magazines and newspapers, it seemed to be the buzz phrase of the day. My mum explained that negative gearing was when you buy a house and rent it out to a family and let the rent pay for the mortgage. I guess she kept it simplified because I was not even a teenager at that stage but even still, it sounded like a good idea to me, you basically get a house for free! So what could possibly go wrong?

A few years later, when I really started to look into investing, I began to see the “negative” part of negative gearing. I guess the answer was always in the name, if something is called negative, then it is never going to be a good thing, right?

So, what is negative gearing? Put simply, negative gearing is purchasing a property as an investment, where the money coming in (rent) does not cover the money coming out (loan repayments, maintenance, agent's fees etc.) and you are forced to use your own income to cover the difference.

But so many people have made so much money out of negative gearing, "how can it be a bad thing?" I hear you ask. Well to make money out of a negatively geared property, the value of the property needs to rise consistently over the medium to long term of the loan. Back when negative gearing was really popular, this was the case but in the not-so-flash property market of today, you need to give things a second and third look before jumping in. In a rapidly rising market like Australia had during the 2000s, it was next to impossible to lose money investing in property. In the end, all these people who invested in negatively geared property were able to still make money despite an unsustainable investment strategy.

So, what makes it so unsustainable? Well it is a fact that the majority of property investors own 2 or less properties, I cannot remember the exact percentage, but I believe it is something like 90% of property investors 'only' own 1 or 2 properties. The reason for this is simple, the majority of properties are negatively geared; they cannot afford to hold any more. 

As an example, let’s say you have $1,000 extra cash flow a month. Because a negatively geared property is taking money out of your pocket, assume it costs you $500 per month to maintain the loan (cover the difference between the rent and the loan repayments). Already you can see that you are only able to cover 2 properties, as after that, you are out of extra cash flow.

So why do people negatively gear into property? Well again, the answer is simple. They have to. They want to invest in property because according to a lot of people, it is a great way to invest, just about risk free, just about a guarantee to make a return and the saying “safe as houses” does come from somewhere after all. 

As it stands now, if you want to invest in property as part of your portfolio, you will see that almost all of the available properties are negatively geared. This is mainly due to the extremely high house prices in Australia, particularly in the major cities. House prices rose dramatically over recent times, and the increase in rent simply did not keep up. I remember when I was renting back in 2009; we paid $550.00 per week for a 3 bedroom house in Sydney. Looking at comparative sales nearby, the house would have been easily worth about $800,000. Assuming an interest rate of 7.00% per annum, that gives a weekly interest repayment of $1,076.00. Repayments at this level don't even begin to "eat" away at the principal amount as the rent is nowhere near the amount needed to service the loan. This is the situation across most of Australia, rent prices just do not come close to the loan repayments and all the properties have to be negatively geared.

Another reason that people invest in negatively geared property is to reduce their tax bill. People are under the illusion that they can end out better off because they're paying less in tax. Of course it is true that you can claim expenses on the house on your tax return, but this is offset by the money out
of your pocket to service the loan, so you still end up out of pocket. Let me show you an example:


Your initial taxable income is $150,000 per year

Tax rate of 45%

Rent collected of $600 per week

Interest repayments of $1,100 per week

Other deductions of $5,000 per year (property maintenance, fees etc)

 

Option 1 – Not investing in property

Taxable Income = $150,000

Tax Paid = $150,000 - [$150,000 x (1 – 0.45)] 
               = $67,500 (approximately)

Net Income = $150,000 - $67,500
                   = $82,500

Option 2 – Investing in property

Taxable Income = $150,000 + $600 x 52 - $1,100 x 52 - $5,000
                         = $119,000

Tax Paid = $53,550

Net Income = $119,000 - $53,550 
                   = $65,450

So as you can see, your net income is almost $20,000 less in this example, so just to break even with a negatively geared property, you need to ensure there is at least $20,000 in capital gains over the course of a year. Now as I said earlier, when the property market was going well, this was fine, but without the large rises, negative geared property should be heavily scrutinised before committing to buy.

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Disclaimer: By viewing this website, you acknowledge that it is for informational purposes only and does not imply any contractual agreement, promises of returns or legal expertise. All investors should consult with legal representation and appropriate accountants before making any investment and should ensure that individual due diligence is done. Any information provided here is for educational purposes only and should not be taken as financial advice.

How to Choose the Right Property Manager

So, you’ve just purchased your property. You’re over the moon that you’ve finally made the leap into the property market and can now start reaping the rewards. Well, unfortunately the hard work is not over. The number one, most critical decision outside of when to buy and sell a property is choosing a suitable property manager.

A property manager’s role is broad and can cover anything from choosing a tenant, collecting rent, carrying out repairs, and providing sensible advice on management decisions. A good property manager will do this and more, covering all of the little, but very important things as well. These should include, but are not limited to:

• Find prospective tenants
• Check a potential tenant’s criminal record
• Prepare the lease documentation
• Advertising
• Maintenance
• Take initiative with undertaking repairs under a nominated dollar value
• Organise bond documentation
• Pay authorised account and statutory charges
• Undertake regular property inspections and provide good feedback back to the landlord
• Check a potential tenant’s credit history
• Give you up to date advice on rentals and the property market
• Administer rent reviews
• Pass on the rent payments to you promptly
• Provide regular statements
• Handle arrears

So, how do you choose a good property manager? There are a number of ways that good property managers can be found. It’s rare that the best one for you will be the buyer’s agent. It’s much more common to find good property managers through word of mouth, looking through investment forums etc. Here are some tips for finding a good property manager:

• Always contact the property manager’s current and previous clients to get a bit of perspective on his or her character
• Have a clear contract set up with your property manager which outlines all the services that will be provided
• Generally, try and steer clear of really cheap property managers as it’s likely the services will be of a much lower quality and will end up costing you more money in the long-run
• Try and gauge the reputation of the company that the property manager works for by looking on the internet and contacting other professionals in the industry
• Find a property manager that specialised in the types of properties that you are planning on buying

Here are some other articles that you might be interested in:

 

How to Set Up a US Bank Account

Advice on American Real Estate Agents

American Real Estate Listing System

If you have any questions or comments feel free to email us at streamlineinvesting@gmail.com

 

Disclosure: The article is not to be taken as investment advice and the views expressed are opinions only. Readers should seek advice from someone who claims to be qualified before considering allocating capital in any investment.

 

Turning your PPOR into an Investment!

Recently I wrote an article about the comparison of Renting vs Buying. That article was for the initial choice between buying a house compared to renting a place to live and investing the assumed extra cash flow that comes with it. A question was asked of us recently on the benefit of moving out of your PPOR and renting a place, while renting out your PPOR in the meantime.

I remember reading an article a couple years ago about the benefit of purchasing a place that you want to live in some time in the future, basically the typical 4 bedroom suburban home to raise a family in, while you are single and young, live where you want to. The benefits seemed to make sense and this is exactly the situation I was asked about. I now seem to find myself in the same situation. I have been living in my PPOR for the last two and a half years but I am relatively far from the city, not close to many of my friends and not in the most desirable area to live in.

The decision to move out has already been made in my mind; I feel for me at this time, it is a better lifestyle choice. Since I have already balanced the emotional side of the decision, I now just had to convince myself of the financial benefits. I was able to develop a fairly routine spreadsheet to show the financial implications of making such a decision.

Basically, I would be able to rent out the property for $400 per week and to rent out a place that I would like, I would be able to find a property for $250 a week. Already it is easy to see a benefit of $150 per week. However it is important to note there is a lot of additional expenses that will need to be covered when you become a landlord. Landlord insurance is required to ensure your tenants do not take you to the cleaners, contents insurance is also a good thing to have when you are renting. Property management fees will also need to be taken into consideration.

After taking all of the above into consideration, I found out that I would be approximately $100 per month better off if I moved out of my PPOR and rented it out. It should be noted that I did not take into account the tax implications of turning my PPOR into an investment. I realise you would be able to deduct a fair bit due to having the investment property, but this would most likely be offset by the added income due to the rental returns. So in the end, I did not take into account the tax implications, it would have made the spreadsheet a lot more complicated, and I do not believe it would have added anything extra.

If you would like a free copy of this spreadsheet, please click this link Spreadsheets

I have also read about the benefits of exchanging the title of the property into a trust to be able to fully deduct the interest repayments with your tax return; however I have not looked into this in great detail and unfortunately cannot provide any extra information. However if you have paid down the principal significantly (in which case there is minimal interest to claim), then it may not be worth it. As stamp duty will have to be paid when you transfer the title to a trust.

2 Houses Are Better Than 1

One of the first things I noticed when looking to get a loan was just how much interest you ended up paying over the life of the whole loan. To purchase a $400,000 property on a 30 year loan would end up costing you around $1,000,000 (assuming interest rate of 7.00%). So you are effectively paying two and a half times the value of the property.

This didn't seem too appealing so I looked at the best way to reduce the amount paid in interest. The most efficient way I could determine was to reduce the loan period, which means increasing your repayments. To purchase a $400,000 property on a 15 year loan, it would only cost you approximately $650,000. Saving you $350,000! This is almost enough to buy the same property again. I then wanted to figure out other ways to be able to escape this need to pay such a high amount in interest repayments.

Unfortunately, to pay off a property quicker, you need to increase the repayment amount. In the example above, the 30 year repayment was $2,660 and the 15 year repayment was $3,600. So where would you come up with the extra $1,000? Then I remembered sitting with my group of friends and talking about investing in property.

I have talked in another post about the benefits of purchasing a property with someone else, where simply the increase in repayments by using the combined incomes, significantly reduces the loan term and effectively reduces the interest paid. But now I am contemplating something different. Let's say two people purchase a house together and use their combined incomes to pay off the property ASAP. Then the same two people buy a second house, again paying it down ASAP. So at the end of the day, each person has a house each.

There would be a lot of complications between what is an equivalent house for each to own and there may be some issues between the two if one believed the other got the better end of the deal, but avoiding all the emotional aspects, and looking at the pure financial side of things:

Using the following inputs:
- Each person has a monthly saving of $3,000
- Initial cost of a house is $300,000
- Capital Appreciation of 2% Per Annum
- Interest Rate of 7.00% Per Annum

Situation 1 - Each Individual buys their own property

Using this formula in excel - NPER( ) - the repayment period will be 151 months for each person, so a total individual cost of $453,000.

TOTAL COST - $906,000
TOTAL PERIOD - 14 Years 7 Months

Situation 2 - They buy 2 properties together, one after each other

So the total repayment is now $6,000 per month.

1st House will take 60 months to pay off. A total cost of $360,000

To obtain an equivalent house for the 2nd property, assuming the capital appreciation of 2% per annum, the house price of the second house would now be $331,200.00 (after 5 years)

2nd House will take 67 months to pay off. A total cost of $402,000

TOTAL COST - $762,000
TOTAL PERIOD - 10 Years 7 Months

So as you can see in Situation 2, the total cost is $144,000 cheaper than Situation 1. And also the total period of being in a loan is 4 years less, with both people at the end of the day essentially obtaining the same thing.

Keep in mind, this is a very simplified example, and there is a lot I have not taken into account. Firstly, if you do buy a property together, you will only be able to use one FHBG and stamp duty exemption or whatever else your government offers you. Also there is the option of, for instance, say you both purchased a 2 bedroom property, then in Situation 1, each person would have a spare room which they could perhaps rent out for extra repayments, whereas this does not occur in Situation 2, until the second house is bought. It is also important to note the preferred option is typically dependent on the capital appreciation of the property, using a low rate (as I used 2.00%) will generally have Situation 2 preferred, but a higher rate (over 5.00%) will generally have Situation 1 as the better alternative financially.

I have developed a spreadsheet which takes all the above into account and allows for a fairly accurate comparison between the two different methods.

If you would like a free copy of this spreadsheet, please click this link Spreadsheets