How I increased my income

Response 4

Well..thought more than response... Why is it so difficult for some of these people to use words like GROSS, or PRETAX etc... rather than selling click bait ....????



Here's how I increase my income and my clients income. And these numbers are what goes into your bank account. No smoke. No mirrors. In fact, lets use the same 120K required for a US purchase just so we are comparing apples with apples

Let's buy a dual occ 4 bed house + 1 bed granny flat in Orange or Bathurst for 550K. That's made up of a 165K block of land and a 385K build price.

Let's contribute 20% using cash. That's 110K.
Let's contribute stamp duty on the 165K of land using cash as well. That's just over 4K
Let's allow another 6K to cover legals and interest during construction. That's about 120K of cash contributed , in total.

Let's go and borrow the other 440K. ie 80% of 550K. Lets say we borrow it at 4.5% . Annual repayments will be 19.8K. Although I would argue that once construction is complete you'd be mad not to lock in a low 4ish fixed rate . Lets say you go with 4.19%, meaming annual repayments would now be $18,436.
Lets also allow 5K for all other expenses. Rates, insurances, p/m fees etc.. So the total cost for all interest and all other expenses is $23,486 for a year. Lets call it 23.5K.

The properties are achieving a combined rent of $660 per week at the moment, although the Raine and Horne people and the Bathurst Real Estate people tell me they believe $670-680 is readily achievable with the next few which are due to settle in a month or so , which would add 500-1000 extra income to the property..... but lets go with $660 because that's what people are getting right now. That equates to annual rental income of $34,320. Let's call it 31.7K to allow for 4 weeks vacancy.

So... lets test the numbers, just like we did above for the US properties....

You've put 120K cash in.
Your expenses are 23.5K per annum.
Your income is 34K per annum
Your pre tax position is @ 10.5K positive.
Depreciation provides @ 17K deductions in year 1, and by year 10 that figure is sitting at @10K, so lets use 13K as the median...fair enough?

So you go from a pre tax position of 10.5K CF+ to a taxable position of 2.5K -. ( 10.5K minus 13K) That gets you somewhere between $812.50 and $1125 back from Mr Tax Man depending on your marginal tax rate, meaning you just earned between @ 11.3K AUD 11.6K AUD from your 120K cash.

Now, lets not forget Ive allowed for less rental income than will probably be achieved. And lets not forget I have accounted for vacancies, but the US businesses above have not... and lets not forget Ive allowed for tax, but the US businesses above have not... and lets not forget I have reduced depreciation significantly for the first several years. Yet even after I took all of that out , 120K cash invested my way still gets you more AUD in your bank account than 120K invested their way

Make of the numbers what you will, but as I said from the very beginning, I think you can put 120K cash to work here and get similar or slightly better results than the US without the hassle or worry ... and I just showed you precisely how.

Now... send me half of the $14,300 that I just saved you!!!!! Thats reasonable, yeah?

 

nudge nudge

 

By dual occupancy you mean house and granny flat?

 

Correct

 

Are you saying that 10K has to be advanced before any property locations, prices or other information are identified, and that its non refundable if you dont like what they show you ?

May as well just charge you 10K for the seminar...

 

I would not touch this product by this group. Its smoke and mirrors


I am not only chasing cash flow in US but growth, going to be hard to achieve both in Aussie markets now that market sentiment is changing

I get your point about leveraging.

For the investors who have been in USA market since 2011 we now have many avenues to source finance.

I have my eye on another property hoping to close this shortly, while US economy is roaring I will continue to play
Financing will allow me to go hard

For those interested in US check out forum
Biggerpockets..... happy investing

MTR

 

Yep, not to totally derail the thread but the dual occ DH and I bought in Orange last year is very cf+ (Purchase price $530k, rent $660 per week) and cg+. Residex are reporting 10% cg in Orange over the last 12months (Sydney was 4% over the same period). If you look at any of the realestate web sites both the for sale and sold prices you can see the market is still moving in the right direction. So there are still pockets in Aus where money can be made if you look...

 

@euro73 Your analysis on Wheregroup is the same conclusion I came to when I looked at them about a yr ago. Sure, 6-9% ain’t bad after tax, but a lot more effort involved than local properties. It can be argued that there’s more potential cap gain since its coming off a lower base than say the equivalent Aussie property (both dollar wise and the general state of economy wise), but it’s not a given that USA will continue its path of steady growth (especially with what’s happening with US politics + Buffett’s recent letter to investor). If you got in just after the GFC and got secure tenants then you’d be laughing. But going in now fresh with no prior USA properties to leverage / diversify against is a big question mark

My conclusion with USA was I have to be doing the leg work myself and hold a large number of properties for it to be worthwhile (like what @MTR does). Otherwise i should go local resi or commercial for similarly high yields.

 

I don't think there is a right or wrong answer here but what best suits your personal risk profile. I assume that your conclusion above is based on the assumption that interest rates won't rise. I recall paying 8.5% on some of my loans probably a decade ago. Run the numbers on a 440k loan at 8.5% instead of 4.19% and I would expect the return on investment to be a lot different. Not to say its going to happen but it needs to be considered as a risk factor.

No loan (such as in a US cash purchase) = reduced risk.

Historically we are at an all time low with interest rates and this has allowed for asset values in Australia to rise as much as they have. If interest rates go up (and I would think its more a case of when than if) all the properties that were purchased on the assumption that they would remain positive cashflow at 4% interest rates may steer into negatively geared territory and some may become highly negatively geared. Add to that mortgage stress around the country and we may well see declining prices in over priced markets. A positive cashflow property today could turn negative with higher interest rates and also lose value causing negative equity.

For this reason I have been reducing my AUS holdings and taking profits. I am invested in both the US and Australian markets and love the idea of owning properties outright in the US and receiving a monthly pay cheque without the risk of rising interest rates.

In terms of US tax, the US tax system is incredibly generous. Firstly they allow you to depreciate the entire building over 27 years irrespective of the age of the building.

They also allow you to do a 1031 exchange to defer any capital gains tax upon the sale of the property. What this allows you to do is to sell your existing property and buy another property without paying any capital gains. There are rules around this that need to be adhered to but its a great tool to reinvest ALL the sale proceeds into further property and not give any to the IRS in the form of capital gains tax.

This then restarts the depreciation clock again, upon the purchase of the new properties you get 27 years of depreciation again.

Add to that the new trump tax legislation that allows up to 20% deduction of net income for LLC pass through entities and you have a very favourable tax situation.

I am not a CPA and this is not tax advise so if anyone is considering US property investing this is something they may like to verify with their CPA. I have heard several US CPA podcasts where CPA's have spoken about how their real estate clients have paid little to no tax even though they are making big profits on their real estate investments because the tax law allows them to do it legally.

Another consideration is the value proposition of both markets. Are Australian markets such as sydney and melbourne at a peak? Are regional Australian markets value for money or expensive?

We all know US markets fell off a cliff during the financial crisis and different states are in different stages of recovery with many still well below the peak prices of 2008 and properties selling for below previous sale prices. Certainly property prices are selling in the markets I invest in for well below the cost of construction.

Lots to consider, at the end of the day its a personal choice and what best matches our skill set, investor goals and risk profile.

 

It’s equally reasonable to argue that rates will stay very low for a very long time in Australia. Anything approaching the 8.5% noted above would cause mass delinquencies and almost certainly trigger an Australian RMBS crisis and require a Bailout .

I’m of the view there are no reasons for the RBA to increase the cash rate , many reasons for them to leave them alone for a long while yet due to the mass P&I migration of the next 2,3,4 years , and increasingly some possibility of rate cuts because of that P&I migration

While I used a dual occ as an example , I could also use NRAS to demonstrate the point.
Take a 250k 1 bedroom apartment in Port Mac where 60k of cash would have paid for 20% + costs , and where the after tax returns are @14k cf+ . 120k would fund 28k net , or 23% net ...

Or take a dual occ dual NRAS .... 550k with 2 NRAS credits . 440k borrowed
Instead of 660 per week you’d receive 20% less . Ie 25.4k rental income over 48 weeks . You’d be running @2k CF+ pre tax , and @ 11k negative after depreciation . That would generate @3.5 - 5k ATO refund . Add 22K for 2x NRAS credits and you’re looking at 27.5-29k net against 120k invested . Over 20% net .

I’m also not against US Resi . I actually think that it’s reasonably attractive , and especially compelling for the 2 reasons I outlined in an earlier post. I’m simply pointing out The yields , whilst excellent, are far less amazing than the video link suggested and can be achieved here as well if you look at options outside the herd . Two examples of 20% outlined above are evidence of that.

PS - I’m also aware your fees are a third of the other guys fees and your cash flows are certainly more realistic . That’s a good start

 

thanks @Karina, good info

 

Good discussion

I agree fees are crazy high and the fact addresses are not provided scary stuff
Who would buy a property in Oz without knowing the address?

As far as US property goes I just purchased a property today 15% net yield, I cant do this in Australia.
As an investor in US I also have many advantages as mentioned no stamp duty, less tax etc

I have not given up on Oz am also looking at developing in Perth... just got to source the right property at right price, tough gig

 

Yeah....asked @RajP to confirm thats in fact what the proposal is, but no response yet.

ie ... is 10K required to be advanced before any property locations, prices or other information are identified? And is that fee non refundable if you don't like what they show you ?

In fact...do you even get a choice of property? Or is one just allocated to you from a pool of pre identified deals?

 

As I said previously red flag with this group

Also the volume of properties they are buying is a concern, I would say its bundles.
This means they buy at significant discount but quality will be hit and miss

This group is new to USA? I wonder how many properties the director holds in US? How he identified suburbs etc. Seems to be little information on criteria of selection and lots of spin on gross yields, meaningless unless you know net figures and they know it

MTR

 

I can answer some of these questions:

• Todd Hunter (and his partner Bec who runs the mortgage broking) owns roughly 33 or so US resi IPs, many in his SMSF
• He does buy portfolios sometimes (i.e. a retiree selling 5 to 20 properties)
  
• You are told city names for US buying (for his Australian buying, you don't know city names, only which state).
• He does inspect each one
• He is / has been buying in the following areas - Cleveland, Columbus, Detroit.

 

as someone who never invested in america, why are we always looking at properties around the $100-200k mark??

any more properties higher in price ?? or we are just too shy to show those off. ? or they are just not worthy investments because the yield are too low ?

but i am saying 5% increase for $1m property is better than 10% in $1m property ? (capital gain) and/or (yield)

i've seen the some commercial from mtr and stuff.

 

You need the address so you can check Zillow and find out how much he paid for the property and what you are actually paying. He could be doubling his money on purchase price and you wont know this without the address. You also need to know the reno costs, it needs to be transparent....

NET yields is what matters, gross is meaningless, there is more slippage in US than in Australia.

If I was buying from a BA I would want to be paying actual price and BA fee, but not what Todd is charging, its obscene. Would you pay 20% BA fee in Australia and where is his track records, by this I mean a history of US rentals, show me the net yields over a 12 month period.. minimum? At this will give me an indication of property management.
Buyer beware

Start with biggerpockets forum

 

Higher entry level prices? depends on yield? commercial we posted was a ripper, hard to find though.

As a foreign investor resi property still comes back to yield, how can you hold a US property when you are buying in Aussie dollars, you are 30% down, this is why you have to have an exceptional yield and volume is key

I just purchased another property with 15% net yield. Wont be posting this one for the moment, but after buying 4 properties in US now that has increased my income to $38,000 net and I started in December 2017.
I cant do this in Australia, even developing property it takes significant work and capital to create cashflow/income streams.

The window for Atlanta is closing quickly unfortunately for investors, just no stock. Tough gig

 

Here are some very basic tools to help you work out US property, start with Zillow. So you need an address for this.

You should look at last sold date/price, value, county taxes, rent
Check out the graph, what's it doing, clearly rising. But if looking at a different market other than Atlanta make sure you see this happening.

This link is one of my first properties I purchased in US

Scroll down...... mountain of information

You will see that date of purchase - November 2011
Price: $34220
Esimtate Value: $158,317 (use as a guide could be more/less dependent on condition/renovated??

6120 Course Side Way, Lithonia, GA 30058 | Zillow

 

Just to give you an idea on this silly market in Atlanta.
I purchased this town home, settled in December 2017

There is no way you could buy a 4 bedroom town home today for $85,000
This required $1000 repairs. Was tenanted.

According to Zillow around $107,000, that is $22,000 above purchase price, that is a 25% increase. Lets revisit this property same time next year

I love Union City and Lithonia they provide the better rental returns and you will have applicants lining up.

6332 Hickory Lane Cir, Union City, GA 30291 | Zillow