How much negatively geared is acceptable

Hi, all.
Like the heading I guess it is depending on individual's situation but just would like to listen to other people's opinion. I will try to provide much details.

I have just enough deposit (5%) + stamp duty, legal ($2k) and buffer (2k) to buy 500k to 520k house. I was told that LMI could be capitalised on the loan.

I have been looking for a house (in Brisbane) in Ferny Hills other areas to a lesser extent. The median rent for 3bd house is around $450.

I asked a broker I know and was told that with 95% lending + LMI at 5% is possible.
Let's say if I purchase one (with 5% deposit) for $520k with 5% IO loan and rent it for $450 pw my chshflow is negatively geared around $160pw. This is after all the cost (rates, water, insurances and PM fees at 8.8%).


Is this acceptable negative cashflow? Personally I could manage that extra $160pw as of now since this will be my only IP. Only one.

- My question is If the interests rate goes up would rent expected to be increase at the same phase?
I would like to continue my property investment journey like you guys.

- Would this negatively geared (by $160 +) property have influence the serviceability and borrowing power for the 2nd IP? If this is the case...

- Should I move my radar to suburbs which give you higher yield?
I know I would need capital+ saving to buy the next IP but I have learned that capital growth and attractive yield do not always happen simultaneously.

Broker I asked told me to start with what I have got (5% deposit) rather than waiting to save more but also recently told me to find more deposit to buy when I raised the concern about the out of my pocket cost. Both might be right but if that is the case I thought why not ask PC members who have gone through similar situation. Any advice or suggestion will be greatly appreciated.

 

For an INV purchase or a PPOR purchase? If you are thinking 5% + stamps + legals will get you an I/O or a P&I INV loan.... you may need to go back to saving another 7 or 8% ... you'll need @12% + stamps to be able to choose from a limited number of lenders at 90% INC LMI. You'll need 20% + stamps for most lenders ( by next week) as most are headed to 80% LVR for INV properties.

If you are thinking 5% will get you a PPOR P&I loan... thats a "little" more possible.... although 95% LVR is still a strict strict ask.

 

Hi euro73, it is INV purchase with I/O loan. Would 3rd tier lenders still do 95% INC LMI?

 

I can't talk about finance but I can talk about negative gearing.

Say you buy a $500k property and pay another $20K in stamp duty, mortgage fees and legals. I have no idea what stamps cost these days but my last purchase was almost $14k for a $427k house. After you reduce the rent by your repayments, rates and water, management fees, insurances and all that, you are going to be way out of pocket if the rent is $450.

Then you factor in depreciation, which nobody can guess here on this forum as all houses are different, and you will take your personal tax rate into consideration. Once you prepare and submit a Tax Variation Form, your monthly out of pocket expense will not be as much as you currently think.

Then again, with lending policies changing at the moment, you will probably be required to pay P and I, which will eat into your cash flow much more than IO finance.

You cant do much until you have discussed your individual circumstances with a competent broker.

After a few years when your property has increased its market value, you can apply to refinance at a lower interest rate due to having a lower LVR. This will provide you an improved cash flow. However this is all hypothetical. Most Qld properties promptly dropped in value following the 2011 floods or when mining construction ended. Rents consequently fell and cash flows got worse, not better.

 

Cheers Angel for the break down negative gearing and tax rate. With P/I loan option I won't be able to make the monthly repayment unless I borrow much less and buy in a regional area with high yield. I should have chat with a couple of brokers around to see what my options are.

Was the 2011 flood much worse than the one that happened this year? This years flood did not seems to affect the price despite weeks of media coverage of the affected areas in Bris...
Thanks again^^

 

This calculates to be 4.5% or thereabouts for Brisbane. I would say that is on the low side of ROI for investments in Brisbane and surrounds.

There are other investment houses in Brisbane and Surrounding councils that will give you positively geared property from day 1. I suggest if this is your first investment you may want to research more before diving.

 

Was there a flood in Brisbane this year?

Do you mean TC Debbie?

That caused flooding up north, in Logan and over the border in NSW.

Not much happened in Brisbane. A bit of wind. A bit of rain.

 

There is literally one lender that will lend you for an investment @ 95% plus LMI, and you'll also have to be approved by the insurer.

You'l want everything to be squeaky clean on your credit file, strong income and no a hint of anything overdrawn or late in your accounts.

IN terms of neg gearing, I think it's fine IF you have a plan for it to become positive/neutral over time - and I don't mean 20 years. Do something to it that will increase the cashflow from negative to positive within a few years, for eg - reno to increase rent, subdivide and build a new property, sell the block to reduce debt, rent via air bnb or so on. Otherwise you have a slow leak in your cashflow that can hurt you down the track.

 

Thee was no flood in Brisbane this year. #fakenews

 

I'll be honest - this concerns me.
While my loans are IO, I know that if/when they flick over to P&I I'll be able to cover the additional repayments with a little cut to my living standards.
We are in a low interest rate environment, but likely won't always be that way.
Not saying don't move ahead with it (my first purchase was 95%+LMI as well), just be careful not to overextend.

 

If you incur those painful cash-flow losses and the house price doesn't grow substantially - it will generally be a bad investment.

But if can either hit a boom market, or renovate well for a higher rent/value or otherwise get lucky - then good times

 

I agree with Jess' comments. Relying on a 95% loan for investment purposes is going to be problematic.

At a minimum, I'd suggest saving 17% of the purchase price. This will qualify you for a 90% loan with enough funds to cover the stamp duty and LMI. It's still possible to get interest only with a few lenders but this may be shut down in the near future.

 

Haha my bad. It was cyclone Debbie. I am still getting familiar with different cities in QLD.

 

Thanks. Would you mind naming a couple of suburbs for me to check out? To be honest my focus for the past couple of months has been Ferny Hills area. Perhaps this might be good time to step back and do some more research.

 

Cheers Jess. Good thing is I have clean credit history. Stable income for the past 10yrs (even tough didn't do well saving decent deposit Lol). I do have two credit cards and no outstanding balance. I will cancel the two cards (citi / Westpac) since this maybe benefit my borrowing power from the lender POV.

Thx for the advice on increasing cashflow.

 

hahaha I see Trump # tag

 

A lot of talk about Geelong at the moment. Could suit you with lower buy in cost.

 

Actually my bad. I got the monthly payment figure confused with weekly figure. Breaking down the P/I repayment into 4wk would not damage too much of my life style. The regular saving will be less but as you said the rates goes up. I know back in 2007 or 2009 it was like 7 or 8% increasing by 0.24% every 6 months. Thxs for the advice.

 

Hi, New Town. I would prefer the later option. Boon after the purchase. ^^
If a suburb is in high demand does that usually reflect on the rental increase?

 

Hi, Peter_Tersteeg.
Cheers for the simple break-down of how much saving I need. This is simple very useful tool. Thx. Regardless of whether or not 90% loan will stay 95% loan will certainly disappear soon by the sound.