Positive gearing on new homes in Sydney with 90% LVR now a thing of the past?

I was hoping to buy a positively geared new home as an investment property in Western Sydney to take advantage of the growth in population and infrastructure for capital growth - 90% LVR - but my read is that the price boom has meant positive gearing under these circumstances anywhere in Sydney is now a thing of the past.

What does everyone thing? Any pockets anywhere where the maths works out, or should I head interstate?

 

You could consider regional ; Places like Mudgee , Orange , Dubbo , Goulburn , Albury, Tamworth etc .... they tend to have very low vacancy rates so produce far stronger yields than Sydney, and they also perform well for growth, typically. They may not have Sydney like booms but they do tend to be very consistent and over the fullness of time they produce similar % of growth .... They are less expensive though, so you are usually able to buy 2-3 times the land size for 1/3 of the price, and hold several before testing land tax thresholds..... You'll test and probably exceed the NSW land tax threshold with just one decent sized lot in Sydney

 

Why is positively geared such a concern if you believe in the capital growth prospects?

 

The old cashflow!

 

What would you prefer, cashflow or capital growth?

 

If you are confident of capital gains, is some negative cashflow acceptable? Would you sacrifice some of that confidence of cg for more cashflow by buying somewhere else?

 

Yes some negative cashflow would be acceptable.

 

Not possible in Sydney.

 

Its barely been possible in the last decade
Prices are up but interest rates are lowest ive seen.
If anything 2020/2021 is the first time ive seen cf+ in Sydney

 

I like both which you can still find in Brisbane if you manufacture equity and rental value by the way of a smart renovation and buying well.

 

One way you may be able to achieve it in Western Sydney is to purchase an established home with ample land size, and add a granny flat/secondary dwelling . There would be a lot of locations this sort of approach might yield pretty decent outcomes; places like Blacktown, Seven Hills, Girraween, Merrylands, Wentworthville for example. ( plenty of other areas too) There are a lot of reasonably level, well sized lots ( you would want 650-700M2 + ideally) in those sorts of areas with an established house that still provides adequate side access and yard space for a granny flat/secondary dwelling . Your greater challenge might be the funding. Buying the established home is one thing... but you'd need to get funding for the construction of the granny flat as well..... something in the vicinity of 150K will be required ....so that's something to explore with a broker.

 

I got one recently very positively geared (at interest only, P and I neutral) in West Sydney. House with granny flat, council approved.

 

It's still possible .. see this recent sale: https://www.realestate.com.au/sold/property-house-nsw-the+ponds-135861230

At 90% LVR and fixed IO rate under 2.5%, you will be paying under $2000 in repayments. At around $600pw rent, you will come out slightly positively geared after rates, insurances etc.

 

At 90% , where's the 12% ( $121,612) funds to complete and the $41,689.50 stamp duty, coming from? Thats over 165K of debt that hasnt been accounted for. If its being funded using equity elsewhere it would take the total debt to $1,090,000 ( ish ) ...maybe a touch more.

$1,090,000 @ 2.5% IO would equate to annual repayments of $27,250
Add 5 or 6K for running costs and you'd be looking at 32-33K total annual costs
$600 (ish) per week would leave you at an annual deficit of 2-3K... the build is relatively modern so capital works depreciation may get you back to a slightly positive position but its not a sure thing .... and there's probably some land tax to consider as well. It's going to require a good deal of luck to get it CF+ and keep it there .....

And when it reverts to P&I.... repayments on $1090,000 P&I @ 2.5% jump to $4065 per month even if you can secure a new 30 year term. That's $48,780 per annum - an increase of over 21.5K - none of which is deductible. OUCH!

If you can only get 25 years, repayments would be $4616 per month, or $55,392... an increase of $28.1K. Basically double the IO repayments , And none of the 28.1K is deductible Double OUCH!

And if rates are higher than 2.5% in 5 years time or whenever the loan eventually reverts to P&I , add more to those figures. Triple OUCH!

The idea of CF+ on a vanilla yielding property in Sydney is fools gold. It can only be achieved with a Dual Occ.... and even then I doubt it would work very well in most Sydney examples if you are entering at todays prices and adding a granny flat...

#calculateALLthenumbers

 

If I had used your calculations, I wouldn’t have bought a single IP but I bought five. Most broke even (my calculations) or were negatively geared (your calculations) but now all are comfortably positively geared, have been refinanced 3 times in last 5 years and up atleast 60% in value and up 20-30% in rent.

I actually bought one in The Ponds in 2015 for $850k inc stamp duty and it was rented out for $520pw. Now it’s worth 40% more, rent is up 25% (currently rented out for $650pw) and it’s bringing positive income.

To the OP, you don’t need to run extremely conservative scenarios else property investing isn’t gonna be a suitable investing vehicle for you.

 

Hold on. I haven't used conservative calculations, I have used facts. You ignored over 165K of debt. Call them "your" numbers or "my' numbers ; I say they are THE numbers and ought to be accounted for unless someone states that cash is involved for that component. Are we to pretend the 165K doesnt matter??????

Your properties have gone positive because rates have fallen. Your rents have not matured by enough ( 20-30% by your estimates) to create anywhere close to CF+ outcomes without the rate reductions. If rates had not fallen, you'd be in negative cash flow still . And the refinances, which have allowed you to kick the P&I can down the road for a few more years may not have been achievable without the rate cuts and the reduced floor rates, either. So while these are all great and happy outcomes for you, to be sure - you should try and be a realist about how they were achieved.

 

650K per week is 33.8K per annum. Not quite a 4% yield on 850K of debt. That's better than the 2-3% generally on offer , but it's not enough to be safe. Already multiple lenders have started moving 4 and 5 year fixed rates up in the last few weeks. Rate rises aren't coming tomorrow, but they are coming . Your yields are artificially assisted at the moment and wont stand up to a rate rise or two, or P&I when that day eventually comes. Believing that 650 per week against 850K of debt is positive is fools gold. Using words like "comfortably" to describe it probably ought to be reconsidered. Whats your plan if you cant refinance again and rates start heading north ?

 

I found one in Campbelltown the other week for about $800k from memory. The rent was $850 pw for the house and granny flat. 5.2% yield.

 

That would work under IO terms, but would struggle to be impressive at P&I. As an established dwelling where you aren't the first owner the depreciation would be significantly reduced/compromised. But it's a far better example of the kind of thing that's required to be "comfortably" positive ...or close to it , than the Stanhope example above

 

Not possible in Sydney anymore imho.

Those were the good ol days. Now prices have risen so much finding a cashflow positive investment + good opportunity for capital growth is no longer a simple task. That train has long long sailed and you've been left at the station.

You "may" be able to find a house that needs ALOT of work and if you can do it yourself and fix it up you "could" transform that house quite cheaply and it may possibly work. Otherwise a dual occupancy but even then it would be hard.

Go to Brisbane. Even though its risen quite a lot there are still places cashflow positive and provide good opportunity for growth. Rents are through the roof at the moment in Brissy with historically low vacancy rates anywhere you look.