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Which road to go down?

Discussion in 'General Property Chat' started by Needanewname, 18th Nov, 2015.

  1. Needanewname

    Needanewname New Member

    Joined:
    18th Nov, 2015
    Posts:
    1
    Location:
    Australia
    Hello...I am a newbie and need help working out what I need to do and how best to get there I wanted to run my goal and situation past the brains trust if I may...


    Anyone got any suggestions on the best approach to take?


    AIM –

    Own 5 positively geared properties in the next 10 years.

    Current Situation –

    I earn 80k a year in a steady job.

    Currently have $400 a week (20kpa) going towards savings. This money can be used for servicing loans.

    Have 7k in the bank currently growing by $400 pwk.

    Married – wife working casual will be full time May next year.

    Neither of us have any debt whatsoever.

    Was gifted a property by family. Mum lives there and pays for maintenance/rates/insurance but doesn’t pay rent. This will continue indefinitely. Property in my name only but I am obligated to sell it and give half the proceeds to my brother when Mum passes. Property worth 200k.


    It’s not a bad position to be in and should get me to my goal. This I am certain...the how I get there though is a bit daunting. ..

    I have permission to use mum’s house to give me a kick start, but I would die if she/I lost it due to my mistakes... so any suggestions need to keep that in mind.

    Can’t wait to read your suggestions.
     
  2. larrylarry

    larrylarry Well-Known Member

    Joined:
    18th Jun, 2015
    Posts:
    3,501
    Location:
    Sydney
    Personally, I'd not touch my mother's property (if my brother's interests tied to the property). I will find out from a good broker what he or she can do for me at my current wage and savings. I note that your mother agrees to it being used as a spring board to investments but using it does not sit well with me, again, my personal view.
     
  3. Azazel

    Azazel Well-Known Member

    Joined:
    18th Jun, 2015
    Posts:
    8,113
    Location:
    Brisbane
    Mmm, equity...

    It's important to get your head around this "losing it all" concept.
    If you bought a house for $300k, and for some reason you had to sell quickly for a $20k loss, you haven't lost it all.
    I would suggest reading as many books as you can get your hands on.
     
  4. Big Will

    Big Will Well-Known Member

    Joined:
    18th Jun, 2015
    Posts:
    1,546
    Location:
    Melbourne, Australia
    First well done on find this website and taking your time to put your thoughts out there.

    I would spend some time reading the forums here as there is a wealth of knowledge and experience.

    Regarding your situation if you are comfortable in using the equity in your mother's house (and her but you said yes). Then you need to work out your best strategy and how risky you want to go.

    Keep the maths real simple you could likely buy all 5 properties right now, withdrawing the equity you could go and buy 5 properties in Broken Hill, you can get a house from $42,000-125,000+. Each of these houses would be as determined cash flow positive as Broken Hill's rental yield on average is 10.4%.

    The risk associated with this is the vacancies rate would be rather high as not much happens out there and not a lot of people want to live there but you can tick the box right away. Another thing is that Broken hill will generally yield next to no capital gains.

    Myself personally if you I was comfortable using the equity from my mothers house would be buy one quality stock in Syd, Melb or Bris. I wouldn't really look at Sydney now as I feel the market has peaked but again up to you. Yes the property would be unlikely cashflow positive in the first couple of years however in time it will become positive but more importantly you will get capital gains. Yes it doesn't sound as fancy as the spourkers who say they own 10 properties but less than 1% of investors have 6+ properties (you have to question why).

    A quick tip is that Cashflow helps you service a property but Capital gains (CG) helps you acquire properties and where you make the money. If you can find one that does both extremely well PM me the addresses ;)

    Lets pretend you bought 2x250k properties that both yield 7% rent and 3% CG and compared to 1x 500k property that is 7% CG and 3% rent and we will exclude all other costs and fees.

    2x250k
    Mortgage (4.5% on $400k 80%LVR (2x200k)) - $18,000
    Rent - $35,000 (2x15k)
    CG - $15,000
    Total gains = $32,000

    1x500k
    Mortgage (4.5% on $400k 80%LVR) - $18,000
    Rent - $15,000
    CG - $35,000
    Total gains = $32,000

    *Side note* As this excludes the fees remember you will have 2x the PM letting fees, mortgage fees etc etc on the 2 properties compared to the 1, however you can have 0/50/100% of your portfolio rented with 2 compared to one which is 0/100%.

    The overall gain is the same as you can see being $32,000 or is it???

    The positive ones you will need to pay tax on, even at 30c in $1 tax you would need to pay $5,100 on tax ($35k-18k x 0.3 = 5.1k), so effectively you get about 12k after tax CF+ plus 15k CG total = $27k.

    The other one you are getting 35k CG but you had to pay $3,000 out of your pocket so lets call it $32k (there is NG benefits but lets keep it simple).

    Would you rather 27k p.a. or 32k p.a.?

    Yes there is capital gains you will only pay tax if you sell (same with the CF+) but if you never sell you never pay :) plus you also get the benefits of NG.

    Lets say after 2 years the both do the act same.

    Your 2x250k properties are now worth $530,000 but the 500k property is worth $570,000, lets pretend you borrow 80% LVR to reinvest at 80% LVR;

    2x250 has increased equity of $30,000 and 80% LVR allows you to withdraw $24,000 out (not much deposit).

    The 500k now has 70,000 in equity or you can withdraw $56,000.

    If you then convert that into what you can buy you are talking about $120,000 vs $280,000 or $160,000 difference in purchase price.

    Now do this 5x and you are in a much better position chasing the capital gains then cashflow.

    Up to you...