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Positive cashflow IP: Is this block of units good?

Discussion in 'Real Estate' started by Mindmaster, 12th Feb, 2009.

  1. Mindmaster

    Mindmaster Member

    Joined:
    12th Feb, 2009
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    Location:
    Victoria
    I'm considering making my next (and only 2nd) IP a postive cashflow one BUT i have a lot to learn so your opinions on this property would be really appreciated.

    MOE

    In brief the Cost is $300 000 (rounded from $298 500) with a annual rent of $19 500 ($375 a week) giving a yield of 6.5%, not bad.

    So lets say you borrow 200k to pay for this at an interest rate of 6.25% This gives you weekly payments of $305. Initial positive cash flow of $70. I'm guessing at least halve that for costs. Alternatively you can go interest only on the loan for say 5-10 years which is weekly payments of $240, giving cash flow of $135

    No idea what the growth rate is for capital, guessing not too much.

    In your opinion is this a good property to buy if you want a postive cash flow IP?

    P.S. I have no plan to buy this place, It is just an example to help understand
     
  2. Billv

    Billv Getting there

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    Location:
    Sydney, NSW
    Mindmaster

    In my opinion you'll need to investigate the area.
    What industry is in the area. Is it being affected by the economic slowdown?
    Will it have population growth in the next 10 or so years?

    The Other thing is, are property prices in the area sustainable long term
    if interest rates go back to 9% as they were last year?
    I think it's hard to tell if it's a good decision but with yields of 6.5%
    and CBA offering 10 year fixed loans of 6.49% you could buy the place and forget about it for another 10 years.

    As with every investment there is a risk factor to consider and you've got to try and find ways to minimise that risk.
    Don't forget that you'll need 20% deposit for this purchase ( approx $60K)
    Check with your bank because it could be hard to get a loan for more than 80% in some areas.

    Do you have the $60K deposit or are you going to take it from existing equity?
    What is the opportunity cost of that $60K?
    Can you do something better with it?
     
  3. dudek

    dudek Well-Known Member

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    Sydney
    You would also like to look at your current income as sometime positive cash flow can also push you higher bracket in tax. I know at least one case where person (couple) was very happy to learn its all positive from IP but now they are scratching heads why they have to pay additional 3K at the and of the year. You may adjust your options depending of income and what’s best for you.
     
  4. Jacque

    Jacque Team InvestEd

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    Location:
    Sydney
    Hi MM

    Any property can be made to be returning you a positive income if you put enough money into it in the first place, as your example demonstrates.

    When I refer to true positively geared properties, I'm referring to those properties where the income (rent) is more than the outgoings (interest repayments, rates, water, strata (if applicable), PM costs, maintenance, insurance etc) based on a 90-100% lend in the first place. Even forgetting purchase costs (stamp duties, borrowing costs), it's a hard call to locate a property that, before tax, is returning a positive amount. It usually occurs over a period of time, and is aided by both increasing rents and lower costs (eg interest rates)
    Property investors such as Margaret Lomas, however, include tax deductions (depreciation) in their workings to ascertain whether or not a property is returning a positive income. These on paper losses can help in creating an income stream when there wasn't one present before. For more explanations check out her series of books eg "How to create an income for life" etc.

    What you need to ask yourself is could that $100K cash that you put into this one deal be better utilized elsewhere, or over a no. of investments, rather than just one? For eg it could be three 20% deposits on $300K properties, where the cash loss is manageable by yourself yet the growth x3 is likely to exceed the income and growth received from one block of units in a country town (like Moe)

    Anyway, just some food for thought. BV has also raised some other good issues concerning the growth potential of the area. Always investigate this as not all regional areas are considered equal.
     
  5. Mindmaster

    Mindmaster Member

    Joined:
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    Location:
    Victoria
    Thank you for your answers BV, Dudek and Jacque.

    BV - Doing research in that area and having a plan to manage risk are very good points. I saw several 10 year interest only loans but need to read up on what happens at the end of 10 years. With the 20% I'd redraw from the loan account of current IP where extra payments have been made.

    Dudek - The tax aspect is very important but I don't have a taxable income in Auss so not an issue.

    Jacque - I agree with you. This kind of property is not a "truly" positively geared one. I'm looking around doing research trying to learn how to find these kinds of properties. Don't know enough yet to find them, need to learn a fair bit more yet :)