Negative Gearing

[matty]

First of all hello everyone, ive been reading posts for the past few months and have found them all really helpful on the road to buying my first Investment property.

I have a couple of questions.

First of all, i have read a fair few books on residential Investment property and quite a few warn against negative gearing and negative cashflow. I agree in the fact that you cant have too many investments taking 50-$100 week out of your regular income.

However when i start to run the numbers, i find it very difficuilt to see a property anywhere (im currently looking in Tauranga) that reaveals positive or even a balancing cashflow.

As an example, looking at the estimates from the many different bank websites a 230,000 home less a fairly good deposit of 50,000 ($170,000). The payments per week are around the $300.00 mark. Whereas a 3 bed house in a healthy area of Tauranga averages rent of around $250.000. Thats $50.00 a week behind.

I dont mind too much topping it up with my own finaces as i know a tenant is imporoving my equity by 250.00 ever week (without even adding in the capital gain). Its just that i have seen a lot of reccomendations against it. I thought i would just throw the topic up to see

And finally, i am currently living in Japan and will return to NZ a around a year and a half (supposedly a the start of the down cycle). Would people reccomend entering the world of Investment property a this stage? I have heard people suggest that you should just get yourself in the game regardless of where the cycle is.

Also with this time up my sleeve could anyone reccomend a book or series of books that will help me continue my Education with Investment property (i have done most of Robert K`s stuff)

Also (sorry i have more questions than i though). I have both $80,000 of equity in my current home and $50,000 of cash. What do people suggest as a deposit on a Investment home....both or one or the other?

Thankyou very much
Keep up the interesting posting
Matt

Matty sit and wait & see what the market does with the change in interest rates.

[Bling_Bling]

This property market is due for a correction.

[OldRider]

It is hard to see average residential property prices being able to rise much further,quite a chunk of lifestyle is now disappearing into extra work to pay the mortgage, can this go further?

Invariably though there will be ups and downs in localities.

From a real life perspective, my eldest son bought a house just over ten years ago,cost was round three times his annual income.
He is looking at selling this same house, it is without modification though well maintained,value now six times his annual income. He is still in same area of work - income up 50% over period - house value up 300%.

Youngest son is just back in NZ after several years oe, after house costs his disposable income and ability to save for investment and retirement is way behind his older brother, and probably will
stay this way for many years.

My point is, how can prices rise much further, our incomes are not growing at a rate that enables higher prices to be paid.

[Capitalist]

quote:Originally posted by Bling_Bling

This property market is due for a correction.

If I had a dollar for every time this meme has been posted on ST I would be a rich(er) woman. This has been trotted out for YEARS, and has been, and will continue to be, consistently wrong. Interest rates have far less effect on the property market than pundits here believe.

[Bling_Bling]

CAp, I agree with your views. That is why we have a market crash once in awhile. Those that continue to hold on and never take profit will eventually learn that nothing goes up forever. I, for one have learnt from 1987 and 1997. Dont get me wrong, I still hold properties, but have cashed up 50% of my portfolio of investments.Just ot be on the safe side.

[stormrose]

I'm not associated with these guys (or necessarily recommending them), but here's a reading list for you.
https://www.richmastery.com/webshop/...alogID=1&cc=NZ

Dolf de Roos discusses negative gearing, positive cashflow arrangements. However negative gearing is more a capital gain rather than an income play. The idea of positive gearing is that you put in a big enough deposit so that whatever cashflow is left is a positive one. It's harder to get started, but does gain momentum after a few houses.

[Sauce]

Matty,

$250pw rental income, is only a 5.6% GROSS return on a purchase price of $230,000. Take expenses such as rates, maintenance, vacancy etc off that and your NET return will be even lower.

I would suggest that it is prudent to find properties that have a higher yeild than this, especially in the current climate where capital gain is not as likely over the next couple of years.

Interest rates are climbing at the moment - eroding cashflow (or at least once everyones fixed terms expire it will).



I personally believe that if a property will cover its costs with minimum management hassle, then it doesnt really matter what the market cycle is doing and you should purchase and sit on it till your old and grey. The problem is that finding properties that will pay for themselves right now is very difficult.

My suggestion is to find a property that you can add value too. I.e. a 3 bedroom that would rent for $250pw, turn it into a 4 bedroom house with as little money as possible, and rent it for $330pw. if it costs you $5000 to shift a wall to create the room then have potentally improved things to a cashflow positive status, and co-incidentally increased your capital value through the higher yeild also.

Of course this is much easier said than done, and required a bit of vision and time (to find the right property, and buy it before someone else does) but it is certainly not impossible, I have done it several times myself. Usually you would be looking for either Huge living areas that can be split, or two living areas where one is fairly redundant. Its usually too expensive and tricky to add extentions onto a house. Also, you will probably need to purchase a property yeilding say a percent more than your 5.6percent example, before you start.

If you know what you are doing, turning a basement or rumpus into a second flat, or building a self contained unit on the section of an existing home can produce fantastic yeilds. - this is definitely for the more experienced.

The other option would be to use more cash equity. If you put down say a deposit of $100,000 then your cost of borrowing/expense should be less than your income. In regards to your question about the equity in your current home and your $50,000 cash - Always remember that if you take money out of your home equity, you still have to pay the cost of borrowing that money, so essentially you are still gearing up which will affect your cashflow position (negatively) and is more risky.

One very conservative way to invest in property while the market is so hot, is to put enough cash down so the property covers its costs even on a principal and interest loan. Have it on a 25 year table mortage (so its paid off in 25 years), then REGARDLESS of what the property market is doing in regards to capital gain, in 25 years time you will own the property outright, and the entire rent will be yours to do what you want with (minus tax), plus you shouldnt have to put a sent of your own money into it each week. Only downside is you will have to wait 25 years and you will tie up alot of capital in a very dormant investment. Admitedly your growth will be slow, and you probably wont be retiring on a superyacht, but for conservative types with access to cash who dont want to take over the world, it definitely works ok.

Hope this is of some interest.

Good luck!

Ragards,

Sauce [}]

P.S. I would say Olly Newlands - The Rascals Guide to Property Investment is IMO a decent read for anyone interested in property investment.

[R2]

Matty, if you are living in Japan for 2 years you should without a doubt, register as non-resident tax status through the IRD and AIL status with the IRD via your chosen financial institution. Deposit funds in fixed term deposits in NZ where you will enjoy net returns of around 7% currently (tax 1.5% non-assesable in NZ i.e. interest earned does not appear on your NZ tax return). When you repatriate you will be in a very strong position to apply negotiating leverage. Also check out the ability to borrow in Japan to fund a NZ property purchase and if applicable how to hedge any exchange shifts, by example funds can be obtained from banks such as ANZ in Singapore currently to buy NZ property at 3% over 3 years - don't know about Japan. As a far as rental agents I recommend Quinovoc - they are like rental nazi's working the landlords side.

[clips]

Sauce is making sense, ....and Olly Newlands book is a decent read re property investment, also a bit of a laugh - you don't have to take life seriously all the time.