Propeller property investment

[marklowes]

I think it depends.

If you were earning $500k, and could pay down the loans turning it to positive, is it so bad?

If the yield is low, then paying it off quickly due to earning 500k a year to make it a cash positive investment still doesn't make it a great investment. If the yield on purchase price is net 4% or less then, then once owned outright it's equivalent to 4% interest earned on a term deposit.

By paying off loan you wear the opportunity cost of not using that money somewhere else.

Positive gearing; say net 7% return on 100% mortgage (after rates, insurance, maintenance but before interest expense), borrowing at 6% locked in for 5 years. You get a 1% carry on total value of property, e.g 300k property, sees 3k profit from zero $ invested (21k net income less 18k interest), essentially an infinite return on equity (ignoring the fact that equity to secure loan needs to exist somewhere else and that essentially some of this equity is 'used up' by the loan, i.e can not be used for additonal lending).

Pay off 50k, 21k net income less 15k interest = $6k profit, or 12% return on equity invested, still much better than a term deposit.

Pay off full 300k and you lose the advantage of the leverage and the 1% carry, so return on equity converges to the net 7%.

[Rosco]

If you are buying neutrally geared property, then in 20 years if no gain, then $0 gain. So what is the point?

Gains are more than Icing on the top! They are the main thing you require as a property investor with 100% debt, otherwise you will never get anything.

I agree that if you are true neutral, then better than being negative.

But on another side how many people put $500 a month into a super scheme? In someways putting into a negative investment property is similar and you are putting aside money now for future gain.

Warren Buffett is very different from most people, and what is right for him isn't necessarily right for you. It depends on your situation. Negative gearing still works for some people! There are people on high income, or about to get large inheritance etc, where it can work for.

Ross

[marklowes]

Further to example and opportunity cost concept of paying off mortgage on low yielding property v using equity to secure positively geared property:

Starting with 300k.

a) Owning outright at 4% net yield = $12k p.a return on investment. (plus skin in game in case of capital gains).

b) Using 300k at 20% deposit to secure $1,500,000 of positively geared property yielding net 7%, locking in at 6%, yields net profit of $33k p.a, or 11% net return on equity.

Say property price inflation matches inflation over a 5 year period (and the big assumption being that the capital gains prospects for the high yielding property is the same as the low yielding property...), at say 2.5%:

a) 300k property now 339k = 39k increased equity. plus 12k x 5years = 99k up from purchase. 33% gain on equity started with.

b)1.5m property now 1,697k = 197k increased equity. plus 33k x 5 years (assume interest only loans) = 362k up from purchase, 120% gain on equity started with.

both assume very low levels of property price inflation, infact zero price inflation in real terms.

Even if we gave option (a) an extra 2% p.a capital gains, increased equity would still only be 73k. For option (a) to match option (b) capital gains for option (a) would need to be 15% p.a or 12.5% above inflation and 12.5% p.a above price inflation of property in option (b).

At this point in the cycle I'm out of auckland and into the provinces.

[speights boy]

They are the main thing you require as a property investor with 100% debt, otherwise you will never get anything

100 % debt !!
Hence their ring fencing policy.

[marklowes]

100 % debt !!
Hence their ring fencing policy.

Ring fence me all you like I'm making profits from day 1 so never have a loss to offset against income.

And that include the 100% financed deals.

[speights boy]

Ring fence me all you like I'm making profits from day 1 so never have a loss to offset against income.
And that include the 100% financed deals.

Excellent news.
Not exactly what King was suggesting though.

[skid]

Hi everyone,
I've got to say that I have found the Properllor Property Team very good to deal with. Sure you can probably hunt around and save some money building yourself and cutting them out of the deal etc but for investors who are new to property investing and work fulltime in corportate jobs and don't have time to learn everything there is to know about the industry they are a pretty good way to go. Deals aside I didn't find them pushy and always returned phone calls within 15 minutes. This is my experiece and until I know exactly what I'm doing I'll probably continue to use them.

Cheers

Dont you just love those glowing recommendations from someone who just joined up 10 minutes ago and is posting their first post

[skid]

If you get to close to a propeller--you can get really chewed up

[Rosco]

Further to example and opportunity cost concept of paying off mortgage on low yielding property v using equity to secure positively geared property:

Starting with 300k.

a) Owning outright at 4% net yield = $12k p.a return on investment. (plus skin in game in case of capital gains).

b) Using 300k at 20% deposit to secure $1,500,000 of positively geared property yielding net 7%, locking in at 6%, yields net profit of $33k p.a, or 11% net return on equity.

Say property price inflation matches inflation over a 5 year period (and the big assumption being that the capital gains prospects for the high yielding property is the same as the low yielding property...), at say 2.5%:

a) 300k property now 339k = 39k increased equity. plus 12k x 5years = 99k up from purchase. 33% gain on equity started with.

b)1.5m property now 1,697k = 197k increased equity. plus 33k x 5 years (assume interest only loans) = 362k up from purchase, 120% gain on equity started with.

both assume very low levels of property price inflation, infact zero price inflation in real terms.

Even if we gave option (a) an extra 2% p.a capital gains, increased equity would still only be 73k. For option (a) to match option (b) capital gains for option (a) would need to be 15% p.a or 12.5% above inflation and 12.5% p.a above price inflation of property in option (b).

At this point in the cycle I'm out of auckland and into the provinces.

Hi Mark,

Many people are very conservative and don't want to take risks. Yes they could make much more with your option b, but many older people won't want to. They would be very happy with a)!

Your investment strategy might be great for you, but you have to realize that there are different investors out there. Some want high risk, some want no risk, some have lots of cash, some have no cash, some have high income, some have low income, some have large inheritance coming, some understand property and know how to buy right and others don't know much about property at all. Also years to retirement can have a large impact.

In your example, what if;
1) property prices drop 5%? and/or
2) interest rates go up and you are averaging say 8% in 2-3 years time?

There are lots of different scenario's and possibilities!


Ross