Help please....Not sure?

[pene]

Hi everyone,we are newbies, we started our investiment property climbing 2 years ago. Purchased a low maintenance 2 bedroom townhouse for around 220k @ 7.85% fixed for 5 years,100%borrowed,p&i, rent at 250pw. We top up the mortgage 135pw,we are in for the long term 10years+.
We are in a position to purchase an identical property at the same price 220k @9.4% fixed for two years,p&i, which means, we will have to top up this mortgage by 195pw,
questions...ARE WE DOING THE RIGHT THING?
At what time would they become cash positive?
We are investing for our children to get them started, ie take over in years to come. Our location/situation makes it impossible to find or create positive cash flow investment.
Should we look elswhere/something else?
From what I have read from property talk, there is some great advice out there,we are more than willing to listen.....
Many thanks Pene.
ps we are in the hawkesbay-gisborne region.

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My immediate observation is that you need to be certain that you are buying the right sort of properties at the right price. If I read your post correctly you are now able to buy an identical unit for the same price you could 2 years ago?? If so this means you paid way too much for the first unit as capital growth in the last 2 years has been staggering.

So the question is not so much about negative gearing initially but do you have clear buying rules and a sound system of due diligence in place.

I also note you have P&I loans. Only interest is tax deductible so stick to interest only loans. This helps cashflow, maximises your tax position and you can convert to P&I when you are in a stronger financial position.

[cube]

I suspect that Pooomba is right, and that you paid too much for the first unit, but it is possible that the new unit is a steal! What prices are similar properties being sold (not listed) for at the moment, and what is the market rent?

cube

[pene]

Thank you Poomba

Thank you Poomba, the current market value for the first unit is around 265k ,we are in a position to purchase the other unit unconditional for 220k due to the vendor falling to one of the three "D's.
I wanted an interest only loan,but the finance company would not do it on a fortnightly re-payment,the home is in an area with good capital growth at the moment. We are trying to bring cash flow forward, parallel with more investment properties, but if we keep this up much longer, ie topping up mortgages,times will be tough, positve cash flow properties are like hens teeth in our region,and the one or two that you do find, are either in the worst areas with high tenancy turn over(property damage) with no real capital gain. I ran our first investment property through a ripa analysis projected 10 years,using 3% capital growth it came back with, after tax npv of 7686 and after tax irr of 11.69%
The identical unit we want to buy came back with,(higher interest rate)after tax npv of 509 and after tax irr of 6.2% ,with your experience, how do they stack up, once again thank you for giving me your time.....cheers Pene

[pene]

hi properties sold in th 250k-265k price range and rented for 250per week

[xris]

Hello pene,

I think you are missing the wood for the trees. Stand back for moment, throw that rental analysis software in the bin and do not worry that you might or might not have paid too much for property 1, or that property 2 is a steal or otherwise.

Look at what it is costing you per week now and what it will cost you if you buy property 2 (easy to work out if they are both near enough the same).

Now forget the cash flow and look at the properties themselves. Are they good solid no nonsense properties in areas of solid rental demand - no looming maintenance; no awkward features etc. In a down market bad properties will cost you a lot but good properties will not. So do not underestimate the hidden costs of any particular property. This should put all this c/f +/- talk into perspective.

xris

ps/ not sure about your name

[Glenn]

Hi Pene.
Good on you for getting in and doing something for yourself and the world.
I come from a completely different angle to all of the good investors out there.
My investing has always been conservative even if at the time of purchase I have not had a clear idea of where the market would be going.
Far too many people sound as if they know where the market is headed and that is simply rubbish.
Swimming in the deep and having no money for yourself is something that will eventually wear you down.
You are living in a ecconomic backwater with low population growth. This does not mean you can not do well there but do not expect to dance to the same drum as the faster growing areas.
In my opinion it is better to be at a break even point before buying each new property. There is only one way for you to do this and this is to pay down the principle. If you can afford to pay more towards the mortgage of a second mortgage you can afford to pay more off your loan.
Sure this goes right against what Poomba and others here would advise.
But then that is what different opinions are all about.

[pene]

Thank you Xris and Glen for your advice(feedback),you both have brought up some good valid points: the properties are fairly new (10 years old)stand alone brick and tile two bedroom (110sm) townhouses in a good area, of very low cost,just rates,insurance,property manager fee's at this stage,which is the good part.
the not so good part, the rent can only cover about 65% of the mortgage.
As Glen pointed out our location,population growth is low, he's right about having to wait for any significant gains.We prefer to keep the properties close for easy inpections etc.
Glen, I like what you said about, making the first property to break even,that will definately make purchasing the second property easier, without topping up both mortgages.
Once again thank you both for your time...kind regards Pene (Pen-Air)

[xris]

Pene (Pen-Air)

Well, here was I reading it as pee-nee.

[pene]

Thanks Xris, thats 0k, by the way, cool photo.

[Halfway To Paradise]

[quote=pene;105975]Hi everyone,we are newbies, we started our investiment property climbing 2 years ago. Purchased a low maintenance 2 bedroom townhouse for around 220k @ 7.85% fixed for 5 years,100%borrowed,p&i, rent at 250pw. We top up the mortgage 135pw,we are in for the long term 10years+.
We are in a position to purchase an identical property at the same price 220k @9.4% fixed for two years,p&i, which means, we will have to top up this mortgage by 195pw, ]

When you say you are topping up the mortgage by $195 per week I think that is excessive and it will be a long time before mortgage rates drop far enough and rents rise enough to get you at break even. I must as have you included other costs such as rates, insurance into this figure? otherwise you will be even further from the break even.

Robert

[xris]

[QUOTE=Halfway To Paradise;106137]

Hi everyone,we are newbies, we started our investiment property climbing 2 years ago. Purchased a low maintenance 2 bedroom townhouse for around 220k @ 7.85% fixed for 5 years,100%borrowed,p&i, rent at 250pw. We top up the mortgage 135pw,we are in for the long term 10years+.
We are in a position to purchase an identical property at the same price 220k @9.4% fixed for two years,p&i, which means, we will have to top up this mortgage by 195pw, ]

When you say you are topping up the mortgage by $195 per week I think that is excessive and it will be a long time before mortgage rates drop far enough and rents rise enough to get you at break even. I must as have you included other costs such as rates, insurance into this figure? otherwise you will be even further from the break even.

Robert

Yes, agree, and pene, something else you must be very aware of.

If, as now seems likely, you mean you have only to top up the interest payments by $195 then you are completely ignoring the other costs, maintenance in particular. These can be hidden and cost you nothing for two or three years but then you will be landed with a very big bill.

xris

[SuperDad]

pene,

(1) Are you claiming tax rebates for the losses you are carrying?

(2) Are you taking the losses into account when assessing you Family Assistance entitlement (if any)?

Paul.

[pene]

thanks

thanks Xris ,Paul, Roger for your valuable information,The properties are 10 year old brick and tile, very low maintenance structures,(i am a p/t builder)the maintenance issue is not a worry,all I'm trying to work out,is there a ratio or limit one should not exceed with topping up mortgages. At present the existing property look like this:
mortgage interest.. 20k pa... cost not including expenses ie rates,etc
rent income..........13k pa....
wepay(top up).......7k pa.......
tax rebate............4k pa......rebate includes depreciation, claiming on the interst portion of the loan,etc,and working for family rebate.
We are using an accountant to look after that side.
once again thank you for giving up your time....kind Regards Pene

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The discount level is OK but the yield is unacceptable unless they are in a proven high capital growth area.