positive gear

[a]

hi guys,

i am new to property investment. to define a deal is "positive gear" or not, should i include the WHOLE mortgage payment (principal plus interest) into the expense (of course, with other e.g. rate, insurance etc), or just the mortgage interest? my opinion is the whole payment. cheers,

A

[orion]

Hi A, yes that is correct - you use the full amount.
There are several ways that investors use to determine if a property purchased is positive, neutral or negatively geared.
There is no right or wrong way, but my opinion on it is that I don't take into account any depreciation. Some investors will even get inflated chattel valuations, and delude themselves into thinking they now own positive cash flow properties because of a tax break at the end of the year.
I also don't do the calculation on the full price of the property, but only on the mortgage. Example - if you pay $160,000 for a property and use 20% as a deposit that you have saved, your mortgage is $128,000. I would work out the rent received (over 52 weeks) compared to all expenses - mortgage on P & I loan, rates, insurance and maintenance. If the latter is more - it is still negatively geared, if it is less, it is positively geared. Other investors use the full purchase price, rather than just the mortgage - which is correct if you are also borrowing the deposit.

Regards
Graeme Fowler

[fudosan]

Hi Orion,

If you use only the mortgage portion in your cashflow analysis, do you also need to look at cash on cash to provide you with a better balance? By injecting a lot of your own cash, it is always possible to make any deal cashflow positive but end up with a very poor return on the investment of your own money.

[CJ]

Orion,

By only using the mortgage balance, it makes it hard to compare two different properties unless you always use the same cash deposit.

I think the best thing for people to do is to figure out the best way for them then stick to it. It may not be comparable to others figures but it is for yourself. If this means basing it on 20% deposit and I/o that is fine.

The term is cashflow so you should include principle as that is a cash cost even though it is not an expense.

[orion]

Hi Fudostan,

You are absolutely correct in what you say. As investors all have their own way of growing wealth, some are more concerned than me about getting a cash on cash return from their properties, which I can understand. I attended Steve McKnights seminar in Melbourne 10 days ago, and he has similar thoughts as to you on this. What he does is look at how quickly he can get his money back after investing it, then putting it to work with higher yields. This has worked well for him, starting in Ballarat near Melbourne, then selling quite a few properties and looking for new areas with higher yields, then sell again when they've gone up in value. The last lot of properties were purchased in NZ in small towns with higher yields again.
My plan is different in that I use income from businesses, royalties, quick cash deals etc to pay for deposits on houses, and let the tenants pay them off over time. This way, I am not looking for the so called 'best' areas to invest, I can invest in property where I live. There is no need to learn values in new areas and there is no need for crystal ball gazing to guess which araes you think will go up in value - to me, that is just too risky and involves guesswork to a high degree. I also am not as concerned as most investors are about rising interest rates, static property prices, or drops in prices. If your overall plan is not clear, you will be heavily influenced by external events such as interest rate rises, prices, opinions etc. Each investor needs to look at their overall plan, goals, intended outcome and circumstances in which they operate.

Regards
Graeme Fowler

[a]

thank you

cheers, guys, thanks for sharing

A

[fudosan]

I attended Steve McKnights seminar in Melbourne 10 days ago

Care to share with us any new ideas that you, a very experienced investor and author, have got from the seminar?

[orion]

Hi Fudostan, I enjoyed the seminar, he had several others he was coaching give brief talks on what they were doing as well, each with their own strategies. The main interesting thing I got from it was Steve's own strategy which has worked well for him It is not for everyone as it involves looking outside one's own area for higher yields continuously. If someone is working at a full time job, or has a business they are also running, it would of course be very difficult to do this without giving it your full attention and time.
Overall though, he was an excellent presenter and well worth going to listen to.

Regards
Graeme Fowler

[Brian_Lease_Options]

Tough getting positive cashflow

I have enjoyed this series of posts thus far.

I think landlords have it tough to have "positive cashflow". I'm new to NZ but in the States and in Canada "Positive Cash Flow is King!"

I suspect that "Capital Growth is King" here in NZ, but I may be wrong.

ROI is a great barometer. (aka Return on Investment.)
I define that as all costs over the year for the rental (including AGGRAVATION COSTS) divided by How much invested in deposit, borrowed money and personal time-(monetary value).

See Home affordability plummets

http://www.goodreturns.co.nz/article.php?ArticleID=976489700

Does this statement below have merit?
"However the market conditions may soon force investors to look elsewhere for stronger yields and we expect a move of investment funds away from direct property investment and into listed property trusts and managed funds." said AMP's savings and investment manger Roger Perry.

There also is an opportunity cost: Opportunity cost is a term used in economics, to mean the cost of something in terms of an opportunity foregone (and the benefits that could be received from that opportunity), or the most valuable forgone alternative. For example, if a city decides to build a hospital on vacant land that it owns, the opportunity cost is some other thing that might have been done with the land instead. In building the hospital, the city has forgone the opportunity to build a sporting center on that land, or a parking lot, or the ability to sell the land to reduce the city's debt, and so on. In more personal terms, the opportunity cost of spending a Friday night drinking with your friends could be the amount of money you could have earned if you had devoted that time working overtime. This does not always mean something of monetary value, just anything that is of any value to the subject in question.

An article on the property wheel approach to diversification of positively geared-negativley geared-lease option geared is at www.info4landlords.co.nz . Also is a free ebook on options.

I look forward to assisting any paticular question on lease options at the website below.

Oh, and I reccommend Graham Fowler's book: NZ Real Estate Investor's Secrets - about 10 Seperate Millionaire Strategies. 10 real millionaires.

Warm Regards,

[muppet]

Hi Brian

Have been browsing your website at http://www.info4landlords.co.nz/ and have taken this quote:

Well, if the rental return is 1.6 times the purchase price per $1000, the property will probably pay for itself.

If it's better than 1.6: 1 it will pay for itself and should generate a cash surplus.

Negatively geared properties are more likely to be in the 0.8: 1 bracket.

Can you give an example please?

Regards

[Brian_Lease_Options]

Hi Muppet:

To answer your question, a good question to ask first is:

If you had a million dollars and you HAD TO buy ALL cash for rentals in any shape, size or location (residential), would you buy:

Choice A.
10 x $100K 3B2B homes in Dunedin that rented for $210 a week, Capital Growth avg 7% over the last 10 years?

Choice B.
4 x $250K 3B2B homes in Hamilton that rented for $280 a week, Capital Growth avg 6% over the last 10 years?

Choice C.
2 x $500K 4B2B homes in Mt Eden that rented for $425 a week, Capital Growth avg 9% over the last 10 years?

That BIG question is "what cash fllow am I getting per $100K spent-risked?"

I think many would spend the $1,000,000 on 10 homes bringing in $210 a week ($2100 a week) with no debt service! And take the lower capital growth!

Capital Growth is nice, but getting good capital growth and negative cash flow of $200-$500 a month is tough, especially with rising interest rates and other factors.

Especially if you are earning $50K - $80K a year gross before tax (no one wants to "feed a property"!)

And bankers-lenders want to see CASH FLOW SUCCESS in property, not just equity growth.

This is why I advocate modest homes in good school districts with good ratios of Rent to Value.

If you are getting $220 a week on a $100K property in Invercargill with 7% Capital Growth over last 5 years, or would getting a $500K villa in Grey Lynn for $500 a week rent with good Capital Growth of 11% avg over the last 5 years be better?

Does this help?

Warm Regards,