Buying and Holding (bleed) vs flick

[socure]

Hey guys,

I'm new to the forums and am trying to figure out the best way to get my 2nd property.

I have skills at renovations/building and will fare well in the flicking game in the Auckland market. However I have found a property that has greater long term potential that is really run down and would require more money to complete than I have available right now.

My options seem to be to buy it and renovate it to what my funds allow and then flick it.

OR

Buy it, cheaply renovate it so it can be tenanted (its really un-habitable right now) until I can free up more cash over 12months holding to 'complete' the house.

The issue with option 2 is that i'll be bleeding about $300 a week on my 2 house portfolio. To circumvent that I was thinking of using about $16,000 of my renovation money to cover the bleed for 12months until capital growth allows me to either buy a 3rd property (flicks to pump extra money into my existing homes) or complete the redesign.

I have a good idea on pro's and con's for both however I would hate to start trading (get tainted) and in a year or two be out of range of buying a hold in Auckland.

On a side note, does anyone know if I was bleeding by $300 a week would that massively affect my borrowing potential with the banks if I have enough equity to buy a 3rd house?

Regards,

S

[Gladdynook]

$300 a week, and whether this would affect your borrowing, can only be determined if we know your income. Note that banks look at only 70% of rent, so your $300/wk is more likely closer to $400/wk in the banks eyes.

Simply a case of income vs outgoings.

Option one of buying, spending only $16k?, and flicking for profit sounds risky to me! You'd have to buy really well to make out worthwhile. Buying, basic renovation and renting sounds like the way to go for me.

[socure]

Option 1 I would have more like 25 - 30k to renovate. could hopefully increase equity by 100k. this is a 2 beddy on the north shore with sea views but really really run down. asking price high 300's to low 400's. So a flick could be quite profitable. I like the property as a long term hold as those kind of views can be hard to come by in the future?

If I held the property I would have to do cheaper reno's and cover the bleed, but should hopefully pay for itself in capital gains.

I would have to refinance my house to free up this money.
It would work out that I'm 100% financing this purchase (hence the bleed). My total LVR would be around 85% before reno's. If I lived with the bleed for a year or so for capital gains on both properties to increase my LVR back to a comfortable level do you think the banks would lend me more?

Consider an income of close to 100k annual + $400 bleed per week.


Either way I believe there's money to be made. I'm just worried the banks wont lend me in a years time and then I end up selling anyway. Where as I may get away with a couple of flicks in that time!

Cheers!

[speights boy]

It would work out that I'm 100% financing this purchase (hence the bleed). My total LVR would be around 85% before reno's. If I lived with the bleed for a year or so for capital gains on both properties to increase my LVR back to a comfortable level do you think the banks would lend me more?

You should get some very specific information from the banks about how the LVR restrictions actually work.

I am certainly not sure, but I thought there was something in the regulations about revaluations.
It was something along the lines of: if you are over 80% LVR when the loan is first taken out it stays classified at that level unless you pay it down below 80%.
It can't be brought out of the over 80% category simply by revaluation.
Or in other words, high LVR is affected in the future by 'L' not 'V'

With your high negative gearing and LVR, and your future plans dependent of increasing capital gains, I think you are right to be concerned about the banks' attitude to future lending.

[artemis]

Also take into account tax payable on buy and flicks.

[Eugene]

A real shame to be tainted, and after income tax and GST there isn't much left once you flick. How about delaying buying a third property?
You should consider buying your buy and holds first, then these buy and holds won't be taxed on eventual sale even if you later decide to do some flicks.

[Maccachic]

You should get some very specific information from the banks about how the LVR restrictions actually work.

I am certainly not sure, but I thought there was something in the regulations about revaluations.
It was something along the lines of: if you are over 80% LVR when the loan is first taken out it stays classified at that level unless you pay it down below 80%.
It can't be brought out of the over 80% category simply by revaluation.
Or in other words, high LVR is affected in the future by 'L' not 'V'

With your high negative gearing and LVR, and your future plans dependent of increasing capital gains, I think you are right to be concerned about the banks' attitude to future lending.

I believe the work around with this is to refinance based on a new valuation, new bank / same bank (re draw the loan or something similar).

[socure]

You should get some very specific information from the banks about how the LVR restrictions actually work.

I am certainly not sure, but I thought there was something in the regulations about revaluations.
It was something along the lines of: if you are over 80% LVR when the loan is first taken out it stays classified at that level unless you pay it down below 80%.
It can't be brought out of the over 80% category simply by revaluation.
Or in other words, high LVR is affected in the future by 'L' not 'V'

With your high negative gearing and LVR, and your future plans dependent of increasing capital gains, I think you are right to be concerned about the banks' attitude to future lending.

Thanks for your reply!
Basically how I am probably going to do it is by taking our original mortgage to 80% with our bank. I will then seek a finance company that are still allowing 10% deposits and work with two different finance. I got the LVR wrong above I believe I will be at about 87% between the two properties. So the equity I get from Bank A by re financing to 80% will give the 10% deposit to borrow from Bank B = 87% LVR and 100% finance on 2nd property.

I am definitely going to be going to my broker to make sure this will be possible of course, so I'll make the assumption that this shouldn't be a problem using separate finance.

I think I will run into a dead end and need to sell the property anyway to move forward.

I guess its worth noting that I have more work to do on my original property to add equity if my LVR is suffering in a year.

Also take into account tax payable on buy and flicks.

Thanks for your reply!
I am aware of the tax implications especially being a builder. not to mention agent fees and holding costs!

A real shame to be tainted, and after income tax and GST there isn't much left once you flick. How about delaying buying a third property?
You should consider buying your buy and holds first, then these buy and holds won't be taxed on eventual sale even if you later decide to do some flicks.

Thanks for your feedback!
I want to be doing this as my full-time job to make use of my building skills. I'm likely going to need to do flicks regardless to make an active income. So whether its worth holding this potentially spectacular house long term and waiting a year and doing flicks if the banks allow me to borrow in a year or so would be nice. I would hate to be in a situation in 12months where I can't get more funds and I end up being forced to sell this property anyway.

Hold for a year > begin flicking when LVR has got better

OR

Flick right away (do maybe 3 - 5 flicks)> free up some cash to put a bigger deposit on a hold in the future to make it cash flow neutral or positive.

I believe the work around with this is to refinance based on a new valuation, new bank / same bank (re draw the loan or something similar).

We will definitely need to go to another lender until LVR restrictions lift (hopefully).

Thanks for everyones feed-back.
I may try add a poll.

Cheers.

[Rosco]

Hi Socure,

$300 per week is a lot!

What happens if you lose your job?
or you have an accident? - hope you have very good risk insurance!

What happens if the market stalls, and doesn't jump up in value?

Obviously the higher the risk the higher the return. But often it is better to take it slower. So many investors have been burnt buying a property that is negative cashflow, and then being forced to sell it, at a loss.

Tax for a builder - just to clarify, if you are in the business of erecting houses, then if you buy a long term hold, do major renovations, then if you sell under 10 years, the gain is still taxable.

Good luck

Ross

[socure]

Just an update on this:

Some one has put an offer on and the auction was brought forward to today. Unfortunately I missed the boat on this one

Should be interesting to see how much it goes for. Time to hunt for another one!
I'll keep you posted.

[BigDreamer]

Secure, don't feel bad about missing out. $300 a week was a lot. Keep your eye out and I'm sure you will find another property that suits your situation.

[speights boy]

Some one has put an offer on and the auction was brought forward to today. Unfortunately I missed the boat on this one

Why are you chasing auction properties before you even have your finance arranged ?
Surely that is the first step.

[socure]

Why are you chasing auction properties before you even have your finance arranged ?
Surely that is the first step.

I'm being active in my area to know what's out there. I'm allowed to look while trying to get the finance But I was hoping to get the finance for that particular property but I was too late.