Will this work?

[duwi]

1. Buy as many as properties as possible with $0 deposit down or small $ down. Interest only loan. Only buy properties that would give us + cash flow after tax (in my case, my tax rate is 39%).
2. Lease them for long term or buy the ones already with lease (e.g lease to HNZ)
3. Wait 1-3 years until their values go up (say by 20% for each of them)
4. Repeat step 1-4 - is there any otehr reasons bank wont lend me money?

[tricky]

Would it work? - yep
May as well buy them at 80% of valuation.

[drelly]

Hi Duwi,

Banks require equity as collateral in case something goes wrong. If you can't pay your mortgage and you only have, say, $1000 equity, then the bank will incur far more costs than the equity in the property will cover.

[CJ]

To get no deposit, +ve cashfolw properties on a long term lease, the question is not will it work but can you find them!

What about step 3b (the alternative email):

3b. Market receeds marginally (5%) and banks review there portfolio and decide to call in your loans.

Cant remember th quote but something like, plan for the bad times, the good times will look after themselves. - I think it is a buffett or a Trump quote so I am sure it iw smore eloquent that than - probably buffett and that doesn't sound like trumps style.

[kolzee]

Duwi, there's a huge HUGE assumption in there, as CJ has pointed out, that the market will rise (let alone by 20% in 1-3 years)....

I won't start the debate on where the market will go from the current position but what i'm most interested in is why you (and so many others) emphasise no money down??

If you're in the 39% tax bracket i would have thought raising a deposit wouldn't be impossible and this gives both you and the bank room for market decline.

People and property 'mentors' may tell you to buy with no money down, but they're probably the same people who have property finders keen to buy the property off you when you're distressed.....

OK, i'm starting to ramble but do you get my drift??

[BusyLizzy]

Kolzee,

... what i'm most interested in is why you (and so many others) emphasise no money down??

If you're in the 39% tax bracket i would have thought raising a deposit wouldn't be impossible.....

I currently am paying off a mortgage on my own home (another 7 years to go, less if I find a couple of +ve cf IPs!!) and am in 39% bracket.

I have been advised in my situation that my main priority should be to pour all spare $$ into my home mortgage (since there is no tax relief there) and should therefore purchase any IP with no deposit and with an interest-only mortgage. I think the logic was that the only time I should consider purchasing with a deposit is if the cap gains would be greater than the interest that I will have to pay by not putting that money against my mortgage.

Does that make sense? And is that a correct assumption? Would be interested in the opinion of the more experienced forumites!

[kolzee]

Hi BusyLizzy,

My thoughts would be that because the banks will probably make you secure the IP against your home (which personally i definitely wouldn't advise) with no deposit, you'd be best to have a slightly smaller amount of deductible interest and use a deposit.....

This would safeguard your home and the tax effect is only about $300 per $100k of purchase price (by my calc below) which isn't much to pay for the security.....

Purchase price of $100k

Deposit @ 10% = $10k

Interest cost on deposit @ 8% = $800

Tax effect at 39% = $312

Am interested also in what the more experienced forumites would suggest??

[duwi]

To get no deposit, +ve cashfolw properties on a long term lease, the question is not will it work but can you find them!

+ve cashfolw *after TAX* which includes depreciation claim. I think if we buy a NEW property (even with ~6.x % GROSS yield), I think we can get this easily (39% tax) .Please correct me if I am wrong.

It doesnt mean I dont want to put $ down, I just dont have the $ to put down If some lenders offer me this option, so why cant I just take it.

[tricky]

Hi duwi,
Please supply us the figures you're thinking of eg house price, expected rent, amount of depreciation you would expect and any other expenses that you've calculated.
cheers
tricky

[duwi]

Asking price: $415,000 - est land value $200,000
Lease: $500 /week for 10 year
Management fees: 8%
Rates: say $2,000
Maintenance: $1000 (brand new house)
Kiwi bank rate , 5 years, interest only loan: 7.25%
LVR: 95%

[[email protected]]

Always use someone elses money whenever you can. No money down strategies force you to buy well and leave you with money to spend on important things like trips, gifts for the wife etc. Always try for no money down and if you have to use your own money you want it back out of the deal as fast as possible. Never more than 12 months, preferably 3 to 6.

[Philmc1]

Hi
Don't want to be discouraging but my calculator tells me it's a very negative cash flow before depreciation - somewhere round $12,000 so you're totally reliant on capital gain. Your depreciation isn't going to put much back in your pocket and IF you do make some capital gain, there will of course be the depreciation clawback.

Just to break even your depreciation will have to be around $30,000 to get $12,000 back off your tax.

Sorry but unless my calculations are wrong, it's all bad.

[kolzee]

Poomba,

Are you advising that people should provide security against their personal residence in order to avoid a deposit?? Or in some cases, as i've seen property 'mentors' advise, secure against a family member or friend's property??

Please tell me this isn't your suggested advice for your mentorees (if this is a word!!)??

Agree to use other people's money if possible but to me the above is not advisable......

Duwi - if the interest rate is 7.25% and your rental yield 6.X% than it's very likely it's going to be cashflow negative.

[tricky]

Hi duwi,
I agree it's cash negative pre-tax but my calcs suggest depreciation of $12k will be the breakeven point.
I guess a new house would exceed this so it seems to be cash +ve after tax.
So the figures are good but there might be a few other issues to look at before rushing into this deal.
Of course, my calculator could be playing up as well.
tricky

[Philmc1]

Try this

Income
Rent $26,000

Expenditure
Interest $30,875
Management $2,340
Maintenance $1,000
Rates $2,000
Insurance $500

$35,815

Loss (- cashflow ) $9,815


Depreciation @ $12,000 equates to tax recovery of
12,000 X .39 = $4,680
Loss of $9,815 equates to tax recovery of
9815 X .39 = $3,827
Total $8507

Cashflow - $1308 but you must be earning $82,000 a year and continue to do so ( job security, health, economy). Any less and the loss gets greater.

Our strategy has been to be breakeven or +ve cashflow
on 50 weeks occupancy before depreciation at time of purchase. Tax recovered is a bonus but on sale IRD claim it back - It's like a interest free loan till you sell.
It also covers the unexpected.

Your scenario on this property fits that of a speculator, not an investor ( investing for a return). If you want to speculate, I'm sure there are better oppurtunities out there than this one.

cheers

Phil