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  1. #1
    Join Date
    Aug 2004
    Posts
    21

    Default how much deposit?

    hi guys,

    Good evening. I'd like to ask for opinions about deposit. To purchase a positive cash flow property, which is the reasonable percentage for deposit?

    There are some views from th forums suggesting 20% (of purchase price), can I ask the reasons for this?

    cheers,

    A

  2. #2
    Join Date
    Dec 2003
    Location
    Hawkes Bay
    Posts
    1,732

    Default

    Hi A,

    Yes you can.

    Regards
    Graeme Fowler

  3. #3
    Join Date
    Jun 2005
    Location
    Mt Maunganui, NEW ZEALAND
    Posts
    1,463

    Default

    Do I hear a "W . O . W" coming on??
    "If you want a better answer......."


  4. #4
    Join Date
    Jun 2005
    Location
    Auckland
    Posts
    5,084

    Default

    Hi A,

    Its not like our experienced and helpful member to be quite so literal!

    The 20% figure is usually quoted as the level where the banks feel happy - they lend you 80% and you find the other 20 from somewhere else, so that they are not too exposed.

    If you can get someone to lend you 100%, good for you, but make sure that the property still stacks up - do the numbers for the downside. What happens if interest rates climb 2% and you have a 4 month vacancy. That sort of downside.

    Keep asking - someone will answer.

    cube

  5. #5
    Join Date
    Aug 2004
    Posts
    21

    Default

    thanks for all the replys. english is not my first language and i am trying my best to express the question as clearly as i can, if my writing sounds strange, ps take it as a weekend laugh .

    my question is: if with 10% as deposit (of course the loan insurance may apply), the cashflow sum turns out to be positive, it is a good deal right?! what about when the number won't turn out to be positive until using 20% as deposit? is it still all right? and what about 25% or 30%?.....

    it is always possible to get a positive-cashflow property by increasing the deposit. i agree that 20% is a comfortable level for the bank, but except for this, any other reasons?

    Cube, appreciate your answer and encouragement.

    have a nice weekend, everyone.

    A

  6. #6

    Default

    Hi A, and welcome.

    When looking at a purchase, I always calculate as though I will be borrowing 100%. If the cash-flow is positive on that (I look for around 10%) then it goes on my "possible" list. That way, all my purchases are positively geared right from the start. Any deposit I put on them with make them even more positive. If I have to look at using a 20 or 30% deposit to get them to be positively geared, I probably wouldn't be buying them. Basically, my strategy is to go for low-end cash cows, rather than capital gains in more expensive areas.
    But I'm sure there will be as many opinions here as there are posters...

  7. #7
    Join Date
    Sep 2004
    Location
    Wellington
    Posts
    155

    Default

    Hi

    I agree with Sparrow. I go for postive cashflow properties based on 100% finance. I buy my properties with 100% using cross-collaterisation. Which has it's good points and bad ones. The bad ones - that it's quite hard to get the bank to un-cross once you've got equity. I've had so doosey excuses from Westpac about why they don't want to un-cross mine. In fact I get a different answer every time I ask. But that's another story.

    The goods points - you don't have to use any hard cash.

    I buy at the low end of the market as well and make. Mine are all over 11%. I've been told not to go below 7%. But I don't think I'd even want to go that low.

    Cheers, QB
    If you go parachuting, and your parachute doesn't open, and your friends are all watching you fall, I think a funny gag would be to pretend you were swimming.

  8. #8
    Join Date
    Dec 2003
    Location
    Hawkes Bay
    Posts
    1,732

    Default

    my question is: if with 10% as deposit (of course the loan insurance may apply), the cashflow sum turns out to be positive, it is a good deal right?!
    Not necessarily, no. It depends more on what the property is actually worth as to whether it is a good deal or not.
    Also, what term is the loan over?

    what about when the number won't turn out to be positive until using 20% as deposit? is it still all right? and what about 25% or 30%?.....
    Again, first of all you want to make sure that the property is bought below market value, then think about the other figures, ie how much money to put in, time frame of loan etc.

    Personally, I always use a 20% deposit so there is no mortgage insurance costs involved, also it makes the lenders more comfortable having a lower debt / equity ratio.

    With regards to the cash flow positive / neutral etc, my thoughts are that if you can put in 20% deposit, and pay the loan off over 20 - 25 years, the rent received should be able to cover the loan + rates, insurance and maintenance. The yield would have to be above 7% p.a. to achieve this.

    My question to you a is - is this your first rental property purchase? If so, what price range are you looking to buy up to and what deposit or equity do you have available now to put into the deal?

    Regards
    Greame Fowler

  9. #9
    Join Date
    Aug 2004
    Posts
    21

    Default

    hi Orion,

    yes, it is my first rental property. my price range is up to $150k. i have 10% deposit at this moment and can get another 10% overseas if it is necessary. quite a few time i found some deals which can be positive if i use 20% as deposit but turn negative if i use 10%. that is why i try to figure out which percentage should be used.

    meanwhile, i use "25 years" to do my loan sum. could you ps give me more about "buying below market value"? thanks a lot.

    A

  10. #10
    Join Date
    Dec 2003
    Location
    Hawkes Bay
    Posts
    1,732

    Default

    Hi A,

    Personally, I think it's best to use 20% deposit, but that's up to you and your tolerance to risk and exposure if prices drop too much. I always assume the market prices will drop when I'm buying any property, so want to still be okay in the deal if the price dropped by 10% or so.
    To buy below market value, it takes lots of hard work initially in learning the market in your area, look at approx 100 properties first before making any offers, it will save you a lot of money in the long run. If you rush in too quick, you may regret it.
    I bought another one last night out of the paper - a 2brm unit with a garage for $105,000, market value is between $130,000 and $140,000. It will rent for $180p.w.

    Regards
    Graeme Fowler


 

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