Buy & Hold Negative Gearing

[House Hunter]

My partner and I own a two bedroom rental property on the North Shore, Auckland. We purchased in early 2014 with a 20% deposit from savings. The property was renovated and tidied up prior to buying as we don't consider ourselves home handyman type people and we are particularly busy with our careers and life in general.

We make a cash loss on the property of around 6k per year after all expenses including property manager, accountant, insurance, rates, etc.

If we want to look to buy a second rental property in 4-5 years before we begin to have children, what would be the best way to go about this? We would buy another two bedroom rental in Auckland, similar in price and location.

Our household income is 95k before taxes and we have been saving around 30k between the two of us annually.

[Leftette]

Given that information, I believe it would be wrong to buy another. The biggest variable to that opinion is the children aspect. Do not underestimate their cost. You must already live quite frugally to save 30k with that income given the 6k loss of the existing property. Do you have no mortgage, or are you renting yourselves?

[House Hunter]

Given that information, I believe it would be wrong to buy another. The biggest variable to that opinion is the children aspect. Do not underestimate their cost. You must already live quite frugally to save 30k with that income given the 6k loss of the existing property. Do you have no mortgage, or are you renting yourselves?

Our thinking of buying a second rental property was that if we have two rentals as opposed to one then we would have two houses appreciating in value when we have children. We are 26 and 27 years old now, plan to have children in around 5 years time. We figure when children (two or three of them) are born and are younger, we will definitely be down to one income and won't be able to look to buy any more rental properties.

If all goes to plan, between now and 5 years time, my income (male) should be up around the 80-90k+ mark.

We don't spend that much money on luxuries, so yes we are quite frugal.

We currently rent with us two and my partners sister. So $450 per week between the three of us.

[elguapo]

In your situation you would be best off paying down as much of your home mortgage as possible and past that, maybe getting your rental to neutral cashflow.

[socure]

Maybe a good way to go forward would be to make that a cash flow positive property before reaching for a 2nd.

Things to consider:

- Is there any obvious work that can be done to the existing property to increase the yield? e.g adding a 3rd bedroom or something that the tenants need to justify a rent increase.

- Consider putting some savings into paying off some of the mortgage, many would prefer their savings in their home then in a bank! which would also decrease your LVR (allowing you to borrow more later) as well as reduce your mortgage repayments.

- Turning the property into a home and income by adding a minor dwelling or a separate unit.

In saying all of this it is going to be quite difficult to get a cash flow positive property in the North Shore. But your goal should definitely be trying to get your properties neutral, Negatively gearing can be helpful but you are still losing money at the end of the day.

I can't comment on the kids situation but all the best!

[PC]

Young kids aren't expensive - all being well.
They don't eat a lot. Medical is mostly free.
Don't waste money buying baby junk - 3 months later it will all be out grown.
The biggest expense is you will lose one income at the same time you want a place of your own.
Flatting with baby - no thanks.

If you can handle the extra monthly cost - then buy another.
It's hard to start with but the rents magically rise to make it easier over time.
Kids & property - just get use to no sleep & being poor!

[PTILoveYou]

Do you own your own home too?

If you do, maybe leverage that and buy another 2 bedroom unit/town house now? I would certainly buy myself.

The market has still got some way to go up in this market. If you wait for 4 or 5 years later, it's still a good option, since it will probably be the bottom of the next cycle, good buying times then, but probably prices will still be higher than now.

If you save $30k per year, that means you can support 5 cash flow loss properties.

Also in 5 years time, rents and wages would have gone up, so your 6k loss now may not be so much in the future.

Once you have a kid and you are down to 1 income, then it would be extremely difficult to buy unless that single income is $100k+..

For you I guess it's a decision between big money (capital gains) vs small money (cashflow), so it's more of a gamble.

But most kiwis have been 'gambling' in the past to get ahead.

[House Hunter]

Apologies, I should have clarified earlier.

- We use all our extra savings to pay down the mortgages. We have a P&I and revolving credit so all excess cash goes into aggressively paying back the debt. Over the five year period, we should be able to pay back around 100-150k of the 400k odd mortgage, making it cashflow positive in 3-4 years from now based on a few estimates of paying back debt and increased rents over that time.

- When we have children, we will live by ourselves. This will most likely increase the rent we pay to live each week from what we are paying now.

- There is no possibility of adding a third bedroom or adding a sub dwelling onto the property. The ability to add value is therefore limited as previously stated we aren't home handyman types so bought the place after it had been renovated by the previous owner.

- We don't own our own home, hence why I stated before that we rent with my fiances sister for $450 per week. We cannot buy a second property right now as we don't have the equity to or the capability with our incomes to support another $500k plus of lending at the moment. Hence why we are thinking of buying a few years down the track.

[Davo36]

So you share a property, and it costs you $450 per week? Must be a pretty flash place?

It seems to me you would be taking on far too much debt and risk to buy a second rental when your first is still costing you $6k per annum.

This whole strategy is totally predicated on houses continuing to rise in price. Sometimes they don't.

[socure]

Apologies, I should have clarified earlier.

- We use all our extra savings to pay down the mortgages. We have a P&I and revolving credit so all excess cash goes into aggressively paying back the debt. Over the five year period, we should be able to pay back around 100-150k of the 400k odd mortgage, making it cashflow positive in 3-4 years from now based on a few estimates of paying back debt and increased rents over that time.

- When we have children, we will live by ourselves. This will most likely increase the rent we pay to live each week from what we are paying now.

- There is no possibility of adding a third bedroom or adding a sub dwelling onto the property. The ability to add value is therefore limited as previously stated we aren't home handyman types so bought the place after it had been renovated by the previous owner.

- We don't own our own home, hence why I stated before that we rent with my fiances sister for $450 per week. We cannot buy a second property right now as we don't have the equity to or the capability with our incomes to support another $500k plus of lending at the moment. Hence why we are thinking of buying a few years down the track.

A lot can change in 4 - 5 years in the Auckland house market. Prices in the same area as your current will be much more expensive for a 2 beddy. Especially if your investing on the North Shore! You can't go wrong with buying more properties as long as you can finance them. The best way is to keep paying off your current mortgage as you are and revisit your situation in 4 - 5 years. You don't need to plan it out now but set yourself medium term goal to save towards it and if things turn out that you can afford to buy sooner then go for it!

[elguapo]

You can't go wrong with buying more properties as long as you can finance them.

Would you like to offer them a money back guarantee on this?

[PTILoveYou]

HH, your plan is sound, good luck =)

[House Hunter]

So you share a property, and it costs you $450 per week? Must be a pretty flash place?

It seems to me you would be taking on far too much debt and risk to buy a second rental when your first is still costing you $6k per annum.

This whole strategy is totally predicated on houses continuing to rise in price. Sometimes they don't.

Yes it is in Takapuna which is one of the "leafy" suburbs in Auckland.

Reason we live here is because two of us can walk to work, the other a 15min drive away. We can walk to the shops, supermarket, beach, etc so we hardly spend anything on petrol and we really enjoy living there. It is one of the very few things we have collectively agreed to spend money on and the cost vs reward weighs up for us.

Yes but in 4-5 years time it would be cash positive so if we bought a second place the entire portfolio would be roughly cash neutral or slightly negative to begin with. So it is not like it would be negative 12k+ when we bought the second.

I don't feel it relies on house prices going up because we have P&I loans so if house prices go nowhere, we will still have paid back 100-150k in the loan over those 5 years which I've previously mentioned.

[socure]

Would you like to offer them a money back guarantee on this?

By the sounds of the OP's intention of long term holds is a pretty risk free strategy if not spread thin.

"as long as you can finance them"

is implying they can pay for them even in a down swing. Long term holds doesn't get affected much by the property market ups and downs so I wouldn't guarantee it but it's probably still pretty safe!

However I can't look into a crystal ball for the future.

But no, I would not give them a money back guarantee. Sorry OP!

[House Hunter]

A lot can change in 4 - 5 years in the Auckland house market. Prices in the same area as your current will be much more expensive for a 2 beddy. Especially if your investing on the North Shore! You can't go wrong with buying more properties as long as you can finance them. The best way is to keep paying off your current mortgage as you are and revisit your situation in 4 - 5 years. You don't need to plan it out now but set yourself medium term goal to save towards it and if things turn out that you can afford to buy sooner then go for it!

Yes good advice. We just want to set ourselves up so when the opportunity comes along in a few years we are prepared for it.