Articles - Graeme Fowler

[AlFa]

I still don't really get it. What is the purpose of this? Just to pay off faster hence saving on interest payments?
Right now I have my loan on 6.29% fixed for another 3 years and talking with bank to break it. It will cost me $20k but will save about 12k within 3 years. Am I doing it wrong?

[orion]

I still don't really get it. What is the purpose of this? Just to pay off faster hence saving on interest payments?
Right now I have my loan on 6.29% fixed for another 3 years and talking with bank to break it. It will cost me $20k but will save about 12k within 3 years. Am I doing it wrong?

You can take 5% of your total debt at 6.29% and fix it at say 4.30% for 12 months on a 5 or 10 year term, therefore pay less interest overall, yes.

I wouldn't be paying the break fees though, do the 5% and it will at least save you some money in interest.

[Perry]

What of deductibility vs non-deductibility?

[smooch]

Orion – thank you for taking the time to share your information. It lifted my spirits to read your calm and solid investment advice.

I started a thread recently, outlining my situation and am grateful for everyone’s thoughts so far. We’ve saved 150k. In hindsight I should have brought an investment with my first 20k – I can hear this forum shaking their heads My pre-approved investment loan at 80% expires in January. Although I change my mind daily, my current plan is to get an owner occupied loan, buying in Auckland soon to minimise the risk of being priced out. If my contracting work continues to go well next year, I would look to buy an investment when possible, hopefully still capitalising on low rates.

I worry about buying into the market at the wrong time, putting my eggs into one basket, being too green when it comes to real estate agents resulting in not negotiating well, or buying an owner occupied property when maybe I should be buying investments.

As you can see, worry, regret and fear are not helping. I’ve talked to friends and family, getting advice where I can to help. I visit these forums hoping to gain insight from experts on an approach before I take my first step. Your post also helped me.

My take from it - I need to focus on positive emotions and enjoy the journey. Re investment, if I don’t invest now, it’s not too late. The main point is to invest well when I am ready. Your principals and advice are useful, and I like the point to invest without relying on capital gain. When I’m ready I hope that my “why” of investing (help with retirement, having a property within my portfolio that I can use to holiday with my as yet unborn kids) pushes me to put in the effort required, with solid choices. Re my upcoming personal property purchase, my hopes are that if prices do go down by 5%, it isn’t a complete loss as I’ll be holding onto it for a few years at least. I need to find a good agent to help buy first!

I hope to read more of your threads – and to revisit them in the future. Thank you in advance for any feedback you may have.

[orion]

You’re very welcome Smooch.
$150k saved is great and whether you say you should have invested when you had $20k or not, is irrelevant.

My first purchase in my early 20’s was with a deposit of $25k and by not buying well or knowing the market or anything about property - I lost all of it, plus more.
So you are where you are right now, it’s not good or bad, it’s just what is.

Don’t be concerned about your pre approval expiring in January - that is don’t let that you make you rush in and make a purchase just because of that.
Buy something when you are ready to and not before.

Yes you will get lots of opinions on what to do and where to invest, and it can be all very contradictory and confusing.
That is where you need to really think about what you want long term from property, possibly the number of properties, also how much income from them.
Also is that income from them with debt still against some, or all of them, or no debt.
Then work out a plan of how to get that, in other words work backwards to where you are now.

Most people will no doubt say to you invest in Auckland because of more gains, but that is not a reason to at all and may or may not happen. Over time the main cities in NZ of over 100,000 population all balance out and so the ratios of how they all were to each other 50 years or more is still very much the same.
I would not personally be buying there unless I could get at least a 9% yield which may not be that easy to find.

Where you want to live does come into it a lot, so if you do buy something to live in there, then it makes sense to also buy rentals there if they can fit into your plan. Just remember not to rely on any gains in prices. Once you use gains in prices in your calculations, then you make assumptions and that isn’t smart investing. Your rules and strategy need to work in a zero property growth scenario, otherwise it is just meaningless speculation.

Maybe read through the articles again and you will probably pick up things you didn’t see before, especially the goal setting, mindset, what to do with $60k, how to get luckier and the building a foundation (both) ones.

Once you get your mindset in a better place to where it is right now, you will feel more comfortable with your investing too.
You may still make mistakes, but we all do and have done in the past.
This doesn’t mean you give up, it means you now know more now and hopefully won’t repeat the same things again.

[smooch]

Thanks orion - look forward to it. Now to ponder whether to wait till Feb/March to buy my own home! Hehe.
Will definitely re-visit your threads. Thanks again.

[orion]

What Does Cashflow Positive Mean? (2015)

I will often ask at seminars or meeting up with other investors – what are some of your rules for investing?
Most will say that one of their rules is to ‘only buy cashflow positive properties’.
I will say – ‘well, what does that mean’?
They will often look at me as if to think I’ve never heard of the saying ‘cashflow positive’ before. So, they say ‘well it has to make money’!
I say – ‘ok so let’s say I buy a house for $200,000 with no mortgage and it rents for $50 a week, is that cashflow positive?’
They say ‘no it’s not’.
And I say ‘well it actually is’!

It is according to some people - it just depends on what your definition of cashflow positive is.

Here are the things that are taken into consideration in order to work out if a property is cashflow positive or not.

First of all, you have the rent which is a fixed amount per year. Some people though when working out if something is cashflow positive or not, will use 52 weeks rent for the year, others will use 50 weeks of the year and some will use 48 weeks. Using 48 weeks or 50 weeks takes into account any vacancies or loss of rent.

Then comes the interesting part as there are so many variables that people use to work it out.
Here is a list of factors/expenses which are used to work out if something is cashflow positive or not:-

Council Rates
Regional Rates
Water Rates
Insurance
Property Management
Maintenance

And after that you also have the interest rate per annum of the loan, the term of the loan (how many years the loan is to be paid off over), the amount of deposit used when purchasing the property and finally if you are using a P & I loan, or an interest only loan.

Simply saying something is cashflow positive or not really is meaningless without knowing how they are calculating it.
With the example above, some would call that positive cashflow, which of course it is if you are using a certain method of determining it.

From the above you can see that there are so many different ways of working out of a property is cashflow positive or not, so here are some of the main ones people use.
None of them are right or wrong and with no mortgage on a property as mentioned above, you can pretty much make any property cashflow positive.

Rent (anywhere from 48 to 52 weeks) per annum - must be more than expenses (to be considered cashflow positive).

Method 1: - Loan on interest only (I/O). No deposit when purchasing the property, and using all of the expenses above (some investors don’t include maintenance into their calculations, and this can vary significantly from one year to the next. Also, some investors prefer to do maintenance themselves on their properties and this will save costs as well).
Some investors will manage their properties themselves, and therefore don’t have the expense of property management.

Method 2: - As above, but loan on Principal and Interest (P & I). What has a huge effect on this is how long the term of the loan is over. If the loan was over only 10 years for example, it would be very difficult if not impossible to have the property be cashflow positive, as the repayments on the loan would be so much higher than they would be on a 20 or 25 year loan.

Method 3: - Loan on interest only. Use a 20% deposit when purchasing each property and using the expenses above as required..

Method 4:- As above using a 20% deposit and using P & I over a specific term, usually 20 or 25 years, and some people even use 30 years.

I’ve used two different methods to work out if the properties I was buying were cashflow positive, or at least neutral (rent is approx equal to calculated expenses).

The first method was when I was buying rentals about 12 – 14 years ago and building up a good solid foundation. What I wanted then was to have the rent cover my expenses on either a 20 year loan or a 25 year loan, using a 20% deposit for each purchase.
The deposit was created/made or saved each time by either trading properties or renovating and selling properties on again. Other investors may save the deposit from their wages or from owning a business which hopefully creates a good cashflow for them.
In the early 2000’s interest rates were a lot higher than they are now, around 8 – 10% per annum compared to around 4.5% p.a. now, so it was a lot more difficult to get a property to be cashflow positive or even neutral back then. That is, unless you used interest only or put in a reasonable deposit when buying any rental properties.

The other method I used was early last year when I set up a new trust to purchase 20 rental properties. These properties were to be purchased with no deposit and they had to be at least cashflow neutral or slightly positive, using a 6.5% p.a. interest rate as a guide.
The expenses that the rent had to cover - was the mortgage, rates, regional rates, insurance and also property management on a 20 year P & I loan.
I didn’t factor in an amount for maintenance, however over the last 2 years this has worked out at approximately $1,000 - $1,200 a month over the entire 20 properties ($50 - $60 for each property).
With these 20 properties that I bought last year, the income after expenses (rates, insurance & property management) is approx $18,500 a month and the mortgage amount is approx $17,000 a month.
Most of these loans are still fixed at 5.75% - 6% p.a. and if they come down to around 4.5% p.a. (current interest rates) when the fixed terms expire during next year, the mortgage payments will drop down to about $15,500 a month.
That would make them $3,000 a month cashflow positive ($150 per property) which is more than enough to cover any maintenance.

So, there’s many, many ways of determining if something is cashflow positive or not: -

1. Various methods of using some or all of the expenses, some investors may even calculate using no expenses.
2. Whether you are using I/O or P & I loans. If using P & I loans, what term is the loan over? Is it over 10 years, 15 years, 20 years, 25 years or even 30 years?
3. And how much deposit is paid when purchasing each property? Is it on no deposit (100% financed) or is it with a 5%, 10%, 20%, 30% or even more deposit?

You may see now why it can get confusing for people at times, or hearing other investors talk about their investing rules, and wanting only to buy cashflow positive properties 

[GregB]

Hi Graeme, thank you for all your very good informative and helpful posts. Been reading through for the past hour.

Can you please explain why you've said refinancing on a valuation is a weakness when you've shown how to use it with your 'what to do with $60k' example?

You're not saying that it's bad, but to be wary of over leveraging your position and weakening the foundation. Is that right?

I'm about to buy my first place and it's definitely part of the strategy to refinance as soon as I can based on the valuation.

Not wanting to get over excited and weaken the foundation though.

In your '$60k' article you mentioned using a 20% deposit ratio and only refinancing once then paying down debt.

Thanks

Greg

[orion]

Hi Graeme, thank you for all your very good informative and helpful posts. Been reading through for the past hour.

Can you please explain why you've said refinancing on a valuation is a weakness when you've shown how to use it with your 'what to do with $60k' example?

You're not saying that it's bad, but to be wary of over leveraging your position and weakening the foundation. Is that right?

I'm about to buy my first place and it's definitely part of the strategy to refinance as soon as I can based on the valuation.

Not wanting to get over excited and weaken the foundation though.

In your '$60k' article you mentioned using a 20% deposit ratio and only refinancing once then paying down debt.

Thanks

Greg

Thanks Greg, glad the articles have been helpful 

Yes refinancing is weakening your foundation if you are borrowing more money.
When I started to build my foundation in property, I was buying below market value (around 10% average) and also using a 20% deposit.
To me that is a good safe way to start and build it solidly, and of course use P & I to pay down the debt.
In the ‘$60k’ article, and also what I did last year with the new trust (local paper article) was different, but only because I already had a good solid foundation in place to start with.
Also, because of buying so well in both of those articles, it doesn’t weaken the foundation really, because of buying at 10 - 20% below market value.

So, when I was buying a property last year for say $120,000 that I knew was worth around $150,000 and would value to at least that, it would be the same as someone else buying the property for $150,000 and borrowing 80%, so a $120,000 loan.
In my case the loan is 100% for the $120,000, however the bank sees it the same as if I had bought it for $150,000 and put in a 20% deposit of $30,000 and borrowed the other $120,000.
Does that make sense?

Where it gets people into trouble is when they get valuations which are so far above reality, that investors borrow against that fictional amount and often spend the extra money, or do the same thing over and over again and are at least 100% leveraged, or effectively worth nothing.
In other words if they sold everything, they would owe as much as all the loans and often more.

Just last week I asked for the E-Values the bank has against some of my properties (they say I-Values) and some were low, some were about right and others too high. But one really stuck out as so far out, it’s just ridiculous.
The property is worth about $220k, maybe $230k tops.
The I – Value the bank has against it is $360,000.
Say I just owned that property and wanted to borrow against it, the bank would be willing to lend me 80% against their valuation of $360,000, which is $288,000. Some investors would do that, and either buy more properties, or use that money to go on holiday, or buy a new car etc.
Now if they went to sell the property, they owe $288,000 on a property that’s worth $230,000 maximum, minus agents fees etc.
That’s where people get caught out, poor money habits and making silly choices.

Building your foundation is paramount if you want to be successful Greg.
With the right money habits and thinking before you do things, and also consider what may change or go wrong in the future should prepare you to start building slowly and solidly.

[primal]

I just bought a brand new property, one month old, and it has negative cash flow of $10pwk.
My loan is on P&I and structured it as offset. I have also decided to make extra repayment of $400 fortnightly that will reduce the debt. Is it good move.

According to evalue the property has same value as per my buying price. No increase in equity.
I want to invest in another property, can I do so.
No rise in equity in the property with repayment of $400 fortnightly.

[orion]

I just bought a brand new property, one month old, and it has negative cash flow of $10pwk.
My loan is on P&I and structured it as offset. I have also decided to make extra repayment of $400 fortnightly that will reduce the debt. Is it good move.

According to evalue the property has same value as per my buying price. No increase in equity.
I want to invest in another property, can I do so.
No rise in equity in the property with repayment of $400 fortnightly.

Yes very good paying down the extra $400 a fortnight to build equity.
If you haven't bought well under market value or perceived market value (E-Value, Registered Valuation etc) then it isn't going to be one that you can refinance. Paying down debt like you are, you will be able to after a few years if you choose to do it that way.
If you were to refinance it later on, only borrow up to a point that the property will still be paid off within the original timeframe you intended to pay it over.

[Orkibi]

Great articles Graeme, keep them coming.
you made think of buying 10 cash flow properties in Dunedin!

[orion]

Great articles Graeme, keep them coming.
you made think of buying 10 cash flow properties in Dunedin!

Oh dear, your better read them again!!

Just kidding, glad you enjoyed them

[Orkibi]

I read most articles but had Mac read to me. Cheers

[Grant Edwards]

Beautiful! Thank you.