Something that's been bothering me for a while.

[cube]

Investors buying property despite the poor returns is achieved by either putting in a substantial deposit, or by topping up the loan with money from another source.

I maintain that this is only possible on your first property (unless you are rolling in cash, and the first few are totally cash purchases )

From then on you are in debt (albeit good debt), and taking cash from somewhere to 'increase the yield on a property' is false accounting - you could just as well take that cash and pay something off the first property, increasing its yield and leaving the second property 100% financed. The net result is the same.

Likewise, once you have a mortgage, you are totally unable to pay 'cash' for something until you have paid off all debt.

One example is buying a car - never go in to debt to buy a car, as its a liability, not an asset.

BUT, if you have $15,000 to buy a car for 'cash', by doing so, all you are doing is leaving the debt on the mortgage. You could just as well pay off the mortgage, and use the increased cash flow to pay off the loan for the car. It might be that a car loan is more expensive than the mortgage, but, equally, you may be able to get a good deal on the car loan, which makes swapping the mortgage for a car loan attractive.

Am I right, and putting more money in to a property to increase its yield is not possible past the first one, or can someone highlight the error in my thoughts?

cube

[cube]

P.S when "that's" is short for "that has", does it have a apostrophe?

[CJ]

English was the only subject I came close to failing but I dont think That has can be shortened.

I agree with you piont. If you take cash from one property to another, then that first must be cash positive to be able to support its increased debt. A case of robbing Peter to pay Paul.

i also agree with your car point. I think I remember seeing ads where you could by a SAAB for effective interest of like 3 or 4%. In that case it would be better to pay off mortgage and get this car loan rather than pay cash (tax deductibility of interest aside).

[Gerrard]

I agree Cube, however everyone's going to see it differently. I know people who have a motgage but have cash savings too. Their theory is about having an emergency backstop or spreading the risk. So in their minds they do have cash to pay for a deposit.

The other angle I can think of is that people might look at their portfolio as a whole, so they might have some properties that generate good cashflow and use that to offset negative cashflow properties.

Gerrard

[Dean@Massiveaction]

Hi Cube,
I think one point to consider is what I call "free money"
If you make money by say doing a reno or a flip, there is a sense in which your profit is "free". It's money you didn't have before and you haven't worked 40 hours a week for a year to earn it. Now if you use that money to write down the mortgage on a property to make it more cashflow positive, I think that's a valid strategy. In fact I encourage some of my students to develop that as a specific strategy. That way you end up with cash flow properties in Auckland where they would not exist otherwise.
So it all comes down to how you view money, as money?, or a tool to achieve your goals.
Vinaka

[Julian]

Cube,
You have posed a very important question. The answer is "yes" - include the apostrophe!
Julian

[Son of G]

My LAQC has a small floating mortagage. That is a cheep (8.5%) $20,000 secured overdraft on cheque account. Unsecured overdrafts have a higher intrest rate.

I lend the LAQC my savings. When I need a large amount of cash, such as for a new car, the LAQC repays me.

Whenever I end up with a debit balance (not paying intrest) on the flexi loan I pay a lump sum off the fixed loan with the highest intrest rate.

[Stevegoodey]

Hi All,

I hate to tell you all this but I think your all missing the point.

In the same way that the message is more important than the grammar.

The Yeild is only as importmant as the value.

In my opinion the rental return and the mortgage are important but they are onlt two variables that may include.

* Valuation (As aposed to purchase price)
* Valuation on completion of renovations
* Rent now
* Rent when renovations completed
* Future Valuation or capital gain potential
* ability to add an income or 2

I think people get bogged down with the configuration of a property at purchase and do not look at what it could be.
And thats were the money is my friends.

Steve

[Perry]

Huh?

Can I say that I'm confused? But not by the English!

(Steve - is spelling the same as grammar; or is it like the sign
above the typist's desk that says: I live like I type: fast and
full of mistakes!)

[AustinWong]

Cube
"One example is buying a car - never go in to debt to buy a car, as its a liability, not an asset."

For the cat among the pigeons, could it not be deemed that a car is a requirement in many cases to enabel us to drive to employment to make money? Albeit you don't need to spend $15k.

I think it is best to take money out of the mortgage to buy vehicles as it attracts lower interest. I think most finance for cars start around 14%.

[Perry]

Aren't there 2 parts to the "buy a car" matter?
1) What it's used for;
2) How it's paid for.

On number 1, my view is that if it's a business vehicle,
it's not a liability in the same way as a surround-
sound home theatre system.

On number 2, depends on the rates being offered, the costs
involved, the fees for chattel registration, etc., ad nauseum.
I.e. there's no single answer that's right. It depends on
too many factors.

[kolzee]

Gerrard, i agree totally with your comment below:

"The other angle I can think of is that people might look at their portfolio as a whole, so they might have some properties that generate good cashflow and use that to offset negative cashflow properties."


Really, the level of financing for individual properties is irrelevant (other than the finance cost of each). The most important factor in finance is your overall equity level.

Also, as a portfolio strategy, consolidating high yield properties that have lower capital gain potential with low yield properties which are more likely to rise in value has a lot of benefits.

That's why, when considering which property to buy or sell you should disregard the level of finance as it should not effect your decision.

[Monid]

This is why whenever I make any property decisions I look at the facts of the particular choice in front of me, and how that will impact on my portfolio as a whole.

[Perry]

This is why whenever I make any property decisions I look at the facts of the particular choice in front of me, and how that will impact on my portfolio as a whole.

Well said! It's the "whole scene" picture that counts. That
includes the general strategy of the PI concerned, and so on.
Certain decisions, if assessed on a stand alone basis would seem
illogical. But on a "big picture" basis, the cost benefit can change
the overall perspective quite dramatically.

(Big picture = whole scene)

[fudosan]

Certain decisions, if assessed on a stand alone basis would seem
illogical. But on a "big picture" basis, the cost benefit can change
the overall perspective quite dramatically.

True. For example, you can pay a higher than market price for your neighboring property, which allows you to combine these two sections to build an additional property to increase the overall yield.