What Strategy Is Best If You Want To Buy More And More Rentals? Part 2
27 June 2019
What Strategy Is Best If You Want To Buy More And More Rentals? Continued ....
Make sure you have read Part 1 of our newsletter sent 7/06/19 with the first three options! Click here to read.
Recap
Martin and Jo own a personal house and are looking to buy a rental.
Personal house worth $700,000 and debt of $400,000 with ANZ. Currently being repaid over 20 years. In five years, expecting $328,000 balance.
ANZ will allow them to borrow another $160,000 which could be used as a deposit for an investment property of up to $530,000 (I would recommend with a second bank).
They have income to meet the banks service requirements around the extra lending.
They can currently save around $200 per week, or $10,000 per year.
What would you do? How will the different strategies work over the next 5 years if the market is flat?
SEE Part 1 of our newsletter for the first 3 ideas! Click here to read.
4. Buy and add serious value – Subdivision and house on the back for example
Would likely run at a large loss for the first year while being done, so lose the $10,000 potential savings in first year.
Once finished, aim would be to break even at least, so we will work on break even. Income = expenses and no cash left for Principal repayments.
Would plan on at least $100,000 gain in equity on $500,000 property purchase.
Big Issue – would banks allow it?
- $500,000 purchase. Would use $150,000 of ANZ funds, and only $10,000 left. 70% lending through another bank, say Westpac.
- Might cost $60,000 to subdivide and $160,000 to move a house on, renovate etc.
- Might be worth $450,000 for existing, plus $370,000 for house moved on, or $820,000 total.
- Once finished
- Total debt would need to be $500,000 + $60,000 + $160,000 = $720,000
- ANZ $160,000 secured over personal house
- Westpac at 70% on $820,000 would lend $574,000
- So, yes, this would work, and would still be $14,000 left!
- BUT would be very tight while being done and might need to use a second tier lender.
Years 2-5 - could put extra savings into personal house debt repayment. At end of 5 years, pesonal debt would be $288,000. Gain in equity $40,000 over the current payments.
Overall:
- Personal house worth $700,000, with debt of $288,000
- Plus used to buy rental $160,000
- $448,000 total debt
- Available equity $112,000
- Two Rentals worth $820,000
- Westpac debt $560,000
- Available equity $14,000
If the ANZ extra funds were put together with the Westpac funds, that would be $126,000, which could be used as a deposit for a third investment property of up to $420,000 in value.
IN A FLAT MARKET THIS STRATEGY STILL WORKS!
5. Trading Stragegy
This is very dependent on being able to trade successfully, which isn't easy.
Buy a property for $400,000
- BNZ $280,000 loan
- ANZ extra $120,000 on personal house loan to buy
- then extra $40,000 from ANZ to renovate.
Say make $30,000 after all expenses, GST and tax.
Do four trades in first two years = $120,000 cash.
Start of third year buy a long term hold
- 6.0% gross yield property purchase in reasonable area
- $500,000
- $120,000 cash put in (probably would pay off personal home with this in reality)
- $350,000 borrowed from say Westpac
- $30,000 would need to come from ANZ secured over personal house
As cash in, can put on Principal and Interest over 30 years.
Third and fourth year, trade 4 properties = $120,000 cash.
Late 5th year buy another 6.0% gross yield property in reasonable area
- $500,000
- $120,000 cash put in (probably would pay off personal home with this in reality)
- $350,000 borrowed from say Westpac
- $30,000 would need to come from ANZ secured over personal house
As cash in, can put on Principal and Interest over 30 years.
END RESULT
- personal debt paid down, same as example 1 , down to $270,000. Gain in equity $58,000 over the current payments.
Extra $30,000 and $30,000 from ANZ to buy the rentals
Total ANZ debt $330,000
Available equity left $230,000 which enables Martin and Jo to keep trading
- First rental worth $500,000 and debt down to $331,000
Passive income each year of (that is going towards principal payments)
Available equity $19,000
- Second rental worth $500,000 and debt $350,000 from Westpac.
If the ANZ extra funds were put together with the Westpac funds, that would be $249,000, which could be used as a deposit for a third investment property of up to $830,000 in value, or enable Martin and Jo to keep trading and buy a cheaper long term hold.
As mentioned above, this strategy is higher risk and very dependent on being able to trade well and consistently, which is not easy.
IN A FLAT MARKET THIS STRATEGY STILL WORKS!
SUMMARY OF FIVE STRATEGIES
1. Buy nothing and repay personal house loan quicker – This is very dull and boring, very safe and it does work in a flat market. Big risk is if the market goes up, you can be left behind.
- At end of 5 years, might just be able to buy two rentals.
2. Buy a normal rental, 5% yield – Doesn’t work in a flat market. After 5 years can’t buy another rental.
- At end of 5 years, would only have the 1 rental.
3. 10% Gross yield property, repay principal over 25 years – This works in a flat market, and should be able to buy another rental in 5 years, even with no capital gain.
- At end of 5 years, would have 1 rental and should have ability to buy a second.
4. Add serious value – This works in a flat market. Perhaps higher risk and also awkward for finance while part way through the project.
- At end of 5 years, would have 2 rentals and should have ability to buy a third.
5. Trading – much higher risk, but if successful, this strategy works in a flat market.
- At end of 5 years, would have 2 rentals and should have the ability to buy a third and fourth.
Combining 4) and 5) together is quite common, with property investors developing a property, keeping some and selling some to achieve a balance between cashflow and tax efficiency.
Kind regards
Ross Barnett
What Strategy Is Best If You Want To Buy More And More Rentals? Part 1
7 June 2019
What Strategy Is Best If You Want To Buy More And More Rentals? Part 1
Martin and Jo own a personal house and they are looking to buy a rental.
Personal house worth $700,000 and debt of $400,000 with ANZ. Currently being repaid over 20 years. In five years, expecting $328,000 balance.
ANZ will allow them to borrow another $160,000, which could be used as a deposit for an investment property of up to $530,000 (I would recommend with a second bank).
They have income to meet the banks service requirements around the extra lending.
They can currently save around $200 per week, or $10,000 per year.
What would you do? How will the different strategies work over the next five years if the market is flat?
1. Buy nothing and repay personal house quicker – The dull and boring approach, but also the very safe approach
If the extra $200 per week is put into the personal mortgage, reduces term to around 13 years.
After 5 years the loan would be $270,000. Gain in equity $58,000 over the current payments.
After 5 years could borrow $210,000 from ANZ, which could be used as a deposit for an investment property, or two, of up to $700,000 in value (I would recommend with a second bank).
A similar approach would be to invest the $200 per week into shares or other investments. This isn’t my area but this could potentially give a higher return.
2. Buy a normal rental, 5% yield
Losing $5,000 per year as average yield, based on 4% interest rate.
Would have to be interest only as no cashflow to enable Principal & Interest payments.
Would still have $5,000 savings per year that could go towards extra debt repayment on personal house. This could reduce the personal home loan term to 16 years.
After 5 years the personal loan would be $301,000. Gain in equity $27,000 over the current payments. Plus still have $150,000 that was used to buy the Rental.
After 5 years could borrow $29,000 from ANZ, which could be used as a deposit for an investment property of up to $97,000 in value (I would recommend with a second bank). This wouldn’t be enough!
3. Buy a high cashflow property, that can pay for itself plus principal over 25 years
Need around 10% Gross Yield, or $1,000 per week for 51 weeks, on a $500,000 property! As this would probably have multiple dwellings, there would be higher rates, insurance and repairs, but overall my quick calculation was $16,500 cash surplus, less $4,600 tax per year, would leave around a $11,900 surplus after tax, which is approximately the principal over a year on a $500,000 mortgage.
Similar to point 1, the personal home reduces to $270,000 of debt over 5 years.
Plus the $150,000 used to buy the rental with ANZ would have reduced to be $131,000. These would total $401,000 with ANZ, and at 80%, Martin and Jo could still borrow another $79,000 from ANZ.
If the Rental cost $500,000, and is still worth $500,000. The original debt, with say Westpac, would have been $350,000 at 70%. After 5 years of debt repayment, it would be down to $305,000.
So in Theory Martin and Jo could borrow an additional $45,000 from Westpac.
If the ANZ extra funds were put together with the Westpac extra funds, that would be $124,000, which could be used as a deposit for a second investment property of up to $413,000 in value.
In a flat market this strategy still works!
Watch out for our newsletter next week with some further examples of strategies that Martin and Jo could use.
If you haven't subscribed yet, you can sign up here: click here to subscribe
Kind regards
Ross Barnett
Recent Changes and Updates, including Ring Fencing
17 June 2019
Recent Changes and Updates, including Ring Fencing
You might have missed some of this information which affects rental properties.
1. RING FENCING
We are still expecting this to be back dated to 1/4/19. The Bill has gone through its second reading on 13/06/19.
For property investors who are making a loss, for the year ending 31/03/20 onwards, we expect that this loss won't be able to offset personal income - so NO TAX REFUND.
2. PRIVACY COMMISSIONER HAS WITHDRAWN "GUIDE TO WHAT LANDLORDS CAN ASK"
It was great to see this. Otherwise there was suggestion that we couldn't do credit checks and all kinds of essential information gathering.
To find out more, read the full article on Stuff.
3. INSULATION MUST BE DONE BY 1 JULY 2019
Hopefully you have all done this!
4. HEALTHY HOMES
In summary:
- From 1 July 2019 signed statement for all new tenancies that will comply with new Healthy Homes regulations.
- From 1 July 2021 have to comply with Healthy Homes changes for new tenants.
- From 1 July 2024 all properties must comply.
Click here for more details.
5. TWO BANKS
I generally recommend that property investors use a different bank to their personal home when buying a rental. See more on these two videos.
Two Bank Approach if existing house becoming a rental youtu.be/GFF_gX1-QMc
Using 2 banks to buy a rental property youtu.be/dFhMvUMtfEU
Still on its way later this week is the second part on strategies to buy more and more rentals.
Kind regards
Ross Barnett
What Xero Should You Use?
15 May 2019
WHAT XERO SHOULD YOU USE?
These are the main Xero options used:
- Non GST Cashbook $12 + GST per month
- GST Cashbook $21 + GST per month
- Starter $27.50 + GST per month
- Limited number of transactions per month (5 invoices, 5 bills, and 20 bank transactions)
- Standard $60 + GST per month
For Residential Rental Properties
Generally would use a Non GST cashbook. Once set up Xero would receive all the bank transactions, which could then be memorised or coded.
- Key concept of cashbook is that it only accounts for income when received and expenses when paid for. So would not show who owes you money, or who you owe money to.
You can only access a non GST cashbook through an accountant or bookkeeper. A lot of our clients prefer a monthly fee to complete their annual financial statements and tax returns, which includes the Xero fees. For full details about the monthly accounting fees options, click here.
If you do not want to go on the Monthly accounting fee option, we would invoice your monthly Xero subscription to you separately each month. There would also be a one-off fee of $25 + GST charged to set up your Xero (if you do not choose the monthly accounting fee option).
Short Term accommodation properties such as Airbnb
Generally this entity would be GST registered, so would use a GST cashbook.
- Xero would calculate your GST due, and show calculations you can check before filing with IRD.
- Key concept of cashbook is that it only accounts for income when received and expenses when paid for. So would not show who owes you money, or who you owe money to.
You can only access a non GST cashbook through an accountant or bookkeeper. A lot of our clients prefer a monthly fee to complete their annual financial statements and tax returns, which includes the Xero fees. For full details about the monthly accounting fees options, click here.
If you do not want to go on the Monthly accounting fee option, we would invoice your monthly Xero subscription to you separately each month. There would also be a one-off fee of $25 + GST charged to set up your Xero (if you do not choose the monthly accounting fee option).
Commercial Property
Generally would be GST registered, and would often invoice tenants for outgoings. Starter or Standard would be best.
- Would show how much each tenant owed you at any time.
- Xero would calculate your GST due, and show calculations you can check before filing with IRD.
We recommend owning the Starter or Standard Xero subscription yourself. This means you have full ownership and control. You can invite us as your accountant to access your Xero, as well as any other relevant parties if you wish. If you change accountant, your Xero continues without any issue, as you own the subscription. It is $5 per month more expensive, but we feel this is worth it.
Property Trading
Generally would be GST registered, and would often have a large amount of invoices due to suppliers for renovation costs. Starter or Standard would be best.
- Would show how much you owe each supplier at any time.
- Xero would calculate your GST due, and show calculations you can check before filing with IRD.
We recommend owning the Starter or Standard Xero subscription yourself. This means you have full ownership and control. You can invite us as your accountant to access your Xero, as well as any other relevant parties if you wish. If you change accountant, your Xero continues without any issue, as you own the subscription. It is $5 per month more expensive, but we feel this is worth it.
Xero Tips
- Always use one xero for one entity. So if you have a Trust owning 1 rental, and an LTC owning another rental, you will have two Xero’s. One for the Trust and one for the LTC.
- Use Tracking. Tracking can help you see the Profit or Loss for each Property. So one LTC might own 5 properties all managed through one bank account, then you would use Xero Tracking to monitor the Profit or Loss for each rental.
- Try to put all income and all expenses through the business bank account that is on Xero. That way Xero will have the transaction that just needs coding. If you pay for expenses on a private credit card, then get the business account to repay you.
- Use Budgets and run the Budget Variance report to compare Actual vs Budget.
I hope this quick summary helps you.
Kind regards
Ross Barnett
