All Forum Posts by: Tracey B.

Thanks, Wheatie.

Example: purchase price $100K, gross rental income $20K, expenses (property taxes, management, repairs, vacancies etc) $10K, net operating income before income tax and interest: $10K

I'm considering purchasing properties in Texas, at retail, with NOIs of 10-11%; are you saying that wouldn't cash flow? :shock: Or would you consider that an anomaly?

1. negative cash flow but a likelihood of strong appreciation

2. positive cash flow but a likelihood of low appreciation?

Shouldn't you really be comparing retail with retail, or discount with discount, for a valid reflection of the difference between a focus on appreciation or income?

Mike, isn't it also possible that a property with significant future appreciation prospects also has significant prospects for increased rentals, and thus the likelihood of being cash flow positive for the vast majority of a 20-year ownership period? Many investors are willing to accept a negative cash flow for the first 4 or 5 years, but after that time, the property usually becomes cash flow neutral to positive with market movement.

I now try and find areas where I anticipate high growth, then seek positive cash flow opportunities in those areas. I would never take positive cash flow instead of growth prospects; the cash flow just provides enhanced ability to wait for appreciation. But to be wealthy from cash flow alone, I'd have to be a full-time property manager, and that's a job, not an investment, IMHO. It may be a well-paid job, but it's still way too active for me; it seems to me that the effort required to earn $1 of positive cash flow far exceeds the effort required to earn $1 of appreciation. :wink:

But what about if you structure the deal like this:

* conventional mortgage of 80% - vendor only has a mortgage of, say, 50% of purchase price, so the 30% cash they receive at closing covers realtor's commission etc
* vendor carryback of 20% - vendor gets paid the remaining 20% as a balloon payment in 2 years, plus interest of 10% (or whatever is agreed)

Why would a realtor be opposed to this kind of deal?

I'm not trying to be argumentative; I'm an Aussie planning to buy in the USA and I'm trying to learn as much as I can about your (very different) methods and customs of transacting property before I hit the ground. :D

Here in Australia, it's true that it's been historically difficult to get realtors to present an owner-financed deal to the vendors in such a way that it's likely to be accepted. :roll: But buyers have a much stronger negotiating position in the current market conditions - and I had assumed the same applied in most of the USA now - so I would have thought that both vendors and realtors would have to be a bit more flexible, no?

Would having a buyer's agent, whose brief is to find you a deal with a carryback element, change this dynamic?

Thank you all for your generosity in sharing; I really appreciate it. :groovy:

I'm an investor from Australia, seeking to begin investing in the USA shortly, so excuse me if my questions seems naive. Your terminology and methods of mortgaging and transferring properties are very, very different!

When you can get, say 70% LTV, what I want to know is, if I sign a contract to purchase a property for $70K that's a genuine bargain, and is worth $100K, could I borrow the entire $70K purchase price (ie 70% of valuation)?

In Australia, the lenders take the position that it's not possible to buy a genuine bargain, and the valuation for mortgage purposes is always taken to be "the lesser of market value and purchase price", meaning that this would be impossible, and on a $70K purchase one could only borrow $49K.

But lots of things are possible in your market that aren't in ours - you're generally much less regulated - so I thought this was a question worth asking! :D

It's interesting to hear that there are cultural differences in property investing, as well as in other endeavours. :wink: I'm a full-time investor in Australia, where cashflow positive property is virtually non-existent. In cities, gross yields tend to be from 2.5 to 4.5%. :shock: So investing in Australia is, of necessity, almost exclusively focused on anticipated appreciation.

Many would say that yields are now unsustainably low and our market is set for a correction (and I agree), but even looking back over the past 40 years, our mainstream market has never been cashflow positive; the best it's done is come close to being neutral. But capital growth has been so reliable and strong that most investors have not been concerned about holding cashflow negative property for long periods of time.

It's so interesting to hear so many of you say things like "appreciation doesn't put food on the table", because in Australia, investors rely on exactly that. :D The vast majority of property investors rely on cash-out refinancing to take profits. So one holds a property that is, perhaps, costing 6% per year to hold (rental income 4%, all cash outgoings 10%). After offsetting that loss against other income, it only costs, say, 3.5% in after-tax dollars, and of course depreciation improves the picture even further. So it may only cost 2.5% per year in post-tax dollars to hold, and growth averages about 10% in capital cities, so one is getting ahead by about 7.5% per year.

Once one has a sizable portfolio, they simply have some or all of the portfolio re-valued every few years, and pull some extra cash out.

So if I have $5M of property with $4M of debt (80% is standard here for residential), it will cost me about 2.5% (say) or $125,000 per year to hold it, but it goes up in value by 10%, or $500,000. At the end of the year, you have the portfolio re-valued at $5.5M, and you are then allowed to have a debt level of 80% of that value, or $4.4M, meaning there is $400,000 available for cashing out from your mortgage. That $400K funds the next couple of years' holding costs, at which time you get the portfolio revalued and repeat... And because you're not selling, no tax is payable on that $400K now, though you are accumulating a future capital gains tax debt.

There are some investors in Australia who focus on cashflow positive property, but it's very much a niche and not the mainstream. (One of the reasons I'm headed for the USA! I'd like to use cashflow property in the USA to fund holding my growth properties in Australia.)

I'm not seeking to refute what anybody has said; just highlighting that if you believe that a good property investment has to cashflow, then you would have made the decision not to invest in Australian residential property in 2002. Which would have been a shame, as you would have missed out on two booms, resulting in prices increasing about 2.5x in 6 years.

Actually, NZ have their own terminology and laws again, which are entirely different to Australia and the USA. Keeps those who cross national borders on their toes, I guess... :goofy: