All Topics / Creative Investing / Thoughts on Investment Strategies

Viewing 15 posts - 1 through 15 (of 15 total)
  • Profile photo of freelancefreelance
    Member
    @freelance
    Join Date: 2008
    Post Count: 93

    Hi all,

    I've been in the process of educating myself about investing in property for 3 years and feel it's time to start making things happen. The reason why I'm posting is because I've been contemplating what the best investment strategy would be to start a healthy investment portfolio.

    My goal is to invest in as much property as possible in the next 10 years (I live in Sydney by the way). And I'm wondering how I should go about achieving this. I've noticed that some people believe that capital growth is most important while others consider income as the main priority.

    I'm shifting towards the mindset that I should be an income focused investor first, which will allow me to purchase more property in a shorter time frame without the burden of struggling to make mortgage repayments. And once I'm satisfied, begin shifting towards more growth investments in order to grow the portfolio at an exponential rate.

    In a nutshell, I'm trying to find a strategy that will allow me to be financially free (or at least approaching this goal) in the next ten years.

    Thank you all for contributing,

    Lance

    Profile photo of ErikHErikH
    Member
    @erikh
    Join Date: 2007
    Post Count: 118

    Lance, think about why you are investing in property and translate that into goals (in $ terms), then look at your current financial situation and see what kind of strategy may suit you best. If you are a high income earner with a heavy tax burden, buying high growth negative gearing property may a good place to begin. Alternatively, if you have less income and don't want to much of a cashflow burden on a monthly basis indeed look for more cashflow oriented properties. Despite what the majority says, you can (with a lot of work) find cashflow neutral/positive property which has good growth prospects especially in the current environment of lower interest rates, higher rental yields and a soft market.

    If you go pure growth you are likely to end up with so much negative cashflow that you soon hit a wall and can't expand your portfolio, if on the otherhand you go pure positive cashflow, you are likely to end up with a much larger number of properties to achieve a similar equity, this can be a strain in terms of management.

    I feel it would be best to get a couple of growth properties first so that you can later on leverage of the equity growth and then invest in more income focussed properties to balance your portfolio, but again, it all depends on your actual circumstances and personal views.

    Profile photo of freelancefreelance
    Member
    @freelance
    Join Date: 2008
    Post Count: 93

    Thanks for the insight Erik,

    Hitting a brick wall when it comes to pure growth investing as you mentioned is a situation I don't want to put myself in.
    I guess it all comes down to finding a balance in your strategy so your options in the future are always open.

    Cheers

    Profile photo of TerrywTerryw
    Participant
    @terryw
    Join Date: 2001
    Post Count: 16,213

    buying income producing property may help you get a few more quicker, but if there is not capital growth, then there is no point in my opinion.  making $50 or even $200 per month is going to take a lot of properties for you to retire on.

    But who knows if or when the capital growth will come back.

    Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
    http://www.Structuring.com.au
    Email Me

    Lawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au

    Profile photo of freelancefreelance
    Member
    @freelance
    Join Date: 2008
    Post Count: 93

    Hi Terry,

    That's true, but if I was to focus on reducing debt and adding value, either by subdividing or renovating at later stages, then wouldn't that compensate for slow growth and essentially allow me to get the best of both worlds?

    Perhaps it would be better for me to ask, what sort of strategies have helped others to build a substantial portfolio in short years?

    Profile photo of TerrywTerryw
    Participant
    @terryw
    Join Date: 2001
    Post Count: 16,213

    Capital growth is what makes you rich. It doesn't really matter how you get it, but the more you get and the quicker you get it the better!

    Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
    http://www.Structuring.com.au
    Email Me

    Lawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au

    Profile photo of freelancefreelance
    Member
    @freelance
    Join Date: 2008
    Post Count: 93

    Point taken

    However, in regards to the "To Trust or not to Trust: That is the question" post:
    https://www.propertyinvesting.com/forums/getting-technical/legal-accounting/4326640
    It's mentioned that when holding property through a discretionary trust (which I plan to do) will not allow you to take advantage of negative gearing, as losses in the trust remain with the trust. On the positive side, you can offset the loss with future gains – so it works out… eventually.

    The point I'm trying to make is, by focusing purely on capital gains without being active in your investments i.e. creating value through reno's, developments, subdivisions etc. Then you're going to be hitting a large brick wall with all the negative gearing you take on. I don't want an obstacle like that preventing me from building my desired portfolio at a young age.

    Cheers

    Profile photo of TerrywTerryw
    Participant
    @terryw
    Join Date: 2001
    Post Count: 16,213

    Freelance

    You are assuming that capital growth property is negative geared – this ain't always the case. The ideal proeprty would be one that is positive geared, in a area with high growth potential and one which can be value added (reno, sub-divided, extra room added etc).

    Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
    http://www.Structuring.com.au
    Email Me

    Lawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au

    Profile photo of freelancefreelance
    Member
    @freelance
    Join Date: 2008
    Post Count: 93

    Hi Terry,

    Sorry, I must have misunderstood your first post. I agree that all aspects as you just mentioned above would be ideal but are unfortunately hard to come by.

    Well I guess there's not much else to do but really go out there and find the deals that fit the profile.

    Thanks Terry

    Profile photo of plasticscalpelplasticscalpel
    Member
    @plasticscalpel
    Join Date: 2009
    Post Count: 8

    This is our strategy…

    First: realise the equity in your home (if you own one) by refinancing as much as the bank will let you and take the hit of lender’s insurance. Split your loan into two – one for your home repayments and the other for your investments. Use the investment portion to pay for deposits, stamp duty, repayment shortfalls etc. As you pay off your home mortgage, you can rebalance the credit over to your investment mortgage. You can pay the rent and tax credits into your home mortgage to achieve this faster than by just paying your income into your own mortgage.

    Second: use your available funds to purchase structurally sound but internally outdated/rundown properties as close to the CBD as you can with the largest loan the banks will give you (currently about 95% with lender’s insurance). Depending on your budget, you may have to buy apartments which, in general, don’t get as much capital growth as houses but this is not always the case as you get in towards the CBD. After all, there are more people who can afford apartments in the city than can afford houses and it is the demand for your property that creates its capital growth.

    Then renovate/refurbish them. It depends on what you’ve bought as to how much you need to spend on renovations. It might just be a lick of paint and a new set of carpets or it might be a new kitchen and bathroom. We use a buyer’s agent to find and purchase our properties and we use a renovations company to do the renovations. That way, we spend next to no effort on building our portfolio.

    We have only just started investing but, with this strategy, we have managed to buy 3 properties in the last 3 months that have rental yields 4.9%, 5.2% and 5.2%, respectively. They all have long-term capital growth of 10%+ pa.

    If you get 5% from rent and, after costs, keep 4% then the shortfall is 1% against the current rates of about 5%. In terms of tax credit, you can add about 1% as depreciation costs making your theoretical shortfall 2%. If you’re in the 40% tax bracket, you’ll get a rebate of 0.8%. If your actual (rather than theoretical) shortfall is 1% and your rebate is 0.8% then your post-rebate shortfall is 0.2%. On $1,000,000 loan, that represents a shortfall of $2,000! In an average year (which it is certainly not this year!), you’ll make 10% capital growth on your portfolio. On $1,000,000 of property the capital growth would therefore be $100,000! Not a bad return!

    As you pay your income, rent and tax credits into your home mortgage and rebalance the credit into your investment fund, you’ll quickly be able to purchase more and more properties. Eventually, you’ll have to refinance your portfolio and then you can use this to purchase more. The more properties you have, the more capital growth you get and the more you can buy!

    A 10 year plan will easily earn you financial freedom if you get your strategy right.

    NEVER be afraid to pay for good advice. Mine is free though! Good luck.

    Profile photo of freelancefreelance
    Member
    @freelance
    Join Date: 2008
    Post Count: 93

    Thanks for the motivational feedback Plasticscalpel

    Would you be willing to mention the buyers agent and renovation companies you use?

    Cheers

    Profile photo of plasticscalpelplasticscalpel
    Member
    @plasticscalpel
    Join Date: 2009
    Post Count: 8

    Of course. The renovations company is actually a subsidiary of the buyers agency, as far as I know. At least they occupy the same offices in Melbourne. The buyers agency is called “Metropole” and the renovations company is called “Central Renovations”. I know for a fact that Metropole has an office in Sydney too so you could give them a try. They offer free property briefings on the weekends.

    Michael Yardney, the founder of Metropole, also runs seminars. Although there is valuable information to be found in these seminars, I have found they have a fair amount of marketing in them and I object to paying for advertising! In particular, the one I went to last year had Ed Chan (of Chan & Naylor, a big accounting firm) trying to sell his Property Investment Trusts which are hybrid trusts by another name. My belief is that these are the last things you want to have anything to do with. There are very few lenders who will lend to hybrid trusts at the moment and I can’t see that improving. If you are intending to grow as big as we are, then I would consider getting your first couple of properties in your own name(s) as the flexibility from this is great. You can get the best LVRs and the widest number of lenders interested in you as an individual whilst maintaining the negative gearing benefits but these advantages deteriorate or disappear with trusts.

    Make sure that you get a really good strategist to sort out all your finance first though. I don’t know anyone in Sydney who’ll do this for you but I can give you our Melbourne guy.

    Profile photo of PosEnterprisesPosEnterprises
    Member
    @posenterprises
    Join Date: 2006
    Post Count: 290

    Hi again Plastic I have a question – What if you want to turn your old PPOR into a IP and then purchase a new PPOR.  Would you sell it to a Trust?  What if you had negative gearing attached to it.

    Also how do you pay down your PPOR faster.  Do you use a line of credit split with all the rent, salary etc going into this account and then paying the IP loans from this account.

    Still learning thanks for the reply.

    Profile photo of freelancefreelance
    Member
    @freelance
    Join Date: 2008
    Post Count: 93

    Thanks again, Plastic. You've been very helpful

    Profile photo of plasticscalpelplasticscalpel
    Member
    @plasticscalpel
    Join Date: 2009
    Post Count: 8

    I’m not sure about selling your PPOR to a trust, although it sounds like a brilliant idea! Let me know if you find out. With regard to negative gearing, I can answer that one. There are three kinds of trusts: unit, discretionary and hybrid (broadly speaking). My understanding is that the unit trusts offer negative gearing benefits but no asset protection; discretionary trusts offer good asset protection but no negative gearing benefits; hybrid trusts offer asset protection and negative gearing benefits but many lenders will not lend to them. I guess the answer is therefore dependent on which trust you go for.

    As for paying down your PPOR, all the rental income and tax deductions on interest losses and depreciation is paid into your home loan. If you have a split loan against 95% of the value of your home (part home mortgage and part investment loan), and your bank allows you to rebalance credit between them, then as you pay down your home mortgage, you can rebalance the credit into your invesment loan. It stands to reason that the more properties you buy, the more rent and tax benefits you get so the faster you pay off your non-deductible home loan and gain credit for your investment loan to buy more properties. This strategy spirals your portfolio size; the more you buy, the more you can buy.

    Hope this helps…

Viewing 15 posts - 1 through 15 (of 15 total)

You must be logged in to reply to this topic. If you don't have an account, you can register here.