Hi all,
Call me green, naive or just plain crazy but I'd love some constructive advice on my thoughts, call it a strategy if you like… (Sorry, Engelo, if you're reading, I started replying to your thread but got a bit carried away and thought it best I start my own.)
If equity was not a problem (ie you have loads of it) and you have a reasonable and very reliable wage (6 figures) what would be wrong with the following: <!–break–>
– Using your equity, buy say 1 million dollars of cash flow property each year for 3 years.
Say the criteria for purchases would be $10,000 CF+ for every million spent. This could be from 2 x $500,000 IP's earning $100pw cf+, 3 for around $330,000 earning around $65pw or any other combo.– Being CF+, the capital gain may not be enormous (some would say) but the focus of these first properties is to develop cash flow that will enable you to 'buy in' to high growth properties for development, reno, strata etc. So the initial properties won't make you rich, they are the foundations for enabling the portfolio to get off the ground without hurting your hip pocket on a weekly basis. Therefore the area might not be selected for growth, but low vacancy rates, high yield etc.
– At the end of the 3 years you would have used over $600,000 of equity on deposits @20% + purchasing costs) and assuming rents don't decrease or increase, have an income of $30000pa by the end of the 3 years. While this certainly not enough to live on, I would imagine it would enable you to start buying into bigger reno projects, unit blocks for strata and resale, subdivisions etc where immediate cash flow is not essential. Put simply, you stay in job with the 6 figure salary and use the additional $30,000 to invest without impacting on your lifestyle.
– Properties purchased after the initial 3 years will need to be purchased for high capital gain, with one or more of the following criteria:
*room to add value by renovation.
*ability to subdivide and build second dwelling to rent/sell.
*Unit block to renovate and strata then sell some or all units if necessary.– Ideally, if properties purchased in the first 3 years could also meet some of the above criteria perhaps more equity could be created and you could repay the 20% deposit back from where it came from (PPOR).
– If at the end of the 3 year plan (or after 10 years), the prices of the cf+ haven't moved, as long as the rent is coming in and you're able to use that cash to focus on high growth properties then in my view the strategy has worked. $30,000pa can cover a pretty big negative gearing hit, covering a weekly loss of $576 each week if it ever came to it.
– Alternatively extend the cf+ purchases to 10 years with the view to never sell and receive a $100000 income… who knows what the world would look like in 10 years?
I'm not about to become a spruiker or charge thousands for a seminar just yet(!!) but would love some opinions, positive, negative or otherwise.
Looking forward to hearing your thoughts
The obvious question is what type of properties will you be targetting that will put that much cash in your pocket from day 1? Are they in high risk areas? If so how does that sit with your risk profile, and what LVR will the bank provide?
Have you factored in holding costs? (ie bank interest, council rates, water bills, insurance, maintenance, property management etc) ?
Jacqui Middleton | Middleton Buyers Advocates
http://www.middletonbuyersadvocates.com.au
Email Me | Phone MeVIC Buyers' Agents for investors, home buyers & SMSFs.
Hi Rusty,
what’s wrong with buying in areas with neutral gearing which will in essence become positively geared as time goes on with CPI etc? This way you can find good properties in good areas that don’t cost you anything to hold yet are growing in capital value.
I could think of a lot easier ways to make $60,000 per year than holding $3m of real estate. If that $3m of real estate was growing at 8% and not costing me anything to hold than its a good investment.
Don’t forget that the financial situation changes on properties as the variables change in the future. If you’re earning 6 figures than look at gaining some tax deductions also and let the ATO assist in paying some of your properties off.
Firm strategies like these can be great, but remember that property markets in different areas can change at different times. I would always make sure you’re in a position to always take advantage of a good opportunity when it presents itself. I see a lot of people who are on the straight and narrow so to speak, that is, they will not deviate from their plan or can because of the position that their plan has put them in. Therefore they cant or wont take up great opportunities that came around.
All good points,
JacM, I'd be aiming for regional towns (or western syd??) with population on 5000+ if that was possible. I know it might be a stretch but I reckon it's doable. I'd hope to factor holding costs into the equation to receive a net of 10k pa. Again, maybe tough but worth having a crack at. A few might be what some might consider high risk, but the aim would be not to sell them. – It seems to work for Nathan Birch!Josh, neutral gearing would be ideal but the fear of a rate rise or two would push it into negative territory. I already have one IP that is neutral and don't want to be forking out each week for 8 or 10 properties – $100,000 pa doesn't go as far as I thought it would! I understand that Capital Gains is where the money is over time (as opposed to weekly rent) but hopefully we can achieve both in the long run be having some properties subsidise the higher growth ones.
I also agree that whatever plan you choose needs to be flexible so it doesn't restrict your potential to grow the portfolio – good advice, thanks.
I appreciate your comments.
rusty,
if you start neautral or just positive then if you have invested in a good area than rents increase along with capital growth. a property that you buy today that might be neutral, in 3 years it should be positively geared with rental increases. thus creating a long term positively geared portfolio with great equity/capital gain
If you used all your equity to buy cashflow properties without growth then it would be impossible to go forward unless you could save the next deposits.
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
May I just say: massive credit to you for asking people to criticise your plan. Welcoming lots of ideas, and then working out which advice is rubbish and which is relevant, is the way forward. The more experienced people that submit opinions on your plan, the more likely it is you'll decide on the plan that is most suitable for you.
Jacqui Middleton | Middleton Buyers Advocates
http://www.middletonbuyersadvocates.com.au
Email Me | Phone MeVIC Buyers' Agents for investors, home buyers & SMSFs.
I dont think the idea of positive gearing is what to look for specifically.
I think usually properties that lie in the immediate positively geared range have one of several problems. Bad tenancies .. higher risk of longer term vacancies .. or poorly designed property or location. From that list .. the only one you can really control is the bad tenancy. And even then there is no guarantee the next tenancy will be any better.
I look more for the probablity of existing value. Lets use an example of market comparison. If I know that the properties are listed as returning $300 per week for the 3 br unit and the current market is more like 380 for the same unit, I wont use the current figure for my future estimates .. I will use the future market rent.
So to anyone who looks at the immediate figure .. they only see a certain return rate. The adjusted rent rate may provide enough of an advantage for the property to become short term viable. I only exist on short term figures. I have to work within MY lifetime .. not the buildings.
The same exists with market values. Often you will find a situation where a property is sold based on other surrounding properties and not changed market conditions. In a lot of areas .. this comes from changes in land use .. i.e. RESCODES. A small change in an area that you know about in advance may change the whole way that the existing property is looked at.
So dont be scared to aim for close to neutral rather than explicitly positively geared property. Dont be mistaken .. positively geared property is EXACTLY the gold mine everyone makes it out to be. But there are less gems out there as positively geared property than people would have you think.
Also keep in mind tax laws. There are slightly different conditions and restrictions in every state and every country affecting property. So for what may sound like a bargain in Vic .. is not the same when jetted into NSW.
Rusty,
I like your thinking but think if your a high income earner you’d be better focusing on a capital growth strategy…how about this alternative:Buy land in the Surat Basin region,QLD (high growth expected over the next 5-10 years), get a construction loan (interest only), get your 10K free new builders grant (apply for it yourself and you get it within 10 business days – straight into your off set account), employ a good reliable builder (I can suggest a few), set up a 100% off set account, set up a buffer account in UBank earning 6.51% interest, do a tax variation through the ATO. As soon as the property is finished, sort out your depreciation of new fixtures, have the property revalued, then set up a LOC to pay all property out goings and interest (you need to apply for ATO private ruling to do this), also use the LOC to purchase high yielding shares (Telstra yielding 10% or any of the backs 6-8%), add a Margin Loan (allow interest to capitalize), all three loans (Margin Loan, LOC and Construction Loan) are tax deductible. Then use your rent and dividends to either pay off your PPOR loan allowing you to use your equity to buy another IP or put all the income back into your off set, increase your LOC + rent + dividends for a deposit on a new IP…then set it up all again.
Hi rusty
Using your first scenario of ending up with $30k income after 3 years, then concentrating on buying properties with a bigger capital gain potential, one problem you will have straight away, as Terry pointed out also, is available funds to
a) raise your borrowing power because you have little or no equity in the houses you have bought and
b) a similar problem to instigate your second strategy of adding value.Concentrating on buying your 2nd phase of properties that come under 'adding value' as you've outlined, is an excellent strategy, but you need the bucks to add value too, unless you are just going to sit on them until you've got the cash or their value has increased substantially.
I would start by using your 2nd strategy combined with your first and buy +CF properties that I could add value to and therefore create my own equity in a possibly flat retail market.
In this way, as you're creating some equity in each property, you could also be looking at those that are nearer to a neutral return as you will be making them positive and therefore they each may be more likely to increase in value as well, as they should be in better areas.
Have your cake and eat it too.
I also have a strategy that you can start with, whereby you can add 25% to the value of your new acquisition on top of any fantastically negotiated, below value, price deal, just by buying them. No reno, no subdvision, no building. The details will be posted on my website on Sept 11 if you're interested.
Ian
http://theblockblog.com
Free Property Investment Information, Tools & Resources for Investors With A Sense of Humour.Thanks everyone, an interesting read,
I guess the key is to find properties that are not only CF+ (or neutral) but also have potential for growth, or ability to ad value to. So as Sapphire suggested, combine the first and second part of the plan and look for:
– Cash flow positive/neutral properties
– Growth potential
– Ability to add value
– Low vacency rates…. sounds easy… lol
Given the flat market I suppose I was focussing the discussion on high yield because it is difficult to predict capital growth.
It's great to hear different perspectives.
Dcwwood, my head's still spinning!haha Rusty, if you want me to send you a diagram PM me and I’ll send you an attachment – its really not that hard but it takes a bit of organising!!
Cheers mate.
Thanks dcwwood. I'll do that!
Just a quick question….
When people talk of Positive Cash Flow, what sort of yield do you look for to achieve this? 8% and above or would it need to be higher? Does anyone have a minimum yield that a property needs to be to fit in with their strategy?
Obviously it depends on the property and it's outgoings but it would be interesting to see how others operate.
RustyHey rusty,
Thanx for stealing my spotlight hahahahah jksssPlan looks good mate, there is no point in re-inventing the wheel, just copy other people's success.
Regards,
EngeloEngeloRumora | Ohio Cashflow
http://ohiocashflow.com/
Email Me | Phone MeF@#$ THE REST WORK WITH OHIO CASHFLOW TO INVEST
Engelo,
280 views compared to nearly 1500, I think we have a winner! lol
Call me slow, but what does jksss mean??Dont worry you will catch up, You shoulda started with a topic under DONT READ THIS PART 2 hahahaha
jksss is suppose to be short for jokes but it isnt, anyways dont ask why hahahaha
EngeloRumora | Ohio Cashflow
http://ohiocashflow.com/
Email Me | Phone MeF@#$ THE REST WORK WITH OHIO CASHFLOW TO INVEST
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