All Topics / Help Needed! / On the way to 2nd IP and trying to find the right strategy

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  • Profile photo of SamAus74SamAus74
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    @samaus74
    Join Date: 2012
    Post Count: 19

    Hi All, hoping to get some advice or some general points on the way forward.. on the way to purchase our 2nd IP and the question I have which I know is a little generic and most will say everybody is different but I would like some advice from which path others took and the strategy they decided on.

    I can see that those property investors on this forum all use different technique, some try to buy below the market, reno and then hold, rent and re-finance and purchase the next one. Others buy looking for high growth and then wait while continuing on there way, others only renovate buy spending big and then rent using the CG, while others like me dont really know which direction is best..

    Inititally I thought and being naive that you just buy and hold waiting for CG and then buy again but I think Australia isnt like it used to be 5 – 7 years ago and hoping for CG is really just wishing at the moment. I understand that maybe the way forward is just to read and research which I have been doing but I have got over loaded with information from all different points and am really trying to find what suits me.. I am sure there are others that are just like me..

    I dont want to be in a situtation that I buy my 2nd and 3rd then I cannot do anymore… because I didnt have the right strategy.. any advice from those more expereinced then I am who reached this cross point at sometime and how they decided the path best for them.

    Thanks in advance.

    Sam.

    Profile photo of markh3084markh3084
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    @markh3084
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    It's hard to comment when we don't know the amount of equity/deposit/income you have.

    regards

    Mark

    Profile photo of EngeloRumoraEngeloRumora
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    @engelorumora
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    As you have already mentioned a strategy that has worked for me is buy below market value, manufacture the growth with a renovation, rent the property, then refinance, pull out equity and repeat same process again. If you can find deals that after you refinance are neutraly geared you can keep buying more properties and they wont cost you anything to hold.

    Also, I see capital growth as a prediction. We dont know were the market will be 2moro.

    EngeloRumora | Ohio Cashflow
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    "Make a PASSION an OBSESSION and you'll never work a day in your life"

    Profile photo of SamAus74SamAus74
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    @samaus74
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    Sorry should have provided the financials… We have about $300k in equity in PPOR and an income after tax of $8k per month, with 1 dependent. The 1st IP has $420k of IO loan with no other debts…

    We don’t have any deposit to talk about… Our hope would be not to go down the renovation track but thanks engelo10 for the reply..

    I was hoping there would be others that were at this point in their portfolio at some point that decided in a particular route which we could look into.. Our initial thoughts was the 1st and 2nd IP to be negative geared to reduce our tax and then look at neutral or positive geared.. But I can’t see where those properties are? Are there such investments that can get some CG but be positive or neutrally geared today? Maybe not looking in the right place. What about NRAS?

    Thanks guys..

    Profile photo of EngeloRumoraEngeloRumora
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    Doesnt matter how much income your are earning I wouldnt recommend negative gearing. I would be happy to pay $1million in taxes cause that would mean I am also earning $1million. Plus the more negative geared properties you own eventually you will get to a stage were finance will be impossible to get due to you having to fork money out of your pocket to cover the loans.

    EngeloRumora | Ohio Cashflow
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    "Make a PASSION an OBSESSION and you'll never work a day in your life"

    Profile photo of Richard TaylorRichard Taylor
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    Income and serviceability is certainly important but one of the key factors in any successfully investing strategy is loan structure.

    You can always look to source alternative funding with a lender more generous in its serviceability if the loans are set up correctly in the first place.

    Debt recyling helps tremendously but there are also many risk management tools you can apply.

    I built my portfolio from positive cash flow from instalment contracts and that has helped me fund and almost pay off entirely the debt on our 40 investment properties.

    For everyone it is slightly different but i always say to many a virgin investor if the foundations are not sounds then you cant move forward. Lenders and many brokers have absolutely no idea how to structure a loan and without this the No Go sign appears quicker than you think.

    Cheers

    Yours in Finance

    Richard Taylor | Mortgage Broker helping investors build their wealth thru property
    http://www.mortgagecapitalaustralia.com.au
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    0-40 Properties in a decade with a unencumbered portfolio value in excess of $40M. Ask me for a copy of my API Interview.

    Profile photo of SamAus74SamAus74
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    @samaus74
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    Thanks Engleo10.., that I guess is my point, where I don’t want to end up not able to move forward to IP 3 or 4 as all properties are negative geared.. Will keep that in mind. Just trying to find properties that arebpostive cash flow might be the trick..

    Richard thanks for your comment – the fact you have 40 investments nearly paid off is a credit to you.. I have a loan broker who seems to know what he is doing but I have never heard of a instalment contract !!!

    What are they and how do they work?

    Sam

    Profile photo of moxi10moxi10
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    Hi Sam
    Neutral and cash flow positive properties are more frequently available in regional areas, particularly in towns benefiting from the resource industry. The Hunter Valley in NSW and the Surat and Bowen Basins in Qld are prime examples. Also some of the port cities such as Mackay and Gladstone offer excellent opportunities for a combination of positive cash flow and potential capital growth. One option is to purchase a house or unit and furnish it to improve yields. By furnishing, you run the risk of reducing the number of prospective tenents, because of course many do not want to rent furnished, but in the areas where there is a lot expansion of existing mines, and new ones under construction, there is generally a high demand for furnished properties from itinerent construction workers on good incomes. The increase in yields on a furnished property is quite likely to push it into the cash flow positive territory, and the furniture is depreciable on tax as well. It may not take long at all to recover the cost of your furniture, and if demand for the furnished properties drops, you can remove the furniture and wherever it ends up, it has already earned it's keep.
      Another option to generate positive cash flow, especially in NSW, is to add a granny flat to a suitable property.

    Tony

    Profile photo of mike.12mike.12
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    Hi sam,

    never heard of  instalment contract..Richard can you ple explain and what sort of structure should you have.

     

    Profile photo of Richard TaylorRichard Taylor
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    Mike

    An instalment contract is simply what it says a Contract where the agreed purchase price is payable in a series of instalments.

    Normally where a Vendor was unable to sell the property in the open market he/she may agree to sell the property by receiving from the potential buyer a given number of monthly payments. Interest would be charged on the initial purchase price and the balance would be reduced by the principal reductions amde over the term of the contract.

    Title remains with the Vendor until such time as the final instalment (whether this be a number of contractual repayments or a lump sum payment) is made and the Title transfer to the purchaser.

    Cheers

    Yours in Finance

    Richard Taylor | Mortgage Broker helping investors build their wealth thru property
    http://www.mortgagecapitalaustralia.com.au
    Email Me | Phone Me

    0-40 Properties in a decade with a unencumbered portfolio value in excess of $40M. Ask me for a copy of my API Interview.

    Profile photo of mike.12mike.12
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    Thanks for the Info Richard.

    mike

    Profile photo of michael1979michael1979
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    @michael1979
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    Qlds007 wrote:
    Mike

    An instalment contract is simply what it says a Contract where the agreed purchase price is payable in a series of instalments.

    Normally where a Vendor was unable to sell the property in the open market he/she may agree to sell the property by receiving from the potential buyer a given number of monthly payments. Interest would be charged on the initial purchase price and the balance would be reduced by the principal reductions amde over the term of the contract.

    Title remains with the Vendor until such time as the final instalment (whether this be a number of contractual repayments or a lump sum payment) is made and the Title transfer to the purchaser.

    Cheers

    Yours in Finance

    Richard Ive been considering vendor financing, do you set up the wraps yourself is there somewhere to find good advice on this set up?

    Profile photo of mattstamattsta
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    you probably wouldn't find +ve geared or neutral properties in the main capital cities, but if you go outwards to rural towns and mining towns and suburbs outside the main cities, then you are more likely to find some.

    Profile photo of SamAus74SamAus74
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    @samaus74
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    Thanks moxi10 and mattsta… but with regard to the mining towns are they not just short term ???

    Buy a house for $500K and get $1400 per week will produce a postive cash flow in the meantime but will these properties maintain their value or will they drop down at some point in the future and loss occur ??

    I would be worried long term or are they ok for the next 5 – 10 years ??? Lookiing at Karratha and maybe Gladstone… any thoughts..

    Sam.

    Profile photo of DerekDerek
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    @derek
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    SamAus74 wrote:
    Inititally I thought and being naive that you just buy and hold waiting for CG and then buy again but I think Australia isnt like it used to be 5 – 7 years ago and hoping for CG is really just wishing at the moment.

    I dont want to be in a situtation that I buy my 2nd and 3rd then I cannot do anymore… because I didnt have the right strategy.. any advice from those more expereinced then I am who reached this cross point at sometime and how they decided the path best for them.

    Hi Sam,

    A couple of key comments here.

    Some investors have built their portfolios on good fortune and circumstance rather than good investment decisions.

    We have 'just' come out of a time when anyone could just about pick any property and it would have gone up in value. This coincided with a time money was very easy to get and the basic buy and hold was a strategy that worked at that point in time. Things are now very different and with banks tightening lending rules your chosen strategy will need to be able to address the two key issues lenders look at – serviceability (can you afford the loan) and security (how much spare equity do you have).

    Given this your preferred strategy will need to deliver capital profits and/or growth along with higher than normal rent returns. It is often not possible to get both of these in the one property so you may need to consider a more balanced approach and look at your overall portfolio needs.

    Put simply your formula may be two growth and one cashflow property – the order of purchase is also important. Obviously the right mixture for you will be dependent upon your long term plans, current situation, risk aversion levels, time resources and so on. 

    I would suggest you go to your broker and talk about financing aspects of your journey – this is more important than the property. Find out how you stack up from a finance point of view, equity levels, spare income etc and this may help you determine what type of property is right for you.

    Seriously look at value adding type strategies; buying under value, renovations, small scale developments, re-zoning potential, and so on. Often these strategies also provide a higher rent return than typical for the area – which is also to your advantage.

    Profile photo of lillystarlillystar
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    @lillystar
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    Hi Sam,

    Have you thought about Rockhampton? The entry price is a lot lower (can still get houses under $300k) and demand for housing from Gladstone is overflowing to this area pushing rental yields up as well which will help with cashflow. You would have to check the flood zones though. Pretty much okay on the north side and in Gracemere as Gracemere is set high so it may get cut off but homes do not flood. 
    As well,  like Moxi said the Hunter Valley region in places such as Muswellbrook, Singleton, Maitland.  Muswellbrook is the cheaper option (again you can pick up property under 300k) with good rental yields and growth drivers one of the obvious being the Mangoola Coal mine under construction outside of Muswellbrook.  Properties in areas like these allow you to grow your portfolio without a big outlay of your own funds and with a good rental return will only be slightly negative beofre tax and overwhelmingly positive after tax.

    Profile photo of SamAus74SamAus74
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    @samaus74
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    Post Count: 19

    Thanks Derek and lillystar – NO THANKS to Juliet !!

    Derek what you are saying is exactly the approach I am taking – my 2nd IP which will be ready by the end of year will also be negative geared ( both my wife and I make an ok income so the tax benefits are there ) and the 3rd IP will be an under valued, some renovations, rent and re-value… but still important tht that ANY IP that is purchased still has good rental and CG..

    I think I am on the right track – I think…

    Cheers.

    Sam.

    Profile photo of DerekDerek
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    @derek
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    Hi Sam,

    Sounds like you have thought it through. Make sure you don't get overly excited about negative gearing – the more negatively geared your portfolio the fewer tax deductions (in percentage terms) you get.  This will limit your journey to varying degrees – even if you have a high income the brakes will be applied sooner or later.

    Now I must admit I am not a reno type investor – so take what I say with a grain of salt – just make sure you know what you are doing. I have seen some renovation success stories where the story tellers have forgotten to factor in their labour and time along with general market movement into the profit calculations.

    The other thing I would say is do not forget to factor a 'family' into your decision making. Dropping down to one wage with a negatively geared portfolio can be problematic depending upon how you have structure things.

    Profile photo of SamAus74SamAus74
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    @samaus74
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    Derek thanks for the info – yes i wouldnt have 5 properties all negative geared – just wouldnt be viable…

    Also we have structured the properties in a higher percentage to my name as yes my wife will be off work again next year for 12 months… have thought this thru…

    I am not a reno person either but i wouldnt be doing any huge reno.. mainly paint / carpet / lights and some garden work…

    Sam.

    Profile photo of Richard TaylorRichard Taylor
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    @qlds007
    Join Date: 2003
    Post Count: 12,018

    Sam

    Any reason why you wouldnt purchased them in a DFT?

    Cheers

    Yours in Finance

    Richard Taylor | Mortgage Broker helping investors build their wealth thru property
    http://www.mortgagecapitalaustralia.com.au
    Email Me | Phone Me

    0-40 Properties in a decade with a unencumbered portfolio value in excess of $40M. Ask me for a copy of my API Interview.

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