All Topics / Help Needed! / How do people buy multiple properties

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  • Profile photo of cs_rlewiscs_rlewis
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    @cs_rlewis
    Join Date: 2010
    Post Count: 53

    Hello everyone, Ive been doing quite a bit of reading lately and i cant seem to grasp the idea of people buying multiple positive cashflow properties.
    I will explain my situation that Im currently in.
    I have an investment property that is positive, about $1K a year, with approximately $150K in equity.
    Say I take a line of credit equity loan out of $150K to fund a deposit on a new investment property (apartment) worth $338K. I now owe the bank 583/month ($7000/year) interest only for this equity loan.
    For the new investment property worth $338K, i will need to borrow an extra $200K approximately. Once all the figures add up lets say this is geared positively and I come up ahead about $3K per year.
    So in total i earn $4K a year for both of my properties, however I still have to pay my equity loan of $7K per year, which leaves $3K that I have to pay out of my own pocket.
    As you can see eventually my borrowing capacity will be limited, so how do people manage to buy 5+ properties? Are these properties geared so positive that its funding all their line of credit equity loans?

    Profile photo of BennyBenny
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    @benny
    Join Date: 2002
    Post Count: 1,416

    Hi CS_R Lewis,

    Are these properties geared so positive that its funding all their line of credit equity loans?

    In a nutshell, YES !! But there is a longer answer, so stick around… :p

    First off, I wanted to say that you are already in good shape with $150k in Equity, so well done already. Second, I would not be buying an apartment without very careful consideration of “the numbers”. Unless it is a screaming deal (and there are some of those around), the Body Corp costs mixed with the limited Growth in value would have me preferring a house and land.

    OK, now to your situation:-

    For the new investment property worth $338K, i will need to borrow an extra $200K approximately. Once all the figures add up lets say this is geared positively and I come up ahead about $3K per year.

    Sounds like you are not taking the Equity loan into account – in which case, I would want to see WAY more than $3k per year at this point. A $200k mortgage at 5% will be $10k, then rates, insurance, etc another $3k – so ~$260 a week. You say you are ahead by 3k, so another $60 a week to make $320 a week. Well, I wouldn’t be buying anything that costs $338k and only returns $320 a week. And right there is the problem.

    That extra loan is another $7.5k per year ($150 a week) so you would be looking for $320 + $150 = $470 a week rental just to break even. So, can you instead buy a $338k property that returns nearer $500 a week? That is the question.

    And here comes the solution – piece by piece :-
    1. Buy as well as you can (can the $338k price be discounted?)
    2. Is the apartment NEW, or just new to you? I would need to have a supremely good reason to buy a new apartment – like a huge discount, or a block of them at a steal. But that is just me.
    3. If it IS new, then there will be taxation benefits that will ease some of the pain if it ends up negative geared.
    4. When “running the numbers” always work things out on “100% lend” upfront (the deposit had to come from somewhere, so account for it in the outset. This new apartment was NEVER going to be positive geared using your original numbers.

    As you can see eventually my borrowing capacity will be limited, so how do people manage to buy 5+ properties? Are these properties geared so positive that its funding all their line of credit equity loans?

    In the thread linked below, there are two stories in particular I want to point you at.
    https://www.propertyinvesting.com/topic/4410491-the-big-picture-for-new-readers-especially/

    DO check out the story about “Westnblue” in the post dated 4 Apr 2014 – have a good read of his extracts from the magazine – the numbers are ALMOST readable…. There you will see how to grow a portfolio, and what returns to start with. Then, the very last post (on page two of the thread) points you to a thread that discusses how to have 25 properties by the age of 30 (or something similar to that).

    Do have a read of the other items too, as they may help overall – enjoy,

    Benny

    Profile photo of cs_rlewiscs_rlewis
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    @cs_rlewis
    Join Date: 2010
    Post Count: 53

    Hi Benny thanks so much.
    I read both posts. I now realise that buying a $338K place for about $330/week is not ideal on a $200K loan. It would be much wiser to haggle the price to $318K, and aim for a rent of $350 upwards. At least then I’ll be heading in the right direction

    Profile photo of BennyBenny
    Moderator
    @benny
    Join Date: 2002
    Post Count: 1,416

    I read both posts. I now realise that buying a $338K place for about $330/week is not ideal on a $200K loan. It would be much wiser to haggle the price to $318K, and aim for a rent of $350 upwards. At least then I’ll be heading in the right direction

    Yes, you will – but think bigger again – if the $338k property can’t return $450+ per week, go looking for one that will, or could. See, it might be that you buy something needing help – perhaps a deceased estate home that could do with a huge reno. That lifts the rent it will command once completed while also lifting the Equity (allowing perhaps the deposit for your next one). Buy it well under median, and have the reno bring it up to median or above. Of course, watch the $$ throughout.

    e.g. Look to buy in an area where the median rents are $450/week. Median price might be ~$380k (depends on the suburb of course, and the quality/age/location/whatever of the property). Look for a bargain in the $300k range and spend $15k on a selective reno. Anyway, right idea, but give it more ooomph and you will have it nailed !! ;)

    Benny

    Profile photo of cs_rlewiscs_rlewis
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    @cs_rlewis
    Join Date: 2010
    Post Count: 53

    As for the westnblue story, do you think his high rental yields are constant year in year out? If he’s bought in a mining town then perhaps the rental yields will decrease once a boom has finished – hence why hes only fixed his rates for 2-5 years.

    Profile photo of Corey BattCorey Batt
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    @cjaysa
    Join Date: 2012
    Post Count: 1,010

    A combination of strong yields and a decent income allow most investors to grow substantial portfolios. At this current time it’s quite easy to afford a reasonable portfolio on an average wage with neutral yield properties – what’s more likely to put the brakes on investors is their borrowing capacities with lenders who are stress testing loans at upwards of 100% above their actual repayment amounts required.

    A carefully structured lending structure can minimise these impacts as much as possible, but the APRA intervention is certainly reducing the days of easy credit for those looking to own substantial portfolios.

    Corey Batt | Precision Funding
    http://www.precisionfunding.com.au
    Email Me | Phone Me

    Investment Focused Finance Strategist - servicing Australia-wide

    Profile photo of AshAsh
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    @ash-dhs
    Join Date: 2015
    Post Count: 16

    Very interesting thread as I am new to the whole concept of drawing down a line of credit (equity loan as described above). Just to clarify in the above example am I right in saying that the OP will effectively take out a loan of $350k for the second property ($200k + $150k equity he already has)?
    So he is ultimately obtaining 100% finance for the 2nd IP? What about the purchase costs such as stamp duty etc?

    Assuming he purchases the 2nd property using the example given above, he will now have 2 properties and effectively the same amount of equity (~$150k), so what would be stopping him from repeating the process over again and purchasing a 3rd property? Would it come down to servicability and whether he is negative/positive geared?

    Sorry if the questions are very basic but I am still trying to get my head around the concept. I’m looking at purchasing my 1st IP which has similar numbers as what the OP mentioned above (costs around $350k and returning approx $320 per week) so now I am wondering if I would be better looking at something a bit more positively geared for my 1st IP. In saying this though, I believe to expect decent capital growth for the property/suburb I am looking at.

    PS. Sorry cs_rlewis for semi hijacking your thread! I figure my question is closely linked to your topic

    Profile photo of AshAsh
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    @ash-dhs
    Join Date: 2015
    Post Count: 16

    e.g. Look to buy in an area where the median rents are $450/week. Median price might be ~$380k (depends on the suburb of course, and the quality/age/location/whatever of the property). Look for a bargain in the $300k range and spend $15k on a selective reno. Anyway, right idea, but give it more ooomph and you will have it nailed !! ;)
    Benny

    Is it possible to find properties which match this criteria in Metro areas or just regional? I have been looking at Metro areas and yields seem to be much lower than that. Or am I just looking at the wrong areas? haha

    Profile photo of cs_rlewiscs_rlewis
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    @cs_rlewis
    Join Date: 2010
    Post Count: 53

    Hi Ash, the purchase price was $338K, so closing costs should make the property about $354K.
    As you can see I would have to use my own money to pay off the equity loan – roughly $3k in my example. So I would eventually reach my borrowing capacity.
    The ideal scenario is what Benny was saying, to aim for a rent of 450+ so the rental yields is covering your equity loan as well as the $200K loan.

    My 1st investment property it started out roughly evenly geared- but each year I was losing money so I decided to sell, made about 90K$ in three years and put it towards another property with better numbers- although im only ahead $1K, rents are low in Perth at the moment but I believe it has upside. So I would say the property you are looking to buy would not be the worst, just as long as you are sure it has reasonable growth.

    Profile photo of AshAsh
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    @ash-dhs
    Join Date: 2015
    Post Count: 16

    $90k in 3 years isn’t bad at all! If you don’t mind me asking, how is your current property performing in terms of growth?
    That’s exactly what I’ve been finding recently too. Especially in Melbourne recently there has been very good capital growth but rents have not kept up and as a result yields have decreased.

    Going to one of Steve’s events tonight so will be interesting to hear what he has to say about the current market!

    Profile photo of cs_rlewiscs_rlewis
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    @cs_rlewis
    Join Date: 2010
    Post Count: 53

    I settled on my current property two months ago, but I bought it off the plan and it took 2 years to build- im sure its worth about 50-60K more as I bought it for $349K 2km out of the perth CBD. You really have to look at the numbers, as people will tell you that off the plan is a bad idea. But as you can see Ive had excellent growth from buying off the plan. If the numbers stack up and you feel its a cheap buy then go ahead.

    Yes my first property i bought as a house and land package, 3 years later the suburb developed a bit and I sold it for a handy profit.

    • This reply was modified 5 years, 11 months ago by Profile photo of cs_rlewis cs_rlewis.
    Profile photo of TheNewGuyTheNewGuy
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    @thenewguy
    Join Date: 2014
    Post Count: 151

    Hi Ash

    Just to quickly answer one of your questions. You can’t keep redrawing because the LVR will keep going up until the bank will stop loaning (as well as serviceability ).

    500k house. 300k loan. 200k equity.
    You can get a $100k LOC to take total debt to 80%. 300 + 100 = 400 from 500 value.

    That 100k might split 80k deposit. 20k purchasing costs (stamp duty etc). You use that 80k to buy a 400k house. Now you total LVR is 900k property with 300 + 100 + 320 = 720k means you still have a 80% LVR and you don’t have any equity to redraw anymore – without LMI anyway.

    Hope that makes sense. Oh and you’re able to essentially get a 102% deductible loan this way.

    • This reply was modified 5 years, 11 months ago by Profile photo of TheNewGuy TheNewGuy.
    Profile photo of MoggyMoggy
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    @lordmoggy
    Join Date: 2015
    Post Count: 24

    It would come down to income = another way of saying serviceability. Once your income level is reached the banks won’t lend you anymore…..

    • This reply was modified 5 years, 11 months ago by Profile photo of Moggy Moggy.
    Profile photo of Richard TaylorRichard Taylor
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    @qlds007
    Join Date: 2003
    Post Count: 12,024

    Hi Cs_rlewis

    Welcome to the forum and I hope you enjoy your time with us.

    Certainly you have done well on your first IP acquisition in regards to equity especially considering it was a Off the Plan purchase.

    Benny has outlined the way most investors start off in regards to equity release and i have written a number of API articles on the topic in relation to my own property portfolio.

    Main thing in order to maximise your borrowing going forward is to ensure the loans are structured correctly as otherwise the road to investment will be short lived.

    Quicker than going down a culdesac in a ferrari.

    Cheers

    Yours in Finance
    0-40 properties in a decade. Ask me how.

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

    100% Investment Finance now available on selected properties. Email us for further information.

    Profile photo of cs_rlewiscs_rlewis
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    @cs_rlewis
    Join Date: 2010
    Post Count: 53

    thanks i believe a good broker is vital, because I’ve only had one so far but since then I’ve learned i could get better deals elsewhere. its all a learning process, the more knowledge you possess the more power you have.

    Profile photo of BuyersAgentBuyersAgent
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    @knightm
    Join Date: 2005
    Post Count: 338

    thanks i believe a good broker is vital, because I’ve only had one so far but since then I’ve learned i could get better deals elsewhere. its all a learning process, the more knowledge you possess the more power you have.

    Correct @cs_rlewis – having a great team speeds things up and make them easier. Overall it is a balancing act between LVR and DSR. You want growing equity (LVR goes down) and growing income (DSR goes up) if you can balance these two with every purchase you maximise how many you can buy. To further speed things up you add some equity and cashflow yourself through market growth, renovations, extraordinary deals, or developing (or any combo of those). I see too many people buy 1-2 or maybe 3 capital city newish properties all together in one market with no value add potential and low income and they don’t see the wall coming but it comes, and then they have to stop and wait a whole cycle before buying again. Spreading things out (location and property type and value add method) gives you more diversity. Finance is a critical component of the equation but also so is the property selection, and price paid. Get either of those things wrong and you will be stuck.

    BuyersAgent | Precium
    http://www.precium.com.au
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    South Coast NSW Independent Buyers Agent - Wollongong to Batemans Bay and Regional NSW. DOWNLOAD OUR FREE 14 POINT PROPERTY BUYER'S CHEATSHEET to avoid painful mistakes at precium.com.au

    Profile photo of AshAsh
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    @ash-dhs
    Join Date: 2015
    Post Count: 16

    Makes sense. Thanks for explaining that guys!

    Richard Taylor – do you deal in Melbourne too or only Queensland?

    Profile photo of BennyBenny
    Moderator
    @benny
    Join Date: 2002
    Post Count: 1,416

    Hi cs_rlewis,
    Re this:-

    As for the westnblue story, do you think his high rental yields are constant year in year out? If he’s bought in a mining town then perhaps the rental yields will decrease once a boom has finished – hence why hes only fixed his rates for 2-5 years.

    A quick look at what he has bought, and I see some exposure to mining towns (Broken Hill e.g.) but then the purchase prices and returns are such a tiny part of the overall portfolio that I would think he has little to worry about.

    Re fixing his rates, there could be multiple reasons :-
    1. A 3 year term is often the cheapest.
    2. If rates generally appear to be going DOWN, why would you fix for a long period at a higher rate?
    3. Darren has stated he wants to lower his overall LVR – many Fixed Rate loans limit the amount you can pay off them.
    4. A Fixed Rate can be a major road-block if wanting to SELL properties to re-engineer a portfolio so having loans short-term prevents long-term headaches.

    You seem to be getting the idea that there are lots of ways to do things to maximise the benefits to oneself – that starts with knowledge, and a great team can provide a large chunk of that.

    Benny

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