All Topics / Help Needed! / Equity rich, cash flow poor

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  • Profile photo of Chief WigamChief Wigam
    Participant
    @chief-wigam
    Join Date: 2004
    Post Count: 60

    For those of us looking to escape the rat race and retire early, or at least have the option to, by replacing our day job income, what are the best strategies people are using to generate cash flow i.e. without having to wait 7-10 years for capital growth, and growing a regular residential portfolio then selling down. This is the typical sell being bandied around on Youtube. Is there instead a way to build or purchase high yield property using leverage and achieve $150k per year positive cash flow.

    I would like to do this without using personal serviceability or at least minimise that. Some ideas:

    1. Get a 100% LVR loan from a tier 2 lender and use existing equity as the 20% security – I am just finding out about this loan product but as I understand this is possible for a new build project such as townhouses (not allowed for rooming houses though) which will be cash flow positive before tax considerations post build period. In this strategy, you are only limited by the equity/cash you have. From what I can tell it’s no different to putting a deposit down with your equity and then getting a new loan for the balance except the deposit requirement is only 20% and not more. If you want a better interest rate, you could go with a tier 1 lender but then deposit in the form of equity will be a higher %.

    2. Get a lease doc loan to buy 1 or more commercial properties. Again only limited by the equity/cash you have and LVR’s are around 65%. You would need to buy a few of these in separate trusts to preserve serviceability, to multiply the positive cash flow effect.

    3. If you have a business, some tier 1 lenders like Westpac offer 100% LVR to buy a commercial property. Seems no deposit/equity is required for this option so it’s the best of the three. But I don’t have a business.

    I am not a mortgage broker, just a regular employee wanting to replace income within this calendar year. Feel free to tell me I’m dreaming but that’s the goal. I may have missed some points or made incorrect assumptions in the above but that’s why I’m posting, to learn about what strategies are real and which are empty sales pitches.

    In the case of non-builds, you could do this say 3 times in 3 different trusts and still get the loans approved provided the trusts trade profitably. So each trust could earn you $50k positive cash flow for example. You’d have $150k positive cash flow overall, hence replacing your income. 4 or 5 if you need more to live off.

    Profile photo of Steve McKnightSteve McKnight
    Keymaster
    @stevemcknight
    Join Date: 2001
    Post Count: 1,763

    Hey Chief,

    Long time, no hear! Glad to see you are still patrolling here to keep things safe.

    Some thoughts about each option:

    1/ I don’t see this working for residential where gross yields are 3% and lower. For commercial it might work, but the cap rate would have to be higher than the interest rate, and then how would you repay the principal. And look out if the property ever went dark (lost the tenant and another couldn’t be found). This is high risk.

    2/ Yes, possible with a multi-trust structure, but the property would have to be positive cashflow. Reach out to Chris Berry at http://www.PropertyInvestingFinance.com

    3/ A business can be as simple as setting up a structure with an ABN. I don’t think you need a trading business, do you? Again though, borrowing 100% brings us back to #1.

    Unfortunately, the old way is still the best way…

    Make more (money) – by swapping time and/or ideas for money;

    Manage (money) better – through careful control of expenditure;

    Multiply (money) faster – through strategic investing that considers risk-to-return (most money, quickest time, least risk, lowest aggravation);

    Add meaning – give your money a purpose by adding a non-financial dynamic for why you want to make, manage and multiply that creates a compelling need that will help overcome the temptation of living the high-consumerism lifestyle promoted by marketeers who profit from your spending.

    Take care,

    – Steve

    Steve McKnight | PropertyInvesting.com Pty Ltd | CEO
    https://www.propertyinvesting.com

    Success comes from doing things differently

    Profile photo of David HallDavid Hall
    Participant
    @wiggles2
    Join Date: 2014
    Post Count: 66

    For me it is a mixture of converting a large 4 bed 2 bath to an HMO (rent by the room) or undertaking a renovate retain and build. Then moving on the original house and retaining the new for the deprecation, lower repair bills and lower vacancy rate. Both of these are hold forever purchases.

    This is a recent purchase that is a hybrid of the above approach. https://www.realestate.com.au/property-house-wa-embleton-146723656 We are subdividing off the back (lot worth high 300’s) building a 4 x 2 to sell down (circa 100k margin above land sale + capital growth over holding) and converting the existing house to a 6 bed HMO estimated rent $2,600 – $2700 a week rent. Paid $900,000, waiting for quote for renovation but it will be high 200’s.

    There are lenders for the HMO that will value the property at a cap rate, to keep your portfolio moving forward.

    You don’t find positive cash flow you have to make it.

     

     

    David Hall | The Buyers Agency
    Email Me | Phone Me

    Buyers Agent

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